Scaling Hydrogen and the LNG Playbook
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At the end of 2023 the International Energy Agency updated its data on low emissions fuel supply. The conclusion was a red marker – we are not on track. Low emissions fuel covered only 1% of global final energy consumption in 2022 with much more rapid roll-out of production and distribution required to hit global commitments.
IEA data for the hydrogen and ammonia industry tracks 1887 projects slated to produce 2bn tons of hydrogen and 14bn tons of ammonia with an estimated market value of $33.3bn. This sounds encouraging but the majority of projects remain at the pre-production stages.
See our Global Hydrogen and Ammonia Dashboard for a visualization of the IEA data.
The economics of hydrogen and in particular green hydrogen are still challenging. S&P Platts Ammonia price chart March 2024 show grey ammonia prices ranging from $289-$462 per mt, produced with steam methane reformers, whereas green ammonia prices ranging from £1024 -$1233. IEA predicts a 30% cost reduction In green ammonia by 2030, assuming production scaling gets on track, but this still leaves a price premium of nearly 50% over its less green cousin. Acceleration requires governments who see Hydrogen as important to achieving Nationally Determined Contributions. Perhaps Japan and South Korea lead the way here.
For producers to accelerate production they need a coalescence of factors.
Highly committed investors. Building a green hydrogen plant from scratch aimed at producing around 1mn tones of green ammonia requires capex heavy investment of around $8bn.
Willing off-takers, and a stomach for off take risk. Generally off take commitments are much shorter than project and depreciation life cycles so investors need to buy into long term market growth.
Stable and supportive governments, who have the power to enable large renewable projects and see export grade production as a strategic priority.
Strategic locations that have environmental capacity for large scale renewable development and access to well equipped ports to ship products to key markets.
PWC proposes the growth curves required for green hydrogen to support Paris Climate agreement goals by 2050.
Learning from LNG's Playbook
Impressive but much smaller than PWC predictions was the growth in LNG markets. LNG experienced rapid growth spurred by the development of efficient cryogenic tankers in the latter half of the 20th century, alongside growing global energy needs. Long-term contracts between producers and consumers further solidified the market.
Source: The International Group of LNG Importers
Today, LNG is a global commodity with significant trade flows. Technological advancements continue to improve efficiency and accessibility, with new players entering the market. As the Hydrogen industry takes its first steps, it can learn valuable lessons from the established Liquefied Natural Gas (LNG) market.
The LNG industry thrived thanks to long-term contracts between producers and buyers. These contracts offered guaranteed income for producers, justifying large-scale investments. Green hydrogen can benefit from a similar model. Long-term contracts with fixed prices will mitigate financial risks for producers, encouraging them to develop green hydrogen production facilities. To achieve this provenance management and finance must underpin the premium credentials of production.
Replicating the LNG industry's phased approach may be beneficial. Initially, LNG focused on securing a few key buyers for large-scale projects. The green hydrogen industry can follow suit by establishing a core customer base, allowing the market to mature before transitioning to a wider range of consumers. In this respect Japan and South Korea lead the way on demand, with initiatives like Neom in KSA and Hydrom in Oman initiating at-scale supply.
The existing LNG infrastructure presents both opportunities and challenges. While some elements, like pipelines, might be adaptable for hydrogen transportation, this shouldn't be the sole focus. Green hydrogen requires a dedicated infrastructure network built with efficiency and safety in mind. However, strategically repurposing existing LNG facilities could offer cost savings during the initial stages of green hydrogen development. Countries like Oman have a legacy advantage with established LNG facilities in ports like Duqm and Salalah.
Policy and Demand Guarantees
Government policies played a crucial role in the development of the LNG market and renewable energy. The UK’s Green Bank’s support for contracts of difference quietly created a world leadership position in renewable deployment. Green hydrogen must benefit from similar support globally if it is to achieve the necessary growth curve. Early-stage policies offering subsidies or tax breaks can make green hydrogen more competitive with traditional fuels. Additionally, implementing programs like Germany's H2 Global scheme, which guarantees a minimum demand for green hydrogen, can incentivize producers and attract investors. In Sustainable Aviation Fuel an alliance of buyers have put $200 million into the pot to finance green premiums and pull production forward.
Unlike LNG, green hydrogen prioritizes environmental benefits. Regulations and policies need to ensure the entire production process is truly sustainable, from renewable energy sources used in electrolysis to minimizing energy losses during transportation. Given the generic product is H2 [or NH3], provenance management systems are crucial to underpin the environmental credentials and value added production.
Conclusions
Green Hydrogen production is central to the development, transport and consumption of renewable energy across technologies and international markets, from power station adaptation, green steel to synthetic hydrocarbon fuels like eSAF. To align emissions reduction targets with production targets, the H2 industry needs government support, large scale investment and provenance management systems to enable an energy revolution. Time is tight.
