Opportunity is knocking: bringing hydrogen into the mix

A growing body of evidence indicates that more frequent extreme weather events are linked to climate change, and these disruptions have become a key issue for both government and business leaders. While fossil fuels remain the dominant source of global energy, many governments are increasingly addressing the risks of climate change and seeking ways to de-carbonize their energy supply.

Climate change risks are also specifically hitting home for energy sector players. Hurricanes, made more powerful by rising ocean temperatures, have recently wreaked havoc on oil and gas production. In October, Hurricane Michael forced operators in the United States Gulf of Mexico to shut down approximately 40% of crude production and almost 30% of natural gas output, and in August 2017, Hurricane Harvey halted about one-quarter of oil production. Operations in the North Sea were likewise interrupted in 2013 by Cyclone Xaver, which pounded parts of Europe.

The mounting pressures from a changing climate are bolstering the case for an energy mix that relies on a greater share of renewable sources, and in turn, taking a closer look at solutions to compensate for the intermittent generation of wind, solar, tidal and wave power. A particularly promising avenue is the use of hydrogen as a storage medium. 

Energy investors, take notice

Most hydrogen comes from the processing of fossil fuels, but 4% is generated from water, separated from oxygen by an electric current. Hydrogen derived from an electrolysis process powered by renewable sources is termed “green hydrogen” and considered a clean energy option. In some cases it can displace carbon fuels outright, lower the carbon impact of natural gas, or be stored as a back-up for gas. The Australian government sees such potential in hydrogen as a future power source that it is putting up half of the $14 million to build an electrolyzer in western Sydney as part of the country’s largest trial of its kind. 

This nascent market is ripe for investment and Canada, with its vast renewable energy resources, presents significant opportunities from coast to coast, particularly for independent power producers (IPPs) and industrial power users looking to lower their costs with behind-the-fence generation. 

In the Maritimes, the Bay of Fundy is being tapped to harvest electricity from tides, and Canadian and foreign companies are exploring the possibility of building offshore farms to harness strong ocean winds. British Columbia, Quebec and Manitoba have vast hydroelectric resources. Ontario leads the country for wind and solar capacity. And wind is Alberta’s largest source of renewable power. 

That said, energy policies and electricity markets vary from province to province. The dominant players in most jurisdictions are government-owned public utilities, which means the investment landscape can differ quite a bit across Canada and it is not uniformly favourable.

Choosing where and how to invest

Major markets are currently in a state of change. In the near term, neither B.C. nor Quebec is buying electricity from independent producers due to energy surpluses, and Ontario cancelled 758 renewable energy contracts last July. Meanwhile, the Alberta government is refining it’s a renewable generation strategy, and may issue further rounds of bidding. Saskatchewan and the Maritime provinces are also considering adding more renewable generation.

With falling natural gas prices driving down wholesale power prices in non-hydro markets, independent producers should look to jurisdictions with either renewable incentive structures, or where fluctuations can provide them with arbitrage opportunities. By storing their electricity, private generators could sell to the grid during periods when counterparties cannot meet demand and revenue will be higher. 

Given current market conditions, Alberta stands out as a prime location for hydrogen storage and distribution projects; however, provinces such as B.C. or Quebec, should not be discounted. Each gets more than 90% of its power from hydroelectricity and both aspire to further industrial electrification. Hydrogen proponents with an interest in making a foray in those provinces will need to find creative ways of promoting clean hydrogen as a competitive addition to the energy mix, as the integration of renewables into the grid open up possibilities for storage in a variety of places.

The first step for any company wishing to develop green hydrogen projects is to understand the market it is targeting, the contracting structures in that province as well as the regulatory trends in order to strike practical partnerships and access energy-related programs. Armed with in-depth knowledge of the power system, early investors may also be able to identify opportunities to piggyback onto other companies’ efforts, qualify for incentives, or make use of existing infrastructure.  

Bringing costs down

The market for stored hydrogen extends beyond potential independent power producers and includes industrial energy customers facing high transmission or demand charges, notably in Alberta and Ontario. For example, there are multiple energy storage options offered in Ontario in particular that use a variety of technologies, including hydrogen, designed to help minimize the impact of the “global adjustment” charge. The electricity grid of the future may well feature a significant increase in major electricity customers that also generate and store their own power, and even add to their revenue by selling any excess. Multiple regulators are considering the related potential impacts on their infrastructure and regulatory systems. 

As a further example, the cost of presently expensive green hydrogen production is falling, and we could be just a few years away from a parity point between transmission and technology costs. And that is where research and technology companies can come in. By investing in demonstration plants, such as Hydrogen Utility (H2U) is doing in Australia through a public-private partnership, they may certainly accelerate the adoption of hydrogen storage solutions.

Like any start-up, IPPs, industrial power customers or tech companies considering putting money into green hydrogen storage projects should not go at it alone. They will want to have partners, financing, and protection for their ideas, to spread and share risk around and to make sure that any partnership agreements are properly managed. 

For assistance, contact our energy team.