Template for a revision of Hydrogen strategy

Author: Erik Rakhou, personal views, 29 August 2024

Scenesetting: on Monday 2 September 2024, I will act as a day moderator for an annual key global discussion forum in London including government and executive leaders active in Hydrogen markets - "Investing in Green Hydrogen summit 2024"*. The below is meant as a provocative "stock take hypothesis" ahead of the discussions on Monday 2 September 2024 in London, and is written in the form of a letter to an imaginary Board proposing a Hydrogen strategy revision given the last 12 months developments. Dawn is over - we need to accelerate. What are your thoughts?

TEMPLATE

Subject: Proposal for Revising Our Hydrogen Strategy Roadmap in Light of Recent Global Developments.

Dear [Leadership Team/Board Members],

I am writing to propose a revision of our current Hydrogen strategy roadmap, taking into account significant developments in the global hydrogen landscape over the past 12 months. The rapid advancements in technology, shifts in policy, and evolving market dynamics present both opportunities and challenges that our current strategy must address to remain competitive and aligned with global best practices of peers & competitors. I will use Europe as a particular example to provide initial proof points requiring a revision of our strategy.

Context

As the global energy transition accelerates, hydrogen remains essential for decarbonizing hard-to-abate industries such as refining or fertilisers. However, the urgency to deploy hydrogen in global transport (maritime, aviation) and power generation (as a storage solution) is becoming increasingly clear to meet Paris Agreement commitments.

Electrification is proving not a readily scalable option in some use cases (see Electrification Staircase), which accelerates the urgency to consider role of hydrogen as enabler of decarbonisation and intermittency.

Recent changes in the regulatory environment, technological innovations, and market dynamics necessitate a thorough review of our hydrogen development plan to ensure it remains robust and future-proof to keeping up with competition & peers.

Current Roadmap Overview

Our existing strategy, much like other leading utilities, aims to establish a comprehensive hydrogen supply chain by 2030, focusing on:

• Production: Utilizing both domestic and international sources, including offshore wind, nuclear-driven hydrogen, and solar/wind-rich regions ready for large-scale hydrogen production.
• Storage and Transportation: Developing, and where regulation permits, taking role in infrastructure for hydrogen storage and distribution, and imports including ammonia cracking and partnerships in global Hydrogen and its derivatives transportation vessels.
• Utilization: Expanding hydrogen usage in thermal power generation, acting as intermittency management fuel, and other industrial sectors such as maritime and aviation, as well as high temperature heat, refining and steel, with a target to capture a significant market share by 2050.

Key Parameters for Strategic Review

To effectively revise our strategy, we should monitor and evaluate the following 3 areas:

• Regulatory Changes
• Technological Innovations
• Market Dynamics including Financial and Investment Landscape.

If we take Europe as example, we see following changes and observations (non-exhaustive).

For Regulatory changes - the key novelty, is that there is little novelty - we finally completed key rules governing and defining the Hydrogen and its derivatives landscape for Europe. Regulatory dawn is over - time to get to work, in Europe one can not blame regulatory uncertainty. There is one notable exception - jury is still out on what is "low carbon Hydrogen". In addition, governments are racking up new support programmes and budgets to incentivise developments such as eg pre-announced forthcoming tenders of H2Global, Hydrogen bank and national developments like autumn tender of 1 BN EUR in Netherlands for electrolysis. The availability of incentives for Hydrogen is a more global trend, including USA, Australia, Canada, China, Korea and Japan.

For more details on EU regulatory framework state of play see Annex below this email.

For technological innovations - we see flexible (PEM) electrolyser technology being scaled; as example Linde delivered 24 MW PEM at Yara some months ago and it is currently the world’s largest PEM (OEM: ITM) in operation. We see in parallel, fierce global competition on electrolyser costs - which is likely to benefit some of the players, and to endanger plans of others. In parallel, shipping, storing and importing technology advancements are made - where scale is likely to bring further opportunities to transport renewable energy globally in form of Hydrogen or its derivatives - cracking is one of these developments, storage is another. Nuclear-powered Solid oxide electrolysis, producing e-fuels, is one to watch as well.

For Market Dynamics including Financial and Investment Landscape. Contrary to outcries of no FIDs and no offtakes, we see first FIDs and signed deals happening. On FIDs, in July 2024, within just one month, six European hydrogen projects reached final investment decision (FID), collectively representing nearly 1 GW of electrolyser capacity, set to be built by 2030.

First commercial deals are emerging and we can learn from those. In Europe this concerned eg Yara-ACME deal, and more globally examples follow such eg Linde-Dow.

Proposed Adjustments to the Roadmap

Based on the above parameters, I propose the following revisions to our hydrogen strategy as hypothesis:

1. Accelerate Integration of Advanced Technologies: Place strategic bets on multiple carriers (methanol, e-methane and ammonia including cracking), consider to actively test hydrogen (or ammonia where allowed) use in power generation as an intermittency enabler.
2. Reevaluate Infrastructure and Market Focus: Consider taking active positions in to be developed salt caverns for hydrogen storage, and import terminals for Hydrogen derivatives - consider long term investments in vessels to carry Hydrogen and its derivatives.
3. Expand Strategic Partnerships and Funding Sources: Actively seek partners to mitigate sourcing and geopolitical risks and secure diverse international funding. The hydrogen market is expanding beyond what our balance sheet alone can support.

Next Steps

To refine these proposals, I recommend conducting a detailed case study to validate our assumptions and gather data on emerging trends and best practices from global leaders in the hydrogen space. This will enable us to make informed decisions and strengthen our strategic position.

I look forward to discussing this proposal further and working together to ensure our hydrogen strategy is both ambitious and resilient in the face of global changes. If you agree, we could first validate the hypothesis with 1 or 2 senior external advisors in a workshop at low cost, and then consequentially employ a strategy firm to do a global deep-dive.

Best regards,

[Your Name]

[Your Position]

[Company Name]

Annex.

Overview of EU key Hydrogen policy elements - August 2024.

1. EU Hydrogen Regulatory Framework:

   - The EU's hydrogen regulatory framework is based on a complex system of directives and regulations at the EU level, as well as legislations at the Member State level. If you are not short on time, make sure to read Gas and Hydrogen package, and Renewable Energy Directive alongside EU Court of Auditors report on Hydrogen, which in itself is a primer on state of play in European Hydrogen.

2. EU Prioritization of RFNBO Hydrogen, Low Carbon hydrogen:

   - EU regulations prioritize RFNBO (Renewable Fuels of Non-Biological Origin) hydrogen. There is a discussion about whether non-RFNBO hydrogen (including blue hydrogen and electrolytic hydrogen that does not meet RED II definitions) should count towards targets and EU funding if it delivers emissions reductions. Awaiting is for Delegated act on Low Carbon Hydrogen by 2024/2025 - some authors including undersigned and Anne-Sophie Corbeau made suggestions on what could apply as "Low Carbon Hydrogen" for Europe.

3. REPowerEU Plan on Hydrogen / EU Hydrogen strategy / Net Zero Industry Act:

   - The REPowerEU Plan recognizes hydrogen as a critical fuel to reduce energy dependency. The plan sets a goal of 20 million metric tons (Mt) of renewable hydrogen by 2030, split between 10 Mt domestically produced and 10 Mt imported. The signs are that targets were just targets, realistically much less will be achieved as EU Court of Auditors pointed out. Voices are heard calling for revision of EU Hydrogen strategy, with less complexity and attention to industrial competitiveness.

4. Renewable Energy Directive III (RED III) in Industry:

   - RED III mandates that the EU's energy mix should include at least 42.5% renewable energy by 2030, with specific targets for RFNBO hydrogen in the industrial sector, including a 1.6% annual increase in renewable energy use and a requirement for 42% of industrial hydrogen to be RFNBO by 2030, rising to 60% by 2035. We see signs of initial implementation by leading EU refiners closing Hydrogen procurement deals.

5. Renewable Energy Directive III (RED III) in Transport:

   - RED III also sets specific targets for RFNBO hydrogen in the transport sector, requiring hydrogen and e-fuels to account for at least 1% of all fuels used by 2030, with multipliers allowing certain RFNBO uses to be counted more favorably towards these targets. We see in addition plans for enabling use of e-fuels in cars.

6. EU Hydrogen Financing Mechanisms:

   - The EU employs a 'two levels mechanism' for hydrogen financing, combining EU funds (e.g., Hydrogen Bank, Innovation Fund) with Member State-issued State Aid (e.g., IPCEIs, DE, NL etc). We see multi-billion budgets continued being dispersed.

Source: initial list of EU Hydrogen items ERCST 2024 survey used as inspiration, personal observations.

*Note: big kudos to excellent organisers of the summit - (6) Leader Associates : Overview | LinkedIn