In the wake of the Russian invasion of Ukraine, the EU published the REPowerEU plan – a crucial note of support for green hydrogen. This set out how the group would accelerate its decarbonisation and reduce its reliance on Russian supplies of fossil fuels.

Hydrogen was tipped as taking a leading role in this pivot, with a move to domestic supplies and new suppliers.

Amongst other measures, REPowerEU included an updated vision of Europe’s hydrogen ambitions. The Fit for 55 strategy had called for 5.6 million tonnes per year of green hydrogen. But the RePowerEU plan scaled this up to 10mn tpy of domestically produced green hydrogen by 2030. It also targeted a further 10mn tpy of imports.

The EU will need to install around 120 GW of electrolyser capacity by 2030 if it is to meet this domestic target. This would require the installation of around 20 GW per year year for the next six years. Unfortunately, the EU is nowhere near the pace of capacity growth required.

Over the past two years only 1 GW per year has reached final investment decision (FID) in the EU, according to a new report by PWC. By the end of 2023, only 3 GW has reached FID, a fraction of the 205 GW in announced H2 projects within the area.

It typically takes around 3-5 years to complete the construction of an electrolyser.

Time is rapidly running out.

Accelerating adoption

Slow progress turning hydrogen announcements into reality isn’t just a European phenomenon.

Globally, developers have annoucned 840 GW of clean H2 projects. Only 15 GW (1.8%) have reached FID, according to PWC.

Only 2.6% (representing 13% of the contracted volume) of the clean H2 projects planned to come onstream by 2030, has a binding offtake agreement, according to BNEF.

Without secure long-term agreements in place, the bankability of these H2 projects is under threat.

But unless green H2 projects get underway, there is little chance that we will reach the steepest part of the S-curve of adoption, where green H2 begins to make a real dent in emissions.

Electrolysers are likely to benefit from the same exponential forces, known as Wright’s Law, that solar and wind technology have experienced. This would bring costs down, as production ramps up

The International Energy Agency (IEA) estimates the cost of an electrolyser could fall by 70% by 2030. It assumes a learning rate of 18% for the electrolyser stack, where the actual splitting of water into hydrogen and oxygen takes place.

For the other components, representing almost half of the cost of an electrolyser, the assumed learning rate varies between 7-13%. Based on the IEA’s poor record in projecting the cost of solar and wind, the impact on electrolysers could be much more pronounced.

Mitigating risk

Research carried out by the Organisation of Economic Cooperation & Development (OECD) and the World Bank identified several offtake risks that influence whether a green H2 project proceeds to FID.

They include inadequate demand signals, unavailability of credible offtakers, price uncertainty, the lack of H2 trading markets and the potential for offtake defaults.

The H2C Registry, founded by the UK’s First Carbon Investments (FCI) and key industry participants, is an initiative focused on catalysing global markets. This covers green hydrogen and its derivatives, such as ammonia.

Firstly, H2C seeks to aggregate global H2 demand to deliver a strong signal to investors.

According to Ellen this is an important step to “kick start the market where 96% of producers are in pre-production phases”. The H2C Registry works in a similar way to the Sustainable Aviation Fuel Certificate (SAFc) Registry. RMI and Environmental Defence Fund (EDF) developed the SAFc.

“In SAFc we saw Scope 2 and 3 participants able to reduce their emissions accounting and send strong demand signals to support [FIDs] for producers,” Ellen added.

Secondly, H2C seeks to unbundle H2’s environmental attributes, supporting the development of a green premium.

According to Ellen, by “unbundling H2 environmental attributes we make pricing more comparable, open up blending and consider incentives for offtakers upon liquidation of certificates in exchange for their commitments”. Offtakers for products such as oil and LNG are used to more mature – and less risky – markets.

Thirdly, H2C enables market interoperability, bridging local markets, compliance standards and registry partners. As such, it applies globally.

“A liquid, resilient and functioning market, where premiums can decrease with scale and technology deployment,” Ellen said, should have a secondary impact in reducing offtake defaults.

Aggregation

H2C is developing an ecosystem where it seeks to catalyse the green H2 market. Members include green H2 producers and offtakers, but also upstream manufacturers, investment and professional services firms, with governments and trade bodies.

The first and arguably the most important step in developing a network effect for green H2 are the producers. It’s here where H2C may have first mover advantage. “Our job is to facilitate the market and with around 100 GW, more than 25mn tonnes, of production in our producer pipeline, we have a leading position.”

The countries most likely to develop a comparative advantage in producing green H2 are those with abundant renewable energy, in addition to the ability to export H2 to major industrial users.

Ellen believes that export projects of 4 GW or 1mn tpy are the ones that will make the global market for H2. Examples of countries where projects meet these criteria include Oman, Saudi Arabia, Mozambique, Morocco, South Africa and Western Australia.

The other members of the H2 ecosystem – upstream manufacturers, investment and professional services firms, and governments and trade bodies – also have important roles to play. This includes signalling to suppliers the need to decarbonise, helping producers execute and companies manage their carbon accounting. They also help setting standards and defining trade mechanisms.

Unbundling

Buyers of green hydrogen and its derivatives can benefit from better prices and more resilient supply chains when the product and its attribute can be purchased unbundled.

Ellen gave the example of a green H2 project located next to an existing methane reformed H2 facility. With H2C, products can be sold and shipped through the same distribution network, while maintaining provenance and premium.

Green Premium Certificates (GPC) are instruments that represent the emissions attributes, and emission related claims, after using a metric tonne of green H2, or other low carbon fuel. Each GPC is unique. Its attributes include independently verified claims rights, documents of origin and audit trails of emissions from production.

Trading

GPCs can also be traded discreetly from the underlying low carbon fuel. The holder of a GPC owns the legally recognised property rights to the underlying environmental attributes.

A GPC can be retired by, or on behalf of its owner, to claim usage of the corresponding low carbon fuel. Advance purchases of GPCs by investors and other buyers can help low carbon producers finance their operations and commercialise their products.

GPCs have similar characteristics to other environmental certificates, such as those used in renewable electricity generation. For example, Renewable Energy Certificates (REC) or Guarantees of Origin (GO) document that 1 MWh of electricity has been generated and supplied (net) to the grid, through a specified renewable energy resource.

The similarity between GPCs, RECs, and GOs offers important lessons. According to Ellen, upholding the principles of additionality and causality is vital if GPCs are to be used in emissions accounting correctly and their value is not to be undermined.

“We are working to ensure that we take lessons from legacy schemes where these things sometimes became neglected. We place restrictions on use cases to uphold these principles.”

Interoperability

The price of GPCs will depend upon two factors.

Buyers are more likely to pay a premium if they derive additional value from the hydrogen’s low carbon characteristics. For example, if it can be used to cut emissions across activities that are difficult to electrify. The higher the weight that buyers place on green hydrogen’s environmental attributes, the higher the green premium they would be willing to pay.

The scarcity of green H2 relative to the equivalent ‘standard’ emissions substitute will also be crucial in determining the size of the premium. If there are only a few suppliers of the low carbon commodity then motivated buyers will compete for the limited production available. If suppliers can respond quickly and ramp up supply, then the premiums may prove fleeting.

However, if unbundling is to be successful, and green premiums are to be accurately quantified by the market, there must be something distinguishable that can be measured and agreed upon by industry. This could be carbon intensity or other quality metrics.

Unless this in place, buyers cannot be sure of the value they should put on the green premium. There will be doubts about the degree of scarcity that exists in the market.

Green hydrogen details

As might be expected in a nascent market, there isn’t even a commonly agreed definition of what constitutes green H2. For example, jurisdictions such as the US, UK, and the EU tend to define H2 using terms such as ‘clean’, ‘renewable’, or ‘low carbon’.

Broad terms such as these do not give any indication of the carbon intensity thresholds. They also fail to reveal the methodology for measuring carbon intensity, or the production pathway involved.

As Oxford Energy illustrated in a recent paper, countries take different approaches to setting the system boundary. They also can’t agreen on which scope of emissions to include. “The US and UK use a ‘well to production gate’ approach whilst the EU uses a ‘well to wheel’ approach,” it noted.

“The UK, EU and US include upstream Scope 1 and Scope 2 emissions. Only the EU includes downstream Scope 3 emissions. None of them include Scope 3 emissions resulting from the manufacture of equipment used in the production of hydrogen.”

That makes it very difficult to compare the cost and potential emissions avoided of green H2 on a like-for-like basis.

Interoperability is the key to overcoming this barrier and enabling the market to grow.

“We can’t wait for jurisdictions to agree on standard,” according to Ellen. “We need to build in interoperability so that H2C certificates support geo-specific use cases,” with certificates carrying “specific claims rights under given jurisdictions”.

Ellen concludes that although “standards creation is positive … the fruits of labour require a market. These standards cannot be parochial in focus if they are to help [meet] Paris targets – we see interoperability being key.”

A role for the UK

Government and industry understandably focus their attentions on bolstering domestic green H2 production. It’s becoming clear the pace at which capacity is being installed is insufficient to meet climate targets.

It may not be enough to rely on more expensive, domestically produced green hydrogen to decarbonise industries. Progress will therefore require imports from countries that have a comparative advantage.

There are challenges to exporting hydrogen. The initial focus has been for projects to co-locate with sources of demand, such as refineries. The EU’s target of importing 10mn tpy of hydrogen looks in some ways more ambitious than its domestic plans.

As part of Europe, and an economy that will also need green hydrogen to decarbonise, the UK has an opportunity to be at the forefront of this emerging market. Given the UK’s proximity to Europe, exports could be sent via pipeline. This is not an option that will work for producers further afield, such as South Africa.

The UK has a long-standing history developing markets for crude oil, natural gas and other commodities. In time, green hydrogen will also become a globally traded commodity.

UK climate tech companies are a hotbed of innovation, delivering products and services to accelerate decarbonisation. UK companies such as FCI, and their H2C Registry initiative, are an example of the UK’s ingenuity.

There is the potential to be a first mover in the global green hydrogen market. This is true both in terms of delivering production but also helping write the rules for this new area.

Related Content

UK’s strategic energy plan banks on hydrogen storage

Hydrogen takes UK heavy transport to task

H2MOF aims to break open the hydrogen storage puzzle