Lack of existing market could hamper hydrogen CFDs, cost reductions: Bank of America

Implementing Contract for Difference support mechanisms for hydrogen could be limited by the lack of an existing market, Bank of America Executive Vice Chair, Global Corporate and Investment Banking, Julian Mylchreest said Sept. 9.

Comparisons between a future hydrogen market and successful offshore wind CFD mechanisms should be treated with caution, Mylchreest said at the First Element conference.

In both the case of offshore wind CFDs in the UK, and the steep cost curve reductions seen in solar power production, there was an existing power market to link to, he said, whereas the renewable and low-carbon hydrogen markets would likely start from clusters, before expanding regionally.

"There isn't the existing infrastructure, which is what made it relatively easy for the wind and solar cost to come down fast," Mylchreest said. "You had stakeholder alignment, you had government alignment, the incentives were there, and there was already an electricity grid which you could connect up to, and that made things like CFDs relatively easy tools to leverage and maximize."

"Hydrogen is going to be slower and more complicated in that respect," he added, noting the need for an underlying price against which to settle a hydrogen CFD.

Industrial clusters

The hydrogen market would first develop around industrial clusters and hubs, before expanding to inter-regional and international trade from the 2030s, he said.

"What's critical is that you've got in place all the building blocks to enable things to truly take off in around 2035 and beyond," he said. "The challenge with the sort of cycle of investment, especially when it requires investments in infrastructure and the creation of demand, is we have to start now in small steps in order to make the bigger steps happen naturally in 10 years' time."

Blue hydrogen, produced from fossil fuels with carbon capture and storage, could provide the large volumes needed to build a hydrogen market, helping to drive down the cost of green hydrogen produced by electrolysis, powered by renewable electricity, Mylchreest said.

Some electrolyzer companies are targeting hydrogen production costs of around $1.50/kg by mid-decade.

S&P Global Platts assessed the cost of producing renewable hydrogen via alkaline electrolysis in Europe at Eur7.25/kg ($8.57/kg) Sept. 8 (Netherlands, including capex). PEM electrolysis production was assessed at Eur8.83/kg, while blue hydrogen production via steam methane reforming (including carbon, CCS and capex) was Eur3.88/kg.

Bank of America was open to financing blue hydrogen operations, Mylchreest said.

"Why wouldn't we support a BP or a Shell or a Qatar Petroleum if they decide to go big in blue hydrogen? It's progress," he said. "It also creates the demand, and that demand is what will make a reality that cost curve on the electrolyzer front."

However, he noted that countries and companies that could move straight to large-scale renewable hydrogen production should do so.

Financing projects

There was plenty of finance flowing into the low-carbon and renewable hydrogen space, Mylchreest said.

There was "definite, massive investor interest" from equity investors, driven by the projected energy market share for hydrogen by mid-century, and corporate environmental, social and governance criteria goals.

There was a "huge amount of money flowing to ESG funds," he said, and "not that many places to deploy your capital."

There were questions for the sector to answer, however, on the potential competition it faced from other technologies.

The early hydrogen market was likely to be dominated by contracts to back financing of projects, Mylchreest said, and markets would probably be regional rather than global, given the high cost of transport.

However, that would be enough for markets to develop, given sufficient liquidity in a region, he added.

"I'm a skeptic on a truly global hydrogen market happening anytime soon," he said.

He noted positive policy moves in the EU and UK on the hydrogen front, citing recent national hydrogen strategies, and the EU's "Fit for 55" decarbonization package to cut CO2 emissions by 55% by 2030. Further clarity was needed from the UK, however, to give investors confidence to finance projects.

The UK was offering "modest" amounts of money to stimulate the hydrogen economy, he said, though that could act as a catalyst for further investment.