Michele Turitto PhD & Federico Buccetti (Bip)

Energy Accounts Lead / Senior Consultant (Bip)

  • Sustainability
  • Supply Chain
  • Hydrogen Feasibility
  • Accessing Funding

14 Mar, 2022

Hydrogen valleys – the key to breaking the “chicken and egg” deadlock

As consensus on the role that hydrogen could play in energy transition plans grows – as confirmed by the pledge made by world leaders at COP 26 –real advancement of a hydrogen economy is hindered by a “chicken and egg” conundrum. This is primarily due to a gap between investments on hydrogen supply and demand, with both lacking sufficient volumes from the other.

Hydrogen valleys (or clusters as they are more commonly known in the UK) are the solution to this challenge. The term “hydrogen valley” describes a geographic area that offers the opportunity to develop a “localised” integrated hydrogen supply chain from production to distribution and utilisation. A valley is a means to facilitate the cooperation of TSOs, DSOs, industrial players, utilities, municipalities, government, and private investors.

Several valleys around Europe and in the UK have been already identified and launched but there is still space for further developments and opportunities to explore. The path to the realisation of the full potential value for hydrogen is fraught with challenges of a business, technical, economic and financial nature.

As privileged observers, having partnered with key players along the hydrogen value chain, through this paper we provide an overview of the typical opportunities and challenges that Chaucer and Bip believe have to be considered to make the hydrogen economy a reality.

Hydrogen valley complexities

The intrinsic flexibility of hydrogen opens up the possibility to penetrate numerous sectors and develop several alternative supply chain configurations. Therefore, hydrogen valleys may be characterised by high heterogeneity in terms of:

  • production technologies (e.g. electrolysis, steam methane reforming, gasification)
  • logistics - in line with the state of the molecule (e.g. gaseous, liquid or delivered through alternative carriers)
  • infrastructure (e.g. transport by pipe, lorry, shipping, train tanks)
  • final use (e.g. industry, mobility, residential heating)

Given the high number of variables at play, asset sizing and supply chain optimisation become critical factors in the successful development of hydrogen valleys.

Hydrogen uses/hydrogen valley ecosystem image (example):

Hydrogen Valley

The role of hydrogen valleys

Hydrogen valleys play a critical role in the energy transition journey as they:

  • Foster the decarbonisation of a wide range of industries – aggregating different players operating across disparate sectors but with the common objective of moving towards full decarbonisation through hydrogen. By enabling the aggregation of sufficient demand and supply investment risks are substantially lowered for all parties involved
  • Offer environmental, social and economic benefits for local communities by attracting greater investment volumes
  • Enable incremental technology maturity growth beyond pilots to fully commercial solutions pushing costs down
  • Promote the uptake of hydrogen economies - the progressive scale-up of hydrogen valleys will lead to the development of interconnections first between valleys, then at national and subsequently at international level

Even though several projects are in the pipeline, most of them are still in planning phase; as such, they demand support from a financial, technical and managerial point of view. Among an overwhelming sea of opportunities, it may be challenging to identify the most promising ones. Investment decisions must be backed by solid competences to ensure full alignment with strategic objectives.

Typical challenges associated with hydrogen valleys

The creation of a hydrogen valley is intrinsically complex and typically raises the following challenges.

Opportunity identification

The identification of opportunities for hydrogen consumption and production is the starting point of the creation of a hydrogen valley; hydrogen enabled decarbonisation opportunities are primarily associated with hard-to abate sector (e.g. steel, ceramics, glass manufacturing, refining) or heavy duty transport combined with availability of resources for production of the molecule (for green hydrogen) or storage (for blue hydrogen).

Achieving critical mass in term of volumes is crucial for the economic feasibility of the valley. For example, the development of a dedicated pipeline for hydrogen transportation may become reasonable only once a target demand level is secured making the distribution much more competitive compared to alternatives such as by truck.

Solid business planning

Planning and business modelling are critical in the early stages of the creation of the valley. Demand estimation, technical sizing, supply chain configuration and economic assessment require cross–sector competences and involvement of all interested parties. Moreover, the hydrogen valley is an interconnected ecosystem, hence the technical and economic evaluation must consider the ecosystem as a whole. For this reason, centralised planning enables a solid, consistent and objectives project evaluation.

Value chain alternatives evaluations and technical and commercial feasibility analysis enable the assessment of potential additional benefits to be reaped or challenges to be overcome. Sensitivity analysis can be used to identify the most effective levers impacting the investment profitability and may lead to the identification of funding gaps to be filled.

Managing complexity

The involvement of numerous and different stakeholders (e.g. producers, TSOs, DSOs, off-takers and investors), though essential for the success of a hydrogen valley, results in inevitable complexity due to the heterogeneity of involved parties. Reliable project management, rigorous coordination of activities and knowledge sharing are key factors for the success of the valleys. Our experience shows that an independent party is the most effective in this role, removing obstacles and facilitating the setting up and running of the valley.

Expanding the valley – further off-takers scouting

Following the launch of a hydrogen valley, the number of stakeholders involved may increase as the creation of a hydrogen hub may stimulate additional demand for applications in mobility, industrial or residential sectors. Therefore, a phase of scouting for additional opportunities is critical to capture the greatest value that may arise from the hydrogen valley.

Access to funding

Most first mover initiatives may demand some form of government support to launch a hydrogen valley. In fact, a critical factor in its development is the presence of broader long term national low carbon strategies. As such, investors and interested parties may need support in submitting the right type of applications to access public funding opportunities.

On the other hand, private institutional investors drawn to the potential returns that the nascent hydrogen economy could bring may require guidance in identifying, assessing and shortlisting the most attractive opportunities to be added to their portfolios.

Critical questions to answer

For all stakeholders across the hydrogen value chain who look with interest at hydrogen valleys as a way to start or progress their decarbonisation plans, the following key questions should be considered:

  • Is hydrogen a relevant option for my business ESG objectives without disrupting my competitiveness?
  • How could my company fit in an integrated hydrogen valley?
  • Are there sufficient production and demand volumes to launch or join a hydrogen valley?
  • What is the most effective supply chain configuration to sustain the hydrogen valley objectives?
  • Is the business planning solid? Is there any other lever to exploit to increase the profitability?
  • What type of funding options are available? And how could they be effectively accessed?
  • How to manage all the stakeholders involved to speed-up with the launch and operations of the hydrogen valley?

Hydrogen valleys – a first step towards a more sustainable future

By enabling the pairing of offer and demand, hydrogen valleys are the key to solve the chicken and egg dilemma that has slowed down the foundation of a hydrogen society. Hydrogen valleys offer a great upside as the overall value exceeds what involved parties could generate on their own. The fulfilment of the potential value requires addressing a number of challenges associated with identifying the right partners, accessing funding opportunities, setting up and running the valleys. With the right competences and guidance, all of these challenges can be overcome enabling first movers to gain significant long term competitive advantage.

To find out more contact:

Michele Turitto
Managing Principal, Energy Accounts Lead, Chaucer

Federico Buccetti
Senior Consultant, Bip

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