The noise surrounding hydrogen, and in particular green hydrogen, has shifted gears this year from being a small murmur in the background to now becoming the posterchild for decarbonisation. The hydrogen hype is increasingly hard to avoid, with hydrogen dominating at oil and gas, renewable energy, mining and climate change industry discussions.

The opportunity, and indeed the imperative, to pivot to green hydrogen is particularly strong in the MENA region. The spectre of climate change looms large and this region has already been impacted by low oil prices which may be exacerbated by declining demand for oil that is predicted to occur between now and 2040. The opportunity lies in re-purposing the knowledge and skills of the energy sector to the emerging hydrogen industry. In addition, given the quality of the solar and wind resources (as demonstrated by record low tariffs) and geographic location, the MENA region is well placed to be a leading world exporter of green hydrogen if it acts now.

Currently hydrogen is often produced from methane using the SMR process. This is relatively cheap, but produces CO2 as a bi-product. Green hydrogen uses renewable energy combined with electrolysis.  Whilst this process does not produce CO2, it is not currently cost-competitive with blue hydrogen or brown hydrogen (which is produced from coal) even when these are combined with CCS to reduce their carbon footprint. However, electrolysis is a tried and tested technology and the costs are forecast to reduce significantly as production is scaled up. Regional developer ACWA Power has recently formed a consortium with other developers with the aim of getting green hydrogen to below $2 a kilogramme by 2026. In the Middle East there is an opportunity to target the hydrogen market through all of these production routes, but it is likely to be green hydrogen that will be the dominant form in the long term as more and more countries look to decarbonise their economies. There is not currently a significant hydrogen market in the Middle East so the initial projects which have been announced in the region are targeting export markets. The challenge there is that in order to be cost competitive these projects will require scale, which in turn will require a large market which has not yet arrived. They will also be competing with existing conventional producers of hydrogen and ammonia in the region.

As with any emerging industry, there are hurdles to overcome. These hurdles will inevitably dissipate as the regulatory, insurance, finance and contracting environments mature and offtake opportunities grow. Some of the immediate challenges faced by the emerging hydrogen market include the following:

• Securing Offtake. As noted above, there are currently limited offtake opportunities for hydrogen, which is largely driven by the lack of a domestic and international trading market. While the number of green hydrogen projects being developed globally is increasing at an exponential rate, it is critical that hydrogen demand develops in parallel. The recently announced Neom project has joint venture partner Air Products as named as an offtaker, but Air Products in turn will need to identify users for the hydrogen given that its business is the supply rather than use of gases.  Where are the opportunities for hydrogen offtakes emerging? The markets to watch include:
  • gas network operators – blending hydrogen into existing gas networks is the simplest and easiest way to boost local demand for hydrogen.  Markets such as the UK, Australia, France and Germany are all taking strides in this direction.  In Japan, they are considering introducing ammonia and/or hydrogen into coal fired power plants so as to reduce carbon emissions.  Saudi Aramco has recently made a first shipment of blue ammonia to Japan which was combined with carbon capture;
  • transportation – while hydrogen demand in the transport sector will be substantial in the future, the significant level of capex to incorporate hydrogen (such as refuelling stations, new vehicle manufacture, hydrogen transportation and storage, etc.) is currently a significant deterrent outside the commercial sector.  Pilot transportation projects have been announced in the UAE and Saudi Arabia, but these are on a small scale at the moment;
  • grid – hydrogen as an energy storage vector will play an important role in grid stabilisation.  Storing excess green energy produced during peak production times can assist with stabilising grid energy loads and flatten the peaks and troughs of the electricity spot market. The round-trip efficiency of incorporating hydrogen storage into grids remains a challenge, but in the long-term this represents one of the biggest opportunities regionally as the development of a reliable, cheap storage solution for renewables would enable 24 dispatch.  If developed locally this could also become a technology which could be exported from the region to the rest of the world;
  • industry – there is an existing market for Hydrogen in various industries, but in order to displace existing sources, green hydrogen will need to become cost-competitive.
• Finance. As this is a relatively new market, financiers tend to apply more onerous lending principles when undertaking its financial assessment of a project. Demonstrating a secure revenue stream is key. While debt finance remains relatively plentiful for standard renewable energy assets like solar and wind, the limited offtake opportunities in respect of green hydrogen is troublesome for conventional debt financiers (and rightly so). However, the emergence of private equity investors and pension funds in this market are quickly filling the liquidity shortfall being experienced in a nascent industry.
• Contracting models. EPC contracting is the global norm for most major renewable energy projects, particularly in the MENA region. However, given the specialist nature of the individual components which make up a hydrogen project (i.e. the solar component, wind component, electrolyser, etc.), split contracting could be a more economic way of project delivery on early projects. However, this approach is often not supported by financiers (which push for full risk transfer through EPC contracting).  
• Regulatory Environment. As a relatively new industry, it is unsurprising that the regulatory environment around green hydrogen remains immature. While new regulations and regulatory regimes will no doubt arise, hydrogen projects will not have the benefit of a mature, certain and consistent regulatory regime. In many markets, regulations will be required to incentivise green hydrogen projects, either through the introduction of emissions schemes or financial support for hydrogen through CfDs or other mechanisms. As the global experience with feed-in-tariffs has demonstrated, these types of mechanism can be subject to regular change which raises the risk associated with such projects. Developers must be conscious that changes, perhaps significant changes in law may occur during the life of their projects, which may have material cost impacts.   
• Storage and transport. The technology around the storage and transportation of hydrogen remains a work in progress. Before a truly global hydrogen trading market is possible, we will first have to develop an appropriate means for storing and transporting hydrogen in a cost-effective and safe way. Japan has just launched the world's first liquid hydrogen vessel to import brown hydrogen from Australia and there are other projects (including Neom) looking to use ammonia as a transport medium as this is easier and safer to store.

Although we have identified a number of challenges being faced by the emerging hydrogen market, these challenges are all surmountable. The biggest challenge for the region is that in the absence to the development of a local market roll-out will be dependant on securing contracts in export markets, The race to develop both a domestic and international hydrogen trading market is very real, which is evident by the substantial government investment being deployed in countries like Germany, France, Australia, Japan and South Korea to advance their local markets. It would be remiss for the MENA region not to capitalise on the natural resources it has in abundance to embark upon its hydrogen journey, in what is a growing, and likely to be dominant, market. While there are challenges for early movers, the rewards will inevitably be plentiful. Energy transition is unavoidable and the potential for the MENA region is very real.

George Varma, Tim Armsby and Toby Evans

Return to eNews