Inflation Reduction Act: Opening Up Green Hydrogen Possibilities
If 2022 turbocharged the green hydrogen economy, then 2023 is the start of a long slog for this nascent sector that is set to be the backbone for decarbonization, transition and energy security strategies. Rystad Energy research has found that electrolyzer capacity is expected to grow by 186% from 2022 to 2023. Attention is therefore turning to the supply chain capacity necessary for electrolyzer production. Even though many of the raw materials needed for the sector’s growth have seen high price tags in recent years, Rystad Energy expects a 10-15% decrease in electrolyzer service price inflation between 2022 and 2027, as green hydrogen adoption grows, and cost cuts are realized. Rystad Energy’s latest projection for green hydrogen production by 2030 is 24 million tonnes from 212 gigawatts (GW) of electrolyzers, fueled by the latest round of incentives such as Inflation Reduction Act and Europe’s multitude of support schemes. Currently, the two most common electrolyzer technologies are alkaline water electrolysis (AWE) and polymer electrolyte membrane (PEM). Both PEM electrolyzers and AWE electrolyzers have experienced particularly high inflation in the past two years – on average prices for PEM electrolyzer components have spiked around 30%, while AWE costs increased around 21% over the 2020-2022 period. Platinum and iridium price volatility between January 2021 and January 2023 contributed to the recent inflation seen hitting catalyst coated membranes – and highlights the significant challenges coming with using iridium and platinum catalysts in PEM electrolyzers. Unfortunately, price volatility is not a thing of the past as both raw materials are some of the rarest in the world. Iridium is only found in two parts per billion (ppb) in the Earth’s crust, and platinum in five ppb. South Africa is responsible for 83% of global iridium supply and 70% of platinum supply at present. Prices for these metals are likely to increase in 2023 due to South Africa’s aging, fault-prone coal-fired power stations that threaten production amid power outages. However, the International Renewable Energy Agency (IRENA) reported that the expected future use of iridium and platinum in catalyst coated membranes can be limited to 0.4 g/kW and 0.1 g/kW, respectively. Furthermore, researchers at the Netherlands Organization for Applied Scientific Research (TNO) have already been able to develop a method which will require 200 times less iridium in the production of PEM electrolyzers, while also improving efficiency. Iridium and platinum recycling could also help meet the growing demand for these precious metals coming from the hydrogen sector. In the longer term, Rystad Energy finds that the pace of PEM deployment will not be constrained by platinum and iridium supply if future technologies can enable the reduction in their usage by between 70-80%, and thus contribute to significant cost cuts associated with catalyst coated membranes (CCM). In the short term electrolyzer prices will start to decrease as key raw materials see their prices stabilize after a volatile period. In the medium to longer term technological innovation and efficiency gains will reduce the need for iridium, resulting in a significant cost reduction. However, unexpected jumps in costs could occur as iridium faces supply pressures as key producer South Africa faces power outages. This demonstrates how the energy transition will not be predictable with many betting that green hydrogen will take a similar path to photovoltaics which saw investment costs drop by around 80% between 2010 and 2020. Nickel and stainless-steel impact Over the past year, the global nickel price has increased by 30% on average, with a much higher spike in June. This is largely attributed to a lower than usual Chinese output associated with Covid-19 lockdowns in the country, and sanctions against Russian raw materials. As AWE uses Raney nickel as a catalyst, and nickel for porous transport layers, bipolar plates, and end plates, the metal contributed to significant inflationary pressures since the beginning of 2020, with an average increase of 10% between 2021 to 2022. Furthermore, stainless-steel production accounts for approximately two thirds of global nickel demand. Nickel is used as an alloying material in stainless steel production to increase steel’s formability, weldability, and ductility, while also increasing its corrosion resistance. Due to the importance of nickel in stainless steel production, nickel prices are a large driver of the cost of stainless-steel. Stainless steel is a common material used in electrolyzers, including PEM stack components such as bipolar and end plates, as well as balance of plant (BOP) components such as piping, valves, tanks, and pumps. According to Rystad Energy research, the price of nickel is expected to continue its downward price trend and is estimated to fall towards $25,000/tonne (or lower) in 2023, due to the relaxing of Chinese zero-covid policies and additional Indonesian supply hitting the market. In addition, global steel prices are expected to lower as the US ramps up steel production and starts importing more from Europe (where prices are significantly lower). These price reductions should help reduce the cost of electrolyzer components containing stainless steel and nickel. There are many pathways to electrolyzer cost cuts: reducing the presence of precious metals, increasing electrolyzer efficiency, increasing production volumes, and automizing manufacturing processes. Additionally, there are actual governmental supports to turn these pathways into realities too. For instance, the Important Project of Common European Interest (IPCEI) ‘Hy2Tech’ €5.4 billion fund released in 2022 or the recently announced Green Deal Industrial Plan where the bloc’s Innovation Fund will focus on scaling up manufacturing of electrolyzers’ components among other. Overall, Rystad Energy expects that such cost cuts will help reduce electrolyzer service price inflation by around 15% by 2027, and thus improve the economics of green hydrogen production.
The Race To Dominate The Green Hydrogen Industry
The race is on to develop and dominate the green hydrogen industry. Investment is pouring into the industry as companies and governments alike push to produce a clean fuel that can be used in a multitude of ways, from heating to transportation. Europe initially appeared to be in the lead, but with big plans for the Middle East, Asia, and the Americas, this may be short-lived. So, with all the talk, what’s actually happening in the green hydrogen world, and which region of the world is likely to dominate the hydrogen market? Experts are questioning whether green hydrogen could be the next space race, as governments around the world pump funds into renewable energy and technology innovations in a bid to secure energy security. While wind, solar, and hydropower operations have been up and running for years, energy firms worldwide are now exploring alternative forms of clean energy that will support the green transition. With many countries introducing laws to curb fossil fuel use, such as the banning of the sale of new petrol-fuelled cars from the 2030s, we will need new green fuels to ensure that transport, heating, and cooking can continue as normal – and green hydrogen just might offer the solution. Several regions of the world announced green hydrogen strategies early on, including Australia, China, Germany, the EU, Japan, and South Korea. While most hydrogen is currently produced using natural gas, many regions are well on their way to becoming major producers of green hydrogen, having invested heavily in the construction of new plants in recent years. For example, China may be producing around 40 percent of the world’s green hydrogen by 2040, even though it accounts for little of the country’s hydrogen output today. China has already established a regulatory framework for green hydrogen production, and its five main utilities have all invested in green hydrogen projects. And in Korea, the government released its Hydrogen Economy Roadmap in 2019, which aims to make Korea a major green hydrogen production hub by 2040. And one Asian power has long been thinking about hydrogen, with the Ministry of Economy, Trade and Industry of Japan having established the world’s first national strategy for hydrogen in 2017. The government has since released the Strategic Roadmap for Hydrogen and Fuel Cell, promoting both green hydrogen and ammonia production and use. But Japan is not working in isolation in its big hydrogen plan, having signed a Memorandum of Cooperation (MoC) with the EU in December to drive innovation and develop an international hydrogen market. Japan’s Sumitomo Corp also signed a memorandum of understanding with Chile’s Colbun to produce a green hydrogen supply chain between Chile and Japan. Latin America is fairly new in the world of green hydrogen, with high production costs having been a major deterrent for project development. The price of electrolyzers, as well as the need to set up renewable energy operations to run green hydrogen plants, has hindered industry development, with International Energy Agency (IEA) estimates suggesting the cost of an installed electrolyzer is currently between $1,400 and $1,770 per kilowatt. However, several countries, such as Chile, have launched a green hydrogen strategy, aimed at developing both investment in production and a market for green hydrogen use. By the end of 2021, there was a pipeline of more than 25 green hydrogen projects, with interest in the sector growing significantly in 2022. Europe, which is expected to be the world’s main green hydrogen market, has been ramping up investment in green hydrogen projects, including several new plants across the region and a major green hydrogen corridor planned, which will link Spain with the Netherlands. The European Commission aims to produce 10 million tonnes of renewable hydrogen by 2030 and import a further 10 million tonnes. In terms of geopolitics, the EU fears China could come to dominate the hydrogen industry, just as it has with other forms of renewable energy, meaning that hydrogen strategies across Europe support both decarbonization and industrial policy. One country that’s worried it’s falling behind in the global race is Australia. Guy Debelle, the director of Fortescue Future Industries, believes Australia’s natural renewable energy advantage in the race to develop a green hydrogen industry is at risk of being overwhelmed by “huge and aggressive” policy support in the US and the Middle East. He suggests new policies, such as President Biden’s Inflation Reduction Act (IRA), could encourage people to migrate to countries with greater funding opportunities in the field, with their expertise and know-how. He stated, “There’s a risk that, despite Australia’s great comparative advantages in green energy, the US and the Middle East are going to eat our lunch.” This shows early on that not everyone can win in the green hydrogen race, although demand is expected to grow so much in the coming decades, – with almost 200 metric tonnes of the fuel needed by 2030 to be on track for net zero emissions by 2050 – perhaps there can never be too much green hydrogen output. Even if Australia does not become an international green hydrogen hub, the development of projects across multiple regions of the world could help ensure greater energy security, helping countries to reduce their reliance on other powers for their energy supply. This has long been an issue and is ever more present in the wake of the Russian invasion of Ukraine and subsequent sanctions on Russian energy. We are far from seeing a clear winner in the green hydrogen production race. However, there are some clear contenders, as both Europe and Asia ramp up their investments in the sector and develop strong markets to boost future demand for the clean fuel. In addition, new climate policies, such as Biden’s IRA, could encourage greater migration to countries offering better funding opportunities, quickly changing the landscape of the global green hydrogen industry. Meanwhile, other powers with significant green hydrogen potential may well miss out if they cannot match these opportunities.
Record Profit Season Is Over For U.S. Shale
Record profits – that would be the best summary of the state of the global oil industry last year. From Big Oil majors to U.S. shale independents, everyone made money from the oil and gas price rally sparked by the war in Ukraine. But the party seems to be over, at least for shale drillers. The Energy Information Administration said earlier this month it expected U.S. oil and gas production to hit a record next month. Oil output in the shale patch, the EIA said, would rise by 75,000 barrels daily, and the Permian would contribute 30,000 bpd of that, for a record total of 9.36 million barrels daily. Gas output would gain 400 million cu ft daily to a record 96.6 billion cu ft. Yet meanwhile, Baker Hughes has reported that drilling rigs are on the decline, with the February rig count revealing the largest cut in activity since June 2020. The total count as of last week was still 15.8 percent higher than it was a year ago, but any comparison with 2020—a year devastating for the U.S. oil industry—should sound an alarm bell. The industry is also signaling it has no big production growth plans. In fact, it has been signaling this for quite a while, with executives noting they do not have much motivation to boost production, even with most forecasters expecting a tighter supply situation in crude oil later this year. To begin with, oil and gas companies in the U.S. are quite aware that they are operating in a hostile environment. President Biden has been openly antagonistic to that industry, blaming it for high retail fuel prices and for making record profits, accusing it of war profiteering and threatening windfall taxes in retaliation. Calls from the White House to boost oil production have mostly fallen on deaf ears because of, among other things, various regulatory requirements that make production expansion a lengthy process that many in the industry have been complaining about. Then there is inflation. It’s easy to ignore when you’re busy berating shale oil and gas producers for their record profits, but it has not gone away. It is, in fact, very much still present and guiding companies’ plans for the immediate future. “We’ve seen anywhere between 30 and 50 per cent inflation — depending on which cost category you’re talking about — that’s what we’re walking into in 2023,” said the chief financial officer of Devon Energy, Jeff Ritenour, during the company’s latest earnings call, as quoted by the Financial Times. In that, Ritenour echoed comments made a couple of months ago by Pioneer Natural Resources’ CEO, Scott Sheffield, following remarks by White House energy advisor Amos Hochstein, who called the oil industry “un-American” because of companies’ refusal to switch back to growth mode. “He was criticising the majors and independents for not growing more,” Sheffield told the FT in December. “He doesn’t realise if we wanted to grow more than 5 per cent, I’d have to call up all the service contractors; they’re going to charge me 30 to 40 per cent more; it’s going to take a year to build new equipment; it’s going to take two years to start showing results. By that time, you may go through an oil price collapse.” Because of higher costs, even if oil and gas production in the shale patch hits a record in March, the same won’t be true of shale drillers’ cash flow. According to Rystad Energy, that peaked last year, hitting $104 billion, and is set to decline to $87 billion this year. That’s bad news for production plans because higher cash flows brought about by higher oil and gas prices helped shale drillers return a lot of cash to investors after years of burning through it in order to see just how fast and how much they could increase production. Speaking of investors, they are yet another factor limiting any production growth potential for U.S. shale drillers —precisely because of those years of drillers burning through cash to see just how much oil and gas they could produce. Investors have had enough of uncontrolled growth. And the companies know it. “Significant growth is still off the cards for the majority of public shale oil E&Ps, who have continued to set cash return targets over production targets and are not willing to budge from focus on capital discipline,” a Rystad analyst, Matthew Bernstein, told the FT last week. Indeed, with cost inflation where it is, with the Fed signaling it will not change course on interest rates anytime soon, and with an administration unlikely to suddenly become friendly to oil and gas, chances are there will not be much further growth in shale oil and gas production this year. Even if prices rise, which most analysts believe they will because global supply remains tight and China is expected to roar back to its usual growth pace before long.