Hydrogen: A Kaleidoscope of Opportunity

As world leaders gathered in Egypt for the COP27 climate change conference to try to step up efforts to reduce emissions and limit global warming to 1.5 degrees, clean hydrogen stands out as a key decarbonization option for hard-to-abate sectors, from steel to heavy-duty transport. Countries and companies around the world are acknowledging these opportunities and have taken the first steps to make clean hydrogen a viable option. How could Mexico, the world’s 15th-largest economy and a key energy player in North America, tap its clean hydrogen potential?

A look at project activity in the energy sector shows there is global momentum around low-carbon hydrogen. While project activity in the gray hydrogen segment (i.e. produced from unabated fossil fuels) has long provided opportunities for the supply chain, clean hydrogen is now an emerging sector across the world. EICDataStream, the EIC database of global energy projects, currently tracks 450 clean hydrogen developments globally, with a combined CAPEX of approximately US$560 billion. Australia, the US, Netherlands, the UK and Egypt lead in terms of number of clean hydrogen initiatives, consisting of 208 projects. Green hydrogen produced from electrolysis captures more than 80 percent of the global project pipeline, but blue hydrogen projects (i.e. associated with a carbon capture and storage component) also represent a significant share of CAPEX, particularly in the US and Canada.

As governments and companies step up decarbonization efforts, the clean hydrogen project pipeline is expanding rapidly. A total of 178 projects were announced in 2022 to date, according to EICDataStream, of which 151 are associated with green hydrogen. Australia, the UK and the US stand out in terms of number of project announcements, whereas Egypt, India and Kazakhstan saw the most capital-intensive announcements over the last 10 months. The latter has recently been chosen by Swedish developer Svevind as the location of the US$50 billion Hyrasia One green hydrogen project, which will feature 20GW of electrolyser capacity.

North America is a key region for clean hydrogen projects, with US$49 billion of projected CAPEX across 59 projects. Following the enactment of the Inflation Reduction Act (IRA) in the US, clean hydrogen produced there has gained instant competitiveness through tax incentives. The IRA calls for a subsidy between US$0.6-US$3 per kilo of locally produced clean hydrogen for 10 years, subject to lifecycle emissions and staff wages. There are currently 38 US clean hydrogen projects, with an estimated CAPEX of US$20.5 billion. Canada has also joined the hydrogen bandwagon, with key green and blue projects announced from across the country. The Canadian government recently reached a deal with Germany for the export of clean hydrogen beginning in 2025, a move that has spurred clean hydrogen developments in Newfoundland and Labrador by players such as World Energy and Fortescue Future Industries.

Mexico holds great potential for the development of clean hydrogen production. Benefiting from formidable irradiation levels in the Sonoran desert, the country’s massive renewable energy potential is key to unlocking green hydrogen developments. Blue hydrogen is also an opportunity for the country, where the natural gas industry has a greater degree of maturity. AMH2, the Mexican Hydrogen Association, believes the development of green hydrogen in the country has the potential to generate 3.2 million jobs and have an impact of US$46 billion on Mexico’s gross domestic product (GDP) between 2025 and 2050.

This potential is already stirring interest from developers: earlier in 2022, Dutch developer Tarafert announced plans to build a blue urea and ammonia in addition to a green hydrogen facility in Durango. This was followed by an agreement between Tarafert and US manufacturer Ohmium for the supply of 343MW of electrolysers for the project, to be delivered in 2025. HDF Energy, a French green hydrogen developer, and Spanish player Dhamma Energy have also announced green hydrogen projects in Mexico, planned to be installed in the states of Baja California and Guanajuato, respectively.

The scale-up of clean hydrogen development – in Mexico or abroad – is not without its challenges. Despite a surge in project announcements, the number of clean hydrogen developments being sanctioned remains low. According to EICDataStream, only three final investment decisions (FIDs) were secured in 2022 so far, with the same number recorded in 2021. This is an indication that developers need greater certainty about demand, available infrastructure, financing, and regulatory frameworks. Another key element to the discussion is the current electrolyser manufacturing capacity, which will need to expand to meet the current pipeline of projects and reduce capital expenditure costs.

Clean hydrogen development is a decarbonization strategy that requires a combined input from private sector, governments and society. The International Energy Agency’s latest Global Hydrogen Review, released earlier in 2022, emphasizes the need to move from announcements to the actual implementation of suitable policies for the development of clean hydrogen. This is also true for Mexico, where a government strategy that unlocks the country’s clean hydrogen potential must be implemented to provide certainty to new and existing developers and boost the country’s decarbonization efforts.