Shell FID on Holland Hydrogen I makes The Netherlands hotspot for hydrogen

Holland Hydrogen I, an electrolysis project near the Port of Rotterdam, has received Shell’s final investment decision (FID), launching the growth of a sizable hydrogen industry in the Netherlands.

ICIS analysis examines how Shell was able to make this business decision, what has made the Netherlands a hotspot for hydrogen project announcements so far, and if other project developers will be able to emulate Shell’s success.

The use of hydrogen has been a key component of Dutch efforts to achieve decarbonization targets. A 200MW electrolyzer project at the Port of Rotterdam, Holland Hydrogen I, received FID announcement from Shell in July 2022. This is the first large-scale renewable hydrogen project Shell has developed to this point as well as the first commercial-scale hydrogen project approved in the Netherlands.

The Dutch government supports hydrogen supply projects financially and politically because it regards hydrogen as a crucial component of its future energy mix. The Dutch government is dedicated to achieving the EU’s goal of net-zero emissions by 2050 and is also eager to lessen the nation’s reliance on fossil fuels, particularly given that the Groningen field, the largest gas reservoir in the Netherlands, is anticipated to be decommissioned in 2023.

The next gas year’s Groningen production will be limited by the Dutch government to 2.8 billion cubic meters (bcm) (between October 2022-30 September 2023). The 2.8 bcm output makes up around 7% of the annual domestic gas consumption in the Netherlands. In contrast, output in 2014 exceeded 50bcm.

Additionally, the Netherlands imports a lot of Russian oil and gas for its substantial heavy industries. In 2021, roughly 35% of Dutch oil imports were from Russia, and big Rotterdam refineries have been modified to produce diesel from heavy Russian crude. As a result of the decreased availability of feedstock, Dutch refineries are under pressure.

Following Russia’s invasion of Ukraine, local gas output has decreased and further supply chain disruptions have drawn the Netherlands’ focus to renewable energy and low-carbon hydrogen.

The Dutch government committed to investing €750 million in a national hydrogen pipeline network between 2022 and 2031 in order to promote investment in hydrogen projects. The coalition administration plans to increase the aim of installing 3–4 GW of electrolysis capacity by 2030, which was detailed in the nation’s Hydrogen Strategy, which was published in 2020.

The electrolyzer capacity objective for the Netherlands is less than half that of Germany, although Dutch subsidy programs provide more assistance to project developers. The Netherlands’ low-carbon hydrogen demand is expected to range from 2.8 TWh/year to 12 TWh/year, and the government anticipates that these initiatives will attract projects and assist the country to satisfy those demands.

Due to its proximity to offshore wind farms in the North Sea and its inclusion in the network of natural gas pipelines throughout Europe, the Netherlands is well situated for the development of a renewable or low-carbon hydrogen economy. The largest container seaport and industrial hub in Europe, Rotterdam is a significant logistical hub and a source of hydrogen demand. The depleted natural gas sources and salt caverns in the Netherlands could also be used to store hydrogen.

In addition, the European Hydrogen Backbone (EHB) development plans are well underway. The EHB’s hydrogen pipeline infrastructure will utilize the Dutch L-gas (low calorific gas) network, which is being phased out, to link industrial clusters across the nation. In the Netherlands, more than 50 hydrogen-related projects have been announced. However, there are significant differences in the scope and viability of making these ventures commercial.

First hydrogen FID by Shell in the Netherlands

Holland Hydrogen I is expected to begin production in 2025, according to Shell. If finished on schedule, it would be the biggest renewable hydrogen project in Europe, producing 60t/day of hydrogen from a 200MW alkaline electrolyzer. The Hollandse Kust Noord offshore wind development will provide the majority of the project’s energy needs.

The CrossWind partnership of Shell and Eneco is constructing the wind farm, with an onstream date of 2024. If the power offtake from the grid complies with the requirements for producing renewable hydrogen, the electrolysis plant will additionally utilize backup power from the grid to deal with the intermittent nature of the renewable source.

The hydrogen produced by Holland Hydrogen I will be piped to Shell’s refinery in Pernis, Holland’s second-largest refinery, which can process 400,000 barrels of oil equivalent (BOE) per day, to decarbonize it. With no current public intentions for hydrogen to be sold on the open market, the refinery will use all of the hydrogen produced by Holland Hydrogen I. Therefore, Shell won’t be dependent on outside demand or market pricing circumstances to make this initiative successful.

Shell has also been building a hydrogen fueling station for 20 Qbuzz hydrogen buses in the Groningen region of the Netherlands, acquiring practical experience with hydrogen delivery on a smaller scale. Until it can manufacture its own renewable hydrogen, Shell is providing green-certified hydrogen at the station, which launched in 2021. This means that Shell intends to market low-carbon hydrogen produced by the NortH2 and H-Vision projects in the Netherlands, both of which are now undergoing feasibility studies.

Despite being unsure of how hydrogen could be taxed, Shell was able to take FID on Holland Hydrogen I thanks to its technical expertise, financial sway, and supply chain need for hydrogen. This is a significant undertaking for Shell that will serve as a model for its other global initiatives.

Will Shell’s Holland Hydrogen I be followed by any additional projects?

ICIS has identified 15 further hydrogen projects with a capacity of 100MW or more in the Netherlands, 11 of which are presently the subject of feasibility studies, and four of which are in the concept stage. According to project developer timelines, if all 15 were to be online by 2030, they would all achieve the electrolyzer capacity goals set by the present Dutch government.

By 2030, Shell is predicted to have the highest involvement in the gross installed electrolyzer capacity in the Netherlands, closely followed by the Dutch grid operator Gasunie, the Norwegian producer Equinor, and the German utility RWE, according to a study of corporate statements. Large-scale projects can be supported by a sizable number of project participants who have the financial and technical resources to do so. Numerous other sizable corporations are motivated to complete projects despite weak economics and have the support of investors in order to advance their energy transition initiatives.

Due to the high capital costs associated with hydrogen projects and the uncertainty surrounding market developments, it will be difficult for other projects to follow Shell’s lead with Holland Hydrogen I. Project developers struggle to evaluate prospective market-based profits using a single benchmark because there is no traded hydrogen price. Additionally, new projects that aim to produce low-carbon, renewable, or zero-carbon hydrogen are likely to command a higher price than those that use high emissions to produce hydrogen or other energy sources based on fossil fuels.

Participants in the market are also quite concerned about regulatory uncertainty. The European Commission is tasked with developing a formal definition via a delegated act despite the European Parliament has adopted guidelines on RED II for the production of renewable hydrogen. Due to its stringent requirements, the commission published a draft delegated act on the generation of renewable hydrogen in May 2022. Due to the possibility that the production standards could change, hindering developers financially or operationally, market participants have expressed their opposition to FID on projects.

Due to this, it is expected that companies that are already using high-emission hydrogen or fossil fuels in their production processes will be the natural clients for hydrogen during the early phases of the growth of the hydrogen sector in Europe.

By establishing a stable base for the generation of hydrogen as a result of a long-term power supply pricing agreement, PPAs may be able to assist in de-risking hydrogen projects. Despite the fact that the prices of these agreements are frequently higher than those on the traded market, their stability can provide investors with more assurance and allow the hydrogen producer to provide hydrogen to potential clients on a term and fixed-price basis.

Last but not least, more than five stakeholders are involved in half of the 15 initiatives, which may complicate decision-making. Shell has complete control of Holland Hydrogen I, but is collaborating with between five and eleven other firms on its other initiatives.

Hydrogen projects are frequently staggered in order to lessen some of the business risks. According to ICIS data, projects could cost over €100 billion to complete before 2031. Phasing will provide businesses the chance to learn from little operations before expanding to more lucrative projects.

Only three more projects, H2-Fifty, Uniper-Maasvlakte, and HyNetherlands, have FID date targets that have been announced as of November 2022. While this does not guarantee that these projects will move forward, it does show that many projects are reluctant to set clear public FID deadlines at this time because there are still planning obstacles to overcome.

This an exciting milestone for the Netherlands, but it might be more difficult for other projects

One of the nations with the highest prospects for developing a significant hydrogen sector soon is the Netherlands. To make its ambitions a reality, the government has allocated funding and set out high goals.

Holland Hydrogen’s FID under Shell I is a critical milestone for the hydrogen sector in the Netherlands. Shell may be able to use the lessons learned from this initiative to improve its other hydrogen-related endeavors and instill trust in other participants. There are numerous businesses aiming to build further projects in the Netherlands that have the technical know-how, project experience, and good financial standing.

Most of these projects, in contrast to Holland Hydrogen I, will require finding counterparties to offtake the hydrogen produced. In the near future, projects will probably have a harder time crossing the finish line in the absence of a traded market for renewable or low-carbon hydrogen. In reality, increased policy backing and business models that can successfully reduce project risk will be required to attract significant capital investment from stakeholders. Source: ICIS