A robust electrolyser investment case means building a viable revenue stack…

… a similar challenge to that faced by battery investors, but with greater revenue stability.

A robust electrolyser investment case means building a viable revenue stack…

… a similar challenge to that faced by battery investors, but with greater revenue stability.

Building a hydrogen electrolyser investment case

Electrolysers are getting a lot of attention in 2020, driven by falling costs and a strong shift in policy momentum behind green hydrogen.

An electrolyser uses power to convert water into hydrogen (& oxygen) via an electrochemical process.  Importantly, electrolysers are becoming increasingly flexible, enabling them to optimise dispatch during periods of high wind & solar output and low power prices.

Policy makers are latching onto a compelling two part vision:

  1. Electrolysers can support the production of hydrogen to enable deep decarbonisation in the power, industrial and heat sectors.
  2. They can also provide flexibility to help balance power markets, alleviate renewable curtailment and manage network constraints.

As policy momentum ramps up, industrial and energy companies are focusing on electrolyser investment.  This is evidenced via the strong growth we have seen this year in clients engaging Timera to analyse electrolyser asset value and investment cases.

In today’s article we look at the core drivers of an electrolyser investment case.  We will then follow with a subsequent article on electrolyser valuation.

If you’re not interested in electrolysers directly, you may be interested in the impact they are set to have on power & gas markets.

Policy support on the way

Investment in an electrolyser currently requires some form of policy support to earn an adequate return. This may change in the 2030s as capex costs decline, but it is a reality this decade. Policy makers are signalling help is on the way with the roll out of aggressive volume targets.

In Jul 2020, the EU announced headline targets for electrolyser capacity of 6W by 2024 and 40GW by 2030. These are being underpinned by individual country level targets for 2030 e.g. 5GW in Germany, 6.5 GW in France, 3-4 GW in the Netherlands and 4GW in Spain.

The challenge investors currently face is a material gap between these targets and the practical policy support mechanisms that will deliver them. But in several countries, there are policy development plans in process that should lead to implementation of support measures over the next 1 to 2 years.

The potential structure of support mechanisms is starting to take shape, for example incorporating:

  • Fixed or input cost indexed payments to green hydrogen producers that support & stabilise revenue
  • Carbon CfDs for industrial buyers of green hydrogen (supporting offtake contracts with electrolysers)
  • Favourable charging rules e.g. German plan to exempt electrolysers from grid charges & the renewables levy
  • Adaption of other renewable support mechanisms & tender processes to cover electrolysers.

Investors are not waiting for all this to fall into place. A clear policy intent is supporting a range of energy & industrial companies to explore the electrolyser investment case now.


Electrolyser revenues and cost components

Any asset valuation is underpinned by a projection of revenues and costs.  The primary driver of electrolyser revenue is the sale of hydrogen, which is likely in many cases to be embedded in industrial offtake contracts e.g. to serve chemical, power or heat related demand.

Offtake contracts cover the requirement to deliver both commodity (i.e. hydrogen) and flexibility (i.e. the ability to profile supply). Security of supply will typically also be very important with sharp penalties for interruption.

Electrolysers can also important revenue from providing flexibility services to power markets, including balancing, ancillary & network services. A robust electrolyser investment case means building a viable revenue stack across all these components, a similar challenge to that faced by battery investors, but with greater revenue stability given hydrogen support.

The key components of this stack are summarised in Table 1.

Table 1: Key electrolyser revenue stack components

Hydrogen productionSale of hydrogen is the primary revenue driver e.g. via an offtake contract or into a local industrial complex (& eventually into some form of market). Hydrogen revenues driven by delivery of both (i) H2 commodity and (ii) H2 supply flexibility.
Power balancing servicesProvision of real time balancing flex (e.g. turn up, turn down). Also constraint management payments e.g. to alleviate wind & solar curtailment.
Other revenuesAncillary revenues (e.g. frequency restoration) and network service revenues.

The challenge battery investors face is a revenue stack exposed to wholesale & balancing prices.  Electrolysers may however enjoy greater revenue stability. The policy mechanisms we set out above, help to underpin the hydrogen revenue stream, e.g. via offtake contracts or CfD mechanisms.

The cost build up of an electrolyser is strongly dependent on the cost of sourcing power, but also includes variable operating and fixed overhead costs as set out in Table 2.

Table 2: Key electrolyser cost components

Power sourcingTypically be via a combination of (i) a colocated wind or solar asset and (ii) grid purchases.
Variable operating costsFor example water sourcing and electrolyser operation & maintenance (typically relatively low).
Fixed overheadsSite e.g. lease & insurance and corporate overheads e.g. trading & optimisation costs.

Valuing an electrolyser is not as simple as forecasting revenues, subtracting costs and discounting. The flexible nature of an electrolyser means that asset optionality needs to be properly valued.

The valuation approach has similarities to that required for a battery. In our next article we will look at how to value electrolysers in more detail.  But first we consider the interaction between an electrolyser and associated assets.

Combining electrolysers with renewables & storage

An electrolyser can be operated on a standalone basis, sourcing power from the grid.  However production of green (or low carbon) hydrogen requires power purchases from the grid to be ‘greened’ e.g. via guarantees of origin.

Many electrolyser projects are planning to colocate with renewable assets, via siting near wind or solar farms. There are two main benefits of colocation:

  1. Cost savings e.g. reduced network charges, connection costs and losses.
  2. Direct access to green power (to reduce overheads from ‘greening’ grid purchases)

In almost all cases, electrolysers are likely to be grid connected to allow access to (i) power to supplement local renewable output and (ii) additional revenue streams.

Grid connection is important because it means power markets will play a key role in driving dispatch of the electrolyser i.e. it will not be dispatched to the output profile of the colocated wind or solar farm.

Power sourced from the colocated asset will typically be cheaper than that sourced from the grid (given avoided charges, losses and greening).  But maximising the value of the electrolyser means optimising it against power market price signals (just as colocated batteries are today).

The other important asset interaction that drives an electrolyser investment case is associated hydrogen storage. It is significantly cheaper to store hydrogen in a tank than to store power in a battery. That means hydrogen storage is an effective way to enhance the supply flexibility of the electrolyser in serving demand.

As investors develop an electroyser investment case, they face two key challenges:

  1. Configuring the size & performance of the renewable asset, electrolyser & hydrogen storage to maximise value
  2. Quantifying a realistic projected project revenue stack based on optimised dispatch of the electrolyser against power market and hydrogen offtake price signals.

These challenges require robust market & asset valuation analysis as well as engineering expertise.

Electrolysers are still in the early stages of evolution as an asset class. But their role as a key provider of flexibility to support decarbonisation has been cemented in the policy decisions of 2020.