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Unlocking the Hydrogen Economy

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On December 9, Eamon Nolan, a Vinson & Elkins LLP partner in the New York office, moderated an insightful and exciting one-hour panel, “Unlocking the Hydrogen Economy.” Eamon, whose practice focuses on large infrastructure and energy project finance, led the panel in a discussion on the future of hydrogen and the steps taking place world-wide to harness the gas’s fullest potential. The session was part of a two-day webcast, “Future of Renewables,” sponsored by Reuters. Panelists included Andreas Schierenbeck, CEO of Uniper, Michele Azalbert, CEO of the Hydrogen Business Unit of ENGIE, Daryl Wilson, Executive Director of the Hydrogen Council, and The Rt Hon Kwasi Kwarteng MP, Minister of State for Business, Energy and Industrial Strategy in the UK.

To set the stage, Eamon pointed out that hydrogen’s role in the energy sector is not a new one, but that a functioning hydrogen economy has had multiple false starts over the last 50 years. According to Eamon, what is new is that we are in the midst of a global push to make hydrogen a significant part of the energy evolution. There is a unique combination of business and governments across the globe energized around various initiatives.

The Minister of State, Rt Hon Kwasi Kwarteng, pointed out that several countries, in addition to the UK, have a significant interest in the hydrogen economy. According to Kwasi, the EU and the German government have already issued statements on hydrogen, and the UK will publish their plans within the first quarter of 2021. The big challenge in the UK right now, according to Kwasi, is to get the “same type of alchemy and same circumstances” that drove wind power adoption to drive the hydrogen economy. Kwasi believes that the private sector will have a large part to play.

Andreas Schierenbeck, CEO of Uniper, was also forward-thinking. “If we want to decarbonize our society, you need more electric energy for a lot of sectors, and for those things you cannot decarbonize with electricity, you need hydrogen.” The demand could be strong, yet as Schierenbeck pointed out, the key challenge is the investment needed to convert gray hydrogen production that uses fossil fuels, to blue, which captures CO2 from being released into the atmosphere, or to green, the cleanest variety of hydrogen, which is produced through the electrolysis of water powered by renewable energy sources, resulting in zero-carbon emissions. He recounted reading that most new forms of energy need three trials in about thirty years to finally make an entrance into the market. Schierenbeck believes this is likely the third try for hydrogen.

Daryl Wilson, Executive Director of the Hydrogen Council, said when he looks at the growing scale of commitments from his council’s 100 members (they launched with just 13 members in 2013), he believes they are ready for real deployment of hydrogen production en masse. He believes subsidies are a must, and this may already be happening. According to Daryl, industrial commitment and investment may already exceed $100B, and public sector commitment is approaching $50B to $60B.

Michele Azalbert, CEO of the Hydrogen Business Unit of ENGIE, agreed with Daryl and the others, noting an unprecedented momentum for studying production. She believes her company will begin investing in 2021. But Michele pointed out three factors must be met to increase hydrogen use:

  1. Visability is needed for the entire hydrogen market in order to foster investment and create a regulatory framework that will set a road map with real targets.
  1. An ability to develop fast and to scale is essential. Focusing on industrial-scale projects to garner a cost decrease and reduce the competitiveness gap, plays a genuine role.
  1. Developers are essential to the equation. They can find the customers, engage in long-term contracts and locate financial partners to build better solutions

Eamon sees a powerful combination of government and private sector focus pushing to bring industrial scale into the market. The EU’s Green Deal targets a 55% emission reduction by 2030 and plans to put additional renewable hydrogen electrolyzers in the EU by 2024, adding even more capacity by 2030. Eamon sparked the discussion by asking the panel what types of government policies they believe are necessary to encourage the industry.

“You will drive the cost down if you allow both market and private capital deployment,” according to Kwasi. In Britain, he said, there were good experiences with three offshore wind auctions of CFDs (Contract for Differences). “The price tumbled from something like £120 per one megawatt hour to £39 per-megawatt-hour, and that took place over eight years.” Kwasi went on to add, “I think you could see and replicate that with the manufacturing and production of hydrogen.”

Daryl remarked that the pathway is in place and there is not a technology scale-up constraint. “It’s more creating the demand.”

Positioned For Success

Eamon asked the panel to provide their insights about the specific industries and areas to be watched, where hydrogen might play an important role. Eamon added that the International Energy Agency estimates that the demand for hydrogen in its pure form is 70 MTPA. Currently, more than 95% of hydrogen production comes from grey hydrogen, which emits 830 MTCO2 per year, or roughly the carbon emissions of Indonesia and the UK combined.

Kwasi said that the UK government has set a milestone and wants to have 2 million green jobs, generate 5GW of low carbon hydrogen production capacity, and develop the first town heated entirely by hydrogen, all by the end of the decade. As the MP explained, the UK has a ten-point plan to support green jobs and accelerate its path to net zero.

Using hydrogen is part of the plan. Kwasi reported that £12B of UK government investment will be mobilized, and up to 3 times that amount will be mobilized from the private sector. Wind energy has been driven largely in part by private sector investment. “The trick is to get a funding mechanism, and an incentive structure to bring to bear the private sector to drive it,” says Kwasi.

Daryl says that as the green hydrogen part of the calculation matures, there will be changes and a cross-over point. “By 2050 there will likely be more green installations. This is not an either-or horserace.”

Transportation and Valleys

Most pipelines can handle a 20% hydrogen mix according to Andreas. “There is enough room for all colors from my point of view.” He pointed out that Germany does not have enough wind and sun to develop what they need, so enabling hydrogen transportation will be essential to that equation. As a corollary, Daryl added that those countries with an endowment of natural resources like wind and sun, such as Chile with its solar exposure, will lead markets with their access to renewable energy.

Kwasi pointed out that a vast number of industrial processes need to be decarbonized, and he has already seen announcements in the steel industry. “Things are moving in the right way. This is an asset allocation and prioritization issue.” He also discussed the applications to the transportation sector, pointing out that while it is difficult, if not impossible, to use electricity for trucks, hydrogen may be an alternative.

The panel described the great opportunities ahead. They explained that hydrogen can be shipped in bulk by using methodologies including converting the gas into ammonia, liquid hydrogen or other forms. Daryl added that there needs to be a realization that a vast amount of hydrogen can be moved easily in pipelines, and it may even be simpler than adding additional power lines for electricity. Kwasi agreed that the corridors and technologies are already in place, and shipping companies in Japan and Korea are already taking steps to make this happen.

Eamon pointed out that various geographical areas called hydrogen valleys have been located as venues where hydrogen and other applications could be combined to work together. He offered that if offshore wind capability is paired with hydrogen production, a complementary ecosystem can be created. Andreas agreed and said there was a strong possibility of applying this for the housing sector to supply both electric and heat. Michelle also pointed out that if a holistic approach is developed, the result will be better business practices with better total value and total cost.

The Future

Kwasi said, “It’s a chick and egg. You need government involvement to jump-start this, but you need private capital to make investment. It’s a dialogue with both. Risk is a consideration in the investment side of things, but electrolysis has been around for a long time. We are not picking up huge new risk where there is no experience.”

“If 2020 was the year we get started,” remarked Daryl, “it will take time to blend the complementary activity of government on policy and funding and investment from the private sector.” He added optimistically, “The pathway will be clear on the way, and we will have real examples.”

Andreas ended the session by summing up the discussion. “To kick start,” said Andreas, “we have the technology, and we need better investment conditions. We need to work together as partners to achieve it. The time is right.”

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.