Fossil link, power generation aspirations complicate financing for Singapore’s hydrogen strategy: report

Policy support will make hydrogen-related projects in the city-state more bankable, but financiers need to “sort the wheat from the chaff”, consultancy Asia Research and Engagement says.

Jurong Island in the evening
An aerial view of Jurong Island, Singapore's petrochemical hub. There are plans to build hydrogen facilities on the island as part of the city-state's drive to adopt the novel fuel. Image: Wikimedia Commons/ William Cho.

Despite Singapore’s “cautious and gradual” approach in adopting novel hydrogen fuel for decarbonisation, project financiers could still face transition risks over credibility and cost issues, according to a local consultancy.

Its report said that the challenges stem from Singapore’s nod for “blue” hydrogen, produced from fossil fuels in a process that also captures the associated carbon emissions, and the city-state’s intention to use hydrogen for power generation, which could turn out expensive.

The study, published on Monday (14 August) by Asia Research and Engagement (ARE), was billed as an introductory guide for financiers in performing due diligence for Singapore’s hydrogen projects. Analysis was based on the country’s national strategy for the increasingly popular fuel, released last October.

The national strategy paper had said hydrogen could supply up to half of Singapore’s power needs by 2050, and serve as alternative fuel for ships and aircraft. The city-state said it would invest in research and training, while working with other countries on building supply chains.

An ammonia bunkering and power generation project is to come online by 2027, with an early call for project proposals having ended in April. Ammonia is a derivative fuel from hydrogen.

Blue hydrogen woes

ARE’s paper said Singapore’s definition of “low-carbon” hydrogen does not appear “wholly credible”, as it encompasses both renewables-based “green” hydrogen, and blue hydrogen from hydrocarbons. 

Blue hydrogen could prolong the use of fossil fuels, going against proposed credible net-zero pathways today, the report said. The most common feedstock for fossil-based hydrogen is methane from natural gas.

ARE noted that carbon capture rates at the two facilities worldwide that produce blue hydrogen, in Canada and the United States, are around 50 and 70 per cent – below the general industry target of over 90 per cent.

Low carbon capture rates mean that blue hydrogen projects could fail to meet sustainability benchmarks, including Singapore’s own green finance taxonomy, ARE said, adding that the lack of common definitions for low-carbon or clean hydrogen exposes the sector to inaccurate sustainability claims.

While blue hydrogen is several times cheaper to produce today, fossil-based hydrogen assets could eventually become a liability as the cost of green hydrogen drops, the report added.

“Financiers should therefore be cautious when financing or investing in projects that would rely on blue hydrogen, given the likely high risk of those projects not meeting expected decarbonisation outcomes,” ARE said.

It said investors’ risk analysis should include the origin of hydrogen being sourced, whether supply chain emissions are accounted for, and if carbon offsets are used in calculations.

Within Asia Pacific, Australia is set to be a leading hydrogen maker, with both blue and green hydrogen projects set to materialise in the coming years. Singapore is not intending to be a major hydrogen fuel manufacturer.

Opportunity costs

Hydrogen fuel, if used for power generation, could make electricity unaffordable for consumers, ARE’s report also said.

It cited an industry report showing generation costs tripling in 2050, should a power plant run on hydrogen, compared to liquefied natural gas. A complete switch to hydrogen fuel is currently technically unproven, while a partial switch will not provide significant emissions reductions, ARE noted.

It said using blue hydrogen – made from natural gas – instead of just burning natural gas for electricity could result in further inefficiencies and higher emissions. Renewable power should not be prioritised for making green hydrogen either, the study added.

Financing hydrogen power generation would present “large opportunity costs”, compared to using the money for “already-proven decarbonisation solutions”, ARE said.

It cited renewables power imports, large energy storage systems and energy efficiency measures – all of which Singapore is already exploring – as well as domestic production of green hydrogen as proven low-carbon solutions.

Such opportunity costs would “frustrate the global ambition to reach net zero emissions”, but are not reflected in conventional carbon accounting standards, ARE’s study said.

“As a result, banks could underestimate the risks that impact credit models and transition risk scenarios of clients involved in hydrogen-for-power projects,” it added.

Singapore is already encouraging prospective gas power plant builders to get their turbines ready for hydrogen blending. The first of such plants – which can take up to 30 per cent hydrogen – could be operational by 2026, though its owner, Singapore’s Keppel Corporation, has not said when such fuel mixing will take place.

Hydrogen could still make sense in areas where few decarbonisation solutions exist, such as in oil refining, aviation, shipping and semiconductor manufacturing, ARE said.

Evolving landscape

In response to queries, a spokesperson from Singapore’s trade and industry ministry (MTI) said the government recognises current uncertainties surrounding low-carbon hydrogen, and that the global hydrogen landscape “will continue to evolve”.

The spokesperson noted renewables are not expected to supply over 10 per cent of Singapore’s power needs by 2050, and there are limits to how much low-carbon electricity the city-state can import from the region. The current target is to have imports, via long-distance power cables, meet 30 per cent of Singapore’s electricity supply by 2035 – thus leaving much room for other energy sources.

Singapore is prepared to provide revenue support for ammonia [the hydrogen fuel derivative] power generation as it recognises the novel propellant may not be competitive with natural gas, the spokesperson said.

“We will continue to update our national hydrogen strategy in line with technological and global developments,” the MTI spokesperson said.

Marc Allen, an energy consultant and co-founder of climate-tech firm Unravel Carbon, said hydrogen for power generation is “an exceedingly difficult business case”, due to the inherent inefficiencies and risks of leakage in handling the lightest gas in the world.

The “optimum use case” today for low-carbon hydrogen is in replacing dirtier forms of the gas where they are already being used, he said.

Blue hydrogen could be used as a temporary option that helps build up supply chains and demand centres, before cleaner variants of the fuel take over, Allen said. The Singapore government would incur transition risks only if it enters a “really long-term” offtake agreement for blue hydrogen supply, he added.

Still, geopolitical concerns would mean Singapore needs a diversity of clean energy sources, Allen said, adding that other possible novel fuels include liquefied biogas and methanol, the latter of which the city-state is already experimenting with in the marine sector.

Globally, low-carbon hydrogen is gaining popularity as a replacement for pollutive fuels and industrial feedstocks, though actual supply of the cleaner gas remains marginal. Most production methods for hydrogen today involve fossil-based ingredients and do not filter out greenhouse gas by-products.

Green hydrogen could reach price parity with its more pollutive peers by 2035, consultancy Deloitte said in a June report. Asia is expected to capture 55 per cent of the green hydrogen market, driven by major economies such as China, India and Indonesia, it said.

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