Despite all of the rhetoric about the need for green hydrogen, we see most of the large ammonia producers pursuing large blue projects – with Nutrien’s announcement yesterday coming on the heels of a CF new facility announcement and the CO2 capture project announced by LSB a couple of weeks ago. While there are some small (proof of concept) green projects in the works, they are very small, tiny when compared with the ammonia need, whether to replace lost material from Russia and Ukraine or whether to supply what could be substantial needs in Asia to co-fire coal plants, or as a shipping fuel, or as a carrier for hydrogen (see third chart below). The ammonia majors are not waiting around for “green” economics to improve as they see meaningful near-term demand that cannot wait for scale efficiencies of available power on the green side. Large-scale sources of cheap renewable power are hard to find, and where they may exist, there is competition from uses that may be able to pay more.
The two charts below today are interesting bedfellows as while one talks about yet more, likely impractical, hydrogen ambitions, the other talks about a possible solution.
One of the concerns that the IPCC has in its report issued this week is that things are not happening fast enough and the Ammonia analysis in the chart below would support this view. Most of the capacity addition comes post-2030 in large part because project planners cannot see a way to enough cheap power to generate the green hydrogen needed until that time. In our view, since COP26 the transition part of the energy transition has been overwhelmed by advocates of green technology and renewable pathways without much thought about how practical they might be today. Those suggesting transition options are being given very little airtime and as a consequence, we see broad hostility towards anything that is not truly green, regardless of whether the costs or time frames make any real sense. If we do not embrace bold transitionary steps including the use of hydrocarbons with aggressive abatement targets we will not meet any of the shorter-term goals that the IPCC highlights and we are putting hope in renewable and technology development which may come up short. Related to this we see the LNG dilemma in Europe, with the current and medium-term needs very apparent, but a reluctance to sign up for longer-term supply because of an expectation that if all things renewable come to pass, the LNG might not be needed. The Europeans will need to make the longer-term commitment if they are to persuade the US and other potential exporters to build new export terminals.
The Canadian targets highlighted below are ambitious and will likely not happen without the significant CCS projects planned for Alberta. The CCS opportunity will drive down energy and chemical (heavy industry) based emissions meaningfully and could also be the basis for new power generation capacity to allow the transport industry reductions that the country is looking for – either through EVs or hydrogen-based transport.
The steel analysis below is interesting because it is likely that a significant bifurcated market will develop for steel as the demand for green steel is likely to be significant, although probably not at any price, while there will also be a few opportunities to make low-cost green steel and the lucky few could make a lot of money. Anecdotally, we are helping a client look for the best use of what could be a substantial tranche of low-cost renewable power in a location that is not heavily populated, and consequently, there is a limited local demand for the power or anything you might make from it, such as hydrogen. Green steel has come up as possibly the best use of the power in a couple of conversations so far. This adds another wrinkle to the question of whether we can build renewable power fast enough – especially to meet some of the green hydrogen expectations. The challenge will be fending off potentially higher bidders for the power, and green steel is a real contender – more so if a reasonable premium can be gained in the market for the steel. See more in today's daily report.
Source: EIA – Today In Energy, March 2022
The Texas hydrogen hub is getting a lot of press and we also cover the idea in our ESG and Climate report today. We see this as not a lot more than intent today and would be surprised if any part of the project would be up and running, assuming it gets built at all, before the end of the decade. Green hydrogen economics do not (yet) make sense and some considerable efficiency learning curves need to emerge before any project could expect to make economic sense without significant subsidy. We have talked at length about the inflationary effects of material shortages and this is the core topic of our ESG report again today, where we suggest that a global recession may be the best thing for the renewable industry as it would slow other sectors' demand for critical materials. But the other wild card is renewable power demand, and how many industrial and materials companies along the Gulf Coast have their eyes on the same renewable power capacity to meet 2030 emission reduction goals. No one must buy renewable power today, because no one has 2022 emission goals. So, renewable power demand is likely understated and it is why the premium to buy renewable power in Texas today is quite low. Fast forward to 2030 – when promises have been made – and we will likely see demand spike and prices rise relative to conventionally generated power. This would materially impact the economics of the green hydrogen hub in Texas even if the electrolyzer costs could be reduced. Given the abundant pore space both onshore and offshore, blue hydrogen makes much more economic sense for Houston.
We continue to believe that the US has a cost advantage in CCS versus many of the other regions of the world and that when coupled with low natural gas prices the US should be able to take a lead in developing low carbon chemicals. CF is pushing the idea of both blue ammonia in the US as well as green ammonia, and while the company has yet to announce sequestration plans for the CO2 it is working to purify – see Exhibit - once dehydrated and compressed the incremental cost of storage should be low.
We view the hydrogen tax credit discussed in today's daily report as potentially very harmful, as it could give life to projects that will further increase demand on a renewable energy industry that has finite limits to its rate of growth. The credit could encourage inherently uneconomic projects – even with a longer-term “abundant power” view. If the incentives are used to back clean rather than green projects it would make more sense as blue hydrogen could be produced in very large quantities without breaking the bank and would allow constrained renewable power investments to focus on other harder to decarbonize power needs. If the hydrogen subsidy could be added to the 45Q sequestration credit we would likely see a wave of blue hydrogen investments in the US – primarily aimed at decarbonizing industrial applications and refining.
The linked Covestro headline from today's ESG & Climate report is a reminder that the chemicals and polymer makers are dealing with more than just recycling and product lifecycle management. Customers are equally focused on the carbon footprint of the products they buy and the green hydrogen move by Covestro (assuming that affordable green hydrogen is possible) would replace hydrogen made from fossil fuels and replace other fuels for heat in some cases. Germany has some considerable issues with decarbonizing, as the blue hydrogen route will be challenging in a country that will likely not allow onshore CCS. Covestro and others may have little choice but to buy green hydrogen and/or green power, even if supplies come up short of plan and costs are higher as a result. This is a good illustration of why we believe that the right policies in the US could drive some additional competitive edge while meeting climate objectives. Cheap hydrocarbons coupled with cheap CCS may only be matched in some parts of the Middle East.
Much of the core focus of both our chemical industry and ESG and Climate research recently has been on inflation and materials shortages; we would point you to: Inaction, Caused By Inflation Fears, Is Driving More Inflation! and Coming Up Short: Materials Availability To Limit Climate Progress. This linked article suggests that, as we have predicted, cost and availability pressures are taking a toll on solar installation plans for 2022 in the US. While the inflation piece is real and the product shortages highlight some of the capacity constraints for materials and panels, the broader conclusions that can be drawn from the headline are more concerning. These shortages (and higher prices) are coming well before we see any step change in attempts to increase renewable power installations associated with all of the green hydrogen projects that have been announced over the last 6-9 months. All of these investments are relying on the deflationary trends continuing, especially for onshore wind and solar.