Mastering the Hydrogen Supply Challenge for Industrial Clusters

By Mathias Kube, Mark Livingstone, and Jan Cihlar

Industrial clusters in Europe are receiving increasing interest from policymakers, industrial shareholders, potential suppliers, infrastructure providers, and investors. They represent substantial energy and feedstock demand and are expected to be the first sector to decarbonise, mainly due to their impact on emissions and the consequent pressure from policymakers and shareholders. Such clusters typically include multiple large players from energy intensive industries such as chemicals, steel, cement, refineries, or transport hubs such as ports. For most of them, carbon-neutral hydrogen is a promising decarbonisation solution as part of an overall decarbonisation strategy. Given investment backlogs, long lead times, and technological lock-ins, the time to invest is now. Hence, industrial clusters are expected to become the first large hydrogen offtakers.

Industrial Cluster with Opportunities for Early Stage Hydrogen Applications

(Source: Guidehouse)

This development is supported by an increasing number of jurisdictions releasing national hydrogen strategies to meet decarbonisation targets, protect energy intensive industries, and build the foundation for new job creation in green markets. Policies are a key enabler for hydrogen. Regulations and subsidies are essential for initial development of hydrogen markets as there is currently no standalone business case for green or blue hydrogen.

Potential Hydrogen Producers Must Consider the Need for Scale 

Local hydrogen production for one company requires less adaptation and alignment with other parties but will be more expensive compared to a large-scale supply solution for the cluster. The latter would profit from large-scale electrolysis or blue hydrogen sources and could leverage synergies that enable cost-effective deployment of pipeline infrastructure (connected to a European Hydrogen Backbone, for example). Many of these key players in clusters are currently looking for the right hydrogen supply partners; however, there are no clear winners yet on the supply side.

Industrial Clusters Are Complex to Serve

Players have different timelines and levels of certainty for their decarbonisation efforts and a different value for using hydrogen in their processes and applications. Some industries such as refining have uncertainties over their long-term prospects, given changes in future fuel needs. Others such as steel face particular economic challenges, such as fierce international competition and imports from non-EEA countries with less strict decarbonisation regulation and lower compliance costs that threaten the viability of some facilities. As decarbonisation solutions often profit from scale or joint infrastructure (such as for carbon capture and storage), players are forming cluster organisations such as SDR in Zeeland, Net Zero Teesside in the UK, or In4climate.NRW in Germany. 

Can We Be Colour Blind?

Additional uncertainty remains as to the colour of the hydrogen. While blue hydrogen production with carbon capture, utilisation, and storage (CCUS) will allow production and scale, it faces public and policy resistance around carbon storage in some countries, and methane leakage is still considered an uncertainty from a sustainability perspective. Green hydrogen is perceived as more environmentally friendly but requires an additional reliable low cost renewable power supply and needs to improve economically. This improvement includes an economic optimisation of different renewables (e.g., wind and solar) and storage (e.g., batteries) to achieve the highest full-load hours of the electrolyser at the lowest possible electricity cost.

Becoming a Hydrogen Supplier for a Cluster Is a Huge Challenge

To be successful, stakeholders need to:

• Develop a detailed understanding of the hydrogen offtaker role, the demand structure including interaction between hydrogen and other energy carriers, and related uncertainties
• Recognise that hydrogen demand for a cluster requires anchor clients and affords synergies on infrastructure build, but it will also be subject to change as existing participants shut down and new industries potentially arrive
• Build up a completely new supply chain in the case of green and blue hydrogen and create the right ecosystem of players for transport (hydrogen, carbon dioxide), storage, and production, possibly extending to imports of hydrogen derivatives
• Fully understand the required end-to-end integration of the hydrogen supply chain and orchestrating it via points of strategic control
• Find solutions for commercial risks such as volume and price volatility and counter party risks that require advanced trading and hedging skills
• Be able to play across commodity markets internationally and be ready to take an active role in policy and regulatory discussions around cluster decarbonisation

Given these challenges, it is understandable that nearly all hydrogen projects announced to date (such as the GET H2 project in Germany) typically include a consortium with a smaller set of offtakers and clear policy support that targets industrial investment and supporting hydrogen supply economics. We see a limited number of potential large-scale, end-to-end suppliers. A promising group in this regard is the newly positioned integrated energy companies formerly known as oil & gas majors. They can manage end-to-end supply chains, including risk management and large-scale operations, and they can leverage their trading capabilities. With their own refineries, integrated energy companies can also act as an anchor hydrogen customer, which—together with the gas supply and renewable power business—allows for optimisation in hydrogen production/sourcing.

Future suppliers of industrial clusters can choose different strategic paths, from becoming a specialised hydrogen supplier for selected industries to turning into a cluster orchestrator serving the full cluster and multiple decarbonisation/cluster needs beyond hydrogen. For example, this effort could involve supplying renewable energy and CCUS solutions across industries. Developing hydrogen infrastructure is another important part of the end-to-end mix, including hydrogen storage, import infrastructure, and pipelines.

The next steps in the emergence of future hydrogen supply champions include:

• Prioritising industrial clusters on a regional basis but also considering global scale (The first focus has been in Europe while other regions hold promising candidates where policy support, sector decarbonisation, and corporate ownership encourage this.)
• Diving deeper into the demand structure of potential hydrogen offtakers, understanding the value of hydrogen in different steps of the supply chain, and developing a commercial view on managing variability and risks
• Understanding the implications of relevant policies and regulation and funding mechanisms on the hydrogen business case, such as the recent developments around RED II Delegated Act or Important Projects of Common European Interest in Europe
• Developing an end-to-end roadmap including demand, supply, and infrastructure, featuring feasibility and economics of alternative supply routes and identifying most relevant partners
• Building consortia to integrate the supply chain (Given the need for an effective physical and economic hydrogen solution, this action requires proper orchestration of all elements including production, transportation, storage, and distribution to key clients. It is unlikely for one entity to carry out every activity themselves or take on all the risk.

Guidehouse specialises in developing decarbonisation pathways for industry leaders. Our team’s vast knowledge leads to implementable strategies that yield significant reduction in emissions. Contact Guidehouse expert Michael Pita to learn more about our services.