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Hydrogen Touted Heavily at COP27

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Widespread enthusiasm about hydrogen's potentially pivotal role in the energy transition has been evident during the first few days of COP27, with everyone from government leaders to companies describing it as a lucrative opportunity and a necessary solution to decarbonize the economy. In that spirit, many delegates and speakers suggested ideas to iron out the kinks in the emerging global hydrogen market, including ways to cut costs and plug infrastructure gaps.

The positivity around hydrogen comes in the midst of climate talks that are otherwise growing contentious on some fronts, given rising tensions around North-South inequality and geopolitical turmoil. This year, COP27 participants are aiming to address some of the thorniest issues that had been kicked down the road at previous summits, including loss and damage and climate finance for developing countries.

Mideast Momentum

Momentum for hydrogen in the Middle East and North Africa (Mena) has been notable, and not only because COP27 is hosted this year by Egypt. The United Arab Emirates, Saudi Arabia and Egypt are among those actively working to gain a foothold — especially in green hydrogen, given the region's abundance of cheap renewables. Egypt, for example, benefits both from convenient geographic access to European and Asian markets and “very unique renewable energy resources,” said Sherif Elkholy, partner for private equity at global investor Actis, during the Hydrogen Transition Summit at COP27.

Given advantages like these, the Mena region could export hydrogen in the future, much like many of the region's oil producers do with petroleum today, a financial expert told Energy Intelligence. Policy frameworks for hydrogen trading and regulations are also coming together in the region: Egyptian officials said the country will be releasing its first hydrogen strategy next week, and Israeli officials said they are working on theirs.

Colorblind Lens

Many at the hydrogen summit warned against putting the different “colors” of hydrogen into restrictive boxes when it comes to government regulation and incentives. Doing so risks sidelining some promising varieties, said Kathryn Huff, a director at the US Department of Energy (DOE). So-called “pink hydrogen” produced from nuclear, for example, shouldn't be treated differently than green hydrogen made from renewables, she argued: “Nuclear is a totally carbon emissions-free source, yet it's not part of 'clean hydrogen' in most taxonomies.” Huff suggested focusing on a simpler question — is the hydrogen clean or not? — based on grams of carbon.

Petronas CEO Tengku Muhammad Taufik — who spoke of mounting demand for hydrogen in Asia in the coming years — said it won't pursue green hydrogen right away. “We believe that eventually green hydrogen will make it, but in the near term, we won't let the perfect be the enemy of the good. We will start producing blue hydrogen,” he said.

Strategic Opportunity

The Malaysian state oil firm's motivations for investing in hydrogen are rooted in its presence in the LNG market, with its customers “evolving and transitioning toward using hydrogen,” Taufik said. The company also sees ways it can draw from its experience with ammonia and hydrogen production at refineries. “The chemistry is not the challenge; it's the scaling up,” he said. “We see this demand is indeed emerging.” In particular, hydrogen and ammonia demand is likely to pick up in Japan and South Korea as they transition their power sectors away from coal and toward LNG, Taufik added.

Haphazard Bets

Yet hydrogen investments are happening in a somewhat scattershot way at the moment. If recent hydrogen bets were split up into categories, around 65% revolve around production, 25% around end-use markets, and only 10% are going toward storage and transportation, warns Arthur Delargy, a principal risk engineer with the specialty markets arm of insurer Liberty. The Petronas CEO said the problem boils down to the long-standing chicken-and-egg question: “Do we build the supply first or build the market first?” Taufik asked. “If we are going to do the supply, we need to produce at a price that is realistic and affordable,” he said, adding that both production costs and electrolyzer costs are important to watch.

Patience Please

So what would bring in the money? A willingness to wait, said the DOE's Huff. “It requires real patience to dedicate billions of dollars and then wait a few years before you even see a profit. The patient capital required for all this infrastructure is the critical component I don't see materializing just yet,” she said.

Government incentives like the clean hydrogen tax credits passed in the US Inflation Reduction Act (IRA) “bring capital to the table and guarantee return on investment, which would be very challenging if all you have is sticks,” Huff said. “If you have carrots, patient capital might come to the table.”

Other regions are taking notice of the US approach. The IRA incentives represent a “very efficient and simple approach,” argued Kurt-Christoph von Knobelsdorff, CEO of the German government's National Organisation for Hydrogen and Fuel Cell Technology. “You want to produce clean hydrogen? Go ahead. For every kilogram you produce, you get a tax credit.” He joked that he's a “little bit envious,” expressing hopes the IRA will be a “wake-up call” for Europe to make similar moves.

Hydrogen, Emerging Technologies, Low-Carbon Policy, Policy and Regulation
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