Where next for global hydrogen?

Transcript

Adam Barber:

Hello and welcome to the latest in Tamarindo's Insights videos where we are joined by a series of senior executives from around the world talking about key issues within the energy transition.

Today on the show, I am delighted to welcome Luke Robottom, a partner at Ashurst. Luke, good morning. 

Luke Robottom:

Morning Adam.

Adam Barber:

Before we dive into today's topic, I think it's worth providing some context on where we're heading. Today's discussion focuses on something close to my heart: global hydrogen.

The global hydrogen market has been under scrutiny for decades. However, when it comes to project financing and the practicalities of developing these projects, the operational infrastructure hasn't yet lived up to the industry's expectations. Today, we'll examine how recent efforts to establish clearer subsidy mechanisms and regulatory frameworks in the US, Europe, and Asia-Pacific are bringing more certainty to the market. We've also seen a few regional green hydrogen projects emerge in key territories like the Emirates and Europe. The question is whether these are market anomalies or the beginning of a significant new growth phase.

One person who can shed light on this is Luke. Luke, you've worked across both the infrastructure and hydrogen sectors for some time. With all the talk about green hydrogen, can you give us perspective on the current state of the market? As we approach the end of 2024, how do you see it evolving in 2025 and 2026?

Luke Robottom:

Thanks, Adam. I guess "hype" is probably a good way to describe what we were all thinking about green hydrogen three or four years ago. I must admit, I was absolutely part of that camp. My background is in working on some of the biggest, most challenging oil and gas projects in the Middle East region for the last 20 years or so.

I've worked on refineries, petrochemical projects, project finance deals, LNG, liquefaction and regasification projects, as well as a range of conventional and, more recently, renewable power generation projects. When green hydrogen really started to gain momentum, I thought it was a perfect fit for what I do and for what Ashurst as a firm does. It combines our expertise in the power sector with very specific knowledge of developing complex process plants, and structuring those developments in a way that works for all stakeholders, including sponsors, lenders, and governments. So, I was very excited about green hydrogen, just waiting for it all to really take off.

The experience has been interesting, though, as there’s been tremendous interest from governments around the world in pushing this forward. Many are looking to develop subsidy regimes to support these projects, as well as regulatory frameworks and hydrogen hubs to facilitate investment, particularly in countries where there’s a clear competitive advantage in generating or developing green hydrogen.

There’s also been tremendous appetite from sponsors—whether oil majors, NOCs like ADNOC, Saudi Aramco and Cathay Petroleum, or the big players in the region — along with substantial interest from banks and lenders, who have a tremendous amount of capital ready to be deployed on these projects. But despite everyone being prepared — lawyers, bankers, sponsors, and governments — we’re not really seeing that many projects take hold or reach FID. There are lots of MOUs and feasibility studies, but very few projects actually getting to FID or securing financing.

Adam Barber:

And is that appetite, which you’ve succinctly outlined — the desire from all parties to get this done — the fact that those mechanisms, though still in early stages, are starting to take shape? If you look back at other areas of infrastructure that have rapidly expanded, like solar and wind (as great examples of that) over the past couple of decades, those were the building blocks that brought new power generation to life. But in the world of hydrogen, and particularly green hydrogen versus any other colour, that hasn’t happened yet. What are the core differences between green hydrogen and more traditional grey hydrogen, which is an established market but, I think it’s fair to say, relatively static? Would you agree with that?

Luke Robottom:

Yeah, I think that's a fair statement. Hydrogen is a gas that has been used in industrial processes for decades, such as in methanol and fertiliser production. I've worked on a number of fertiliser projects in this region. However, there is a capped global demand for it. And I think that's the key point as to why hydrogen is different from, say, wind or solar renewable developments, which embarked on their own journey 15 or 20 years ago and have now reached a point where these projects stand on their own two feet. Of course, they have brought with them a host of other issues, such as transmission and grid stability, but that's a topic for another podcast, I'm sure. Those projects, at the time, the issue with renewable energy projects was not so much "Is there a use for these electrons if we can get them into the grid?" since there are electric grids in all the countries where renewable power is being built. So, it wasn’t a demand question, it was a cost of supply question. Does the technology stack up? What does it cost to build an offshore wind project? We hadn’t done many of those before? How can sponsors deal with the cost of production like this [indicates space with hands] when a coal-fired power station operates like this [indicates different space with hands]?

Governments came up with a group of really great solutions to bridge that gap. The CfD (Contract for Difference) mechanism in the UK is a great example, where a subsidy was used to bridge that gap. Over time, as developers gained more experience with these projects, and as technology became more efficient, they had auctions for these CfDs and the price went down and down and down. This happened because efficiency improved, the supply costs reduced, and, ultimately, the supply became economically viable to meet the demand that was already there.

Now, hydrogen is different because, while you have all of those same supply-side questions, there are additional complexities. For a green hydrogen project, you’ve got the green electrons – and I think we’re sorted on that front now in terms of everyone knowing how much it will cost to develop a solar or wind project. But then you’ve got the electrolyser, the process of converting electricity into hydrogen, and then the issue of transmission and distribution – how do you get it from where it's produced to the market? These factors all feed into the supply cost side of things.

So, that’s fine. If that were the only problem, you could look at solving it on a similar basis to how the problem was solved in renewables. But you also have the demand side. With hydrogen, you don’t have a grid into which you can simply feed power when the price is right. Instead, you have a currently capped demand.

Adam Barber:

And a very price sensitive market.

Luke Robottom:

Absolutely, it's a price-sensitive market that's based on the cost of natural gas, which has been the base case price for hydrogen to date. So, at the same time, you're trying to develop enough projects quickly enough to bring the price of supply down. You're also trying to figure out what the demand position is going to be. We're told that all these hard to abate manufacturing sectors are going to be perfect for the use of green hydrogen, but they're not there yet, right?

Without that guaranteed offtake/demand, it's hard for developers and sponsors to take on the supply risk. Without that, it’s difficult to get a stream of hydrogen projects that can help reduce costs on the supply side. So, developers are kind of stuck in the middle at the moment, trying to make these projects stack up.

Adam Barber:

Yeah, and I think, just for context, traditionally, developers have tended to sit in two different camps. The traditional player, who would develop an oil and gas facility or a traditional grey hydrogen facility, ultimately had a very defined price point to work with. They knew what they were going to be selling at the end—i.e., the molecules coming out of the facility—well before the project reached financial close, and that became part of the financing package.

However, if you look at green hydrogen development, you've got volatility at both ends. There’s risk at both ends of the project. You've got the price of electricity, which is variable depending on the region. Then, you've got the price of the hydrogen itself, and the willingness (or propensity) of off-takers to pay what we know will be a premium for that hydrogen.

Luke Robottom:

Yeah, exactly. And how does anyone take your view now? Look, there is no global market for green hydrogen at the moment, right? Understanding what that premium is actually going to be worth is very, very tricky for sponsors. It’s nice to talk in the abstract — yes, we know that in the future, there will be a premium on this — but that becomes difficult when you're at FID and having to make investment decisions today based on assumptions about what that premium will be in the future. It becomes even more challenging if banks are being asked to take views on off-take prices without a committed off-take primes that underwrites the revenue streams.

Adam Barber:

I can't see that passing many of the credit teams at many of the banks. Price will come down.

Luke Robottom:

No, that's right. And it's really interesting with banks, right? As I said, there's an incredible amount of capital ready to be deployed. I can absolutely see banks taking more relaxed positions on some aspects of risk allocation, such as construction risk and similar issues, which you might expect in a more traditional project finance deal. However, when it comes to the pure economics of the project, those questions can't be avoided. They will, without a doubt, be the questions that the credit committee are asking.

Adam Barber:

Yeah, when we spoke ahead of the recording, you mentioned a project in Sweden that could potentially be quite interesting in that regard. I wonder whether you might be able to elaborate on that particular project and give us an indication of whether or not it could serve as a barometer for how we might see those first steps playing out.

Luke Robottom:

Yeah, it is really interesting. It's actually a deal that was just announced, I think it was yesterday, in terms of our client's involvement. Our London office is advising on an ancillary project to provide water treatment services for a green steel project in Sweden, being developed by Stegra.

I believe it’s in the Boden region of Sweden. Green steel is an interesting one because we are seeing green steel projects being seriously considered in various places around the world. There’s one here in Abu Dhabi, the project in Sweden, and I’m also aware of another one in Italy that's still in development. All of these projects are using DRI (direct reduction technology), and while they can use natural gas, they are also designed to use green hydrogen.

Adam Barber:

I was going to say, why are they doing that? Just to be clear, perhaps not necessarily focusing exclusively on the Swedish deal, because I recognise there are sensitivities around that. But what is driving this? What we're talking about here is how we find those first steps into a new market and, ultimately, what is driving the willingness of an off-taker to pay a premium for those green molecules? Why do you think they are prepared to do that?

Luke Robottom:

Well, I think part of it is that arguably the premium is less. The interesting thing about these projects is that they’re not using hydrogen developed in Namibia or Australia, then converted into ammonia and shipped to Sweden, re-converted back to hydrogen, and then put into the green steel plant. These are green hydrogen electrolyser facilities built directly on the green steel site or very close to it, with a pipeline connecting the electrolyser to the green steel plant. This means you’re using green electrons sourced directly from the grid.

So, right there, you’ve removed a lot of the uncertainty around transmission infrastructure, distribution, and efficiency losses from converting hydrogen to ammonia, which is necessary when shipping hydrogen over large distances by ship. With that part of the equation removed, the end cost of the hydrogen is much lower, which makes the economics stack up much better for the off-taker. And, in turn, it makes it more viable for the supplier.

Adam Barber:

And I suppose we can't dismiss the fact that there is also a geopolitical element to that as well — that they control their own supply chain on-site. Now, there is a cost to that, which is separate to the transportation costs, etc. But ultimately, they are the masters of their own destiny in that supply.

Luke Robottom:

That's a really good point, especially if you’re thinking about a key input to your production process. If that input is not readily available and you can't secure it from alternative sources, that’s a big risk for your business. So, for those sorts of projects, it makes sense to have a dedicated electrolyser facility on-site to supply hydrogen for the green steel.

Adam Barber:

It's that point—are the projects we're starting to see, like the Swedish example, enough to open up the market at scale ultimately? And is that going to unlock growth? With Ashurst having tracked the market for quite some time, is it viable? What we have here is hydrogen production, albeit in small amounts, in territories that previously weren’t producing hydrogen. Are we going to see a significant shift in the areas of global hydrogen production? Or are we going to see a kind of displacement effect? I mean, where does that come into play?

Luke Robottom:

Look, I think it's somewhere in the middle. Is it going to be what we all thought it would be two or three years ago? Probably not. Is it going to take longer? Yes. But are we going to get there in the end? I still remain positive.

You mentioned this global hydrogen guide that we produce, which tracks hydrogen developments around the world. It monitors the policy measures governments are taking to support the development of hydrogen markets, both on the supply side and through the creation of hydrogen hubs on the demand side in their own jurisdictions. And look, there is still tremendous appetite to make this happen, and a strong understanding that it needs to happen if we are going to meet these really tough net-zero goals.

Hydrogen might not play as big a role as we initially thought a few years ago, but it will still be a really important part of the solution. I think these small, incremental steps — like on these green steel projects — will be really helpful in getting sponsors and governments comfortable with the fact that things are moving in the right direction. Perhaps not so much the lenders, but for sponsors and governments, these developments can make them feel more confident, as there’s one less unknown, or at least the unknown becomes less daunting when you can see green shoots of progress in hydrogen markets around the world. So, I think the green steel movement is very positive.

Adam Barber:

So, just finally — and I’m aware of your time on this — does that mean you see the hydrogen market globally, if you look at the metric tonnage across that sector, and we stare into that crystal ball that I know all lawyers have on their desk, what’s your sense of the global hydrogen market? Forget the colours for a moment, but what does it really mean? What do you think the market will look like in the next five to 10 years? Have we seen peak hydrogen, and what we’re really going to see is a transition in the way it’s produced? Or, do you think that, through the advent of sustainability becoming a priority in supply chains, this ultimately represents a huge opportunity for the wider hydrogen market? Where do you see it? Do you see growth, or are we capped?

Luke Robottom:

I do see growth. Is it going to be a straight line? No. Will there be fits and starts? I think so. But I believe we're seeing gradual movement in the right direction. Will it be quick enough to satisfy the desires of every lawyer sitting in Abu Dhabi who dreamed of their career being all about green hydrogen projects? Probably not. But I think there’ll certainly be enough to keep everyone really interested in this sector. And it still, for me, remains a very exciting one and one definitely worth watching.

Adam Barber:

I think you're at the heart of that debate right now, out in the Emirates. I can't see you moving from that region anytime soon as a result. Maybe that's a good point to draw this to a close and say thank you, Luke, for your comments on that. I look forward to reading the Global Hydrogen Report in 10 years' time to see exactly how things have developed.

Luke Robottom:

That's right. That would be interesting to run and compare between today's version and the one in 2034.

Adam Barber:

And I think therein lies the real opportunity for this market: there's displacement, but there's also growth. I think understanding where those opportunities are is key. So, thank you for joining us. We look forward to catching up with you again soon as we see further projects develop in the future.

For now, thank you everyone for watching. And of course, if you'd like to find out more about our Tamarindo Insights video series, please do get in touch.

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