Shell takes lead in Europe’s hydrogen projects, but others unlikely to follow suit

Shell has signed off on a 200-MW green hydrogen plant in the Netherlands, which will likely be Europe's largest when operations start in 2025. Others are not expected to join the energy major in droves before more clarity on regulations, financial aid schemes, and long-term demand outlets.

On 8 July, Shell announced its final investment decision (FID) on the Holland Hydrogen I electrolyzer in Rotterdam, designed to produce 60,000 kg/day of hydrogen from renewable energy.

It is the largest green hydrogen project that has received an FID in Europe. Others with start dates by 2025 are either below 100 MR or yet to get the sign-offs.

"Shell needs to be applauded for stepping forward," said Daryl Wilson, executive director of the Hydrogen Council, a trade body.

"There continues to be quite significant policy and funding uncertainty for the vast majority of other projects in Europe," Wilson told Net-Zero Business Daily.

The Shell electrolysis plant, which could be scaled up to 400 MW by 2027 in its next phase of development, will be powered by the Hollandse Kust (noord) offshore wind farm.

The 759-MW wind farm, scheduled to become operational in 2023, is 79.9% owned by Shell and 20.1% by Dutch energy firm Eneco. It is 18.5 km off the Dutch coast near the town of Egmond aan Zee.

Shell plans to use the green hydrogen to replace some of the gray hydrogen usage in its 400,000 b/d refinery in the Energy and Chemicals Park Rotterdam, which can help the company meet its target of halving operational emissions from 2016 levels by 2030. Some output could also be supplied to heavy-duty trucks when demand emerges, according to Shell.

"Renewable hydrogen will play a pivotal role in the energy system of the future and this project is an important step in helping hydrogen fulfil that potential," Shell's Executive Vice President for Emerging Energy Solutions Anna Mascolo said in a statement when announcing the FID.

Favorable setting

Shell's decision came after the company in April became the first to sign an agreement to use HyTransPortRTM, a 32-km pipeline connecting Holland Hydrogen I to the Energy and Chemicals Park.

The Port of Rotterdam, which aims to supply 4.6 million metric tons (mt) of low-carbon hydrogen, said the pipeline will be eventually linked to national and international hydrogen transportation systems.

Rotterdam's planned hydrogen supplies will be produced locally and sourced from overseas suppliers. S&P Global Commodity Insights estimated over 385,000 mt/year of production capacity could come onstream at the port between 2022 and 2026, including Holland Hydrogen I.

In terms of the green hydrogen capacity in Rotterdam, the Shell plant's size is second only to the H2-Fifty 250-MW electrolyzer, a BP-backed project whose FID is expected next year.

Wilson said Holland Hydrogen I is of "world-class scale in a fairly favorable setting," with Shell having control over the input energy and demand outlet.

"It's [also] sitting in a region where there is likely to be very substantial uptake and hydrogen demand," Wilson added. "The context they're acting in is a fairly stable one … It was wise for them to select that location as a platform for a first major step."

Industry participants said not many hydrogen projects are operating in the same business environment as the Shell electrolyzer.

"In the absence of a clear policy framework, we expect that some projects will go ahead where there are elements that reduce the risk of the project," said Catherine Robinson, global analysis lead on low-carbon gases at S&P Global. "For example, using the hydrogen in a refinery owned by the developer of the electrolysis, [with the] electrolysis co-located with large scale new renewables."

"However, the really big projects that will be essential to meet Europe's climate ambitions are unlikely to go ahead without clarity on certification requirements and the support framework," Robinson told Net-Zero Business Daily.

The EU targets

To meet its emissions goal and reduce reliance on Russian natural gas, the EU executive—European Commission (EC)—established targets to produce 10 million mt of green hydrogen in Europe and import another 10 million mt by 2030.

Assuming a 50% capacity factor, meeting the domestic production target would need 110 GW of electrolysis capacity, equivalent to 550 projects the size of the Shell plant, according to Robinson.

"Many GW of capacity will be required. The projects that are proposed for the second half of the decade are over 500 MW and many in the GW scale," Robinson said.

Over 108 GW of electrolysis capacity has been planned in Europe, of which just 1.89 GW has secured finance, according to S&P Global estimates.

The European Investment Bank, the EU's development bank, carried out an industry survey and concluded in a recent report that investment barriers for green hydrogen projects included "economic competitiveness, regulatory clarity, financing availability, and lack of supply chain maturity."

Holland Hydrogen I is "a bold move by one actor to take a decisive step at significant scale," Wilson said. "I don't see this as indicative of a change in the decision-making context."

For a future hydrogen market to function well, industry participants have called on the EU to accelerate regulatory development for matters like guarantees of origin, and safe transportation and storage.

In the near term, Robinson said how the EU defines Renewable Fuels of Non- Biological Origins (RNFBOs) will be especially key to watch, describing it as "the first building block" for the legal framework for green hydrogen.

Additionality principal

The EC last month issued two delegated acts to the Renewable Energy Directive (RED), of which the first details the requirements for hydrogen to be considered fully renewable.

Green hydrogen producers, including Shell, generally want their products to meet the requirements so they have a better chance of receiving subsidies. Also, only qualified hydrogen under the RED can count towards future government quotas for renewable transportation fuels.

Starting in 2027, the first delegated act demands green hydrogen to be produced using power from newly constructed, unsubsidized wind and solar farms so it does not detract from renewable electricity penetration goals, a concept known as additionality.

That is to address concerns the hydrogen industry may absorb renewable electricity that could otherwise help decarbonize households, road transportation, and other sectors. For powering the electrolysis capacity required to meet the EU's domestic production target for 2030, S&P Global estimates at least 150 GW of renewable generation capacity is needed.

But Wilson warned the additionality rules are "dictatorial" and "constraining" and will create investment barriers for hydrogen producers.

"We have the disturbance of policies like the additionality principle, which severely restrict the operating window available for renewable hydrogen assets," Wilson said. "This is a point of very serious concern for us in the Hydrogen Council."

Exemptions to the additionality rules are possible if electricity is taken from the grid in areas that have 90% renewable electricity penetration, the renewable hydrogen and the renewable power are produced simultaneously during the same one-hour period at a renewable project that was built in the past three years, or the power produced was surplus to grid demand.

Hydrogen Europe, another trade body, has argued that a 70% threshold for renewable electricity penetration can already lead to significant GHG emissions cuts in most cases.

"We call on the European Commission to stop ignoring repeated warnings of the industry and adapt the document in a way that fosters the rapid scale-up of hydrogen technologies," Hydrogen Europe CEO Jorgo Chatzimarkakis said in a statement 13 July.

Upon approval by the European Parliament and EU member states, the delegated act that defines renewable hydrogen could enter into effect this fall.

Funding and revenue streams

The EU has multiple channels for green hydrogen producers to receive financial support, some at national levels, but critics said they tend to be slow to come and lack bespoke support for hydrogen.

For one, producers can apply to label their facilities as the EU's Important Projects of Common European Interest and receive country-level subsidies, like BP does with the H2-Fifty electrolyzer. But the criteria for such projects are not clearly defined.

The EC has promised to introduce Carbon Contracts for Difference (CCFDs) to promote hydrogen production, yet the progress has been slow.

The Netherlands recently held an auction allowing hydrogen developers to bid for Europe's first CCFDs subsidies via the SDE++ scheme. But consultants said hydrogen projects are last in line for funds under SDE++.

"There's an issue about the pace of funding," Wilson said. "There are multiple funding streams in Europe, but they have not all opened up and moved ahead."

The EC moved quicker at the grant level. Earlier this week, the Shell electrolyzer and another two hydrogen facilities were among the 17 cleantech projects selected to receive €1.8 billion ($1.81 billion) from the Innovation Fund.

But industry participants said long-term intake agreements, either from the public or the private sector, are critical for producers to make their investment decisions. So far, those have been lacking in general.

Germany's H2Global program is seen as a model for hydrogen procurement contracts, but it is aimed at imports rather than domestic production. As for the private sector, EU lawmakers are discussing RFNBOs consumption targets in industry and select sectors for 2030 and 2035, which could provide some demand signals.

"When a company takes the final investment decision over a project, they're anticipating a revenue stream to support that project for 30, 40 years," Wilson said. "There remains quite significant uncertainty in that area."

Posted 15 July 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.