Inching towards a green hydrogen economy
With hydrogen central to governments’ plans for decarbonisation by 2050, there is plentiful capital available for commercially viable projects.
When H2 Green Steel’s new plant starts production in 2025, it will be the world’s first large-scale project making green steel, eliminating virtually all CO2 emissions from the production process. Located in Boden, northern Sweden, it has the advantage of plentiful wind and hydro resources – and by 2030 is projected to produce five million tonnes of steel annually for automotive, white goods and industrial businesses.
“The beauty of this is that it brings to the market a new category of steel,” notes Christophe Hadjal, Head of Advisory & Business Development – Natural Resources, Mining, Metals & Industries at Societe Generale,a financial adviser to the project. “It is a not just a product with a low CO2 footprint: it is a high-quality range of steels targeted at sophisticated end-users who need both certainty of quality, but also a fundamental requirement to reduce their carbon footprint based on objective science based targets. The most material decarbonisation step many industrial players can take is to reduce the carbon footprint of the steel they are using, and this is why producers and consumers alike are focusing their energies in this space.”
As a commercially viable hydrogen project, H2 Green Steel is one of a kind, benefiting from deft strategic planning bringing together all the factors needed. Not only does it have renewable energy, local iron ore and confirmed customers, but also the European Union is levelling the playing field for hydrogen with its emissions trading scheme that puts a price on carbon. Whilst H2 Green Steel can produce green hydrogen competitively based on current market forces given its favourable location, without government regulation or subsidy, the high cost of green hydrogen – currently $6-$9 a kilogram, against $1-$2 for grey hydrogen – makes many projects uneconomic.
Even so, today’s plans for decarbonising the global economy rest partly on green hydrogen. The EU, for instance, has targeted installing 40GW of electrolysers by 2030. And while green hydrogen is less than 0.1% of the global energy mix today, this could grow to a quarter by 2050, according to some estimates.1
Making projects commercially viable
The spectrum of colour that describes different types of hydrogen is useful for depicting its future evolution. ‘Grey’ hydrogen is today’s dirty form of the gas; its steam methane reformation production process releases CO2. ‘Blue’ is hydrogen produced through the same process, but the CO2 is locked away using carbon capture technology. Lastly, ‘green’ hydrogen is produced by electrolysis, which does not emit CO2 because it uses renewable energy.
There are currently more than 220 hydrogen projects underway globally, according to the Hydrogen Council. These range across giga-scale production projects, large-scale industrial users such as refineries, transport mobility projects and infrastructure projects.
Logically, industrial users can prepare for green hydrogen by using grey or blue hydrogen as a source of energy or feedstock to start with. As they use more hydrogen, so this will build a customer base for green hydrogen, justifying investment in production, distribution and storage infrastructure.
“The steppingstone for us, and what we're seeing in certain markets, is the development of blue hydrogen, with 95% of the CO2 emissions captured and stored,” notes Allan Baker, Societe Generale’s Head of Power Advisory and Project Finance. “I think in Europe, particularly, that's probably the most economic technology today.
Ample potential funding
Establishing a hydrogen economy by 2050, when the EU and other governments aim to have climate-neutral economies, is a mammoth task. Recent analysis indicates that up to $100trn in hydrogen investments will be required to meet net zero goals by 2050.2
Whilst these sums are huge, capital is already available for projects with a sound commercial basis. The world’s largest fund investing in green hydrogen infrastructure, Hy24, for example, launched in October 2021 aiming to raise €1.5 billion. At launch alone, through a combination of industrial and financial investors, €800 million had already been committed demonstrating the appetite.
“You've got strategic investors in Hy24, who could also be the off-takers,” explains Louis-Aynard de Clermont Tonnerre, Societe Generale’s Head of Power, Utilities & Infrastructure Industry Group, who is leading the Societe Generale team partnering with Hy24 and several of its investors to provide financial advice. “You can see that they are taking a stake in this project not only to secure off-takes for their needs, but also as part of their broader diversification in the energy transition. Then you've got the financial investors who want to make a return.”
In February 2022, the fund already invested in Hy2gen AG, the world’s largest platform dedicated to building green hydrogen production facilities. Based in Wiesbaden, Germany, Hy2gen raised €200m in its investment round, with Hy24 once again advised by Societe Generale.
While it remains early days, over time the green hydrogen industry is likely to gain scale and more projects will become commercially viable.
“There are projects that are real today, projects that will make sense in the future and those that never will. It's where we were with renewables 10, 15, 20 years ago, when we had small developers with small projects often buying packages of land hoping that it was going to be windy or sunny,” says Allan Baker, drawing a parallel between Societe Generale’s pioneering role in financing renewables and its leadership in the evolving energy transition.
1 BNEF Hydrogen Economy Outlook
2 Hy24, Bloomberg NEF (New Energy Outlook)