Electrofuels provide an alternative to conventional liquid fuels and reduce CO2 emissions, writes Allan Baker
Hydrogen has long been recognised as a valuable tool for tackling climate change, providing an alternative solution to fossil fuels. According to the International Energy Agency (IEA), global hydrogen demand reached 94 megatons in 2021, a 5% increase on demand in 20201, bolstered by a recovery across core sectors following the Covid-19 pandemic. Even further, as a result of increased demand linked to energy transition and the replacement of fossil fuels, the global hydrogen market is forecast to reach 650 megatons by 20502, a growth of 20% per annum.
As with any new asset class, there are challenges and opportunities for both developers and financiers, and hydrogen is no exception.
Firstly, the technology used to produce low-carbon hydrogen from renewable electricity has only been used at relatively small scale to date. Electrolyser systems use electricity to break water into hydrogen and oxygen, in a process called electrolysis. The two main issues with electrolysis are cost and efficiency. In order to produce the anticipated volumes of low carbon hydrogen, we will need hundreds of gigawatts (GW) of renewables, hydrogen plants will need hundreds of electrolysers, and it is uncertain whether this can realistically be achieved in the timeframe envisaged to meet net zero targets.
According to the IEA's Energy Technology Perspectives 2023 report3, global electrolyser manufacturing capacity is set to increase to more than 100 GW a year by 2030, but this is still only half the level needed in order to meet the net-zero goals for 2050.
On top of this, individual projects can be as large as 2GW to 5GW each and, as a result, developers are rushing to reserve electrolyser production from manufacturing facilities that have yet to be developed.
"The recently announced US Inflation Reduction Act ... can be accessed by eFuel developers as a means to aid with funding costs"
Hydrogen is also hard to work with, due to the small size and density of the molecule that makes it difficult to contain and prone to leaking. To tackle this, we will need to develop state of the art infrastructure, such as salt caverns for storage, to pipelines and ships for transport, which will be expensive.
Transporting hydrogen over long distance is a particular challenge for many export-based projects where the need to cool the hydrogen to negative 423°F and hold it at very high pressures to convert from a gas to a liquid state, which reduces its volume by 800 times, is very challenging for vessel design and itself consumes significant energy, hence the focus on converting to ammonia, which is easier to ship, but this also adds cost.
Local consumption, initially, may be a more suitable solution than transportation, one example being conversion of hydrogen into electrofuels or eFuels, which are fuels in gas or liquid form produced from renewable (or decarbonized) electricity. Electrolysis-produced hydrogen is combined with captured carbon dioxide (CO2) converted into a liquid energy carrier: eFuel.
eFuels provide an alternative to conventional liquid fuels and reduce CO2 emissions, providing an alternative and significant way to tackle climate change.
Organisations exploring this avenue include Highly Innovative Fuels (HIF) Global, an international electrofuel development company founded in 2016. It uses cutting edge technology to help accelerate decarbonisation by producing carbon neutral eFuels from a range of renewable sources.
Last year, Societe Generale was appointed to provide general financial strategy and planning advice for the development and financing of HIF Global's eFuels facilities in Chile and the US. Through this partnership, HIF Global will construct the first large-scale commercial eFuel plants in Chile and the US. These will begin construction by the end of 2023, with the aim to start eFuel production in 2026.
The eFuel production process is currently expensive, due to the cost of electrolysis and CO2 capture but we anticipate that costs will reduce. However, as part of the recently announced US Inflation Reduction Act (IRA), the Federal government has provided $370 billion of clean energy incentives and tax credits, that can be accessed by eFuel developers as a means to aid with funding costs.
The EU is also considering simplifying its own funding and state aid rules in a bid to continue to attract clean energy investments. Last year, the European Council approved a further $5.2 billion in funding for renewable hydrogen-based projects throughout the region, focused on developing 'large-scale electrolysers and transport infrastructure, for the production, storage and transport of renewable and low-carbon hydrogen4.'
When putting a project together, we need to consider the economic environment and the ability to overcome any technical challenges. The project also needs a long-term agreement with an 'offtaker' willing to buy all or most of the future production (at a premium in the case of export projects), so a developer can attract financing on attractive terms. For example, HIF Global, is selling the output of its first plant in Chile into the European market, primarily Germany, given the price premium available in Europe for clean fuels.
The financing part of the overall equation requires a management team in which investors, lenders, customers and, indeed, regulators have confidence. At Societe Generale, we're excited to play such a significant role in developing the low carbon hydrogen economy to support the rapid need for energy transition to mitigate the global climate crisis.
Allan Baker is global head of power advisory and project finance at Societe Generale.
- IEA, Hydrogen, Energy system overview tracking report, September 2022
- South Australia, South Australia's Hydrogen Power Plant: Powering jobs and industry, December 2022
- IEA, Energy Technology Perspectives 2023, January 2023
- European Commission, State Aid: Commission approves up to €5.2 billion of public support by thirteen Member States for the second Important Project of Common European Interest in the hydrogen value chain, September 2022