Hydrogen is changing power dynamics in energy sector
December 28, 2022
As the EU tries to finalize its hydrogen rules, Asian countries are moving fast to secure deliveries and the US is committing money to set up local supply chains. Can the Middle East collaborate with both continents?
The momentum behind hydrogen has remained strong over the past year, but unexpected twists are changing what insiders are calling the "hydrogen race."
The European Union, the region which just two years ago held a competitive know-how advantage, is now getting caught up in defining its own regulatory framework. These rules are needed to create certainties to implement local hydrogen projects and define a hydrogen supply chain to unlock export projects abroad.
The EU's cooperation with Gulf countries, and the Middle East in general, is one good example.
Project developers see the potential for hydrogen production in the region. Land, renewable energy, infrastructure and ports are plentiful. Such large projects increase efficiencies yet require caution, as investment mistakes could waste billions of dollars.
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"It takes quite some time between the signing of the memoranda of understanding and the final investment decisions, as these projects need more time to design, to get the permits and partnerships in place. The off-takers also need to be secured," Alexander Ritschel, head of technology at Masdar, told DW.
Masdar, a UAE-government-owned renewable energy company, is one of the major hydrogen investors in the region. It wants to be an early mover and is waiting for regulations in import markets, namely EU member states and Asian countries like Japan and South Korea.
"The financing becomes more complicated if significant rules are not defined. We don't need to wait for all the details of all regulations, but the most important ones need to be clear," said Ritschel.
Competition for hydrogen deliveries?
Masdar welcomes the clear political will of Asian countries, adding it is waiting for local incentive schemes to be published. "These details are being finalized, most likely next year. Whenever they are, we can go ahead." According to Ritschel, the Middle East has the resources to meet Asian and European hydrogen demands simultaneously.
Not everybody agrees that a lack of competition among importers will lead to harmony. Some experts think the developing hydrogen economy will bring about new, competitive relationships between countries.
"Europe, and especially Germany, have a wrong perception of the hydrogen market. They think they can wait because, eventually, they will decide who will produce hydrogen, not realizing that other countries are far quicker. Exporting countries are increasingly deciding whom to collaborate with," Dawud Ansari, a researcher at the German Institute for International and Security Affairs, told DW.
Ansari suggested that European risk aversion might be a reason for Germany's cautious approach, but it could imply larger risks and higher energy prices in the future.
Hydrogen-focused companies see a positive state of affairs. The recent US mechanisms meant to bring the entire supply chain for green hydrogen technology within its borders are pushing European institutions to develop an equally attractive framework to avoid technology providers resettling across the Atlantic.
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"There is competition between policymakers. There is competition between customers to have their projects flying because most of the support schemes have expiry dates," Manuel Kuehn, head of sales for sustainable energy systems at Siemens Energy, told DW.
On the other hand, according to Kuehn, intra-EU competition might be more dangerous, which is why he has called for unified EU regulations.
Many hydrogen developers also have an incentive to wait — and not only because of the regulatory framework. "Technology prices will decrease, mostly due to scale effects," he said.
According to Siemens Energy, large regional projects are unlikely to start producing green hydrogen over the next two years.
Regional cooperation in the Middle East
Ansari pointed out that Gulf countries are advancing commercial agreements and political plans. A mix of collaboration and competition defines their strategies. For instance, since Kuwait and Bahrain do not have much leeway in the green hydrogen sphere, they are investing in other countries' endeavors.
"There are also Saudi actors in Oman's hydrogen projects, and UAE players being active in Saudi ones," said Ansari, underling that countries are trying to specialize in different segments of the upcoming hydrogen economy. "Besides exporting green hydrogen directly, Oman plans to go up in the production chain and set up plants for green steel and cement. Qatar is keeping it simple. It is committed to exporting LNG and supporting clients to produce hydrogen and ammonia from LNG directly in the destination country."
According to Ansari, Gulf countries are overriding the model imposed for years by Western management consultancies, "which only look at their own profit and show neither interest in nor knowledge of the region. The region requires different logics."
As the recent tensions over US incentives show, competition is not only a matter of hydrogen deliveries. It's also a matter of hydrogen technology. If just half of the projects in the pipeline come online as planned, massive issues with the supply chain would arise, say experts. Technology providers will play a key role in the nascent hydrogen markets.
"We have to ramp up a whole industry on the supply side, and this could take some time," said Kuehn. "Suppliers, often smaller companies, make investments when they receive orders. It takes time for the support schemes to trickle down to suppliers."
At the same time, slower developments would decrease tensions. Companies would have time to standardize new components like electrolyzers — a key component to produce hydrogen from renewable sources — and scale up the production of others, like compressors, transformers and rectifiers.
Some countries, like China, could move faster in the entire supply chain. Experts also expect the supply chain to take advantage of American policies, like the Inflation Reduction Act. That is why the EU's policies and regulatory framework are key to unlocking investments in Europe.
"In the next couple of years, players will decide what they want to be and which role they want to play in the energy transition. I would expect disruptions as it happened in the solar and wind industries a decade ago," said Kuehn.
In general, experts agree that competition between technologies and countries will remain. But, given the high demand for these components, all the technology providers are set to benefit.
"There will be space for every player to achieve a certain degree of scale effect to reach the endgame," concluded Kuehn.