INTERVIEW: UK's Octopus Hydrogen seeks to unseat conventional production, diesel in transport

Octopus Hydrogen is already able to produce green hydrogen that is competitive with conventional fossil fuel-derived production and diesel in transport applications, the company's CEO Will Rowe told S&P Global Commodity Insights in a recent interview.

The hydrogen startup has production costs of around GBP3-4/kg ($3.7-$5/kg) at the facility gate, Rowe said, and offers sale prices from GBP5.30/kg once logistics and transport costs are accounted for.

Rowe said diesel parity was around GBP6/kg, equating to around GBP1.50/liter, while hydrogen pump prices in Europe were around Eur12.85/kg (GBP11.33/kg, $13.48/kg) in January, according to monthly Platts assessments from S&P Global.

"We do like those diesel replacement applications, especially in things like auxiliary power -- diesel gensets where there's very little option to go down the battery route," Rowe said in January.

Octopus Hydrogen, part of the Octopus Energy Group, is targeting green hydrogen production of 20 mt/day by the end of 2025, a level Rowe acknowledges is ambitious.

The company is targeting customers in two core markets: replacing conventional hydrogen in tube trailers for industrial gas supply, and as a fuel in heavy transport and auxiliary power, Rowe said.

Octopus' 1-MW pilot project at the MIRA Technology Park near Birmingham, England, is due to go live in April, and its project pipeline includes a 15-MW plant in Scotland powered by 70 MW of onshore wind, and two 10-MW projects in southern England, both co-located with solar power plants, with construction planned across 2023-24 subject to funding.

Octopus canceled an electrolyzer order with UK-based Clean Power Hydrogen (CPH2) in November, following problems identified during testing of the company's membrane-free cryogenic electrolyzer unit, CPH2 said at the time.

Rowe said CPH2's technology could be of interest in the future once they had demonstrated the ability to scale, but Octopus had selected an alternative manufacturer for the MIRA project.

A pilot project of 1 MW is very similar to a 10-MW plant in terms of key operating aspects such as engineering, planning permission and water handling, Rowe added.

Co-location business model

Its business model is to co-locate hydrogen production facilities in the 5 MW-20 MW range with new-build renewables, securing a power price at the level of the Contract for Difference won by the solar or wind power producer.

"We found a bit of a sweet spot," Rowe said. The company had previously targeted power purchase agreements at a slight premium to typical market rates, but Rowe said the CfD approach was more appealing, given the recent rise in PPA costs.

BayWa, with which Octopus Hydrogen is developing projects in the UK, won CFDs in the UK's Allocation Round 4 process in July 2022 at GBP42.47/MWh for its 48-MW Broken Cross wind project in Lanarkshire, Scotland, and GBP45.99/MWh for solar projects across England.

Octopus can then take curtailed, excess and some core power production at the CFD price on 20-25-year contracts.

Rowe said the power price the company could access was much more favorable than locking in a PPA at current market rates.

PPA platform Pexapark's PEXA GB trend price across technologies was Eur92.24/MWh (GBP81.36/MWh) on Jan. 30.

Octopus Hydrogen will join a renewables project post-final investment decision, siting its facilities where a battery unit might have been planned.

"We're in a nice niche where we can get power very affordably," Rowe said. "We're not really subject to any grid-related issues and we can get producing hydrogen quick because of our modular design."

A project could be up and running within 18 months of a final investment decision, he said, compared to around three years for integrated renewables and hydrogen development.

Octopus has been promised a 15-month lead-in time for electrolyzer delivery, which is the longest lead item for a project, Rowe added.

He said the company would assess the market in 12 months' time before deciding on the next big phase of projects. The plan would be to raise a lot more capital to be in a position to deploy billions of pounds worth of projects, rather than tens of millions of pounds worth.

The incumbent hydrogen demand sectors in refining and ammonia production are too large to serve by tube trailers, but could be an area of interest for Octopus in future, Rowe added.

Octopus is focused on hydrogen production, leaving distribution and deliveries to partners such as Greenergy.

Blue hydrogen

Rowe said the UK's proposed hydrogen business support model, which is to operate across both green and blue production pathways, works well for electrolysis projects as well as fossil fuel derived production with carbon capture and storage.

However, while adding CCUS to existing hydrogen production is a "no-brainer," Rowe questioned new-build blue hydrogen projects to serve new sectors in industrial clusters.

Gas prices would need to be below 50 pence/therm to be competitive in hydrogen production with offshore wind-powered electrolysis at around GBP45/MWh, he said.

Platts last assessed UK NBP month-ahead gas prices at 148 p/th Jan. 31.