Securing net zero success: Creating the business case for hydrogen

De-risking hydrogen projects using in-depth business case development serves to prove the technical, environmental and financial value of hydrogen. We are seeing advances in global clean hydrogen projects across hard to abate sectors such as traditional refining, chemical and fertiliser production. Emergent heavy haul transportation, energy storage and export markets such as Europe and Asia are also expanding.

The success of such projects is built on developing a thorough and compelling business case. The concept and options for the project, return on investment, market and policy, risk and constraint considerations, multi-stakeholder requirements, and practical levers to achieve the investment objectives are critical.

As of May 2023, less than 10 percent of more than 1,000 globally announced projects have achieved Final Investment Decision (FID). GHD Advisory has supported many of these projects. This article provides guidance on best practice business case methodology and framework to get the right strategy for successful implementation of hydrogen projects.

Very low carbon hydrogen projects have multiple supply chain elements: water, renewable energy and connectivity, hydrogen production, storage facilities and transport. All critical factors, both together and separately, are required to be technically feasible. As a starting point, there are several mature and proven technologies that can be applied to the concept review during business case development. The supply chain needs to be considered from a feasibility perspective, for example transport factors, water sourcing and renewable energy or carbon capture requirements. In most cases, several inter-related projects need to gain FID at the same time and will likely need approval together, yet in most cases these inputs are not owned by a single entity.High risk elements should be further understood through technical investigations or studies prior to moving forwards with the project. If they cannot be solved, then alternatives need to be considered.

A clear business model is required to determine financial viability. This covers what role your company will play, but also who you will be selling your hydrogen to, and who else might be involved. Consider capital costs, operating costs, and the potential revenue, as well as available tax credit incentives, and carbon credit revenue. Jurisdiction-specific incentives are continuously evolving and can sometimes include grants or low-interest debt financing. Keeping up with new and revised government subsidies and regulations will help you maximise financial opportunities. Once all the financial modelling elements are in place, you can begin forming and fine tuning various hypothetical scenarios and pulling levers to ascertain different options – from supply chain inputs, transport, storage, production, and development pathways.

Environmental attributes form a fundamental role in understanding the benefits of hydrogen towards a net zero world, and it is important to be clear on the goals and outcomes. For example, different production modes of hydrogen produce varying carbon intensities, and this will influence the availability of credits and incentives. Industries where emissions are hard to abate are turning to hydrogen to advance their net zero pathway because substituting hydrogen might allow them to remove carbon to achieve decarbonisation objectives. Extended hydrogen uses in transportation, utilities and manufacturing are continuing to emerge.

By identifying specific end-users, organisations can develop detailed and varied scenarios for demand analysis and pathways. Clean energy subsidies are driving massive market supply opportunities for hydrogen, and it’s also creating strong demand at levels not seen before in non-traditional markets. However, the actual levels and timing of that demand is still uncertain and accurately matching supply to demand is a challenge. Mapping out who the end users are, what they look like and how it connects to overall objectives can uncover niche opportunities. Analysing the market need and demand allows for more flexibility in approach, including exploring alternative use-case options and more economical distribution channels. Timing is important too, as is synchronising with the scalability of your project. When it comes to anything new and pioneering, in many cases investment needs to be staggered over time as return and realities become more evident. Creating and aligning with hydrogen hubs and owning a portion of the value chain can help de-risk the demand side of the project.

Regulatory success is gained through consultation, and the project needs to have a clear path to being permitted. Social engagement is critical to achieving the positive environmental benefits of hydrogen. While there is growing support for clean energy, some concern remains. Most commonly due to an unclear understanding of the “what”, and the “why”, as well as the competition from alternative energy options. The earlier the engagement takes place, the more productive the outcomes. Illustrating value to all groups of stakeholders through authentic engagement is important to the success of any energy transition project. Given the unique attributes of hydrogen projects, the stakeholders across the value chain need to take the step forward together. Identify all the necessary groups including Indigenous communities, landowners, government, public and private sectors. Be authentic and genuine to progress the project in a way that benefits all parties.

At a technical level, make sure you have what’s needed to complete the project. For example, if the goal is to produce very low carbon hydrogen, you must have access to renewable power, water and land. Sometimes these building blocks are constrained or expensive. Will the project need access to a grid – and at what time of day? Does more investment in distribution need to take place? Are there a variety of possible water sources or permits available? The effort around this section of the business case is on creating parameters around each constraint to determine short and long-term feasibility. Looking at constraints through an order of magnitude lens allows for different options, elements and scenarios to be more deeply explored. Strong and successful business cases strive for several viable options; if only one path becomes apparent, then that becomes a risk.

Hydrogen is receiving mounting policy support in key jurisdictions around the world. It is becoming increasingly central to long-term energy transition strategies as governments are realising the value and role hydrogen will play in their net zero success and energy security. Understanding the nuances across each jurisdiction’s stance on hydrogen will help organisations leverage and capitalise on the growing momentum. As an example, Germany, and much of Europe, is looking to import only hydrogen that is produced from renewable energy, other net importers such as Japan and South Korea are more concerned with the measured carbon intensity and delivered cost. In North America, Alberta in Canada has a starkly different strategy to California in the US, for example.

Considerable investment needs to be made to scale clean energy and hydrogen projects. Yet, as mentioned above, being flexible and staging the approach prevents overcommitting capital – creating an element of cost certainty and risk management. Explore different project delivery models that both share and lessen the pressure of costs and risks through teaming with partners or forming consortia. Determine multiple pathways to optimise the financial outcome and return on investment. You can experiment with different levers, such as sale prices, ability to access more tax credits, or funding to reduce capital and operating costs.

• As hydrogen gains more momentum in the drive to net zero, the ultimate success and end-goal of your business case is to take the project forward and achieve the final investment decision.

• Prepare a hydrogen business case that thoroughly explores and creates optionality, business models, technical feasibility, financial viability, scalability to meet market demand, regulatory requirements and stakeholder buy-in so as to set the project up for success.

• Best practice sees business development efforts such as partnering, consortia forming, financing arrangements and offtake agreements receiving due consideration.

• Enable pathways to bring the hydrogen project stakeholders together in win-win scenarios. Conversations with government, Indigenous and local communities allow for both early engagement and discussions of risk and reward – for both their and your benefit of understanding. Multiple stakeholder buy-in is critical and the stakeholders need to take the step-forwards together.

• Thoroughly understand the constraints of the project, whether that be technical, regulatory, stakeholder, financing or other. Focus efforts that de-risk and create multiple opportunities to remove that constraint.

• A key part of hydrogen projects reaching FID is optionality. The business case needs to ensure options exist, are understood (technically and economically) in the project development phase, to de-risk the projects and optimise project configuration and outcomes.

• Leverage the business case to demonstrate the long-term opportunities and benefits including reduced emissions, improvements to air quality, job creation, and sustainable water use. Highlight these factors to your advantage in discussions with financiers, government agencies, potential partners or consortia, industry, vendors, and communities.

• Showcase how the project is advancing the energy industry through public and end-user awareness and knowledge. Highlight the benefits of being a pioneer in this space by gaining early access to funding and resources ahead of the expected surge in demand for hydrogen projects over the next decade.