3 ways clean hydrogen projects can boost their chances of securing final investment decisions

There are many barriers preventing clean hydrogen projects from reaching final investment decision (FID). Here, we take a closer look at the importance of securing clean hydrogen offtake customers and share practical solutions to overcoming this challenge.

Clean hydrogen is set to play a critical role in the energy transition, yet, despite a growing pipeline of projects, only 4% have reached FID. To discover what is driving this dynamic and to identify ways to remove barriers, the World Economic Forum launched the Clean Hydrogen Project Accelerator to understand how the pathway from announcement to FID may be expedited. Somewhat counterintuitively, given demand forecasts, Accelerator projects highlight that finding and securing offtake agreements is a challenge. This is critical as it enables these capital-intensive projects to demonstrate long-term bankability and return on investment.

So, why is it difficult to secure offtake agreements and how can this challenge be overcome? Through the Accelerator engagements, three key avenues were identified:

There is a sizable gap between the price expectations of clean hydrogen buyers and sellers. Most buyers are constrained by the price of their existing energy and a switch from grey to clean hydrogen could be multiple times more expensive. Despite the soaring natural gas prices driven by the war in Ukraine and increasing public and regulatory pressure, the cost gap still prevents many companies from taking meaningful action towards net-zero. This is a particular challenge in sectors with low-profit margins, such as fertiliser production, where hydrogen is a critical component.

In the short to medium term, government intervention and subsidies will play an important role in helping to bridge the price gap between buyers and sellers, making offtake contract negotiations more attractive for both parties. In Europe, under RePowerEU, the European Commission will roll out carbon contracts for difference (a financial mechanism to cover the switching cost) to support the uptake of green hydrogen by industry. In the US, the Department of Energy has announced an $8 billion program to develop regional clean hydrogen hubs under the Infrastructure, Investment and Jobs Act and $270 billion for clean energy tax credits under the historic Inflation Reduction Act, allowing green hydrogen to have a $3/kg subsidy advantage over grey.

At the project level, Yara Clean Ammonia, the world’s second-largest ammonia producer, received a $33.2 million grant from the Norwegian government for the development phase of its Skrei Project, a new electrolysis plant that will tie into the existing plant for ammonia production.

A similar approach has been adopted by JERA, the largest power generation company in Japan. It is undertaking an ammonia procurement and co-firing demonstration project at its Hekinan Thermal Power Station and has leveraged government grants to reduce ammonia production costs and to cover R&D costs until FY2024.

While over 45 giga-scale clean hydrogen projects proposals (over 1 GW of electrolysis) have been announced, production at this scale is not yet proven, creating significant supply-side risk. This will improve over time, but it creates a real risk for early-moving offtakers and is particularly unpalatable for buyers, such as public utility companies, for whom reliability and security of supply is a matter of national interest.

To overcome this issue, two key strategies have been adopted:

One strategy is to create industrial clusters, where supply and demand are co-located. These industrial clusters are epicentres for hydrogen activity, coalescing stakeholders across the entire hydrogen value chain and aligning them around common goals. This enables cluster members to source hydrogen from multiple sources and for suppliers to take advantage of a readily available pool of potential offtakers. The HyNet North West cluster in the UK is a visible success story in this regard having facilitated over 24 Memorandums of Understanding for offtake. Another example is how Mitsubishi and Chiyoda have engaged the Port of Rotterdam industrial cluster to support their efforts in sourcing offtakers for hydrogen delivered through their 'SPERA' technology. They are now in the early stages of securing offtake within the steel, sustainable aviation fuel, chemicals and power sectors.

The second strategy is vertical integration. A growing number of companies are taking on multiple roles across the hydrogen value chain and others are exploring options to become equity partners in aspects of the value chain that are not typically core to their business. This has allowed them to act as their own offtaker, increase control and awareness of the price premium challenge and utilise trusted relationships. H2 Energy Europe (a joint venture between H2 Energy and Trafigura), for example, is developing green hydrogen in Denmark’s two key landing sites. Its approach has been to prioritise large-scale production so that economies of scale will enable future demand. In order to create an end-to-end hydrogen value chain, it established a joint venture with Phillips 66 to create a European network of hydrogen refuelling stations, combining retail and hydrogen experience to boost hydrogen development in Europe.

In addition to the policy clarity needed from governments, market-wide standards and certification frameworks and tradeable guarantees of origin are essential to alleviate uncertainty, garner investor and market confidence and enable global trade. In other words, beyond the debates around the colour of hydrogen (blue versus green), investors and offtakers need to understand and compare the carbon content of hydrogen products from a lifecycle analysis perspective. Without this security, many developers are hesitant to invest in projects that may not comply with future regulatory requirements and prevent them from achieving offtake.

The Enabling Measures Roadmaps for Green Hydrogen, published last year at COP26, highlighted the need to ensure clear technical standards for projects across the hydrogen value chain, including a common approach to certification for carbon intensity. Through the G7, IRENA is working on a gap analysis of hydrogen certification schemes that will provide much-needed clarity for the industry.

There are a few instances of organizations innovating to overcome this barrier. Yara Clean Ammonia, for example, has created its own certification scheme that it expects will align with future standards as they are rolled out. Although not yet internationally recognized, its introduction has been key to providing certainty and reassurance to offtakers paying a price premium.

Securing offtake contracts will play a vital role in progressing projects to FID, but this is not the only challenge. It is critical that supply, demand and infrastructure for clean hydrogen are scaled up jointly, and that the underlying supply chain and required skills are developed at pace.

At the time of writing, governments from across the globe are gathered at COP27. We need them to work together and with industry to solve bottlenecks, establish policy frameworks and enable measures that will build the confidence needed to unlock the market for clean hydrogen and help fulfil its role in achieving a net-zero future.