Pricing the promise of green hydrogen

As advances in technology make a hydrogen-powered path to net zero more likely, a crucial question remains unanswered: Who is going to pay?

Momentum suggests that many countries are willing. Nine published hydrogen roadmaps in 2020, a record 200MW worth of electrolysers shipped, and there is an estimated 17GW in the electrolysis project pipeline.1 Yet, only two countries have fully funded their hydrogen strategies. Many other projects are speculative and leave out crucial details on commissioning dates and technology choice. They are also in want of funding.

“Who's going to pay and how?” asks Sujay Shah, Managing Director and Global Head of Cleantech Coverage at Standard Chartered. “There was a flurry of announcements from Europe, but other than France and Germany, not many countries have actually said how they are going to finance all the subsidies that would be required to get these projects up and running.”

Indeed, of the $300 billion in investment that the Hydrogen Council says is needed by 2030 to develop all projects currently announced globally, governments have only pledged $70 billion.2 To unlock further investment and generate more certain returns, lower production and distribution costs are crucial.

The Path to Affordability

While the levelized cost of hydrogen made from solar or onshore wind power is set to drop dramatically, cost remains a challenge for now. Green hydrogen production currently ranges from less than $1/kg to $10/kg. Divergent electrolyser and renewable energy prices underlie that disparity. Thus, producing green hydrogen is expensive in many parts of the world. Without a commercial business case, meeting electrolyser targets will require funding.

“A lot of our clients are wondering how they should price green hydrogen to make projects work while balancing risk,” says Galid Lahdahda, Managing Director, Global industries Group, Oil & Gas and Chemicals at Standard Chartered. “As there clearly isn’t enough volume for a liquid market, the price has to be negotiated under long term contracts. We are many years away from green hydrogen becoming a commodity. That brings us back to large carbon markets, which – when functioning well - will set the incentive side and create a level playing field in industrial applications.”

The gradual decline in renewable energy and electrolyser prices promises to make green hydrogen cheaper than blue hydrogen made from coal or natural gas with carbon capture by 2030.3 By mid-century it should fall below $1/kg in many countries, outcompeting grey hydrogen made from natural gas alone.3

Whether the cost reduction comes quick enough remains to be seen. According to the IEA, global demand for hydrogen would need to more than double from existing levels by 2030 for the world to meet the goals outlined in the Paris Agreement.4 Approximately half of that demand would need to be met using low-carbon hydrogen production.

“Many countries have come out with net zero targets, and corporates are following,” Shah says. “There’s increasing support in terms of the macro fundamentals of hydrogen but making good on those intentions will take time because the machinery is not adapted to a sudden surge in interest for hydrogen projects. New policies need to cover several things including land, infrastructure, regulation, grid clearances and carbon prices.”

Catalysing Hydrogen with Carbon Pricing

Hydrogen holds huge potential to decarbonise heavy industry and transport. Success is vital to achieving net zero ambitions as these hard-to-abate sectors account for roughly one-third of global CO2 emissions.5 To accelerate the adoption of hydrogen and make it competitive in industry, authorities will have to increase carbon prices substantially.

In the European Union, for instance, the carbon price is forecast to average EUR46.88 per ton in 2021 and reach EUR108 by 2030.6 While that is up significantly from the 2020 average of EUR25,7 those prices are still far lower than what is required to make hydrogen competitive with the cheapest fossil fuels in several hard-to-abate industries.

“It is often difficult for banks to finance the adoption of new technologies in the renewable energy space,” Shah says. “Financing entails a raft of risks around which technology will ultimately win, pathways to commercialization and the long-term track record of these technologies. The policy framework is also missing in several markets. Thus, quality long-term offtake agreements may not be available.”

Industrial hydrogen projects in Europe and elsewhere will require extensive aid, especially if carbon prices do not rise significantly. In the meantime, carbon credits can help companies in hard-to-abate industries to offset their emissions. Here, Standard Chartered is contributing through its joint venture Climate Impact X (CIX)—a global exchange and marketplace for high-quality carbon credits due to launch at the end of this year.8

CIX will leverage satellite monitoring, machine learning and blockchain technology to enhance the transparency, integrity and quality of carbon credits that deliver tangible and lasting environmental impact. The exchange will facilitate the sale of large-scale high-quality carbon credits through standardised contracts–catering primarily to multinational corporations and institutional investors.

Inflation and the Energy Transition

The global economy is picking up steam and with it concerns around inflation. Already, prices of raw materials including steel and copper have risen to multi-year highs.9 In turn, this threatens to drive the costs of renewable technologies upwards.

For instance, renewable power generation, battery storage, electric vehicles, charging stations and related grid infrastructure accounts for about a fifth of copper consumption.10 With demand set to increase over the coming years, prices are on course to rise further.

“Inflation could actually put the brakes on the developments and create a negative feedback loop for the clean energy transition,” Lahdahda says. “We've seen it during the upcycle of oil prices before—tremendous inflation in new project costs derailing momentum.”

Rate hikes are another consideration. The latest consumer price data in the U.S. increased the odds that the Federal Reserve will raise rates in 2022.11 Given that debt-to-equity ratios of 80:20 are common for renewable energy project financing,12 higher interest rates could make investing less attractive.

“As we transition from some of the more polluting technologies to those that are blue or green, the cost is going to be higher,” Shah says. “So, the question becomes, how does that impact the long-term trajectory for the adoption of hydrogen and other clean technologies?”

Produced by Bloomberg Media Studios in partnership with Standard Chartered.

1 BNEF – 1H 2021 Hydrogen Market Outlook

2 The Hydrogen Council – Hydrogen Insights 2021

3 BNEF – 1H 2021 Hydrogen Levelized Cost Update

4 IEA – Net Zero by 2050

5 Energy Transitions – Mission Possible

6 BNEF – European Carbon Monthly: May 2021

7 BNEF – 1H 2021 European Carbon Market Outlook

8 Standard Chartered

9 Bloomberg

10 Bloomberg

11 Bloomberg

12 IEA – Financing & Funding Trends 2019