H₂Tech (H₂T) sat down with Cosima Sagmeister (CS), Associate – Energy, at Charles River Associates (additional insights incorporated from Dieter Keller-Giessbach, Vice President – Energy, at Charles River Associates).

(H₂T) What are the key opportunities and challenges for diversity and inclusion (D&I) within the emerging hydrogen (H₂) market, particularly as it relates to project development?

(CS) Many opportunities related to the development of the low-carbon H₂ market lie in the need to create new teams, structures, and organizations, allowing companies to build in and prioritize D&I from the outset. Additionally, the skill shortage in H₂ and energy more broadly requires companies to invest heavily in training, which opens opportunities for talent that may not yet fulfill the technical requirements for the job but are eager to learn and develop. This is an opportunity to attract a more diverse workforce to the sector. In general, since low-carbon H₂ is a relatively new field with therefore fewer established experts than traditional energy fields, there is a lower barrier to entry, which is another opportunity for talent from diverse backgrounds. However, challenges persist, particularly in legacy structures from the traditional oil and gas sector, which were typically not built with D&I in mind from the start, creating an additional challenge to drive rapid change. Building a more inclusive H₂ workforce will thus depend on proactive efforts to diversify talent pipelines and provide the necessary training to new entrants.

(H₂T) Can you explain the process of commercializing H₂ projects and what it means to reach a final investment decision (FID)?

(CS) Commercializing a low-carbon H₂ project requires careful structuring the deals associated with developing the project, securing feedstocks, and selling the produced clean H₂. Key to this process is securing long-term, binding offtake agreements with buyers of the H₂, which provide guaranteed revenue streams and are essential for attracting investor commitment and keeping capital costs (CAPEX) relatively lower. These agreements reduce market risk, giving investors the confidence that the project will generate steady returns. Alongside offtake contracts, developers must secure regulatory approvals, form partnerships, and conduct risk assessments. FID is only achieved once offtake agreements, financing, and technical feasibility are firmly in place, ensuring the project’s long-term viability. Reaching FID is the critical milestone where investors and developers commit to funding and building the project.

(H₂T) What role do binding offtake agreements play in the success of H₂ projects, and how can companies secure these agreements effectively?

(CS) Binding offtake agreements are crucial for H₂ projects, as they provide long-term revenue certainty and reduce financial risk for investors. These agreements guarantee buyers for the H₂, stabilizing cash flows and ensuring commercial viability. In doing so, they generally reduce the CAPEX and help projects reach FID. Today, securing long-term binding offtake agreements is a big challenge for low-carbon H₂ projects, as buyers are typically hesitant to commit to volumes and prices beyond a few years, especially due to high uncertainty regarding future market developments. Where successful offtake agreements have been signed, offtake has sometimes been tied not only to H₂ production but high-value end products such as green steel. These agreements have directly targeted industries facing regulatory and consumer pressure to decarbonize and demand for their products is less volatile and more predictable, making them ideal partners for H₂ offtake. Other strategies for successful offtake agreements are tailoring contracts to buyers' specific needs, offering price reviews and contract flexibility, finding partners to spread risks and collaborating on pilot projects to build trust and commitment. Additionally, leveraging government incentives and decarbonization mandates can further enhance the attractiveness of long-term agreements.

(H₂T) How do demand-side projects align with supply-side commitments in the H₂ market, and what implications does this have for overall market growth?

(CS) The development of the low-carbon H₂ market has always faced a chicken-and-egg challenge between supply and demand, as is to be expected in a nascent market that is largely driven by policy. While demand for H₂ has been slower to grow than supply, this is poised to change as key demand side incentives come into play. In Europe, renewable H₂ targets for industry and transport should be nationally implemented by mid-2025. In the U.S., the planned introduction of demand-side incentives in the form of subsidies to purchase H₂ from regional H₂ hubs are being designed to drive uptake. As these policies take effect, it is envisioned that demand and supply will further align, fostering a more balanced market and accelerating H₂ adoption and growth.

(H₂T) How does European Union (EU) H₂ policy and regulation shape the market, and what specific aspects are crucial for the ramp-up of H₂ projects?

(CS) EU H₂ policy and regulation significantly shape the development of a low-carbon H₂ market by creating incentives and frameworks that drive demand, supply and the connecting infrastructure development. The approach is based on a sticks-and-carrots system and policies very much work in combination and interact with each other to drive the market. The EU Emission Trading System (EU ETS) is the key tool, setting a cap on emissions and encouraging industries to switch to less carbon-intensive operations. It aims for a 62% reduction in emissions by 2030. The Carbon Border Adjustment Mechanism (CBAM) is designed to prevent carbon leakage by imposing fees on high-carbon imports like aluminum, cement, and steel. Since a crucial aspect for ramping up low-carbon H₂ projects include binding offtake agreements, EU demand incentives in the 2023 Renewable Energy Directive (RED III) are a driving force behind demand creation. They mandate renewable H₂ uptake, targeting 42% of all H₂ consumed in industry to be renewable and 2.6% of all energy consumed in transport to be met through renewable H₂ 2030. Additionally, funding mechanisms like the European H₂ Bank (EHB) offer fixed premiums per kilogram of renewable H₂ to stimulate production. National schemes, such as Germany’s H2Global, use two-way contract for difference-style auctions to bridge the gap between production costs and offtakers’ willingness to pay. Additionally, there is available funding for transport infrastructure to connect demand and production centers.

(H₂T) What are the current challenges related to H₂ certification in the EU, and how might these impact project developers and investors?

(CS) Current challenges related to H₂ certification in the EU include the complexity and novelty of the regulatory framework and lack of practical project experience. Ensuring robust and transparent sustainability criteria across the entire value chain is essential but challenging. For instance, a challenge remains the lack of detailed methodological guidance on how to account for the emissions of all energy inputs across the value chain of low-carbon H₂. Additionally, there is a lack of standardization and experience with green H₂ certification and supply chain tracking, meaning that more practical questions are expected to come up in the first years of this market development. Capacity building is needed to ensure that auditors have the necessary skills to verify green H₂ production and supply chains. Furthermore, the lack of final approval of certification schemes by the EU Commission remains a bottleneck that should be resolved quickly.   

These challenges can impact project developers and investors by creating uncertainty and potentially delaying project timelines. The lack of clear and consistent certification standards may hinder investment decisions, as stakeholders seek assurance that their projects will meet regulatory requirements and qualify for incentives.

(H₂T) Looking ahead, what trends do you see influencing diversity and inclusion in the H₂ sector, and what steps can industry leaders take to foster a more inclusive environment?

(CS) It is expected that the realization of just how important the skill shortage in low-carbon H₂ and the energy transition more broadly is, will drive diversity and inclusion in the sector. It will also accelerate a recognition that diversity is crucial for tackling the complex, interdisciplinary challenges facing the low-carbon H₂ market. This awareness, coupled with the urgent need to address skill shortages, underscores the importance of expanding the talent pool. To foster a more inclusive environment, industry leaders should focus on three key areas: attracting diverse talent, training existing employees in underrepresented groups for leadership roles, and retaining this talent by creating a supportive and representative work environment. By broadening recruitment efforts and focusing on talent development rather than looking for “off-the-shelf” H₂ experts, leaders can draw in a wider array of perspectives. Increasing representation of a more diverse set of leaders will further create a pull effect that encourages diverse talent to join the sector. H₂T

COSIMA SAGMEISTER is the Associate – Energy, at Charles River Associates.