Issue
25
September
2020
SPECIAL HYDROGEN ISSUE
Funding and financing hydrogen projects for mines Is hydrogen worth the hype? Modularity: key for hydrogen to become business as usual in mines
story
Funding and financing hydrogen projects for mines MELODIE MICHEL Reporter, Energy and Mines 2
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or most people working in the renewable energy space, green hydrogen is seen as the cornerstone of a carbon-free civilization: perhaps the only technology that can store clean energy in the long term, serve as a clean fuel in vehicles that cannot be electrified, and displace CO2 emissions even from processes where carbon has so far been considered impossible to abate. In the mining sector specifically, this is a game changer — and miners have taken notice. In the past couple of years, tier 1 mining houses have gone from watching the space, to testing potential use cases for their needs, to forming partnerships and relatively large pilot projects. Among the latest projects announced, Anglo American set out to test fuel cell heavy haul trucks in South Africa and Queensland, Australia; BHP started exploring hydrogen use to displace diesel in mining processes in Western Australia (WA), and Fortescue Metals Group (FMG) added hydrogen-powered buses to its to its Christmas Creek fleet in the Pilbara (also WA). These projects are ambitious, namely because hydrogen technology is currently far from being commercially viable. “The Australian federal government has set the ambitious target for hydrogen of ‘H2 under 2’ - that is A$2/kg. We believe this target is focused on export, but that is the target everyone is working towards. This target is equivalent to 16.7$/GJ. Dependent on fuel source and cost of energy inputs, current production cost is a multiple of 2-3 times the target” says Bernardene Smith, Associate Director at KMPG’s Infrastructure and Projects Group.
Government funding criteria: equity and offtake
Because hydrogen is currently three times more expensive than it needs to be to compete against diesel and gas, commercial lenders have little appetite for these pilot projects. To get them off the ground, miners need to apply for government grants and/or concessional finance which, in Australia, comes from the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC), as well as state governments. 4
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Australia is a strong believer in green hydrogen’s potential to displace fossil fuels at home and abroad, and is investing big money into the development of the domestic industry. In 2019, ARENA announced its Renewable Hydrogen Development Funding Round of up to A$70mn, which has now shortlisted seven projects, including two by miners. Applications are still open until January 2021, and the agency is expected to award the funding to two or more projects once the selection process is complete. While ARENA’s funding round consists of grant money, CEFC is focusing on debt and equity with its A$300mn Advancing Hydrogen Fund. The corporation’s Head of Hydrogen, Rupert Maloney, tells Energy and Mines: ”Being concessional finance, we can take a lower return and a higher risk position than might be open to a bank or a private sector financier. We’re happy to finance these projects with very long-term tenor, either in the form of project finance or corporate finance. The percentage of the project cost that we finance will depend on the type of financing chosen.” As in the case of ARENA, demonstrating offtake is key. Maloney adds that while there is no standardized application, projects need to be at a stage where the operators understand its economics and have a procurement and offtake plan before they approach CEFC. For smaller players, state government funding may be a better avenue: WA alone is investing A$22mn in the development of its hydrogen industry. “There are a few private R&D groups that will work with you to do the government grant application, forward you the funding upfront minus their margin and then when it comes in from the government, they’ll collect the government funds direct to their account. That’s pretty handy for smaller companies with little capital capacity. There’s
While there has been no financing from commercial banks on hydrogen projects for miners to this day, bankers realize the incredible opportunity that the technology presents, and hope to capitalize on it in the future. 5
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also asset finance facilities becoming more accessible to the junior end of the market,” explains Richard Beazley, director of Hydrogen Energy . But before they even think about approaching government agencies for funding, project sponsors need to show commitment — by investing their own money. “First-mover projects will have to put in significant owner equity to get going. Conversion to hydrogen comes at a cost penalty at this stage, so needs to be considered as part of longer term transition to cleaner energy. ARENA and CEFC are both supportive in providing grant and debt funding, but until the industry becomes competitive that will be the way it goes,” adds Smith.
Banks and investors waiting to cash in
While there has been no financing from commercial banks on hydrogen projects for miners to this day, bankers realize the incredible opportunity that the technology presents, and hope to capitalize on it in the future. “Given the technology risk inherent in the project until it is proven and operations are scaled up, you do see these projects being funded largely by equity and government support,” says David Roberts, Head of Project Advisory at ANZ. “But as the offtake markets are proved up and the economics become clear, there will be huge appetite from the bank market. It’s The real attraction likely that when it really becomes viof this technology able, the scale of projects will be very is its green credentials, so large in the longer-term, particularblue hydrogen, ly if we develop export markets, and especially without that is very attractive to the banks. CO2 sequestration, That’s why a lot of banks are folwill be less lowing hydrogen developments very appealing to banks closely.” 7
Banks are not the only ones hoping to cash in on the hydrogen industry: fuel cell vehicles have received billions of dollars of corporate investment, and the pace of investment is increasing: according to The Guardian, shares in UK-based electrolyzer manufacturer ITM Power have more than tripled in price since the start of the year. Development and interest are accelerating, spurred by robust government incentives the world over, and by the realization that hydrogen seems to be following a similar cost curve to that of solar power technology. “The reason that people are investing in the sector is that, for parts of our economy (including mining), green hydrogen is one of the only viable solutions to reduce emissions. Additionally, post the European stimulus packages, there is now a clear path for scale and cost out which means green hydrogen should compete with fossil fuels in some applications in the not too distant future,” notes Mike McKensey, Division Director at Macquarie Group. For the opportunity to be realized, recently announced pilot projects need to demonstrate their ability to bring down costs over time, and help guide electrolyzer manufacturers toward more efficiency. They must also be willing to share learnings with the rest of the industry. “In order to be able to access government funding, you have to be prepared to share knowledge and the outcomes of your project with the industry as a whole,” says James Arnott, a Partner in KPMG’s Energy & Natural Resources Management Consulting team.
How to structure a fungible project
Arnott believes that this knowledge-sharing element must be built into the contract binding the various partners on the project. “If we take, as an example, the publicly known hydrogen relationship across the mining industry, we have to believe that all parties are drawn together around the concept of collaboration and knowledge sharing. That the learnings and IP, whether that is process or technology IP, are for the mutual benefits of all parties,” he says. 8
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Additionally, since these early stage projects need to demonstrate their future commercial viability, the nature of the agreement has to exist in a commercially viable framework, ensuring that in the longer term, the entity of the contract will no longer depend on grants to avoid losses. “You may take a lower internal rate of return for an investment project, as opposed to a pure commercial project, but in reality these decisions have to be made considering a commercially viable principle,” adds Arnott. In terms of offtake, CEFC’s Maloney explains that initial hydrogen projects for mines are bound to be more fungible if they follow a captive offtake model, whereby the operator of the mine will be both the operator of the hydrogen project and its offtaker. “We’re talking about a major mining company using its own staff and capability and operating the electrolyzer on site to create and consume hydrogen there. Then, at a later stage we’ll expect to start getting some third-party suppliers offering to supply hydrogen to the mine. The key challenge is distribution cost: hydrogen is very expensive to move around, that’s why most usages will be captive at first,” he says. At KPMG, Smith believes the strategies throughout the supply chain, must ensure benefits flow all the way to the end-user. For example, the supply chain requires careful optimization of the location of energy source, hydrogen production facility and supply point (either refuelling station or export terminal).
Australia is a strong believer in green hydrogen’s potential to displace fossil fuels at home and abroad, and is investing big money into the development of the domestic industry. 10
And when it comes to attracting commercial financing in coming years, project developers will need to bring in guarantees, and a lot of them. “The way to get banks to the table on the initial projects would be to include government funding, sponsor equity, a technology guarantee from the technology provider, and an offtake guarantee from the miner,” points out Roberts at ANZ. “If you have substantial creditworthy parties standing behind those ENERGY AND MINES MAGAZINE
elements, then you could see banks coming in, and then over time, the requirement for the full guarantee of the technology will start to fall away and you will get to more non-recourse project financing.” He adds that while banks are not currently prepared to provide debt funding to hydrogen projects, it may make sense for miners to encourage them to get involved even in the form of corporate guarantees, because at least banks will get familiar with the technology, and may be more comfortable financing future projects.
Long-term risks and cost profile
As the industry matures, banks will also be looking for some form of international certification system for the electrolyzers involved in the project, as well as safety guarantees. The good news is, the production process for green hydrogen doesn’t produce any unacceptable output, so it will have no problem meeting the Equator Principles requirements for banks. “The real attraction of this technology is its green credentials, so blue hydrogen, especially without CO2 sequestration, will be less appealing to banks,” notes Roberts. Miners and their hydrogen partners also need to consider the longterm risks that are likely to impact the technology’s cost profile, and water is a significant one. “One also has to consider water and the quality of water: this may be a longer-term risk as water becomes more scarce. You may need to add a process and cost to clean the water down the line, as you cannot use ‘dirty’ water in an electrolyzer. So make sure you have a good supply of clean water and understand the long-term cost of that supply,” says Beazley. There may be many hoops to jump through for miners currently looking to finance pilot hydrogen projects at their sites. But given the level of enthusiasm from financiers, and the pace at which the technology improves and lowers in cost, capital is likely to become much easier to come by in just a few years. In the meantime, large miners’ investment and collaboration with public and private partners on hydrogen projects are a clear signal that once the technology reaches commercial viability, the mining sector will jump in with both feet. 11
story
Is hydrogen worth the hype? DR GORDON WEISS and DR ADELINE KLOTZ, Energetics
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emember Google Glass? Few gadgets debuted with as much hype as Google Glass, the smart spectacles unveiled in 2012. Although it is still being used in some specialist applications, Google shelved the product in 2015. Gartner, the global research and advisory firm developed the Gartner Hype Cycle to track the maturity and adoption of technologies and applications. Google Glass rapidly passed through the Peak of Inflated Expectations and currently sits in the Trough of Disillusionment. So, where is hydrogen for mining on the Gartner Hype Cycle? Hydrogen certainly sits well past the Innovation Trigger. After all, routes to make hydrogen and its application in chemical processes and fuel cells have been known for years. Hydrogen powered the first internal combustion engines over 200 years ago. Perhaps, it could be approaching the Peak of Inflated Expectations? Despite hydrogen production currently being carbon-intensive either via the preferred route of steam methane reformation or the emerging application of electrolysis
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of water, it is seen as a key part of the decarbonisation of energy use and of certain chemical and mineral processes. However, for hydrogen to make a significant contribution to clean energy transitions, green hydrogen - hydrogen produced using electrolysis powered by renewable energy, must be used. The production of hydrogen in bulk from renewable energy is neither easy nor is it currently cheap.
Comparing hydrogen with other fuels
What is “cheap” for the mining industry needs to be considered in terms of the fuels that hydrogen competes with. Here we focus on the movement of materials; the “easy” problem to solve. The other source of emissions that hydrogen could decarbonise is associated with mineral processing – high temperature heating and metals reduction. However, the routes to decarbonisation are less well defined for mineral processing than for materials movement. Diesel is a great fuel. It is energy dense, easy and relatively safe to handle and offers valuable flexibility for mine operators. It would take significant advances in technology for green hydrogen to be cost effective against diesel. That said, a few years ago you could not imagine solar PV offering electricity below the short run marginal cost of electricity sourced from coal, but that milestone has already been achieved. Diesel, however, carries the burden of greenhouse gas emissions, and its future use is no longer consistent with the aspiration of many miners in Australia and elsewhere to achieve net zero emissions at or before 2050. Examples include BHP, Rio Tinto, FMG and, South32. Therefore, hydrogen is not competing against diesel but against other options for the movement of materials that result in zero emissions. Fuel use by large mobile mining equipment currently generates 30-50% (and up to 80%) of the scope 1 emissions at a mine. Green hydrogen fuel cell electric vehicles would eliminate these emissions. But so too would battery electric vehicles (charged by renewable electricity) with or without trolley assist. It is therefore necessary to compare the potential cost of hydrogen powered fuel 16
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cell electric mining equipment with plug-in battery electric mining equipment. There is no question that battery electric vehicles (EVs) have the lead on hydrogen fuel cell EVs for light vehicles, where payload and range are less of an issue. The average Australian car is driven for less than 40 km per day. Not so a mine dump truck, which must operate all day, every day without stopping. Further, every extra kilogram of battery storage is a kilogram of ore that cannot be carried. Fuel cell electric vehicles, though more expensive to deploy, are better suited to long-haulage transport due to higher range relative to battery electric vehicles, a key consideration for long distance transport. Other benefits of hydrogen fuel cell vehicles are the elimination of diesel particulates, less noise, less heat generation and shorter refuelling times. It is therefore not surprising that the Australian mining industry is looking seriously at hydrogen fuelled vehicles. The leader is probably Fortescue Metals Group (FMG) who is planning to purchase ten hydrogen fuel cell buses, replacing a fleet of diesel buses, at the Christmas Creek mine, and will establish a solar powered plant for hydrogen production at the site. This is part of a $32 million total investment in hydrogen fuelled transport. The buses will be provided by the heavy hydrogen vehicle manufacturer HYZON Motors, and they will be equipped with higher powered fuel cells, generally used in trucks, to allow for like-for-like performance replacement for the previous diesel fleet1. FMG joins BHP, Anglo American and HATCH to form the Green Hydrogen Consortium (GHC)2. Aimed at identifying opportunities to develop green hydrogen technologies for resources sectors and other heavy industries, the Consortium seeks to provide a mechanism for suppliers and operators to contribute and engage with development activities. Alannah MacTiernan, Western Australia’s Minister for Regional Development welcomed this industry collaboration to help decarbon17
ise mining operations and cement WA’s place on the world stage as a green hydrogen innovator and producer. The Minister recently announced $22 million to accelerate renewable hydrogen with nine initiatives including support for the FMG hydrogen powered bus project.3
Clean hydrogen is planned for many nations
Japan, the Republic of Korea, China, Germany, Britain, the European Union, United States and New Zealand all have plans for clean hydrogen. In some cases such as California, this extends to specific targets with respects to uptake of fuel cell electric vehicles and development of refuelling infrastructure. Aside from Australia’s National Hydrogen Strategy, around the world there are 19 other hydrogen strategies and roadmaps. There is an expectation that hydrogen has a major role to play in decarbonisation, including within the mining sector. Consensus is that large-scale and rapid deployment of hydrogen technologies will emerge from 2030 onwards. Which brings us back to the Gartner Hype Cycle. History contains examples of disruptive technologies that will make their mark in 10 years’ time, and the 10 years in question keeps receding. Some technologies to produce zero-emissions hydrogen are well understood (e.g. electrolysers powered by renewable electricity) but are expensive and have not been deployed at scale. Other technologies such as photo-catalysts are still being developed. This is why the recent Technology Investment Roadmap Discussion Paper published by the Australian Government placed hydrogen vehicles at Technology Readiness Level 7 (Demonstration in operational environment) but with a very high cost of emissions abatement at around $1,000/t CO2 abated. There are many who see green hydrogen as a vital part of Australia’s future energy landscape with an exciting potential as a future energy export; and it’s encouraging to see governments and companies take steps to support its development. However, the gap between the current status of hydrogen for materials movement and other applications in mining, and what is required for it to be eco18
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nomic against alternatives provides ample scope for a slide down to the Trough of Disillusionment. Time will tell whether hydrogen for mining languishes in the Trough of Disillusionment because other zero-emissions technologies prove to be more cost-effective. Or whether it climbs to the Plateau of Productivity as hydrogen becomes the flexible fuel of the future. FOOTNOTES 1 Fortescue Metals Group, media release, Fortescue advances hydrogen technology at Christmas Creek, 17.8.2020. 2 Australian Mining: Mining heavyweights form Green Hydrogen Consortium, 19.3.2020. 3 Media release, “$22 million investment to accelerate renewable hydrogen future�, Office of Alannah MacTiernan Regional Development Minister, Government of Western Australia, 17.8.2020.
Dr GORDON WEISS Dr ADELINE KLOTZ is an Associate at Energetics. is a Perth based chemical engiHis expertise lies in climate neer and consultant with Enermodelling, emission projections, getics. She supports businessenergy and carbon policy devel- es with large carbon footprints opment, renewable energy tech- to assess their climate risks and nologies and energy manageopportunities, forecast carbon ment. Gordon has worked with prices, report emissions and dea number of governments on velop data validation tools. the development of energy and greenhouse gas programs and policies. 19
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interview
MODULARITY:
key for hydrogen to become business as usual in mines
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Interview by MELODIE MICHEL Reporter, Energy and Mines
ecause of its versatility, hydrogen is set to change the mining sector dramatically, but opinions differ on the path to commercial viability for this versatile molecule. Energy and Mines speaks to Bernhard Voll, Senior Technical Expert & Platform Manager at SMA Sunbelt Energy GmbH, about what is needed for hydrogen to become business as usual in mines. According to him, one way to overcome the economic challenges around hydrogen would be to make this technology modular, following the way paved by the solar industry. “The biggest challenge is that mining companies’ expected return on investment is typically very short, because operations don’t exist forever,” he explains. In Zimbabwe, SMA developed a modular solar solution for a mine with a fiveyear lifetime, so that it could be packed up and taken to the next site at the end of the mine life. “With something like that, you can afford longer return on investment. This would absolutely work with hydrogen: you just have to put everything in containers,” Voll adds. In terms of economics, it is important to consider the versatility of hydrogen in mines. When taking into account that it can work as long-term energy storage, green fuel for trucks and thermal power for mining processes such as steel and aluminium refining, it is much easier to reach a viable business case. 21
Source: Stock Hydrogen Image
“Hydrogen may not be ready yet economically, but the comparison is very interesting,” says Voll. “Grid connection is perfect, but it would not allow you to run your trucks, because electrification on a 250-tonne truck just won’t work. Battery storage is great, but only short-term. Hydrogen can be used as a multi-purpose fuel for electricity from solar, for long-term storage, fuel for the trucks and for heating. It has the ability to fuel the entire mining supply, and therefore there is no comparison with other options,” he adds. In fact, Voll believes that when the other option is to truck diesel over thousands of kilometres, or build a gas pipeline over the same distance, hydrogen may already be viable today. “At roughly US$800,000/km, you can get to US$800mn just for the pipeline. You can build a fairly big solar to hydrogen plant using that money,” he explains. Hydrogen is widely seen as the missing technology to get to 100% renewable energy on mine sites, but Voll warns that it’s all about striking the right balance. He says: “It’s important to have a proper grid 22
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management system to ensure that the frequency and voltage is stable, since mining operations have an incredibly volatile load. The key is to have a good combination among solar, a battery as short-term storage and hydrogen as long-term storage to make sure that even on a rainy day or week you still have power. Maybe you add diesel as an emergency back-up, but I would say 100% renewable is absolutely possible for mobility and electricity in mines.”
Cost curve declining rapidly
In any case, the industry needs to get involved now if it wants to have a commercial solution in the future. Voll remembers that when the solar industry kicked off in the 1990s, many — himself included — didn’t believe in its potential, and at €2 or more per kWh, it was deemed completely unviable. “Today, even in Germany where we don’t have that much sun, the kWh is down to less than €0.05: that’s the change we had in the space of 30 years. If we apply a similar metric for hydrogen, we will easily reach values that are extremely competitive compared to current fuel sources such as trucked diesel or long gas pipelines,” he notes. And until this competitiveness is achieved, Voll believes it is up to governments to step in and subsidise projects to build up the industry. In terms of timeline, he optimistically predicts that hydrogen will become business as usual in mines by 2030, with the first commercial projects around 2025. The hydrogen energy revolution is also set to create tremendous opportunities for the solar sector. “Hydrogen is the most versatile molecule on our planet, and therefore the solar market we have today is probably very small compared to what it will be if we produce hydrogen with solar,” Voll says, adding that countries like Australia, Chile and South Africa, which have a lot of space and sun, will be perfect to become exporters of hydrogen. Having learned from his own skepticism around solar energy about 30 years ago, Voll is convinced that widespread use of hydrogen in power solutions is not a matter of if, but when. “At some point, we will reach the end of the oil age, and hydrogen made by solar could be a perfect replacement,” he concludes. 23
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