Firstly, let’s quickly address the government’s plans for a state-owned hydrogen company. What we first need to establish is that hydrogen is not a high margin industry, it is currently an industry in-the-making with many potential competitors and no supply shortage. A quick look at the number of planned hydrogen production plants or Euronext growth confirms that. The focus of the producers in the market establishment phase will be on reducing prices to make it economical for consumers to switch fuel or source of energy. This means that margins will not be huge, especially not when comparing to historical oil and gas margins. To compete with projects that are being developed at the moment, a state-owned company would have to sell hydrogen at a loss, at a low enough price to satisfy the consumption side.
Additionally, the government already has high ownership in Equinor, Aker, Statkraft and Hydro, which are all planning to produce hydrogen, along with numerous other companies and JVs. To get return on these investments, would it not be more beneficial to pave the way for these companies to succeed and not compete against them?
One thing we do know is that tapping into economies of scale is a strong point on making hydrogen a commercial, financially sustainable solution. In addition, green hydrogen remains economically unsustainable to this day because making energy is more expensive than finding it. Therefore, the government does not need to start a company but rather create a baseload of projects that can push the economies of scale, increase the cost of CO2, or alternatively to provide incentives that can de-risk projects to such a point that more projects are realized.
There is already high number of projects in development in Norway. Currently 50+ hydrogen production projects are in the development or feasibility stage. Many of these will not be carried through to a final investment decision. The reason for this? There is too low economical feasibility or too high risk connected to the projects. Both of which are due to market risk related to production volumes, price and competition. There is simply not enough certain consumption in the pipeline to build out all projects and to get large enough scale to reduce prices. The lack of consumption is a critical bottleneck, and this is where the government’s focus should be if the goal is to speed up the hydrogen economy.
Today the projects that are best positioned for success in Norway are the ones related to large fixed offtakes in maritime or industrial sectors. These projects have a guaranteed production size at scales large enough to reduce costs related to scale. This provides certainty and reduces risk of investment. Today we mainly speak about incentives on investments into hydrogen production. In fact, some of the largest risks for hydrogen producers are in the uncertainty of offtake – this is both difficult to predict and to hedge against.
The reality is that the hydrogen market does not yet exist. There is significant economic risk in building out a plant with no fixed contracts, gambling on the emergence of a spot consumption market with variable offtake. If the government wants to contribute to the development of a national hydrogen industry, they will be much more efficient by creating consumption and incentives for de-risking investments related to market uncertainty.
