Hydrogen’s potential to decarbonise each and every corner of the economy has been talked up relentlessly in recent years. Now, that overly bullish narrative has given way to a new pragmatism. There is a narrower focus on applications in sectors where hydrogen is the only viable option for decarbonisation.

“We have reached peak hype in the hydrogen sector and are now at the point of realism,” Frederik Beelitz, advisory principal at energy consultants Aurora, told the recent Aurora Hydrogen Conference in London.

Industry and mobility are now by far the largest target markets for hydrogen projects through 2030, although the scale of projects aimed at industrial offtake is far larger. “Industry is the absolute key offtaker at this early stage,” Beelitz said.

“We have reached peak hype in the hydrogen sector and are now at the point of realism” Beelitz, Aurora

In Germany—potentially Europe’s largest market—and the Netherlands, the focus of offtake is firmly on refining and chemicals, where the goal is to replace grey hydrogen. The steel sector is also in the mix as the leading “new adopter”. Governments are showing the political will to get behind green steel and backing it with subsidies of about €10b ($11.2b) across Europe, Beelitz said.

The recent pilot of the €800m European Hydrogen Bank subsidy auction highlighted the dominance of the chemicals sector as an early adopter.  Four out of the seven winning projects are aimed at supplying ammonia-related processes.

Despite the move to green the hydrogen feedstock used in refining and chemicals production, securing offtake remains a significant challenge for developers and those financing them though equity and debt.

The number of new electrolyser projects announced by developers has shown a “clear downtrend” this year, according to Aurora. That said, some projects have achieved FID. “There is some momentum developing,” Beelitz said.

Carrots and sticks

Coaxing industrials and others to switch to green or low-carbon hydrogen is difficult, given the gap between the price they are willing to pay and the cost of production. And do not forget producers and their financiers need some margin on top of the production cost to make their projects financially sustainable. Current subsidies do not fully bridge that gap in some cases.

The debate over how to incentivise switching is ongoing. Incentives such as quotas on hydrogen use can involve penalties that can in turn have a serious impact on the companies targeted.

€10b – European green steel subsidies

“Offtakers are sometimes industries that are on their knees, and another penalty, another cost to them is quite significant,” said Deniese Ramsundarsingh, development director at green hydrogen firm HYRO, a joint venture between RES and Octopus Energy Generation.

“Adopting hydrogen is not easy. There is a lot of capex and infrastructure changes that have to be made to businesses,” she told the conference.

Tightening  the screws

On the supply side, the EU is pressing on with auctions of fixed subsidies to green hydrogen projects via the European Hydrogen Bank. Subsidies worth €1.2b will be offered in second-round auctions due later this year, However, the EU is “tightening the screws” on conditions imposed on projects bidding into a second round, said Johanna Schiele, policy officer at the European Commission.

Second-round auction terms and conditions released in late September include a five-year timeline for projects to be commissioned, and a 2.5-year deadline for projects to reach FID. Overall, projects will have to show “greater maturity” than those bidding into the first round, Schiele told the conference.

Clearing prices in the first auction were “surprisingly low” and it is expected that the revised terms in the second round will see it clear at higher levels.

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Author: Stuart Penson