Germany expects to be a huge green hydrogen importer, starting with first commercial deliveries in 2025, and Australian ventures can carve out part of the market, according to participants in a high-level roundtable with Carbon Challenge in Sydney. It comprised:
AFR: Can we start by asking how Germany is thinking about energy security since the Russian invasion of Ukraine, given Germany’s reliance on Russian gas? Where does hydrogen fit into this?
Volkermann: There are two different dimensions to it. One is you need to solve short-term needs. So, this is where natural gas comes from, and this is something which the German government is working on. They have chartered four FSRUs – floating LNG terminals. We need to diversify the sources of natural gas, with more from Scandinavia and the Middle East.
Then what we are talking about today is how this energy transition will work out in the future, which is a different thing. At the moment, hydrogen is obviously there – but it’s all grey hydrogen [produced with fossil fuels].
Green hydrogen is more a mid-term and long-term solution. But it’s certainly part of the mix for this vision of how to get to the net zero target. There will not be one silver bullet.
Can you be more precise on the timing? When will Germany be ready to import green hydrogen [made with renewable energy]?
Volkermann: You may have heard about the H2Global Initiative [under which the German government is backing purchase contracts for international supply of green hydrogen and derivatives]. Siemens is one of the founders, Deutsche Bank as well. We can be pretty precise because the processes for these hydrogen offtake contracts are in procurement and scheduled for delivery in 2025.
But this is only the starting point. If you look at the different studies done recently, there is a real breakthrough for green hydrogen in around 2030. From a project finance perspective, this is around the corner. The market needs to ramp it up now, and that’s not really a financing question in the first place: we need to ramp up a total industry.
Well, 36 months for first deliveries is very soon. When you look at all the challenges. Is that realistic?
Volkermann: I am already seeing the projects in the financing process. We are currently working on three or four concrete projects in the due diligence phase. And we are still looking at pilots in non-mature markets because we need to start somewhere. These are the first large-scale project financeable transactions.
Hydrogen is something which has been around for a hundred years, how to treat hydrogen and how to transport hydrogen derivatives is quite well known. If you think about ammonia, it’s been around for more than 100 years – the molecule does not know that it is green.
We see these kinds of pilot projects as a really concrete solution. You know where the green electron is coming from: it’s PV or wind. Everyone in the industry knows how to do the air separation unit to get to nitrogen; you know what an ammonia synthesis loop is; you need desalination to get water in some jurisdictions; and you need a jetty and storage to get it to a tanker to deliver the ammonia.
Carbon challenge: Michael Volkermann, Thomas Hertling, Hans Bonestroo, Florence Lindhaus and Glenn Morgan, at Deutsche Bank’s Sydney office. Edwina Pickles
We need to have enough electrolysers. At the moment, everyone is very happy if we can produce one giga in the future per year, but there are multi-giga on my table [in Deutsche Bank due diligence], and I am not the market.
The volume of each project is tiny compared to the market. So for market participants who are taking contracts, these are point-something volumes compared to their overall trading.
We should not only think about hydrogen for fuel cells, it has a universe of use cases, and at the moment, given that we are so small in terms of volumes, it may stay in its specific derivative form, e.g. green ammonia, green methanol, e-kerosene to name a few.
Are there comparisons between the development of the green hydrogen industry and that of offshore wind in terms of the engineering challenges?
Volkermann: When we embarked 15 years ago on offshore wind, wind turbines onshore were well known, but doing foundations and maintenance 100 kilometres off the coast was only known in the oil and gas industry. There was a combination of different industries, and when it comes to hydrogen, you have basically the chemical industry and the renewable industry coming together to do hydrogen.
A difference to offshore wind is you need to think about transport. In offshore wind, you’re always producing the same thing: an electron. When we talk about hydrogen, there will be e-kerosene, methanol and ammonia as the three initial products. None of the projects we are working on is proposing at the moment to transport hydrogen as a molecule.
There are many hydrogen projects appearing in Australia, seemingly there is a new one every week. How many will be realised?
Hertling: There was a while last year I could literally sign an MOU every week about a hydrogen project in Australia. And half of them, if not more, will end up in the rubbish bin because people don’t consider things like deep sea port requirements and infrastructure.
There are too many hydrogen projects in Australia at the moment. I counted 147 on my list and this is not going to work because you need to have a scale for this. I think it’s reasonably clear [who] the large front runners are at the moment.
We have identified probably three projects which we are seriously following now where we can see that people have got the right ingredients and the right understanding and are also realistic in terms of what can be produced by when. When people are telling you they have got the ambition to produce 10 gigawatts by 2025, that ain’t going to happen.
Has Australia enough skilled workers to run these projects?
Hertling: I’m deeply concerned about the workforce that is required to deliver them. When I look into the renewable resource sector as it is today, I will always call it negative employment because we have more available jobs than we have good people. These are massive projects requiring a massive workforce.
There is an investment that needs to take place now in terms of education, and together with universities to build a big workforce that is required for the future. We don’t have it at the moment.
You said Deutsche Bank is looking at funding three or four projects. Where in the world are these, and how far behind do you think the best Australian projects are?
Volkermann: They are not in Australia. They are in the Middle East, Scandinavia, Southern Europe and North America … [They could get to financial close] in Q4 or Q1. These are a small fraction of the overall proposed projects which are in financing now, and I think they will get financing.
It is hard for me to judge if Australia is a couple of quarters or a few years behind, but as a rule of thumb, when a market sounding happens for debt, it could take 9 to 12 months to get to financial close and we are not busy at the moment financing anything related to hydrogen in Australia. Although our team on the ground continues to have constructive conversations about possible projects, so we are optimistic for the local market.
Is there much interest from equity investors?
Bonestroo: In terms of equity on the global scale that is what we definitely see, we actually get requests from companies that want to co-invest. You see that corporates are slowly trying to get into those projects next to the bigger players, just to understand what’s happening, what is the return, how does it work, what is the cost curve?
Hertling: Siemens equity is involved in some of these projects as well, but I think it needs to be a bite size initially because no institutional investor will say ‘Oh, yeah, sure. Let’s do it’. It also needs to be a marriage of like-minded people. The unknown question mark for all of this is insurance, I still see some unknowns around how the insurance market reacts to the technology risk, the finance risk and the PPA risk.
How are the Australian and German governments engaging around hydrogen trade and technology? Are the two countries planning future supply chains for Australian exports to Germany, or is Germany more interested in supplying technology?
Lindhaus: It’s definitely a two-pronged interest, both as the Australian hydrogen industry being a chance for tech companies like Siemens to contribute, and also as an offtaker.
We have seen the accords, lots of research activities and with Fraunhofer (Institute) on the German side and CSIRO on the Australian side, we have very renowned research institutions playing a big role. We have a fairly well established German tech industry in Australia as well.
Most of all, we will be looking at infrastructure. In Germany, companies ask why would we buy hydrogen from Australia, sometimes it’s not exactly clear to them how that will work, so that’s why we do a lot of explanation work. In Australia, they often say we’re happy to use the German tech companies to build up that industry but why would we be selling to Germany?
From the Australian perspective, there’s the Asian market, which geographically makes a lot of sense. But when we look at Japan now coming back to nuclear, and the incredible advances China and also India are making, does Australia want to put all its eggs in those baskets?
Just for diversification purposes, it would be very good to have Europe as an offtake market. And for Germany, if you look at its options to purchase hydrogen from, through the lens of do the values of those countries align, you’re not left with many.
So Germany does see Australia as having a competitive advantage to supply?
Lindhaus: The idea would definitely be to try to come at it from the EU region, as much as possible. Spain or Portugal are in a good position, as are Norway and Greenland. Anything that’s close is obviously much better.
But last year in May, Morocco and Germany stalled conversations about hydrogen because Morocco wanted Germany to accept the West Sahara as being Moroccan. For the same reason, Algeria stopped providing Spain with natural gas just three months ago and instead diverted it to Italy. These are risks you’re not going to incur with Australia.
Wouldn’t the geographic distance be a hurdle?
Lindhaus: Transport isn’t a big issue. It’s going to take a few more days, but it doesn’t matter in the grand scheme of things. It depends on the cost. However, we know through HySupply that the cost for shipping a kilogram of ammonia over 20,000km is just between nine and 12 euro cents per kilo. So it’s about roughly the 6 per cent mark. Whether that is a dealbreaker or not, remains to be seen.
Morgan: We don’t know what the capital cost is going to be. But it feels like the transport component of that could be small enough so that it doesn’t become the problem. This could be a small challenge but we are optimistic.
Hertling: If you have a lot of scale it becomes more competitive, and if there’s a lot of demand to export hydrogen out of Australia, the price would come down.
So, you think it is realistic to think that in 10 or 15 or 20 years time, there will be a trade link between Australian green hydrogen projects and German industry?
Lindhaus: I’d say sooner than that. Germany’s hydrogen demand will double in the next 10 years and 80 per cent will be imported. The cake is big enough, there won’t be enough hydrogen supply to fulfil the demand. Australia can totally play a role here. If Australia is quick enough to produce enough green hydrogen, it can establish a trade route here.
Volkermann: In oil and gas, whatever the geological chance you either had it or not. But here in the emerging hydrogen economy, it’s based on specific investment decisions. So therefore you are competing with other, from an Australian perspective, jurisdictions which have comparable benefits.
It’s not only irradiation and wind speeds, but probably also rule of law and investment capabilities. I wouldn’t be too content and say it is only Australia – it could be Patagonia. There’s a lot of wind there, and it’s at the end of the world as well.
Hertling: There’s a lot of demand for hydrogen. Take the aviation industry, which has made a commitment to decarbonise between 2030 and 2050 and is looking at hydrogen as a potential fuel source. They don’t care if they get it from Argentina or Australia or Qatar – it needs to be at a competitive price.
We need to think beyond our traditional ways of who has oil and how do we transport this via an oil and gas pipeline, it will be a completely different trading platform going forward that comes with the hydrogen industry.
Andrew Forrest’s Fortescue Future Industries expects to be among the pioneering suppliers of commercial hydrogen to Germany in 2025.
How competitive can Australia be. The government is talking about an ‘H2 under 2’ target, or two Australian dollars per kilogram. How does that sound?
Lindhaus: You would have seen the Inflation Reduction Act passed in the US [last month] that promises a subsidy of up to $US3/kg hydrogen which in some areas brings the price of a kilogram of hydrogen down to $US1.63 – already today. If you put your mind to it, you can have that tomorrow. This is a clear subsidy for domestic green hydrogen production.
Morgan: When you’re talking about targets they’re putting on, they’re just saying this is what it needs to be to compete with natural gas. But you can approach it from the other side as well. If Australia had a carbon price, or a proxy for a carbon price, that’s been politically difficult to achieve.
But the debate is slowly morphing where we get there and industry would welcome some certainty around that. Once we sort out factoring carbon into the equation, at least relative to other fuel sources, it starts to make it stack up more.
Volkermann: Carbon pricing obviously will impact the profitability of projects because you get economic earlier with green hydrogen if you have a higher carbon price. If you look at the research, and what is happening with a $US100 per tonne carbon price or a $US200 carbon price the cut-off point where you get economical with your green projects is a totally different one.
Hertling: When it comes to pricing, I am a bit more cautious. This $2 mark is globally the benchmark that everyone is talking about. So I don’t see that much difference between countries. But the unknowns that we have at the moment are the cost of transport of ammonia, there’s still a question mark about how do you transport it and what will the cost of transport be. And the raw material market is quite volatile at the moment as well.
What do you think about blue hydrogen [making hydrogen using gas and using carbon capture and storage], does it have a role to play?
Lindhaus: Perhaps for an initial ramp up, the machine doesn’t care which colour the hydrogen so perhaps, initially, that may be an idea – as long as you’re not creating locked in assets. But with carbon sequestration, you’re really just giving the carbon a second life yet you’re still going to emit it and this is what we’re trying to avoid.
If we think with net zero in mind, because we’re trying to save the climate, there is no point playing around with when we release the carbon, that’s not the point. We may make more money by giving it a second life but we’re not saving the planet – which was the original idea of the whole hydrogen business.
Hertling: Blue hydrogen will still be attractive because when you look at the infrastructure that we have in Queensland, and to an extent in Western Australia, the existing gas pipelines would lend itself to blue hydrogen. All three [grey, blue and green] can be done at a different price point. But it becomes a philosophical discussion of what we want to produce as a country. If we fall into the purist view of saving the planet and decarbonising, then the support should go towards green hydrogen.
Are there deep pools of capital looking to finance hydrogen projects? Do you see Australian banks as partners in project financing and are they willing to take on that risk?
Volkermann: I think you’re right as we see the first hydrogen projects going to financial close, it’s the bank’s game on the debt side in that moment because banks are more geared up to take these new kinds of technology risk. This is not new technology never being done before – but new technology for project financing.
We see a large group of banks interested in that and it’s not only banks but export credit agencies, which are supporting a bank product and providing additional credit cover. This is on the debt side of the current stack. What we are not seeing at the moment is institutional debt that normally will follow once the market becomes a bit more mature on the project finance side.
Given there has been no project financings of the hydrogen market, it’s a bit early to say if the Australian banks are good partners already but if we drew conclusions from the energy and renewable energy markets, Australian banks played there so I see no reason why the Australian banks would not be partners on this.
What role can the Australian government play to help build the green hydrogen industry?
Morgan: The Clean Energy Finance Corporation is a material benefit to us in Australia. It’s real, it’s well funded. They’re really flexible in how they invest. It’s not only generating a return for the taxpayer but really getting industries going. That deserves a lot of credit and it is a very good construct for Australian sustainable energy development.
Hertling: The Clean Energy Finance Corporation is doing a really fantastic job. They almost got marginalised under the previous government it got squeezed out but I am really pleased to see that under the new government, they’ve been given a new lease of life and you can see the energy coming out of them and the willingness and motivation to invest in new areas of clean energy, together with ARENA, which has been around for quite some time.
These are very fundamental institutions that we ought to keep in Australia and support because they will be quite widely used to get these first initial pilot projects off the ground, together with her private industry.
Many thanks for the discussion.
Follow the topics, people and companies that matter to you.
Fetching latest articles
The Daily Habit of Successful People