November 2021

Accuracy Talks Straight #3 – Industry Insight

Accelerating development in the hydrogen sector

Jean-François Partiot
Partner,
Accuracy

Hervé de Trogoff
Partner,
Accuracy

For some years now, hydrogen has been presented as the miraculous solution to develop clean transport and energy storage on a large scale. The combustion of hydrogen, which produces energy, water and oxygen only, is indeed 100% clean, and we can certainly glimpse its promising potential. However, the carbon footprint of its production varies considerably depending on its origin. The hydrogen sector is not necessarily clean, and it is only decarbonised hydrogen that is stirring up so much desire.

• Historically, industrial hydrogen – also known as grey hydrogen – has been produced from fossil fuels, and its environmental record is unsatisfactory, or even poor, depending on whether the CO2 emitted during its production is captured and stored. Grey hydrogen is an inevitable by-product of oil refining (desulphurisation of oil) and ammonia production.
Today, more than 90% of the hydrogen produced in the world is grey, but this proportion is destined to fall significantly to the benefit of green and blue hydrogen.

• All eyes are now on the production of green hydrogen, that is, the hydrogen produced from decarbonised electricity (solar, wind, nuclear, and hydro power).

• Some researchers are also looking into the exploitation of white hydrogen, that is, hydrogen sourced naturally. As surprising as it may seem, knowledge of the existence and extraction possibilities of this native hydrogen is still rudimentary. For the time being, white hydrogen remains the dream of a few pioneers. Related knowledge is inchoate and accessible volumes unknown. Its research cycle and potential development will be long. If this path were to prove economically viable, it would most likely be explored by large oil producers thanks to their in-situ extraction expertise.

– Finally, big oil and petrochemical groups are calling for a transitory phase using blue hydrogen. Produced using natural gas, it can be considered clean as long as all related CO2 and methane emissions are captured.

For the decades to come, green and blue hydrogen will be the major areas of development in the energy industry. But this ambition is confronted with three constraints.

Constraint 1: Demand versus capacity

‘Nothing is more imminent than the impossible’
– Victor Hugo, Les Misérables

Environmental expectations for the industry seem excessive today, as the requirements for energy production capacity are of titanic proportions if we are to consider decarbonising a significant share of the market. As a reminder, global energy consumption mostly serves industry (29%), ground and air transport (29%) and residential consumption (21%).

Currently, the hydrogen sector meets less than 2% of energy needs.

To cover global energy consumption in 2030, an area the size of France would need to be covered in photovoltaic solar panels, according to Land Art Generator (US). And that is assuming that these panels benefit from optimal and constant sunlight and that they give maximum yield. As observed yields from solar power today stand at 25%, the logical conclusion would mean using an area four times the size of France to achieve the same goal.

These figures help us to understand why the great powers are now considering reinvesting massively in the nuclear industry and securing their access to uranium deposits across the world. A huge redeployment of nuclear power for electricity generation might make it possible to solve the environmental equation in 50 years (climate change – IPCC objectives). Various significant issues remain to be resolved, of course, including questions of nuclear safety and the treatment and storage of nuclear waste. But given that the time scale to resolve these issues is measured more in the hundreds, if not the thousands of years, rather than in 50, some will quickly weigh up the consequences and decide.

Constraint 2: A development cycle for major projects that cannot be shortened

‘The difference between the possible and the impossible can be found in determination’
– Gandhi

Current electrolysis processes offer a low energy yield, and the green hydrogen sector will require the construction of gigafactories, the technology, design and scale-up of which are not yet fully appreciated.

Despite all attempts to accelerate the process, we are talking about major projects, and their development cycles are standardised. There needs to be a 10 to 20 MW prototype / test site, before any 100 MW sites – currently the target entry capacity to play in the big league – can be launched.

These large projects follow the classic cycle in major project engineering as presented below. If we take as an example the liquefaction process for natural gas, which is the most similar in terms of engineering and construction complexity to that of large-scale electrolysis, between five and seven years would be necessary to go from the feasibility study to the commissioning of the test site.

Cycle d’ingénierie de grands projets

Then, if we say that feedback from the test site will be provided in parallel to the conception and feasibility studies of a gigafactory, we would need to consider five to seven additional years before the gigafactory could begin its operations. It would be reasonable to imagine that a 100 MW factory would be composed of independent units, whose installation would be sequential over an additional period of 12 to 24 months. Based on this plan, we would need to count around 15 years in total to create a gigafactory with an effective production of 100 MW.

To accelerate the development cycle of these types of project, the following levers could be activated:

• Directly selecting qualified service providers, minimising the tender phase. Based on our experience in similar major projects, the ‘open book’ selection solution makes it possible to reduce the tender offer time, all whilst maintaining effective control over capital expenditure. This lever could facilitate the truncation of the tender phase, potentially winning around 12 months.

• Beginning construction of the prototype and obtaining in parallel the administrative and environmental authorisations for the gigafactory site.  This lever would make it possible to reduce the development cycle by a few months.

• Starting up the factory capacity sequentially, segmented in discrete units, and by doing so, advancing the beginning of production by up to a year.

• Launching engineering and construction of the gigafactory in parallel to the prototype and managing the feedback on process optimisation through retrofitting (a rare disruptive approach but efficient).

• Accelerating the engineering and construction cycles by financing a more expensive project and mobilising more resources at a given moment.

For even greater urgency, more disruptive levers could be applied:

• Removing certain administrative and environmental constraints and the related delays.

• Developing tools (IT and AI), making it possible to accelerate the engineering stage significantly.

• Working on smaller interlinked units able to be serially produced.

In all these cases, we must accept that the costs and risks resulting from the use of an acceleration lever will be higher than those of a traditional development cycle.

Constraint 3: Financial constraint

‘If you have to ask how much it costs, you can’t afford it’
– John Pierpont Morgan

Developing the green hydrogen sector requires massive and sustained investment. The major powers have finally understood that fact and acted: more than 30 countries have announced investments totalling almost 300 billion euros to develop the sector.

However, these substantial investments still seem insufficient when confronting the carbon behemoth menacing the planet. Based on the calculations of the Energy Transition Commission shared in April 2021, 15 trillion dollars must be invested between 2021 and 2050 to decarbonise the global energy market. That comes to 50 times more than what has been announced to date.

As Bill Gates said via his Catalyst initiative from Breakthrough Energy, the scientific, political and economic worlds have already proved their ability to support innovation in energy and to give it a favourable development framework. That is what happened in the past few decades with solar and wind energy and lithium-ion batteries.

But in 2021, we no longer have the luxury to wait decades. We must collectively make a quantum leap to accelerate decarbonisation innovation and its implementation. We are talking about not only investing in proportions that far exceed investments made in the past but also freeing ourselves of historical financial IRR models. Here is a short list of some of the actions that may be put in place:

• Sourcing a colossal amount of capital from central banks, countries, financial institutions, great fortunes and philanthropists.

• Also targeting a significant proportion of personal savings (pension funds, mutual investment funds, etc.).

• Enhancing incentives for decarbonisation technologies by implementing systems more powerful than carbon taxes and credits (the effect of which is spot), for example, using specific interest rates based on a project’s future environmental impact.

• Not providing a financial return (IRR) for some of the capital invested. The expected return would become mostly environmental…

– Breakthrough Energy, a non-profit organisation, raised over a billion euros for its Catalyst initiative at the end of September 2021.

• Putting in place environmental reporting that is as reliable as financial reporting.

Investments in decarbonisation are revolutionising finance through their magnitude and the nature of their expected return; this will be environmental, not financial.

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