“Reason for optimism”, even if the hype fizzles out

Greetings from London, where the effects of Russia’s war against Ukraine are still being felt in the region.

On Friday, the UK energy regulator is expected to announce a 9 percent increase in household energy bills due to a rise in wholesale gas prices, partly due to uncertainties surrounding supplies to Europe via Russian gas pipelines.

This means that average energy bills are still several hundred pounds a year higher than they were before the energy crisis fuelled by Russia’s full-scale invasion in February 2022.

This comes as Russian attacks on Ukraine’s gas storage facilities are deterring traders from storing gas there, his colleague Shotaro Tani reported last week.

Kadri Simson, EU Commissioner for Energy, warned in an article for the Financial Times this week that attacks on civilian energy infrastructure in Ukraine have escalated and that this winter is likely to “test the resilience of the Ukrainian people in a way not seen on our continent since the Second World War.”

In this week’s newsletter, I look at the emerging green hydrogen industry – and the question of whether the hype will finally be replaced by realism.

Enjoy reading — Rachel

Programming Note: Energy Source is off this Thursday and returns on Tuesday, August 27th.

Green hydrogen: patchy progress

Hydrogen has a tough time. The gas, widely used in oil refineries and chemical plants, is touted as a crucial fuel for the energy transition because it emits no carbon dioxide when burned. But it is currently made almost exclusively from fossil fuels, mainly natural gas, and emits hundreds of millions of tons of carbon dioxide each year.

Producing hydrogen on a large scale and with fewer CO2 emissions will require huge investments in facilities to remove and capture these emissions, or in electrolysis plants to extract hydrogen from water. The latter process (which produces “green hydrogen”) could help use excess wind or solar energy in future renewable-dominated power systems and avoid emissions from natural gas production.

However, getting projects off the ground is proving more difficult than hoped. Several high-profile attempts to produce green hydrogen on a large scale have failed in recent months. Manufacturers are grappling with the chicken-and-egg problem facing the industry, with high costs and uncertain demand slowing projects down.

Australian iron ore giant Fortescue in July dropped its self-imposed 2030 timeline for producing no more than 15 million tonnes of green hydrogen per year. French state-backed utility Engie and Norway’s state-owned renewable energy company Statkraft have also postponed plans for new green hydrogen production capacity.

Last week, Danish offshore wind developer Ørsted stopped operations at a factory in Sweden that was supposed to produce e-methanol, a fuel made from a combination of green hydrogen and carbon dioxide. The company warned that the market was developing more slowly than expected.

And Thyssenkrupp Nucera, the Frankfurt-listed maker of electrolyzers for producing green hydrogen, warned last week that its “growth momentum” was being slowed by market uncertainty.

Emma Woodward, head of European hydrogen market at Aurora Energy Research, said there was “a general feeling that it is much harder to put together these investment cases (for new hydrogen plants) than companies may have expected two or three years ago”.

To get projects off the ground, several elements need to come together, says the researcher, such as long-term electricity supply, hydrogen sales contracts, financing and government support. In the US, project developers are being held back by uncertainty about the criteria for tax credits.

“Reason for optimism”

However, the setbacks were mitigated by the green light given to a number of projects in Europe over the past six months. These include Shell’s 100-megawatt Refhyne II power plant south of Cologne, which is to supply energy to the oil company’s chemical plant and refinery at the site.

German energy company EWE has given the green light to a 280 MW plant in Emden, northern Germany, that will supply up to 26,000 tonnes of green hydrogen annually to factories in the region. In Aberdeen, Scotland, BP and the Scottish government have approved a green hydrogen plant that will supply buses and other vehicles with up to 300 tonnes annually.

Overall, according to analysts at Wood Mackenzie, final investment decisions were made in Europe in July for green hydrogen projects with a total capacity of 483 MW.

“Progress in Europe has been quite slow, but we believe there is reason for optimism,” Greig Boulstridge, research analyst at Wood Mackenzie, told Energy Source, noting that further growth catalysts – such as new government support – are on the way.

Woodward echoed that view. “I’m not negative (about the sector) because last month we saw a flood of final investment decisions across Europe,” she said. “So while some are pulling out, there are also people who have managed to make it work.”

Woodward and others argue that as the hype about the role hydrogen could play in the energy system has died down, the market has become more realistic, which could help developers focus on implementing viable projects.

BP chief executive Murray Auchincloss said during a conference call last month that the company is “focused on hydrogen,” adding: “We have pursued 30 different opportunities in the past. Now we are thinking about what we can actually build and deliver.”

Power points

• A leading US oil company is expanding in Russia, despite Moscow’s war in Ukraine.

• Tata Sons has expressed interest in buying some of India’s heavily indebted state-owned power companies.

• Falling iron ore prices have reduced the market capitalization of the world’s largest mining companies by about $100 billion.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global reporting team. Contact us at [email protected] and follow us on X at @FTEnergy. Read the latest issues of the newsletter Here.