Can eFuels Drive the Hydrogen Revolution?
There is no doubt that hydrogen is emerging as an important player in the battle against climate change.
The International Energy Agency describes hydrogen as “a key pillar of decarbonization for industry” (1) and has compiled a database of close to 1,000 low-carbon hydrogen projects(2). The market for green, or zero-emission, hydrogen alone is forecast to grow from $444m in 2021 to almost $4.4 billion by 2026 – a compound annual growth rate of 58% (3).
The challenge will be to convert this palpable enthusiasm into practical applications. It is true that hydrogen has been worked with for decades and that the technology required to produce it without carbon dioxide emissions is relatively proven. But it has yet to be successfully scaled. Also, the comprehensive value chain required – spanning production, transport, storage and utilization – is in its very early stages.
Scaling up a new asset class
Green hydrogen is a new asset class, says Elena Robciuc, a Houston-based Managing Director of the Energy+ Group at Societe Generale. This is tremendously exciting for both developers and financiers; but alongside the opportunity there are also challenges.
For a start, the electrolyzers used to produce green hydrogen – by taking water and splitting off the oxygen using clean energy – have generally only been used at small scale. To produce the hundreds of gigawatts (GW) of hydrogen needed in the future will require plants that hook up potentially hundreds of electrolyzers. There is considerable uncertainty whether this can be achieved effectively to result in the necessary economies of scale.
Even if it does, current global electrolyzer manufacturing capacity is below 10 GW a year, while individual projects mentioned above can be as large as 2-5 GW each. Consequently, every developer is scrambling to reserve electrolyzer production, notes Ms Robciuc.
Beyond that, hydrogen is hard to work with: the molecule is so small and light that it is difficult to contain and prone to leaking. It will require expensive new infrastructure to be built – from salt caverns for storage to pipelines and ships for transport.
One solution to increase hydrogen transportation and storage efficiency is to cool the hydrogen from a gas to a liquid state which reduces its volume by 800 times; however, the hydrogen must be refrigerated to negative 423 degrees Fahrenheit which consumes significant energy.
Refine and apply
A much better solution is to convert hydrogen into other products. These include so-called electrofuels or efuels.
Meg Gentle, Executive Director of HIF Global, a start-up in this sector that is being advised by Societe Generale, says:
eFuels are a clean, carbon-neutral, direct substitute for fossil fuels that are made of green hydrogen and recycled CO2. eFuels are produced using proven technologies and can be used in today’s cars, trucks, ships, and airplanes without modifications. This makes efuels a practical and immediate way to reduce carbon emissions, ahead of tightening standards – such as those being imposed in California – and longer-term solutions.
The hurdle, to date, has been cost. This is what makes the recently passed United States IRA or Inflation Reduction Act(4) a game changer. Not only does it contain a massive $370 billion of clean energy incentives and tax credits; for developers of low-carbon hydrogen and efuel projects, there is the potential to combine multiple tax incentives together. Beyond that, they may even be able to monetize carbon credits generated in the process.
Roughly, that means a US green hydrogen producer could receive up to $3/kg in incentives – a meaningful amount as they work to reduce costs from around $6/kg currently to the $2/kg or so which many experts see as the level needed to achieve market competitiveness and hence real scale.
The IRA has the potential to turn marginal clean hydrogen and efuels developments profitable, and we therefore see it as a very strong catalyst for this industry, says Ms Robciuc.
To counteract this more muscular US industrial policy, the European Union is considering simplifying its own state aid rules in a bid to continue to attract clean energy investments
Putting a project together
Sound economics and the ability to overcome technical challenges are of course essential, but such projects also need other elements to be successful. Foremost among these is a long-term agreement with an ‘offtaker’ willing to buy all or most of the future production. With an offtaker in place, a developer is able to attract financing on attractive terms. HIF Global, for example, is selling the output of its first plant in Chile into the European markets, primarily Germany, given the price premium that Europeans are willing to pay for clean fuels.
The financing part of the overall equation requires a management team that investors, lenders, customers and, indeed, regulators have confidence in.
We feel confident that the same approach that has successfully unlocked the investment required to build a 400m ton per annum Liquefied Natural Gas (LNG) industry can be implemented to roll out the infrastructure for the required millions of tons of efuels, says Ms Gentle.
Societe Generale, one of the key financial advisors in the U.S. LNG market, is aiming to play the same lead role with this new asset class as it supports its clients in driving the energy transition.
(1) IEA Global Hydrogen Review
(2) IEA Hydrogen Projects Database
(3) Markets and Markets
(4) Inflation Reduction Act