ICIS WHITEPAPER: Shell announces FID on first hydrogen project in the Netherlands, will others follow suit?

Aislinn Clarke (Hydrogen Analyst, ICIS)

Shell has taken final investment decision (FID) on Holland Hydrogen I, an electrolysis project at the Port of Rotterdam, kick starting the development of a large-scale hydrogen industry in the Netherlands. This ICIS analysis reviews how Shell was able to realise this commercial decision, what has made the Netherlands a hot spot for hydrogen project announcements to date and whether other project developers will be able to follow its example.

The Netherlands has been at the forefront of efforts to meet decarbonisation goals through hydrogen. In July 2022, Shell announced FID on Holland Hydrogen I, a 200MW electrolyser project at the Port of Rotterdam. This is the first commercial-scale hydrogen project to be given the green light in the Netherlands and the first large-scale renewable hydrogen scheme that Shell has progressed to this stage.

The Dutch government sees hydrogen as a key part of its future energy mix, providing hydrogen supply projects with financial support and political clarity. The Dutch government is committed to meeting the EU’s target of net-zero emissions by 2050 and is also keen to reduce the country’s dependence on hydrocarbons, particularly as the Netherlands’ largest gas reserve, the Groningen field, is forecast for decommissioning in 2023.

The Dutch government has capped Groningen production at 2.8 billion cubic metres (bcm) over the next gas year (between October 2022-30 September 2023). The 2.8bcm output accounts for roughly 7% of Dutch annual domestic gas consumption. Comparatively, in 2014 output was over 50bcm.

The Netherlands also has a large amount of heavy industry reliant on gas and Russian oil imports. Russian oil accounted for about 35% of Dutch imports in 2021 and major refineries in Rotterdam have been customised to make diesel from heavy Russian crude. As a result, Dutch refineries have come under pressure as the feedstock availability decreases.

The decline of domestic gas production amid additional supply chain disruption following Russia’s invasion of Ukraine has made renewable energy and low-carbon hydrogen a point of attention for the Netherlands.

To encourage investment in hydrogen projects, the Dutch government pledged to spend €750 million between 2022-2031 to develop a national hydrogen pipeline network. At the same time, the country’s Hydrogen Strategy, released in 2020, outlined ambitions to install 3-4GW of electrolysis capacity by 2030, a target which the coalition government intends to double. The Netherlands’ electrolyser capacity target is less than half of Germany’s, however Dutch subsidy schemes offer greater support for project developers. The government hopes these measures will draw projects to the country, helping the Netherlands to meet low-carbon hydrogen demand projections ranging from  2.8TWh/year to 12TWh/year.

The Netherlands is well-positioned for development of a renewable or low-carbon hydrogen industry as it is close to North Sea offshore wind farms and part of the European natural gas pipeline network. The city of Rotterdam is Europe’s largest container seaport and industrial centre, making it both a source of hydrogen demand and well as a key logistics hub. The Netherlands also has the potential for hydrogen storage by way of depleted natural gas fields and salt caverns.

Additionally, plans for the development of the European Hydrogen Backbone (EHB) are well underway. The hydrogen pipeline infrastructure outlined in the EHB will connect industrial clusters across the country, utilising the Dutch L-gas (low calorific gas) network which is progressively being phased out. Over 50 hydrogen projects have been announced in the Netherlands. However, the scale and feasibility of making these projects commercial varies materially.

Shell takes first hydrogen FID in the Netherlands

Shell is targeting an onstream date of 2025 for Holland Hydrogen I. If completed on time, it would be the largest renewable hydrogen project in Europe with a 200MW alkaline electrolyser producing 60t/day of hydrogen. The project will be powered principally by the Hallandse Kust Noord offshore wind development.

The wind farm is being built by the CrossWind consortium of Shell and Eneco, with an onstream date of 2024. The electrolysis plant will also use back-up power from the grid to deal with the intermittency of the renewable source, provided such power offtake from the grid is compliant with conditions for producing renewable hydrogen.

The hydrogen produced by Holland Hydrogen I will be transported by pipeline to decarbonise Shell’s refinery in Pernis, the second largest refinery in Holland, with the capacity to process 400,000 barrels of oil equivalent (BOE)/day. The refinery will offtake all the hydrogen produced by Holland Hydrogen I, with no public plans for hydrogen to be sold on the open market at this time. As a result, Shell will not be reliant on external demand or market pricing conditions to make this project a success.

Shell has also been gaining real-world experience of hydrogen supply on a smaller scale by building a hydrogen fuelling station for 20 Qbuzz hydrogen busses in the Groningen region, Netherlands. The station opened in 2021 and Shell is supplying green-certified hydrogen until it can produce its own renewable hydrogen. This suggests that Shell is planning to sell low-carbon hydrogen from two other Netherlands hydrogen projects, NortH2 and H-Vision, which are both undergoing feasibility studies.

Shell’s technical experience, financial clout and supply chain demand for hydrogen has allowed it take FID on Holland Hydrogen I despite uncertainty over how it could be taxed. For Shell, this is a landmark project that will act as a test case for its other projects worldwide.

Will any other projects be able to follow Shell’s Holland Hydrogen I?

ICIS has identified 15 other hydrogen projects in the Netherlands at or above 100MW capacity, 11 of which are undergoing feasibility studies and four are at concept stage. If all 15 were to come online according to current project developer timelines, they would meet the current Dutch government’s electrolyser capacity targets for 2030.

Based on analysis of company statements, Shell is expected to have the largest involvement in gross installed electrolyser capacity in the Netherlands by 2030, followed closely by Dutch grid operator Gasunie, Norwegian producer Equinor and German utility RWE. There are a significant number of project participants with financial and technical capabilities to support large-scale projects. Many of the other large companies have goodwill from investors and desire to make projects work despite marginal economics to fore fill companies’ energy transition strategies.

Despite Shell’s step forward with Holland Hydrogen I, it will be challenging for other projects to follow suit due to the capital demands of hydrogen projects and a lack of certainty surrounding market developments.  The lack of a traded hydrogen price means project developers struggle to assess potential market-based returns via a central benchmark. Further, new projects which seek to produce low-carbon, renewable or zero-carbon hydrogen are likely to sell at a premium to high emissions hydrogen production methods or other fossil-fuel based energy carriers.

Regulatory uncertainty is also a primary concern for market participants. Despite guidelines carried by the European Parliament on RED II for renewable hydrogen production, the European Commission is mandated with providing a formal definition via a delegated act. The commission released a draft delegated act on the production of renewable hydrogen in May 2022 to much criticism due to strict criteria. Market participants have therefore voiced protest when considering FID on projects as production criteria may well change, impeding developers financially or operationally.

This makes it likely that in the initial stages of the development of the hydrogen industry in Europe, the natural customers for hydrogen will be industrial participants already utilising high-emissions hydrogen or fossil fuels within their manufacturing processes.

PPAs may be able to help de-risk hydrogen projects by providing a consistent basis for the production of hydrogen as a result of long-term power supply price agreement. Although these agreements often have higher prices than the traded market, their stability can offer greater certainty to investors, and enable the hydrogen producer to offer hydrogen to potential customers on a term and fixed-price basis.

Lastly, half of the 15 projects have more than five stakeholders, which could hinder decision making. In Holland Hydrogen I, Shell had sole control, but in its other projects it is partnering with five and eleven other companies.

To offset some of the commercial risk, hydrogen projects are often phased. ICIS data shows that over €100 billion could be spent bringing projects online before 2031. Phasing will allow companies to learn from small projects before scaling up to become more profitable.

As of November 2022, only three other projects have published FID date targets: H2-Fifty, Uniper-Maasvlakte and HyNetherlands. While this does not confirm that these projects are any more likely to go ahead, it demonstrates that a lot of projects are not willing to commit to public deadlines for FID at this time as there are still hurdles in planning to overcome.

Exciting step for the Netherlands but other projects may find it more challenging

The Netherlands is one of the world’s best-positioned countries to build a large-scale hydrogen industry in the near term. The government has set out ambitious targets and added financial support to make plans a reality.

Shell’s FID on Holland Hydrogen I is an important step for the Dutch hydrogen industry. This project may help to give confidence to other participants and allow Shell to apply lessons learned to its other hydrogen ventures. There are several companies with project experience, technical expertise and strong balance sheets looking to develop other projects in the Netherlands.

Unlike Holland Hydrogen I, most of these projects will need to find counter parties to offtake the hydrogen produced. In the absence of a traded market for renewable or low-carbon hydrogen, projects are likely to find it harder to get over the line in the near-term. In practice, a combination of greater policy support and business models which can effectively de-risk projects will be needed to unlock large-scale capital investment from stakeholders.

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