Is Green Hydrogen Being Overhyped? 

May 27, 2023
By Cyril Widdershoven

• Green hydrogen is being hyped as fuel of the future by business and governments alike.
   
• Technical and commercial constraints remain unresolved while European nations are making huge commitments to green hydrogen.
   
• Saudi Arabia’s Prince Abdulaziz recently questioned market dynamics of hydrogen.

The global discourse on addressing climate change, energy transition, and investments is currently dominated by the topic of green hydrogen. The media frenzy surrounding the expanding array of projects, subsidy schemes, and international strategies is fueled by the influence of Washington's IRA plans and the EU's energy strategic projects. It appears as if the choice for a post-hydrocarbon world has already been made, with green hydrogen or its derivative, green ammonia, emerging as the favored options. Western parties remain highly optimistic, as large-scale renewable energy initiatives are closely tied to these alternatives. However, it is crucial to bring realism into the discussion. This aspect should be addressed sooner rather than later. During the Qatar Economic Forum in Doha, Saudi Ministry of Energy Abdulaziz bin Salman highlighted the skepticism, stating, "People talk about hydrogen as the fuel of the future... but who is going to be the offtaker?" Abdulaziz bin Salman emphasized that hydrogen lacks a clear market price, which inhibits its development. He questioned the prevailing discussions on various types of hydrogen, such as blue, green, purple, or pink, by emphasizing the need for identified offtakers and clear policies in this regard. Amin Nasser, CEO of Saudi Aramco, previously stated that blue hydrogen costs $250 per barrel of oil equivalent (boe), which suggests that customers in the EU, Japan, or South Korea would not be willing to procure it at such prices. Additionally, Bloomberg reported that despite the exponential growth of the green hydrogen project list, investors remain unconvinced about financing them.

Currently, there is a proliferation of hydrogen projects being proposed, but only a mere 7% of them have secured financing to commence construction. Bloomberg New Energy Finance has highlighted that this financing reality sharply contradicts the expectations set by the IRA and EU strategic plans. Financial institutions remain highly skeptical about the feasibility of economically and affordably producing large volumes of green hydrogen. According to some industry insiders who spoke to Bloomberg, while there are numerous project announcements, very few are actually being realized on the ground.

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Another critical aspect that has been previously mentioned but continues to be underestimated is the deficiency in infrastructure. It is vital not only to establish infrastructure for utilizing hydrogen in power plants but also to facilitate its transportation to end users. These overlooked factors are causing concerns among financial institutions and banks. The absence of sufficient infrastructure presents significant risks for investors due to the large-scale nature of hydrogen projects.

Simultaneously, even if all the proposed projects are implemented, it is important to address the realistic fact that they collectively account for only 3.5% of the EU's projected energy needs by 2030. Project developers and financial institutions are also deeply concerned about the narrow focus taken by Western governments, which primarily revolves around energy transition and hydrocarbon substitution. There is a pressing need for greater regulatory clarity, and government financing remains crucial. An illustrative example is the EU Hydrogen Bank, holding $3.2 billion, which is intended to support future fuel markets, while the full implementation of EU regulations for green hydrogen production is not expected until 2028.

The current hype surrounding green hydrogen fails to adequately address the existing technical challenges, which cannot be resolved within a few years. Research reveals significant technical hurdles that hinder a comprehensive economic assessment of the use of green hydrogen or ammonia. Two prominent challenges are evident: the small size of hydrogen molecules poses safety and greenhouse gas-related risks that must be mitigated. If these challenges remain unresolved, transportation and infrastructure developments will not materialize. For instance, a German energy giant aiming for 75% green hydrogen usage in its gas plants has highlighted that Germany's current grid can only transport 20% of hydrogen. Similar limitations exist in the Netherlands and other European countries. In this context, the EU's ambitious target of importing 10 million tons of green hydrogen by 2030 is at significant risk. Converting existing LNG regasification plants and infrastructure to accommodate green hydrogen transportation, as some suggest, would be exorbitantly costly and has not yet been factored in.

BloombergNEF has emphasized that while the availability of green hydrogen is already under pressure, the demand side is not yet established. Without a clear understanding of who the customers will be, no project can be deemed bankable or economically viable. Brett Ryan, Head of Policy at Hydrogen UK, bluntly states, "There's no point producing huge volumes of hydrogen if you don't have off-takers who are ready to actually use that hydrogen." This sentiment is echoed by major green hydrogen producers such as Saudi Arabia and the UAE.
Without a market price, which does not currently exist, or robust reference prices in a still nascent commodity market, it will be nearly impossible to realize the proposed projections for green hydrogen. The green hydrogen market finds itself in a "chicken or egg" situation. While many renewable energy projects align themselves with green hydrogen as a potential economic driver, the reality must be acknowledged. Considering the significant influx of intermittent renewable power generation, the market needs to recognize that without off-takers for green hydrogen or green ammonia, the overall financial outlook will be far bleaker than anticipated. A market based on both supply and demand is essential. Presently, viable options are scarce, even in prosperous markets like Northwest Europe. Green hydrogen is expensive, and if it cannot be efficiently transported, it ceases to be truly green and becomes a potential waste of financial resources. Prince Abdulaziz's warnings should be heeded by project developers, not as a death knell but as a cautionary message.

The early phase of the development of a hydrogen economy is full of risks. Relying on hype alone does not establish a foundation for stability but instead exposes inherent risks.

By Cyril Widdershoven for Oilprice.com