|A pilot plant for the CO2-neutral production of hydrogen commenced operation at a Voestalpine AG steel production factory in Linz, Austria, which is supported by utility Verbund AG.
Source: Voestalpine AG
For Europe's green hydrogen sector, the COVID-19 pandemic and associated economic downturn could be an inflection point. While there are concerns over the direction the market will take, with some looking anxiously at investor sentiment and utility spending, the rising tide of legislative resolve is likely to lift hydrogen, too.
In a draft policy document leaked to news outlet Euractiv on June 18, the European Commission said it is looking to instate guarantees of origin and demand targets to drive hydrogen growth and design an "open and competitive green hydrogen market."
The commission will present its official hydrogen strategy on July 8. For the industry, a commitment to facilitating commodity market-scale quantities of green hydrogen is welcome news.
"I don't want to be cynical, but COVID-19 was definitely for our case an accelerator," said Jorgo Chatzimarkakis, secretary general of industry and research group Hydrogen Europe, on a June 25 webinar during EU Sustainable Energy Week.
Hydrogen Europe had warned policymakers in May that, for all the hype in recent years, the sector is facing substantial threats in the wake of the pandemic. In a report, it raised concerns over weakening investor sentiment for the developing technology, and liquidity crises at the smaller companies that form the backbone of the hydrogen supply chain.
While the political commitments made in recent weeks bolster the case for hydrogen, Chatzimarkakis also pointed out that there is not yet a clear legal framework for a hydrogen market, and that such a market design would only be ready by 2024. In the meantime, a steering committee called the Clean Hydrogen Alliance, which brings the European Commission together with industry representatives and governments, has been set up and tasked to find solutions for scaling production in the bloc.
Potential for retrenchment
As a result of the pandemic, some are concerned about potential retrenchment in the industry. "It's something you need and should be worried about," said Ben Madden, director at advisory firm Element Energy. But Madden, who has advised on hydrogen projects and financing across Europe for many years, does not see evidence of this. Rather, the crisis could flip a regulatory switch the sector has been lobbying for for some time, he said.
Hydrogen solutions are being put center-stage in COVID-19 recovery programs and national energy transition strategies, from Germany to the U.K. It will be the implementation of legislative frameworks on the production targets, use cases and infrastructure construction that ultimately allow companies to follow through with plans for projects. "Hydrogen is in the right place at the right time to secure the government support it's been looking for for 10 years," Madden said in an interview.
A lot of the impetus is coming from traditional utilities. "If their core business is hit they may have to retrench," Madden added.
Some utilities active in advancing hydrogen projects in Europe, such as Sweden's Vattenfall AB, have indeed seen their financial results hit by the pandemic in the first quarter already, with the brunt of the lockdown pain likely still ahead.
One industry expert in the utility sector, speaking on the condition of anonymity, said that the crisis may delay projects by a few months but it will not totally derail plans given the long-term nature of the energy transition. Vattenfall also told S&P Global Market Intelligence that it is sticking to its capital expenditure plans and targeted development pipeline for its hydrogen projects.
Industrial use case is lower hanging fruit
The momentum has not slowed in recent weeks, with several new projects announced, including RWE AG's agreement with steel maker thyssenkrupp AG, which importantly is conditional on a hydrogen strategy and infrastructure framework being passed in Germany. The country is planning to set aside €7 billion under an hydrogen strategy, with a 5-GW electrolyzer target for 2030, rising to 10 GW by 2035 and 15 GW by 2040.
"We have seen new projects announced every week despite the challenging times we live in," said Cristian Carraretto, associate director for energy efficiency and climate change at the European Bank for Reconstruction and Development, on the EU Sustainable Energy Week webinar.
In hard-to-abate sectors such as steel production, hydrogen is seen as an important tool for achieving the EU's 2050 climate neutrality target. Those industries could be among the first to see investments in pipeline networks and other hydrogen infrastructure. Co-locating electrolyzer capacity with existing wind and solar farms near industrial off-takers is seen by industry experts as the lower-hanging fruit.
"We need to start to retrofit pipelines ... We would like to start with industrial clusters," said Chatzimarkakis. Further down the line, European economies will need to develop a robust carbon accounting and tracing system for the hydrogen in the network, he added, in order to level the international playing field for off-takers.
The heavy industry use case also buoys the outlook of U.K. electrolyzer maker ITM Power PLC, which also expects the policy focus on hydrogen to sharpen. Among other projects, ITM is building an electrolysis facility at Royal Dutch Shell PLC's Rheinland refinery in Germany.
"This is a moment of acceleration, without a doubt," Graham Cooley, the company's CEO, said in a June 25 interview, adding that there is little room for retrenchment by utilities and the oil and gas sector. "We only have 30 years to get to net zero. They have to find a way of converting their assets."
Like other electrolysis and fuel cell businesses, ITM has seen its share price rally in the last year. According to Cooley, that is reflective of a new market reality. "Everybody has now realized that green hydrogen is the only way of getting to net zero," he said.
In the U.K., the net-zero target places an early focus on decarbonizing industrial clusters, and the Netherlands has also recently presented its green hydrogen strategy. The national hydrogen strategies sit alongside the EU's central policy structure. "Green hydrogen is central to these recovery packages," said Cooley.
While financial incentives can be helpful, the EU should place an emphasis on eliminating permitting bottlenecks for renewable energy projects if it wants to facilitate continued hydrogen deployment, said the industry expert in the utility sector. "A single big demonstration project is not going to drive the transition. You need a steady stream of projects," he said.