If you are an energy developer who wants to add hydrogen projects to your portfolio, you will soon discover that with this decision, several questions and challenges arise. While there are similarities in the development processes with renewable energy projects, there are also important differences that need to be taken into account in order to be successful in the hydrogen market.
In this article, we’ll give you an understanding of the main similarities and differences between the development of renewable energy and hydrogen projects, with a special focus on the final user of the energy, which is commonly called the offtaker.
Similarities between renewable and hydrogen projects
First, let us mention the similarities between renewable energy and green hydrogen projects. Both require a lot of engineering hours to figure out the cost, expected performance, and risks involved. Both project types also require a long development timeline, typically around 5 years, to get the necessary studies, permitting, and financing in place.
Regardless of which of these project types you are developing, a good understanding of the costs and being able to manage the uncertainty around them is crucial. This includes having a handle on the costs of the core technology (solar modules, electrolyzers, etc.) as well as the costs for development, permitting, construction, and commissioning.
Both renewable energy and hydrogen projects follow a gated process, where you and your team unlock funding for each stage of development you are at. This is to reduce the investment risk of the project, as you move further along the road of development, to increase the project’s viability and the portfolio’s profitability. So this stage-gated approach is probably familiar for you as a renewable energy developer, since it is fundamental to manage these complex infrastructure projects.
Differences between renewable energy and green hydrogen project development
Now, let us dive into the main differences between the two types of project development. One of the primary ones lies in the cost range and technical uncertainty involved. This may sound contradictory to what you have just read, but it is true. In mature renewable energy markets, developers have a good understanding of the costs associated with the core technology. This allows them to manage the uncertainty within a relatively narrow range. Renewable energy developers have in general a good understanding of their projects’ technical performance based on extensive operational experience.
Read more: Optimizing green hydrogen plants for maximum profitability – a simulation
In contrast, the green hydrogen market is relatively new, with fewer projects and less operational history. This results in a much higher degree of uncertainty around the costs of the core technology (electrolyzers), as well as the additional expenses for auxiliary components. Developers often struggle to accurately estimate the total capital expenditure (CAPEX) required to bring a green hydrogen project to fruition. If you want more control on parametres such as CAPEX and LCOH, a software platform like Southern Lights would be a fitting solution.
Additionally, there is more technical uncertainty in green hydrogen projects, such as component degradation which can significantly impact the performance and the revenue of the hydrogen production system.
What is an offtaker, and why is it important?
Another key difference between renewable energy and green hydrogen projects lies in the offtaker. The offtaker is, simply put, the one who will buy and use green hydrogen. In the renewable energy sector, you can often find a buyer for the electricity you produce by connecting to the grid. However, in the green hydrogen space, the offtakers are typically industrial players, such as steel manufacturers and chemical producers, who have different requirements, processes, and business conditions.
In the green hydrogen market, production is usually done on-site, where the hydrogen will be used, as transporting it is both complex and costly. This means that the location of the hydrogen production and the proximity to the offtaker, becomes a crucial factor in the project’s viability.
Read more: Tackling Uncertainty in Green Hydrogen and BESS Projects
So engaging with these offtakers and understanding their technical, commercial, and financial needs is essential when you want to develop your project. Since the offtakers have different processes, terminology, and expectations compared to electricity customers, it will require you to spend more time and resources to understand the offtakers needs and adapt your project development approach accordingly.
The most successful green hydrogen projects today are those that involve the offtaker from the very beginning of the development process. By working closely with the offtaker, you can optimize the project to meet the specific needs and requirements of the end-user, which can significantly improve the project’s competitiveness compared to other generic hydrogen projects.
How to find offtakers for your green hydrogen project
The process of finding consumers for green hydrogen projects is an active and proactive effort. In the current market, there are more green hydrogen development projects than there are established offtakers. As a result, you need to take the initiative and actively search for industries that would be interested in consuming hydrogen.
One way to do this is to reach out to commercial managers or decision-makers in industries such as steel manufacturing, fertilizer production, explosives manufacturing, and fossil fuel refineries, as these are some of the largest potential consumers of hydrogen.
You would also benefit from being part of hydrogen associations, i.e. Hydrogen Europe, and industry groups, as this can provide you with access to a network of potential offtakers.
Building trust and demonstrating expertise is crucial in securing commitments from offtakers, as they want to be confident that you can deliver on their promises. For this reason, it is important that you’re willing to invest some budget and commit resources to this engagement process.
By working closely with the offtaker, you can optimize the project to meet the specific needs and requirements of the end-user.
So finding, and securing, an offtaker is not a simple or straightforward path. It typically involves a multi-stage approach, starting with initial expressions of interest, progressing to more detailed discussions and negotiations, and ultimately, hopefully, culminating in a binding agreement between you and the offtaker.
Throughout this process, you need to be able to provide detailed information about the project’s costs, performance, and risk profile, as offtakers will carefully evaluate these factors before committing to a long-term agreement.
How to develop an agreement with the offtaker
The process of developing an agreement with an offtaker typically involves several stages. It often starts with a Memorandum of Understanding (MOU) or a Letter of Interest, where both parties express their interest in the project. As the project progresses and you demonstrate your capabilities, the relationship with the offtaker deepens, and they may eventually sign a binding agreement to purchase the hydrogen.
However, offtakers will not simply sign an agreement without thoroughly vetting you and your project. They want to see that you have the necessary expertise, experience, and a clear plan to deliver the hydrogen as promised. This means that you need to be able to provide detailed information about the project’s costs, performance, and risk profile, which the offtaker will carefully evaluate.
In some cases, the offtaker may even become a joint venture partner in the project, further aligning their interests and increasing the chances of success.
Why technology matters in green hydrogen project development
As you know by now, planning and executing the development of your green hydrogen project is, to say the least, complex. As a project developer, you have a lot of factors to consider, which can be easier to handle if you have the right technology to help you. A platform such as Southern Lights can help you streamline your development process and handle the high levels of uncertainty in the early stages of your projects.
The key to have control over your project and make informed decisions throughout the development process, which is required by the offtaker, is access to insights and traceable and auditable information. Using the right tools and software helps you to map out and quantify the sources of uncertainty in your projects, including uncertainties around the cost of the core technology, such as electrolyzers, as well as the additional costs for installation, piping, and other project components. This significantly reduces the risk of you developing “blindly” and shooting in the dark.
The goal of Southern Lights is to empower you to internalize the know-how you need to develop your projects and provide you with the tools needed to manage your projects independently. If you need assistance or support, our team of hydrogen experts are here to help. What we want is for you to succeed.
