US hydrogen offtakers resist long-term contracts

Would-be US hydrogen customers are showing resistance to the bilateral 20- or 30-year offtake contracts that most developers need in order to secure investments for production plants.

Some claim hydrogen will always be too expensive in the way many said solar panels would remain cost-prohibitive, but solar costs have fallen by 90pc since those days and the US Department of Energy (DOE) is working to drive hydrogen costs down even faster, DOE infrastructure undersecretary David Crane said this week at the CERAWeek by S&P Global conference in Houston, Texas.

However, the solar industry had a customer base in the electric industry that was familiar with long-term offtake agreements, while hydrogen's end-users in heavy-duty transport and industry have little history of signing 20-year contracts, Crane said.

Others disagreed that hydrogen will follow the same path as renewables.

"I think people two or three years ago were kind of drawing a very quick parallel between hydrogen and renewables. And I think they're actually very different," BP senior vice president of hydrogen and CCS Felipe Arbelaez said.

BP views hydrogen as similar to the LNG market 30 years ago, which was characterized by point-to-point contracts between one party and few other parties that underpinned final investment decisions (FIDs), Arbelaez said.

Long-term contracts not only let production centers reach FIDs, but also allow consumers to make FIDs on facility modifications to adapt processes to use hydrogen, Arbelaez said.

Some smaller projects are reaching FIDs, but large projects are straggling, trader Trafigura energy transition and venture investments head Margaux Moore said. The industry is shooting for bilateral contracts and clinging to the idea of a fixed return on investment, but it should abandon this ambition and start pricing hydrogen like natural gas, she said.

Chevron hydrogen vice president Austin Knight argued it will be difficult to take projects to FID without those long-term contracts. Knight views hydrogen as more similar to LNG, and said developers will need such contracts to make projects bankable.

Large-scale infrastructure projects typically take seven or eight years to reach FID, and it is difficult to jump directly to financing so quickly, UAE state-run Masdar strategy and corporate development executive director Nikolas Meitanis said. The strength and tenor of the offtake agreement is the deciding factor in convincing banks to offer non-recourse loans for projects, he said.

US hydrogen hubs are primarily targeting domestic uses — but "primarily and exclusively are two different words," Crane said. If international demand plays a role in satisfying a portion of production from the hubs, "certainly I would be supportive," he said. Ultimately hydrogen is set to become a global commodity, and it is no coincidence that three of the seven US hubs are located at ports, he said.

US hydrogen hubs may attract international investment to help support other countries' supply chains, Mitsubishi Heavy Industries chief executive Tak Ishikawa pointed out.

But hydrogen consumers, like ammonia producers, appear to be slowly warming up to the idea of longer-term contracts, DOE senior adviser Leslie Biddle said.

In the midst of producer uncertainty and lack visibility on offtake opportunities, some have turned to hydrogen's more promising derivatives, for which some infrastructure already exists, trade association Fuel Cell and Hydrogen Energy Association chief executive Frank Wolak told Argus on the sidelines of the conference .

"I found it really hard to sell hydrogen as the H2 molecule," Tree Energy Solutions (TES) chief executive Marco Alvera said. TES is developing "e-NG", also known as e-methane, which is made from electrolytic hydrogen and carbon. E-NG is cheaper to produce than e-diesel or e-kerosene because it doesn't require upgrading — and it is chemically identical to natural gas, so can be used in existing infrastructure, Alvera said. There is not enough biomass to reach decarbonization targets with biomethane alone, he added.

Alternative fuels like e-NG, which still produces emissions when used, are "clearly needed" and have a role in the clean energy future, but need to be deployed carefully, nonprofit Environmental Defense Fund vice president of global energy transition Beth Trask said. But e-fuels need to have appropriate guardrails that are "based on data, not just industry exuberance," she said.

By Emmeline Willey