Navigating Challenges in Green Hydrogen and Derivatives Project Execution

Energy transition is the “new normal” (or the only way forward in some peoples’ minds), which aims to reduce emission levels through various forms of decarbonization. Some of the key drivers are increased penetration of renewable energy into the energy supply mix and battery energy storage systems. While these measures contribute incrementally to decarbonization, the role of an alternative energy carrier, such as green hydrogen becomes essential for substantial increase in the share of decarbonized energy.

In the last five years, the green hydrogen and derivatives sector across the globe has broadly been transitioning through three phases:

• Phase I—Learning Phase. In this phase, the business was evaluating the market requirements and connecting the dots across the complete value chain.
• Phase II—Educating the Customer. Customers started showing interest in the green hydrogen and derivatives space. A standard set of questionnaires was developed and discussed with the prospective customers to evaluate their readiness for project implementation. While about 60% of them had done their homework and decided to proceed, the remaining 40% of them opted to defer for the time being, deciding to allocate more time for further preparation.
• Phase III—Constructive Phase. Customers understand the overall project lifecycle and are getting engaged to carry out pre-feasibility and feasibility studies, conduct front-end engineering design (FEED) and basic engineering work to evaluate the overall capital expenditure (CAPEX) and operational expenditure (OPEX) of the project. Subsequently, a final investment decision (FID) is made, marking a green signal to progress to subsequent phases of execution.

In the present scenario, green hydrogen and derivative projects are emerging worldwide, progressing through various stages. However, throughout the execution, developers and engineering, procurement, and construction (EPC) contractors have encountered challenges, learning valuable lessons through hands-on experience. This article broadly presents the consolidation of these challenges, accompanied by proposed recommendations for the way forward.

Kick-Start of Green Hydrogen and Ammonia Project Execution

It is encouraging to observe that some developers along with their shareholders are swiftly engaging in negotiations to secure onsite green hydrogen and derivatives projects. Despite the comparatively higher production costs in contrast to conventional “grey” methods, there is a growing acknowledgment now that successfully executing the first deal paves the way for subsequent agreements (first mover advantage). This sequential approach positions these companies at the forefront, establishing confidence in the market that such projects can be effectively commissioned (Figure 1).

While the governmental bodies are taking up the initiative to establish smaller capacity pilot green hydrogen plants for demonstration purposes, a few private players have undertaken the construction of larger-sized green hydrogen (GH₂) and green ammonia (GNH₃) plants. The pilot plant capacity for green hydrogen is in the range of 25 kW to 1 MW capacity and the larger capacity plants for commercial operation are emerging in the range of 5 MW to 100 MW capacity. The produced green hydrogen is further transported to different locations for consumption using tube trailers and for larger capacities through pipelines. There has also been a steady increase in setting up of green hydrogen refueling stations across the world for mobility. Notably, some operators of existing old fossil power plants are beginning to decommission their aging plants and explore the option of building green hydrogen plants by repurposing the fossil plant utilities.

Current Challenges in Project Execution

Projects that are currently under consideration are experiencing the following challenges (Figure 2).

Clarity on Plant Capacity and Configuration. Finalizing the optimal plant capacity is of prime importance and is dependent on financial feasibility analysis. The estimation of overall plant CAPEX and OPEX costs is crucial to determine the levelized cost of producing one kilogram of green hydrogen (LCOH) or one kilogram of green ammonia (LCOA). This initial decision marks the crucial “go” or “no-go” point before progressing to subsequent project phases. However, it has been observed in the market that plant capacities are sometimes reconsidered after project initiation, requiring a revisit to the earlier toll gate of project feasibility.

As previously noted, green hydrogen plant capacities presently under execution vary from 5 MW to 100 MW, while green ammonia plant capacities vary between 30 metric tonnes per day (MTPD) and 3,000 MTPD. Several factors influence the determination of plant capacity including project viability, the finalization of off-take agreements, consideration for future expansion (whether executed in phases or as a larger, one-time plant), etc. Another important aspect driving the plant capacity in the energy transition sector is the desire to commission GH₂ plants in the quickest possible time frame.

Delay in Achieving Financial Closure. Financial closure is a condition wherein all the financial agreements and commitments are formalized, and the project is officially set in motion. It has been observed that projects are sometimes halted due to financial closure issues. Lenders occasionally review a project report thoroughly and are not fully convinced of the viability of the project for a variety of reasons. Some of the factors that are critically reviewed in this sector are:

• Availability of fresh water and land for the desired capacity including future plant expansion.
• Optimal plant capacity with viable LCOH or LCOA.
• Availability of off-taker for the production for the plant lifetime.
• Availability of all the required permits from local government authorities.

Inaccurate CAPEX and OPEX Estimation. The FEED phase constitutes approximately 30% of the total engineering effort required for a project. Its primary objective is to finalize the plant configuration, solidify system concepts, and quickly estimate the total project cost. The accuracy of this estimate depends on the level of detailing and the inputs considered during this stage.

While it is a common practice to estimate the total project cost based on Association for the Advancement of Cost Engineering (AACE) cost estimate Class 2 guidelines, which are expected to have an accuracy range within –15% to +20%, achieving this precision is dependent on the thoroughness of detailing, in-house engineering, and cost databases, facilitating a more precise determination of project timelines. In the context of emerging green hydrogen/green ammonia projects, the existing database may prove inadequate, potentially leading to either overestimation or underestimation of project costs and timelines.

Aggressive Schedule. Targeting unrealistic schedules leads to challenges in project execution. One of the key factors that impacts on the overall schedule is placing orders for long-lead equipment/packages (LLE). Equipment suppliers’ order placement to delivery at site timelines should be in line with the planned schedule. There are certain standard timelines defined by the suppliers for the same. The more aggressive the schedule, the less lead time available for suppliers. Hence, deriving timelines from suppliers is very important. Slippage on this would seriously affect the schedule and would lead to delay in commissioning of the project as well. Subsequently, this will result in a financial impact on key stakeholders.

Evaluating the Risks. A thorough project risk evaluation needs to be carried out prior to initiating project execution. Current project experiences indicate that a few of the below risks were either not considered or not fully evaluated. Some of the key risks specific to green hydrogen and derivative projects are indicated below.

• Off-take strategy for green hydrogen and derivative.
• Limited electrolyser manufacturing capacity.
• Schedule risk.
• Cost risks for long-duration projects.
• Technology risk—electrolyser.
• Health, safety, and environment (HSE) risks considering GH₂/GNH₃
• Applicable international codes and standards.

Way Forward

Figure 3 indicates proposed solutions against the challenges and are detailed below in the same order.

Pre-feasibility and Bankable Feasibility Study (BFS) Are Must Requirements. A pre-feasibility study is conducted to assess the overall viability of a project, considering various factors influencing its success. It helps in finalizing key attributes of the project, such as plant capacity, location, configuration, type of operation, land and water requirements, high-level schedule, project cost estimate, etc. Plant capacity finalization is one of the critical aspects amongst these attributes and is purely dependent on the off-take demand in the market. A market analysis must be carried out to assess the demand and identify potential off-takers.

Feasibility studies including detailed project reports aid in narrowing down options and identifying the most promising ones. Following this, a detailed evaluation is carried out on the down selected options and on different packages to optimize the cost and time. Despite being relatively small investments compared to the total project cost, these initial checkpoints are essential prerequisites before the actual project commencement. Furthermore, these reports facilitate the developer in obtaining approvals from relevant decision-making authorities in the shortest possible time.

Techno-economic Evaluation. As part of a feasibility study, a comprehensive evaluation is carried out on down selected options for various systems/packages. A techno-economic evaluation is carried out to understand the advantages and disadvantages of different options. The primary objective is to look for opportunities to bring down the project cost. The selection process prioritizes the ones that are both technically and commercially viable, effectively meeting a project’s unique needs.

Given the narrower profit margins in green hydrogen and derivative plants, it becomes imperative to make a conscious effort to minimize the overall project cost without compromising on essential project specifications. Achieving reduced cycle times, minimizing CAPEX, and expediting GH₂ time-to-market are pivotal in managing these lower margins. For very large projects planned at a GW scale and executed in phases, optimization methods like standardization and modularization can be explored.

Signing Off-Take Agreement. An off-take agreement is generally made in advance to buy the producer’s goods. This arrangement makes it easier for producers to obtain financing from banking institutions. An off-take agreement also helps the producer to guarantee a minimum level of profit for its investment. So, the first step for the producer/developer would be to sign the off-take agreement and subsequently kick-start the project execution in full force.

Realistic Project CAPEX/OPEX at FEED Stage. Learning from past experiences, developers are now opting for a more comprehensive FEED approach, incorporating a significant portion of detailed engineering (DE). There is a trend toward advancing detailed engineering work to a stage approaching 60% DE progress during the FEED stage itself. This shift aims to produce accurate overall project cost estimates that align closely with the actual expenditure, thus enhancing project management effectiveness.

Advancing to a higher level of detail during the FEED stage necessitates technical and cost inputs from major original equipment manufacturers (OEMs) and suppliers of various packages, especially for balance of plant (BOP) engineering. However, placing orders for all long-lead items at this early stage can be challenging. An alternative approach involves providing a reservation fee to suppliers of long-lead equipment, enabling them to initiate engineering work for project-specific inputs, thereby facilitating the progression of DE during the FEED stage. This modality is advantageous for developers, positioning them more favorably in negotiations with EPC contractors for open-book EPC contracts. Such contracts are structured to establish a realistic project cost, coupled with a focused execution schedule. Additionally, they foster a fair and transparent risk-reward sharing mechanism.

Managing Aggressive Schedules. Aggressive schedules can be managed in two ways. Firstly, look for opportunities to take up certain activities in parallel (fast tracking). Secondly, advancing those activities that can be independently executed, instead of following the conventional sequence. The following options were implemented in some ongoing projects to manage aggressive schedules:

• Initiating “Early Work” Activities. Begin basic engineering work, preliminary site activities, etc., prior to achieving financial closure. This proactive measure acts as a preparatory step to ramp up the project execution on a fast-track basis post financial closure phase.
• Early Start of Civil Activities at Site. Prioritize non-plant buildings until receipt of input to engineer the main plant buildings.
• Pre-Engineered Buildings. This is more applicable for non-plant buildings. Although a techno-economic evaluation needs to be carried out to finalize the cost-effective option, pre-engineered buildings can be a winner if schedule is considered as key driver for project success.
• Structural Steel Pipe Rack Vs. “Sleepers Only.” In this case, the sleeper activity can be “late start” as against “early start” of structural pipe rack work and would help in managing the aggressive schedule. However, this option needs to be planned carefully prior to finalization of the overall layout.

Order Placement of Long-Lead Equipment. One of the key factors for the success of a timely project execution is a proven procurement strategy for LLE. The overall project schedule depends on equipment suppliers’ order placement to delivery at site timelines. Certain standard timelines are often defined by suppliers for the same. Below, Table 1 indicates a tentative timeline for major LLE that are expected in these projects. However, this can vary depending on the geographic location of the site.

In the case of favorable supply and demand chain scenarios, these timelines can be brought down in agreement with the supplier. Also, it can be beneficial to utilize EPC contractors or developers that have an established longstanding partnership with suppliers, because they will be in a better position to negotiate for the shortest possible timelines.

Standardization and Modularization. Standardization and modularization have recently gained focus in many sectors. Both of these concepts offer benefits such as cost and time reduction. To quote an example, for a green ammonia plant project of 1,200 MTPD, it is necessary to decide whether the execution should be in a single or multi-phase. Based on the above factors, project execution can be planned in the following configurations: 1 x 1,200 MTPD, 2 x 600 MTPD, 4 x 300 MTPD, etc. Considering identical size of blocks of execution in phases, the engineering work for the first block can be standardized/templatized and reused for the subsequent blocks. Assuming the time taken for the first block is X, the time for the second block of similar configuration can be brought down to about 0.6X to 0.65X.

Alternatively, the main ammonia synthesis loop can be sized for 1,200 MTPD as one unit and modularization can be planned for the BOP, where feasible. In cases where modularization is not possible, these systems can be engineered as common to all phases to operate across a complete range of plant operating loads, varying from 10% to 110%.

Risk Analysis and Mitigation. With the energy transition industry still evolving, an adequate risk allocation framework needs to be developed during the feasibility phase and development phase. Risk analysis and mitigation is not a one-time activity but a continuous and ongoing activity over the entire duration of the project. Identified risks should be periodically assessed. Some of the key risks and mitigation plans are indicated below in Table 2.

Project Delivery Methods. Three major modes of project delivery are broadly followed in the industry:

• EPC (Engineering, procurement, and construction)
• EPCM (Engineering, procurement, and construction management)
• PMC (Project management consultancy)

Each execution mode has distinct advantages and disadvantages. In the EPC mode, there is a complete dependency on a single contractor, leading to higher project costs. On the contrary, the EPCM mode reduces the overall project costs but demands seamless coordination among various stakeholders, including contractors, logistics, supply chain, and inventory management, for project success. The PMC offers a middle ground between the two, presenting a trade-off. It can be chosen under specific conditions where cost-fixing is preferred, and professional external management is required. In this mode, the PMC company manages the EPC contractor on behalf of the client. Determining the appropriate project execution mode, considering factors such as project requirements, timelines, and complexity, is crucial during the feasibility phase of the project.

Bankability Considerations for EPC Structuring. Considering the complete value chain in the green hydrogen and derivatives sector, these projects involve execution with a diverse set of technologies. A single EPC contractor may not have the capability or expertise to undertake the turnkey development of all these assets. An alternative would be to involve multiple EPC contractors for different project components as indicated in Figure 4. The EPC agreement in this case would be signed between an EPC wrap provider and the project company. Lenders would also sign a direct agreement with the EPC wrap provider.

Development of International Codes and Standards for the GH₂ Sector. Codes and standards are the set of rules and guidelines that are developed and maintained by professional organizations and government agencies. They are legally enforceable and define minimum acceptable levels of safety, quality, and reliability. If a project is engineered and executed as per the defined guidelines, it will be easier for the regulatory authority and the lenders to approve the project.

The GH₂ sector is evolving and requires established international standards as guidelines for project execution. Currently, it is in the developmental phase. Additionally, local governments have come up with safety and execution requirements, which also need to be complied with for project approvals from regulatory authorities. There have been some delays seen in approvals from the regulation authorities due to this situation. This stage is expected to be streamlined shortly.

Success Demands a Sound Engineering Plan

The energy transition is well underway and will continue. The evidence is all around. Changes that can be expected going forward include:

• Moving ahead from the learning phase to the current constructive phase, projects have started to see the light of execution. In the next five-year window, the energy transition market is expected to be streamlined.
• While the sector is transitioning into different phases progressively, it is also important that the engineering and project execution are streamlined. Where possible, it can be standardized or templatized.
• Present challenges encountered in ongoing projects were reviewed and action plans for the way forward were brought out. While certain proposed action plans are basic requirements and not unique, it was observed that these were expeditiously implemented in ongoing projects.

Just as it takes nine months for a baby to undergo full development, regardless of external factors, a project requires its own gestation period. This evaluation determines the appropriate duration for a specific project. Once established, it becomes imperative to meticulously track and adhere to this timeframe, preventing any unnecessary delays in project timelines.

Despite the urgency to execute projects aligning with energy transition goals, proper planning and evaluation during the initial phase are essential. This meticulous approach ensures a firm grip on the project during execution, leading to successful commissioning. It is recommended to invest quality time during the initial and conceptual phases of a project rather than rushing into execution, only to circle back repeatedly to the initial phase. Taking the time for thorough planning upfront can significantly contribute to a project’s overall success.

—Rajarajan Rathina is general manager and sector head of Energy Transition with Tata Consulting Engineers Limited.