Matchmaking hydrogen suppliers and refineries

Low-carbon hydrogen can only get off the ground if demand and supply matches – and refineries may be the trigger for progress.

Starting in 2020, a number of companies sketched out plans for hydrogen projects. They paid less attention to offtakers.

As the sector has matured, the importance of demand has increased. Some of the wilder predictions about hydrogen’s uses have fallen away and the appeal of focusing on existing demand has come to the fore.

The European Hydrogen Observatory has reported demand for hydrogen in 2022 in Europe was 8.2 million tonnes. Refineries accounted for the largest share, at 57%, around 4.6mn tonnes.

Ammonia accounts for another 24%, around 2mn tonnes.

As Michael Liebreich says on his “hydrogen ladder” fertiliser and fuel production “are huge markets … And there is no route to net zero that doesn’t” include them.

Greener Grangemouth

Refiners are starting to take note. In mid-May, Germany’s RWE announced that it would be developing a green hydrogen project adjacent to Ineos’ refining and petrochemical complex at Grangemouth, in Scotland.

The project would have an initial capacity of 200 MWe, producing up to 3.6 tonnes per hour of hydrogen. It would have potential for expansion to 600 MWe at a later date. RWE said it would supply the initial hydrogen output to Ineos, helping it to decarbonise its operations.

RWE is aiming to bring the green hydrogen facility online by 2029.

“Here, Ineos, which needs hydrogen anyway, is happy to procure green H2,” an Oxford Institute for Energy Studies (OIES) research fellow, Aliaksei Patonia, who works on hydrogen research at the institute’s Energy Transition Research Initiative (ETRI), told E-FWD. “The main point here is the final outcome: will Ineos’ products manufactured with green H2 be cost-competitive?”

This, according to Patonia, is the factor that will determine whether other companies follow in RWE and Ineos’ footsteps. As early movers in an industry where projects are still at their initial stages, the two companies will likely have their plans and progress closely scrutinised.

Overcoming challenges

Indeed, RWE and Ineos’ plan highlights some of the challenges involved in building out the hydrogen supply chain. While they also offer a potential path forward. These include the fact that distribution infrastructure is not in place yet.

Patonia noted that this is not limited to pipelines, many of which are expected to be repurposed from natural gas service. Port infrastructure for the import and export of hydrogen and its derivatives, as well as storage sites, are also lacking.

HyEnergy Consultancy also highlighted distribution and storage as areas that will need attention in building out hydrogen supply chains.

“Matching supply with demand and having an offtaker or offtakers for your hydrogen is crucial, but how you store and distribute the hydrogen is a significant challenge,” HyEnergy consultant Cian Moran told E-FWD.

“When you produce your hydrogen may not be at the same time that the customer needs it. So, hydrogen storage is needed to act as a buffer between production and demand,” Moran continued. “In some cases, the storage buffer needed is a real challenge and can make or break a project.”

Distribution and storage infrastructure adds further costs for industry players that are already contending with higher costs for low-carbon hydrogen than its fossil fuel-derived counterpart. Indeed, a Baker McKenzie partner, Andrew Hedges, highlighted the cost difference between of blue and green hydrogen versus grey hydrogen as the most well-known hurdle.

Government support

Would-be producers continue to explore ways to bring down the cost of low-carbon hydrogen. The UK is among the countries that are trying to help kick-start the industry by offering subsidies.

“The UK government has started solving this through the subsidy solution being offered to projects selected through a competitive process,” Hedges told E-FWD.

Aurora Energy Research’s head of research Anise Ganbold also pointed to government initiatives. These include the Hydrogen Allocation Rounds (HAR) for companies seeking to access long-term revenue support.

“The running costs, in particular the input electricity, is the largest cost component for a hydrogen producer, therefore opex support is important to make the project economically viable,” Ganbold told E-FWD.

Infrastructure requirements and other factors also play into the economic viability of a project. One of their major challenges is “getting all of the needed infrastructure such as on-site storage and pipelines together in one place and at the same time and at a combined cost that won’t break the bank”, Ganbold said.

Longer term

There are various other considerations for suppliers of hydrogen. In most cases, moving from fossil fuels to green hydrogen will require long-term offtake contracts, according to Hedges.

“Beyond price, there are significant challenges for buyers in key sectors to overcome before committing to a long-term offtake contract that will underpin development of low-carbon hydrogen production,” said Hedges.

“Whilst this is clearly easier where there is a subsidy solution for production, a long-term offtake contract involves significant commitments. For example, minimum purchase commitments will usually be required. If changes in business conditions alter the demand profile at the offtaker site, significant liabilities can arise.”

Hedges suggested that ways to grow the clean hydrogen industry include accelerating the deployment of production subsidies. Reducing exceptions to emission trading scheme liabilities for industrial users of natural gas would also help. Another strategy might be to tie sector commitments to hydrogen offtake.

Developing additional incentives and support for offtakers to enter into long-term agreements was another option he identified.

“The key issue for the low-carbon hydrogen sector currently is finding buyers prepared to underwrite significant hydrogen production facilities through long-term offtake commitments,” Hedges said. “Most solutions recently have tended to involve a number of steps in a supply chain through to an end-user that is prepared to pay a premium for a low-carbon product.”

Next steps

RWE and Ineos’ approach on partnering up and co-locating production and demand make sense.

“Currently, hydrogen is produced at or very close to the site of consumption,” OIES’ Patonia said. “Transporting hydrogen is challenging, and such infrastructure investments are expensive and risky. Therefore, securing demand before investing in infrastructure and even production is very reasonable.”

Co-location is expected to be attractive to other companies as well. The expectation is that, in the near term at least, clean hydrogen projects will be developed close to end-users.

With carbon capture and storage (CCS) required to produce blue hydrogen, this also makes it likely that hydrogen projects will be developed within industrial clusters. Such an approach has UK government backing.

“In Aurora’s forecast we expect hydrogen demand to first ramp up in these clusters, where demand and supply are located near each other,” said Ganbold. “Only by the mid-2030s do we expect there to be enough hydrogen transport infrastructure to have production located far away from supply.”

Simplified

The emergence of hydrogen producers and end-users near industrial clusters could help with the challenge of storage, according to HyEnergy.

“Co-location of supply and demand is great because you simplify the distribution piece,” said HyEnergy’s Moran. “If there is also potential for large-scale underground storage nearby, as is the case for some of the UK’s industry clusters such as Teeside and Humber, then that’s a gamechanger,” he continued.

“These clusters, where we have abundant offshore wind nearby, have fantastic potential for flexible renewable hydrogen production to supply industry and transport in the region.”

Indeed, a new hydrogen partnership emerged in Teesside in early June. Green Lithium Refining announced it would secure supplies from EDF’s Tees Green Hydrogen project. The hydrogen would be used at Green Lithium’s lithium refinery in Teesside. This would help decarbonise both its own operations and the local EV and battery supply chains.

Additional details – including on whether a binding agreement has been signed – have not been disclosed. Green Lithium did not respond to a request for further information. The announcement shows that further efforts to partner up on low-carbon hydrogen production and co-locate supply and demand are underway.

Seeking partnerships

Elsewhere, TotalEnergies is demonstrating how companies wishing to use hydrogen to decarbonise their operations could go about finding suppliers.

The French company called for the supply of 500,000 tonnes per year of green hydrogen in September. In early June, it unveiled the first agreement to be signed as a result of the call for tenders. It signed a 15-year deal with Air Products for the supply of 70,000 tpy in Europe.

TotalEnergies is still some way from securing all of the hydrogen volumes it is seeking. Its approach could ultimately result in multiple suppliers.

“A diverse supply is also a more secure supply as if one supplier fails to deliver for whatever reason, others may be able to supply the shortfall,” said Moran. “Open tenders such as the one from TotalEnergies also send a real signal to would-be hydrogen producers that there is a significant market for renewable hydrogen. For an idea of scale, TotalEnergies’ 500,000 tonnes represents over 10% of hydrogen demand in European refineries.”

Given the drive for physical proximity between producers and end-users, a tender process could have its limitations.

“There are also alternative solutions such as a sector-based collective procurement for a low-carbon product that is produced using low-carbon hydrogen,” said Baker McKenzie’s Hedges.

Ganbold said Aurora was closely following the H2Global auction scheme. This matches supply and demand, with the German government covering the price difference.

Bringing onside

And Patonia pointed to Shell’s Refhyne project. This is working on the installation of an electrolyser at a Shell refinery in Germany, as another way for a major refiner to access low-carbon hydrogen.

Another example is OMV Petrom, which on June 11 set out plans to invest 750mn euros (£633mn) in its Petrobrazi facility, in southeast Europe. The company will build out sustainable aviation fuels and renewable diesel capacity, with two green hydrogen units.

The two electrolysers will have 55 MW of capacity, capable of producing around 8,000 tonnes per year of hydrogen.

The plant will consume 11,000 tonnes per year, meaning that most of the hydrogen involved will be clean. As such, it offers a 70% reduction in CO2 emissions compared with conventional fuels.

OMV secured financial support from Romania’s Ministry of Energy, which will kick in 50mn euros (£42mn) for the hydrogen facilities. This is about one quarter of the total cost.

Distance in focus

“TotalEnergies might end up partnering with electrolyser producers and suppliers of renewable energy so that electrolysers can be installed at their refineries, and green electricity can be delivered where grey hydrogen is normally used, rather than transporting green hydrogen from distant locations,” Patonia said.

“In the foreseeable future, I expect hydrogen supply and demand to still be located close to each other and the hydrogen industry to be developed through clusters and via partnerships,” Patonia added. “This would be less risky than investing in large-scale infrastructure projects with no certainty around sufficient demand/supply.”

Refineries and petrochemical facilities will prove natural bedfellows for co-location with low-carbon hydrogen, whether backed by CCS or renewable energy. As carbon restrictions increase, the need to demonstrate lower carbon products will become more important and drive further investments.