INTRODUCTION
JULES
0’ - Europe uses about 8 million tons of hydrogen per year, mostly to refine fuels and to produce fertilizers. But today, almost all of this hydrogen is produced from fossil gas, generating not only carbon emissions, but also energy dependencies on adversaries like Russia. Yet hydrogen can also be produced by other means, for instance by electrolysis, a process that uses electricity, not gas. And it turns out that Europe is already a technological leader in electrolyzers, the machines that are used to generate green hydrogen. Now, green hydrogen has been touted as a solution to almost every decarbonization challenge in Europe. But this hydrogen hype has completely overinflated expectations, and now project delays and cancellations are putting this nascent industry at risk. And just like in solar panels and electric vehicles, Chinese manufacturers are increasingly competing with European ones. And so our question for today is, can Europe get its act together and build a successful local hydrogen industry, or will we fail to meet our ambitions and seed on yet another promising sector? I'm Jules Besnainou, and you're listening to Time to Scale, a podcast by Cleantech for Europe.
PART 1
JULES
Today, we are super excited to welcome Nils Aldag, the co-founder and CEO of Sunfire, a leading European manufacturer of electrolyzers for green hydrogen production. Hello, Nils.
Hi, Jules.
Nils, you co-founded Sunfire at the age of 24, and you took the company from about three employees to what, 650 employees today. And in the process, you helped to position Europe really at the forefront of electrolyzer innovation. I'd like to focus our conversation today on whether Europe can develop a clean hydrogen economy, what it will take to get there, and how you see Sunfire's role in it. But first, I'd really love to introduce you personally to our audience. And so what I wanted to ask is the first question is that typically at 24, people start their first job in a big company, and you decide instead to build an electrolyzer startup. So how did that happen?
NILS
2’10 - So I have the, I would say, big privilege that I come from, that I have parents that have actually been active as entrepreneurs themselves, and a grandfather who is also an entrepreneur. So having a family background with people who have started small ventures, started small and bigger companies was probably the biggest source of inspiration to me. Most notably when I was, shortly after I was born, my mother, I created a small startup in the living room in which we were together. And I think that kind of influenced me in a significant way. Also, I always had in my mind this idea of starting a company at some point in time in my life. I probably wouldn't have expected this to happen at the age of 24. And as very often in life, it's a lot of kind of it’s right moment, but also a bit of coincidence. I was very fortunate that I developed an interest in clean technologies during my studies. I wrote a thesis on opportunities in the cleantech space. So I looked basically, I tried to make a map of areas where there was already great solutions. We were in the age of solar and wind and batteries were emerging. Big projects like the desert tech project in Germany were starting to unfold. And I was fortunate also to meet some people in that context. So I was looking at what was already happening and at areas where there were no solutions and little ideas how to fight climate change. Interestingly, already that thesis concluded that heavy industry, long distance transport, aviation, those were the areas where solutions were scarce. And then coincidence kicked in. A guy that I knew from high school and a friend from my personal network were looking for a co-founder with some business and legal knowledge. And that's where I came in. And to be fair, the original idea was not to become an electrolyser manufacturer, but there was a slightly different idea in the beginning and then you pivot into all sorts of directions and eventually, Sunfire has become a big electrolyser manufacturer.
JULES
4’40 - But tell us a bit about that journey. How did it start? And looking back at it 10 years later, what have you built?
NILS
4’48 - So when we started the company, the idea was more to be a technology integrator, we called it. So trying to buy hardware from hardware providers, integrate it and then actually make money by developing those projects and selling the molecules coming out of those projects like hydrogen, the molecule we will talk about a bit more today. So this was the original idea. We quickly realized that, especially hydrogen back in those days was understood as a fuel for passenger cars and only that. And while it can make sense to drive a car with hydrogen, I don't want to oppose that. It's definitely one of the more difficult business cases because there's battery electric mobility, which is just very convenient and extremely cheap. So what we realized back then was that hydrogen could be used to replace practically anything that comes from crude oil, natural gas or coal and that, for example, industry and also refineries were the more interesting place to look into, to sell equipment into. And this was really, I would say, probably a seven-eight-year journey where we were trying to figure out what we wanted to do and where we were trying to educate the ecosystem or discuss with the ecosystem where this topic could go. And eventually, because a lot of things in the value chain were missing, most notably the providers of electrolyzers that could operate with renewable, fluctuating renewable electricity input, we moved more and more into that direction, acquired businesses during that time that transformed also our own business. And since 2018, 2019, we've become a pure play electrolyzer manufacturer based on two different technologies.
JULES
6’54 - How can you tell us a bit more about your experience as a young founder? What was it like to participate in technology development, but also, I assume, fundraising and selling? How have you grown over these 10 years?
NILS
7’08 - Yeah, so from a personal side, I have three little kids now and I think it's almost impossible to do something like that with three little kids. So actually, it's quite a good idea to start it as quickly and early as possible. A bit more on the serious note, on the serious side, I was on the one hand side, I was fortunate to have people alongside myself and my co-founder, our CTO, Christian, who was still with the company who was also relatively young, who had a lot of experience. So it was not that we were those young, almost kids, trying this pretty, I would say adventurous thing on our own. So we've always had people on our side that liked the topic, that were engaged heavily. One of our co-founders who retired from the Sunfire topic in 2020, Kara, was already an experienced entrepreneur. So that was a big blessing actually, and a nice model how those things can be done. It was experienced people on the one hand side and hungry, driven guys on the other together, joining forces and developing a successful company. And then truth is also that for many years I was hoping I'd have a bit more grey hair and would look a bit older because I've had situations where people looked at me and were waiting for the boss to also join the meeting. So yeah, that's the more challenging side. But like I said, it was a huge privilege, big fun to do that. And for me, exactly the right time. You're young, you're free, you can take risks.
JULES
8’51 - And in terms of the, because you obviously now have more than 600 employees, when does the big inflection moment come and how experienced are you at that moment?
NILS
9’01 - Yeah, so this is also part of the story that we had a relatively long initiation phase if you want. Sunfire was for the first seven or eight years, we were really searching for our own positioning for what we wanted to actually do and that was a phase where I was fortunate to be able to learn also quite a lot. The real inflection point, I think one moment that changed the direction was definitely the Paris Climate Agreement that put the whole topic of decarbonization completely on a different level and it became obvious that pure electrification would not be sufficient. You would also have to convert renewable electricity into molecules to substitute natural gas, oil and coal in all sorts of areas where direct electrification doesn't work. So this was step one. The second one was very much driven by Ursula Von Der Leyen’s man on the moon speech and the Green Deal and this vision of becoming a cleantech champion, not only to decarbonize but also to reindustrialize Europe to create new jobs and new business areas. So I think really her speech and the cabinet back then was extremely supportive of hydrogen and I always sliced our development into three phases. The first one was really finding out what we wanted to do and discussing with the market side where this could go. The second phase was enormous ramp up growth, big financing rounds, support from all sides, a lot of hype frankly also and we're now entering an extremely interesting phase which is the one where you actually grow up and start to make money and that's where we are right now. Sunfire will for example this year for the first time in 15 years be profitable on P&L level. That's a massive step up, a massive achievement for our company and the sign that we're actually growing up that the industry is now going into a new phase is maturing.
JULES
11’09 - I want to pick up just for one moment on what you said on the political side of things because it's something that I also try to explain from time to time. I had the pleasure of having Laurence Tubiana, the architect of the Paris Agreement in your seat a few weeks ago and I was trying to explain for us on the cleantech side what it felt like to see the results of the Paris Agreement in 2015 but I think what you mentioned with President von der Leyen is very similar. It's like we're here sitting developing, financing these technologies and all of a sudden the big political movement is here and says, "Yeah, that is a big part of the equation." For me, it was a bit of a aha moment so just keen to hear from you a bit more on the Paris Agreement and maybe 10 years on what you judge what this process has brought?
Nils 11’56- For me there were two things. One was you were suddenly out of the niche if you want. You were suddenly in an interesting spot, in an interesting industry and people were starting to look at the topic fundamentally different than they had before the Paris Climate Agreement. So the public perception, the need to act, the dynamics in the external world substantially changed. So I think this is likely the biggest real life contribution that it put a spotlight on those topics. What is also not to be underestimated is what it does to yourself. The motivation that comes out of it, suddenly the understanding that you're working on something that is extremely meaningful, that has impact, people start to also look at you. I think this is a combination that creates an enormous force in people, in industries and allowed for things to really move forward. To give you an example out of different that I could give, but we were back until that point. We were raising single digit euro, a million euro amounts and the focus, as I said, was not so much on those topics. Eventually we started to raise completely different amounts of money, we’ve, until today, have raised close to one billion euro. I think for this to happen in Europe with the financing ecosystem being what it is, wouldn't have been possible if you wouldn't have had those moments, the Paris Climate Agreement, but also the Man on the Moon speech, the Green Deal. I think that has unlocked enormous force financially, technically and also on the motivational side for human beings working in the area.
PART 2
JULES
13’50 - Absolutely. So Nils, where is hydrogen used today and where do you think it could be used tomorrow?
NILS
13’58 - First of all, hydrogen, which is a chemical molecule which today is produced from fossil energy, most notably from natural gas, is used in various ways in the industry. The biggest consumer of hydrogen is big refineries. They need it in the process of producing conventional fuels like gasoline or diesel. Hydrogen is a necessary molecule to produce the products that consumers want to have. Hydrogen is also used in the production of fertilizers. So the fertilizers that are necessary to produce or to grow crops, to grow food and hydrogen is also used in the chemical industry. So this is how hydrogen is being used today. Globally, it's about 100 million tons of hydrogen, which corresponds to about a gigaton of CO2, which is around about 2% of global carbon dioxide emissions. So while it's not a molecule that we're talking about a lot, it is a massive source of CO2 emissions. The exciting thing about hydrogen is that it cannot only be used in those areas, but hydrogen can also be used to replace all sorts of other fossil molecules, especially in the industry. So to give you one prominent example, hydrogen can be used to turn iron ore into steel, which today is something we do by using coal, and which in the future could be done with hydrogen, provided that the hydrogen is renewable. And then there are other forms or ways how you could use hydrogen, which hydrogen is today not being used. Another, probably the third very important area is you can combine hydrogen with other molecules and produce fuels for planes or for ships, and with that provide a solution to long-distance transport that also needs to be decarbonized.
JULES
16’06 - So we'll get a bit into how realistic each of these use cases are compared to current economics. But maybe before we do that, can you also help us? How is hydrogen produced today? What are the various ways of producing hydrogen?
NILS
16’22 - The number one way in which hydrogen is being produced is through so-called "reforming" of natural gas. So we take natural gas out of the ground, we split natural gas into hydrogen, which is the molecule we want to have, but we produce a lot of CO2 as a byproduct, which today is being emitted into the air. I would say around probably 85% of the hydrogen that is being produced on this planet comes from natural gas. A little bit of hydrogen comes from coal, and now more and more hydrogen is also coming from electricity through a process called electrolysis.
JULES
17’07 - Can you get in a bit more detail on electrolysis? How does the process work? And maybe after that, talking a bit about the economics of electrolytic hydrogen production.
NILS
17’23 - I'll try to do it in at least scientific terms to make it understandable how hydrogen is being produced in the device, which is called electrolysis. So what you basically have is you have a membrane, you run water on one side of the membrane, you apply an electrical current, which helps you to split the molecules in simple terms, and separate water into its two fractions, one being hydrogen and the other one being oxygen, which goes through the membrane and this is through that separated from the hydrogen. Then you can basically capture the hydrogen and the oxygen separately and make them available to the end user of the molecule. So in very simple terms, that's what happens. So a membrane, water on one side, electricity on one side, you split the molecule into hydrogen and oxygen and you make use of those two. The devices that do that range from very small installations that most of us have seen at school in our chemistry lessons. The ones that we're building are substantially bigger. So to also visualize this for you, the smallest unit that we are building basically fits on the space of a tennis court. It consists of two big electrolyzers that are about four meter high, 12 meters long and have an individual weight of about 100 tons. So it's massive steel installations and then a lot of pipes and cables and so on to connect all the things with each other. And this is the smallest unit that we're selling is this size. It has a 10 megawatt power supply, electricity supply to the electrolyzer and it produces around 200 kilograms of that gas per hour. That's the smallest unit and then you multiply this unit five times, 10 times, 20 times depending on how much hydrogen your industrial client needs. And then you quickly move into the space of the size of a football field, which is typically what we're selling today.
JULES
19’42 - So if I compare the two main production routes basically with the old kind of fossil way of producing hydrogen, the input is natural gas and the output is hydrogen and CO2. And with the electrolysis, the input is water, electricity, and this produces hydrogen on the one side and oxygen on the other. Is that a fair?
NILS
20’05 - Correct. And the very important aspect to it or point to it is the electricity has to be renewable. So it has to come from CO2 free sources.
JULES
20’17 - Right. Otherwise you're just moving the problem around. Could you help us understand for these two methods, what is the cost structure of it? What are we talking about?
NILS
20’26 - So the traditional way of producing hydrogen, this process called reforming, generates hydrogen at around two euro per kilogram. And then you have to add the costs of the CO2 emission that you're creating, which in Europe actually happens. The ETS system puts an additional CO2 price to the hydrogen, which means that cleaned up fossil hydrogen costs you around two euro fifty, three euro fifty today. The problem is, from their point of view, the price of CO2 is increasing and hence the combination of fossil gas plus CO2 emissions is something which will become more expensive over time. So heading north of three euro per kilogram, which we think is where fossil cleaned up hydrogen will eventually be. Renewable hydrogen is more expensive today because we are obviously at a very early point in time. We're competing against the technology that has been there for decades. Still, green hydrogen, renewable hydrogen can be produced in good locations in Europe at something between five to seven euro per kilogram. So especially in Spain and Portugal, but also in Scandinavia, our clients are able to produce hydrogen at costs somewhere in that range, five to seven euro per kilogram. And remember this is for a technology which is very young, which is still relatively immature. So there is significant potential to bring down the costs of this renewable hydrogen.
JULES
22’17 - Maybe on the natural gas side, how did this evolve with the invasion of Ukraine and what do you think is the outlook for the next few years ?
NILS
22’28 - That's actually an interesting point. We're based in Germany. I'm half German, half French. So I've kind of observed in real time the changes in gas prices. So the gas price increase that we've seen shortly after the Russian attack on Ukraine was so high that natural gas had for a short period of time become more expensive than renewable hydrogen produced in Germany, which is probably the most expensive country in Europe for hydrogen production. And while it was obviously just for a short period of time, it showed to us that this is what can happen when we're under attack, when supply is being shortened. And it gives you a direction where fossil natural gas based hydrogen is eventually going to be price wise. So we're coming from a position relatively early in the development of this market with a clear indication that costs and prices will go down. And we are competing against something which today is relatively cheap but is likely going to become substantially more expensive in the midterm. And like renewable electricity has become the cheapest form of electricity, we are convinced that renewable hydrogen is going to be the cheapest form of hydrogen in the midterm and without the most attractive in the long term.
JULES
24’05 - And so on the electrolysis side, what is the cost breakdown of any given project today and which parts do you expect to shrink because we know that the construction of the project is actually a relatively big share, right ? And that is unlikely to move. So in your opinion, what is the cost? You said five to seven euros per kilogram today. How do you expect that to move in the coming years and where are the changes going to come from ?
NILS
24’35 - Yeah. So you can say that roundabout a third of the costs is the equipment. Two thirds of the costs is electricity and there is a bit of OPEX for running the equipment. But that's roughly how the costs are distributed. And I think on the first third, you have a factor of three or so that you can reduce the costs.
JULES
25’03 - So your own electrolyzers will be three times cheaper in, whatever, ten years ?
NILS
25’09 - Not even that. I think this is something we can achieve in the course of the next three to five years if we enable for scale to happen. The biggest driver to reduce costs is to get economies of scale, to be able to purchase more components with that reduced the cost of those components for us, establish a more professional, more effective supply chain. Then there is a lot of learning costs involved at the moment. So since this is the first time companies are building those large scale projects, we're still putting a risk premium on every project. Our customers are doing that. So through the scaling up and the learning effects, you bring down the cost of the equipment by a factor of three in a relatively short period of time. That's the first third. That's the second, the two thirds that are related to power, to the supply of renewable electricity are influenced by two things. On the one hand side, they are influenced by, let's say, the fact that we can't, because of a lack of infrastructure to transport hydrogen across Europe, we can't tap into the cheapest areas of power production. So in order to be able to place the equipment in areas where power prices are really as cheap as they can be, we need to create an infrastructure that then allows us to transport those molecules in a cost effective way to the end customers. Today you're placing the equipment normally closer to your offtake, the industry, which positions you in an area where you are probably between five to 10 cents per kilowatt hour of renewable power production. So the buildup of infrastructure will allow you to go into cheaper places. The other point is that the second point is that we have a quite complex regulation to fulfill when we procure renewable power, which we think is something which can be optimized or at least delayed so that in the initial phase, we are not making a product which anyhow is already a bit more expensive because this is new technology, even more expensive. So while most of this legislation makes sense, the rules make sense in the initial phase, it actually hinders projects to develop properly. So I think that's the second one.
So there's a regulatory piece. And another one, which is a hybrid of basically both sides, is that the equipment has to become more efficient because more efficiency means for the production of the same amount of hydrogen you need to buy less electricity and that brings down your cost share on the electricity side. So the goal that we are working towards is to produce green hydrogen in Europe at something between three to four euro per kilogram and be able to compete with fossil hydrogen, which will be there at that level.
JULES
28’30 - So give us an example from today and I think you've developed a, you are working on a number of electrolyzer projects in Germany. This is where we would expect the electricity prices to be the highest, right ? How does it make economic sense to do projects in Germany today ?
NILS
28’47 - So there's two sides to this. So one is that you have an extremely cheap product, which is gasoline or diesel produced from crude oil and kind of a high flexibility on the customer side to pay for that product because mobility is important to people. So when you produce hydrogen in a more expensive form and you use it in the production of conventional fuels, you increase the price of the conventional fuel by something between one and three cents per liter. This is less than, substantially less than the fluctuations that you see at one at the same petrol station during the course of one day. So because you are in this well established world with established prices and willingness to pay and the impact is not so big, there is a kind of a built in almost mechanism that allows you to put green hydrogen into a refinery without overburdening the user side.
JULES
30’01 - Is it the same story as in steel where basically, even if the steel you produce is much more expensive on a percentage basis, in the end as a percentage of the cost of a car, say ?
NILS
Exactly the same mechanism.
JULES
Negligible, okay.
NILS
30’15 - So this is one side of this. The other one is that the fuel sector is extremely well regulated if you want for decades. So for the past 25 years, whoever was selling fuels into the European market had to fulfill certain CO2 emission or renewable energy usage targets. In the early phase of the market, this was almost exclusively fulfilled by using biofuels, biodiesel, bioethanol were used to fulfill the early quotas that existed in Europe. Over time, we found out that certain fuels actually don't have that CO2 reduction balance. We found out that there was better solutions like electric mobility and we opened also, we opened the regulator opened up different options to reduce CO2 emissions in the production of conventional fuels. And one option that has been created by the European Commission in the so-called renewable energy directive three is the use of green hydrogen, of clean hydrogen in refineries. And this allows the refiners to fulfill their targets with a new tool, a new instrument, green hydrogen. And since compared to other options, it's actually affordable for them, this is something that companies are moving into. So if you look at the projects that are taking place, the large scale industrial projects that are taking place right now, the majority of those projects is driven by oil companies trying to reduce the CO2 emissions in their refineries and fulfill the targets that have been created through the renewable energy directive.
JULES
32’12 - So can you give us a couple of examples of the projects you're working on?
NILS
32’15 - So we are one of two suppliers, two European suppliers to a project in Germany that is being developed by RWE. RWE is in total in this first stage installing 300 megawatt of electrolysis. And they have publicly announced a relationship with Total Energy with the big oil company from France that is operating one of the biggest refineries in Europe in Germany. And they have agreed on a massive contract. I think it's a 10 or 15 year off-take contract where Total is buying, I think it's 30,000 tons of hydrogen, green hydrogen per year from RWE to do what I just described to reduce their CO2 emissions in their refining operations and clean up part of the conventional fuels that they're selling. And that this contract has been signed, that there is such significant interest from a player like Total is from our point of view a sign that under the surface actually a lot of good things are happening while obviously the overall mood on hydrogen is not as good as it was five years ago. But there is a lot of those projects happening, there's similar activities taking place in southern Europe, most notably in Spain, in France. So we see more and more oil companies actually stepping into that topic.
JULES
33’48 - And so on your side, if we take this RWE project, how big is it for Sunfire in terms of scale, in terms of money, what does this represent for you?
NILS
33’57 - So I think you can roughly say a megawatt of electrolysis is for all the players involved in such a project. Today is around 2 million Euro. And so a 100 megawatt project, not just for us, but also for all the other involved parties is a 200 million Euro project. If you take the additional 200 megawatt that go in there, that's 600 million of value that goes into this project. And there is several of those projects taking place in Europe right now. So this is quite significant. We're moving into billions of Euros that are being invested into this topic in order to produce green hydrogen. As I described in terms of the size, 100 megawatt electrolyzer is a big football field, a huge hall with a lot of technical equipment going in there, producing significant volumes of hydrogen. In this case, it's about 2000 kilograms of hydrogen per hour that are being produced in that installation. And you asked how big that is also for us, not just in Euro terms, but we, after 2020, and with the targets that the European Commission had set for 2030, we have started to invest quite a lot of money into production capacities and into the ability to contribute to the targets that the Commission had set. We have overall installed a production capacity of around about a gigawatt of annual electrolyzer output. We're running about 200 megawatt right now. And so we're capable of building two of those.
JULES
35’45 - So it takes you six months to complete this project ?
NILS
35’47 - Exactly. On the production side, then you have to bring it to the customer, install it, put all the cables and pipes around it and so on. So it takes a bit longer, but that's pretty much what it means for us. And there is other projects of that magnitude that we're working on in Europe in parallel.
JULES
36’04 - So I guess my question with all this is, how many of these big projects do you need to really scale Sunfire to a major industrial player ?
NILS
36’13 - Yeah. The answer to that question is, what do we need in order to operate profitably? I told you in the beginning of the discussions that this is one of the key targets we were chasing. We will reach it on the P&L level first time this year. So with a fully running 200 megawatt production with bigger customer projects behind it, we are able to run Sunfire in a profitable way. Having said that, we could produce five times as much without having to change the structure of the company a lot. So in order for this to also be interesting for our shareholders, it should be more than 200 megawatt of annual production capacity in order to create a valuable company that generates profits. And it's also interesting from the shareholder side. And like I've said, we have taken measures in order to be able to deliver that. So now it's a lot about demand side incentives, demand creation, and really this industry is starting to pick up pace. But then that's an interesting case.
JULES
37’36 - So today we have sky high electricity prices, tight fiscal space, scarce public money, you name it, right? In this really tough moment, why should Europe even prioritize green hydrogen?
NILS
37’50 - Look, I think we've passed the time to discuss whether we have to become climate neutral or not. This is a given, we have to be climate neutral by 2050. If we accept that, it is completely clear that we need to invest heavily into solutions that will help us to decarbonize, to defossilize and become carbon neutral on the one hand side.
We've seen extreme political shocks like the attack of Russia on Ukraine that have shown to us how our dependencies can create energy prices that we cannot cope with as a society. So also from a resilience standpoint, there is no alternative to renewable hydrogen. Fossil hydrogen is definitely not the answer to those situations.
And the third one is clearly with industries going into different directions, we need jobs for Europe and this is a sector that can create a significant amount of jobs for Europe in the near term.
JULES
39’49 - So I'm very clear on why renewable hydrogen versus gray hydrogen, because we have such a security dependency on Russia and on other gas providers, right? But how do you compare green hydrogen with other decarbonization solutions for a number of industrial use cases?
NILS
38’07 - Yeah, for me, I mean, blue hydrogen, so the production of hydrogen from natural gas with carbon capture and storage and putting the CO2 underground doesn't solve the resilience aspect. We are still using natural gas, crack it, convert it into hydrogen.
And that is not an alternative that will help us become climate neutral in 2050. Green hydrogen is the only solution for that.
JULES
39’09 - But you were saying you then need transport infrastructure to make that a reality, right?
NILS
39’14 - Correct. But the transport infrastructure for hydrogen is substantially cheaper and easier to realize than the infrastructure for electricity. So putting a hydrogen gas grid across Europe costs, I don't have the exact figures in my mind, but it's a fraction of the costs of putting an electrical grid up. So that's the first one. It's easier to transport molecules than to transport electricity. The second beautiful point about hydrogen is that it's storable. So you can actually also use it as a mid to long term storage, which is another downside of renewable electricity. It doesn't make sense to just jam up renewable electricity power production if it's not available during times where you need it. So that's the second aspect. It's an easier way to transport renewable energy. It's a way to store renewable energy, make it accessible during times where we don't have enough of it. The second point, which I think is extremely important, is that if we are serious about decarbonization and about net zero in 2050, we have to decarbonize industry, long distance transport and so on. The volumes that are necessary can only be covered through renewable hydrogen. And if we accept that as a given as something that we have to work towards in order to fully decarbonize, then you actually start to realize that this is a massive job opportunity for Europe. The skills that are necessary in order to build an electrolyzer are very similar to the skills that are needed in the automotive industry, for example. So a lot of suppliers, we're working with, a lot of the people that are working for us, came from the automotive industry or are working in the automotive industry. So besides being a great way of transporting renewable electricity, storing it, it also has massive job potential for Europe in the European market and eventually also as a good to export into other regions of the world.
JULES
41’32 - So the redundancies we start to see in automotive suppliers, for instance parts supplier, you're seeing that as potential workforce ?
NILS
41’40 - Absolutely. If you look at the supply chain, at our supply chain, a majority of partners that we're working with are suppliers from the automotive industry.
JULES
41’51 - Maybe in terms of sectors where it will make economic sense or it may make economic sense, obviously we're all familiar with the hydrogen ladder. So you've mentioned refineries, you've mentioned potentially maritime and aviation fuels. Clearly in the hype days we would have sent pretty much anything and everything can be solved with hydrogen. We have a very different view now. What is your view on the key maybe three or four sectors that we really need to prioritize where it really makes sense ?
NILS
42’20 - Interestingly, that hasn't changed much since 2016/2015 when we started to really get into the electrolyzer space. We think that there is an interesting book describing how new technologies find their way into the market, Crossing the Chasm, and one core point of kind of crossing that and maturing technologies is to find your first beachhead market as it's called in the book. That means the first place where you actually see significant offtake and you can generate economies of scale learnings that will allow you to bring down the costs of your product and make it accessible for other industries. That is clearly the refining sector. That is the beachhead market for electrolyzers producing renewable hydrogen in order to produce cleaner conventional fuels. This will allow us to bring down the price of hydrogen for customers towards 4-5 euro per kilogram. With that you make green hydrogen more accessible for other industrial use cases, most notably, at least that's how we see it, for the steel industry replacing coal and for the production of fertilizers, which is also a significant source of carbon dioxide emissions. Those two, plus potentially also policy driven, the aviation sector or the maritime sector, I think that's the four areas where we see the biggest potential. Having said that, hydrogen is probably not such a good solution for the heating sector. We've mentioned at the beginning that it's probably not the best solution for passenger mobility and whether it is a good solution for the production of power really depends on how many hours during the year you have where you need peak power to be produced. And if that has to be renewable, which we assume, then that could also make hydrogen interesting in that field.
JULES
44’40 - But even if we get to aviation, for instance, where you said in refineries you're at a 1.5-2x price difference between the polluting solution and the green solution, in aviation we're likely between 5 and 8x. Do we ever manage to bring those to cost parity?
NILS
44’45 - It's a difficult question and likely one where the answer is that it will become more expensive. Taking crude oil out of the ground, turning it into jet fuel is something which is extremely cheap today. And if we'd be allowed to continue using fossil fuels would remain relatively cheap also in the long term. So here the question is really do we want to decarbonize that sector as well? And if the answer is yes, then I think flying will become more expensive than it is today.
JULES
45’22 - Got it. Maybe looking at it from another side, I read recently in a report by the IAEA that China today has about 65% of global electrolyzer capacity and about 60% of global electrolyzer manufacturing capacity. Are we already outcompeted ?
NILS
45’44 - So I think that first of all we're scared because we have the solar history behind us where Europe was leading and eventually Chinese solar PV panel manufacturers took over the European market, eventually the global market. So I think we're driven a lot by that fear that this could happen again. In order to understand whether the fear is real or not or whether the story is similar or not, it's important to compare those two things. Solar panels are a commodity. They are produced in massive volumes in a very optimized way and that is playing into the skill set of Chinese manufacturers. They are using certain resources that are cheaper and better available in China than in other parts of the world. So that combination of playing into the manufacturing skills, the fact that it's a relatively commodity and the resources, the resource advantage that China has made this an easier play for Chinese companies.
With electrolyzers it's a very different thing. We've talked earlier about what a megawatt of electrolyzers costs. 50% of that electrolyzer is actually not related to the device itself but to the creation of a concrete ground, the erection of a hall around it, the connection to the electrical grid, the connection to your off-taker and the execution of a very complex large-scale project. So this part of the costs, often called EPC costs, is country or geography specific. So whether you are a Chinese manufacturer of equipment or a European one, the EPC costs in Europe is the same and in China it's another one and it's the same for China. So 50% you can only change through adaptations of your product but it's the same for more or less the same for everyone. And then Chinese electrolyzers, those are, remember, devices that are dealing with explosive gases that need to fulfill quite a lot of safety requirements and so on. They are manufactured in very different ways in China versus in Europe. An electrolyzer made in China used in Europe has to fulfill the same requirements as a European one and that again drives the price of both electrolyzers, the Chinese one and the European one. So I think the advantage actually decreases and decreases and decreases, right? So eventually today-
JULES
48’50 - I assume it's also harder to transport than a solar panel.
NILS
48’55 - It's obviously substantially harder to transport a 100 ton device that is transported on special vehicles. You're fully right. So eventually the costs of a Chinese electrolyzer in Europe with European EPC, I think it still has to be demonstrated. I don't know of a Chinese product of relevant size being built in Europe but taking everything into consideration that I just said, I think the advantage is if at all is relatively small. We're not talking about the same differences as we've seen in photovoltaics.
And then there is a second point to it, which is you are in most cases connecting your electrolyzer to sensible infrastructure, be it a power grid or an off-taker that is operating a complex industrial machine behind your electrolyzer.
There is a trust element which is extremely important in those relationships. You want to have a counterparty that puts the equipment there in a reliable way that is available for you. And eventually there's also cybersecurity topics and so on. So there's also a couple of soft factors next to the pure price side or cost side, which you have to take into consideration. And in essence, today we don't see significant Chinese competition in the European market. And we are strong believers that China will not outcompete Europe and that actually with this complex equipment, Europe has a significant chance to be the strongest place for electrolyzer manufacturing in the world.
JULES
50’40 - But we started to see in the innovation fund auctions, for instance, that in the first call when people were able to compete just on price, that a lot of the electrolyzers that were chosen were Chinese made, right?
NILS
So in the first auction it was about 40% of the manufacturers that had been selected as final contestants, I think is the right word, was Chinese. This number did not yet say that those would be the selected parties. It was just saying out of, I think you had to provide three or four different quotes and out of those, the entirety of players providing quotes, 40% was Chinese. Eventually we don't know a project that is being realized even from that first wave where the Chinese supplier was the one who took the project. Rightfully, as I think the European Commission in the second round of the hydrogen, the EU hydrogen bank decided to implement certain criteria, resilience criteria. It was a non-Chinese criteria, I think, or pro-Europe criteria that I think are important because we must not forget that we are using European taxpayers' money. And I think it's extremely difficult to explain to European taxpayers that you are spending billions of euro to create a new industry, but actually with that you're reducing the, or you're supporting the cost aggression curve of Chinese suppliers.
JULES
You're giving additional subsidies to products that are already heavily subsidized.
NILS
Exactly, and are being produced under completely different conditions, probably not in the same kind of way we have to do it here in Europe. So I think those criteria make a lot of sense and we should be smarter about that in the world that we're living in right now. I wish it wouldn't be like that and probably 10 years ago we would have looked in a different way at this. But I think today, since it's not just about decarbonization, it's not just about creating jobs in the new industry, but it's also about resilience and reducing dependencies in critical infrastructure, which energy infrastructure for sure is. I think it's a good reason to implement those restrictions and allow the four or five, six excellent European manufacturers that today build the largest volumes of electrolyzers next to a couple of Chinese suppliers to give them the scale that they can compete with their Chinese counterparties.
JULES
53’21 - And do you see the risk that we're starting to see in the electric vehicle space with CATL, for instance, shipping workers to open a new factory in Spain? Do you see the risk of Chinese manufacturers setting up shop in Europe to better compete ?
NILS
53’36 - So first of all, I think it's better to have jobs in Europe than to have all the jobs in China and none here. So I think for the battery industry, that's probably the only way forward. Obviously, it would be good and important to also hold the IP. And in our industry, I think it's relatively easy if you provide us with significant scale through demand side incentives, you allow companies to be competitive, eventually on a subsidy free basis, which is the overarching goal. And if we do that, we will not only have the production side of it, but we will be in the position to also hold the IP and actually have great companies not only building for Europe, but potentially also for markets outside of Europe.
JULES
54’28 - That's a great segue to start talking a bit about policy. I want to start maybe by talking a bit about EU targets, because it drove me a bit nuts when I read about this, that the EU had set a target of 10 million tons of clean hydrogen production and 10 million tons of clean hydrogen imports by 2030 for Europe, when globally the world only produces about one million ton of clean hydrogen today. How did Europe come up with this kind of pie in the sky number ?
NILS
55’09 - So, from my point of view, this was driven by the by it was an overreaction to the Russian attack on Ukraine. We were in a situation where we realized how severe our dependence on natural gas from Russia was. We realized how severe prices could increase if events like that would happen. And during that time, this new target was established. And I think it was actually not just the mistake of the Commission, but I think as an overall industry, we've been too optimistic on what is possible. So, this hasn't been very helpful to be frank. Before this event, the target was substantially lower. It was a four million ton target, which represents about 50% of the hydrogen that is used in conventional areas in Europe at the moment. So, in refineries and fertilizer production in the chemical industry.
JULES
Already a huge achievement to switch 50%.
NILS
Absolutely, but I think that is a much more realistic target. And in Germany, we're seeing that we're moving back to that initial target, which was set in 2020. Now, the pace at which we've set significant and probably achievable targets, we've then substantially increased that target because of an external shock moment, which it was. We're going back down to the original target. However, we've lost a bit of time in between because certain things haven't happened in that time. I said earlier on, there's quite a lot of good things happening. There's projects like the one with the Sunfire, RWE and Total. There's a variety of other projects with Shell, with BP, with some of the Spanish, Portuguese oil companies, and also some of the energy companies in the sector.
But we, in the past five years, have talked a lot about the target side. We have probably, because I also don't want to sound too negative, we have actually achieved also quite a lot of things in other areas. We've created, whether it's optimal or not, is a different debate, but we've created a mechanism how we can purchase renewable electricity. We have created a certification scheme. We have implemented quite a lot of instruments like the Hydrogen Bank we've talked about in order to incentivize the early movers. But in those five years, we have missed one critical element, which is to create a demand side on national level. So we've talked a bit about the renewable energy directive early on, which is something which had been created long before hydrogen was discussed as a solution. Eventually hydrogen was added to the renewable energy directive. The challenge here is that the renewable energy directive coming from the European Commission is still to be implemented into national law in most countries of Europe. And in anticipation of that happening, a lot of companies, again, have started to move. But that implementation from the European level to the national level still to happen. This has taken too long. We should have been there two, three, four years ago. It's happening now in a couple of countries in Europe, and it will lead to the ramp up, and then likely more towards the initial targets of something in the range of four or five million tons of hydrogen in 2030.
JULES
59’12 - In your opinion, if we want this industry to scale successfully and to reach those four million tons by 2030, what is the kind of policy framework that you need to make this work ? You keep talking about demand creation. Can you get a bit more specific as to what that means ? And then let's get into some other elements of what the framework needs to be.
NILS
I'll talk a bit about Germany. Germany is at the moment trying to figure out how to convert this European legislation into national law. What is being prepared is, first of all, hydrogen, green hydrogen can be used by refiners to fulfill CO2 emission reduction targets. That's the first point, which is important. The second one is they're saying for certain nascent new technologies, we want to have something which is called a subquota. So a target for companies bringing fuels into the market that is mandatory to fulfill. And other than most other member states in Europe so far, Germany has decided to also put a significant penalty to that. So if I am Total, for example, and I'm obliged to reduce CO2 emissions, as of most likely as of next year, I will be obliged to use a certain amount or to reduce a certain amount of CO2 by using green hydrogen. And if I don't do that, I will be penalized with a penalty that is a strong incentive to use green hydrogen. That is what has to now happen on national level. And what we're hoping is that Germany set a good example for other member states to also implement this renewable energy directive into their national law. So France is working on a draft, Spain is working on a draft and other member states are working on it. But the reality is today, I think the only countries that have implemented RED III into national law are Finland, I think Romania, the Czech Republic, if I'm not mistaken. So there is still a bit of a way to go. And we think as of next year, especially in Germany, this will trigger significant demand.
JULES
01’01’36 - Got it. And so that part kind of settles the demand creation aspect. Maybe once you've had this demand, can you tell us a bit about how you're able to finance yourself to meet that scale ? And what's the role of public finance within that ?
NILS
01’01’54 - That's another interesting aspect. So when we prepared our budget and midterm plan with our investors, I think it was two and a half years ago, we realized that there was a significant danger for our own growth. We were starting to see bigger projects like the one with RWE, we have another project with UNIPER and a couple of other projects. We were starting to see those projects coming in and we realized that we need, again, I'll simplify it a bit, but we realized that we need a lot of money in order to build those electrolyzers, pay the workers that are putting them together before actually being paid by the customer side. So what we do, what we did, what is natural in our industry is that you agree on prepayments, which our customers agreed to give to us in order to be able to finance the buildup of this equipment.
However, what our customers did is they asked for guarantees that we had to provide in return for them giving us those prepayments. And those guarantees, we could only issue by putting the money back to a bank that would then guarantee to the customer that the money was safe.
So a long story short, we were lacking the money to grow and this was a serious, serious threat for our growth**.** Now, big corporations, big companies don't have that problem. They have a big balance sheet. They are able to pay that potentially also themselves. For the cleantech sector that has grown with a lot of companies similar to ours from small scale, small structures, innovative structures, this is a significant issue. And as long as those companies don't have that balance sheet, as long as they are not profitable, they are faced with that challenge.
JULES
01’03’56 - So the banks basically think, well, you're just going out of business in the middle of this project. So I'm not going to put my financial guarantee on this.
NILS
Unless you give me the money you got from your client. Exactly. Which makes no sense because you're on top of that, obviously, you have to pay interest rates. And it was a huge challenge back then. Probably not the technology was seen by us as the biggest challenge, but this financing piece.
We've been able to gather with the banking consortium that, to be fair, was quite bold and was willing to discuss an instrument with us. We were able to create a bank guarantee instrument, which is partially backed up by the German government and partially by those banks, that allows us to actually make use of those prepayments. We're very proud that we've actually started to pay back some of the money that was locked in that instrument and we've retrieved new guarantees on new money from that instrument.
And this was such a success and such a first of a kind instrument that the European Investment Bank has decided to provide in a similar instrument now as well, which is extremely helpful. And obviously, you guys have played a little role in that as well, for which we're extremely grateful. But I think in that case, for the European climate tech industry, we've actually created something which is extremely valuable to be able to provide those bank guarantees and make use of the money that we get from our customers to build those big industrial plants.
JULES
01’05’24 - Got it. And important that you were able to figure this out with the German government, right? And I think for the next ones, the fact that this new EIB product exists out there is going to make a big change. We've talked about demand. We've talked about finance. Do you see any importance in trade policy, given what we've discussed with the competition with China?
NILS
01’05’51 - I think the easy... So eventually, we have to be able to compete with the Chinese, with the Americans. And we have to be able to compete with fossil energy. And I'm convinced that green hydrogen can be produced in a competitive way with fossil natural gas-based hydrogen, and that we can compete with the Chinese, the Americans, if the things we've discussed in here are actually happening.
So eventually, I don't think we will need those kind of trade policies in order to be successful**.** For me, really, the most important point is in that intermediary phase, where it's really about scaling up, reaching the volumes necessary to bring your costs down. There, you need an extra level of support, of protection. And whenever European taxpayers' money is involved, I think in the world we live in today, it's important to be a bit smarter than we probably were in the past years.
JULES
01’06’53 - So on anything that leverages public money, you're saying these types of resilience, local content criteria make total sense.
NILS
Exactly.
JULES
01’07’05 - Okay, got it. Maybe one last question on policy. You've clearly... So you've gone from 3 to 650 plus employees, right? How is this the kind of skilling game played in Europe? And where do you recruit your workers? And does the policy framework help to do that?
NILS
01’07’31 - So I think Europe is probably the best place in the world when it comes to this type of manufacturing, engineering capabilities. I think we are hugely blessed by excellent technical universities, by industries, especially the automotive industry, but also the plant construction sector that have created significant skills that for reasons that we've discussed are becoming available now. The world is changing. We're going from combustion engines to battery electric vehicles. A lot of people are being laid off. In Germany, most recently, we've heard more than 10,000 people having to leave Bosch. Those capabilities are enormously valuable. We still have them in Europe and Sunfire and our peers are greatly benefiting from that, both from students coming from universities, but also from well-trained engineering or production people joining companies like ours in new industrial sectors, like the electrolysis sector.
JULES
01’08’48 - But do you think the electrolysis sector would be able to scale rapidly enough to take in that level of capacity, like 10,000 people being laid off in a year?
NILS
01’09’10 - It might sound very ambitious from today's point of view, but if we manage to achieve this 4 million target by 2030, which is about 40 gigawatt of installed capacity, you need a lot of people to do that. The ambition doesn't stop there. This is 2030, which is almost tomorrow. We need to be climate neutral by 2050. The amount of molecules that we need to achieve that is so big that I strongly believe that the electrolyzer industry, where Europe is still in a leading place, has the potential to employ a significant number of people that are unfortunately being laid off in traditional industries right now.
JULES
01’09’49 - What's your top message then to European policymakers? If I'm President von der Leyen, what would you tell me in a one-minute meeting?
NILS
01’10’05 - This is your solution for decarbonization, for job creation, significant job creation, and it makes you more resilient and energy-independent from states that you don't want to depend on. That's the three criteria that our industry brings, and the big benefit is that we are leading today. We're still leading today. I don't think that the Chinese have a particular advantage today over us, so if the conditions are being created that we can scale, this is an industry where Europe can lead in the mid to long term.
JULES
01’10’31 - That's a great place to leave it. Thank you so much, Nils. We've now reached the end of this episode. I really want to thank you so much for making the time to be with us today and for a great conversation. Maybe a couple of things that I take away from it. One is that there is a path ahead for green hydrogen and the electrolyzer industry in Europe. It is narrower than what we thought two, three years ago, but it is there. The second is that we need to maybe reset our expectations based on this, but the path, as you described it, to 4 million tons by 2030 is already a huge kind of potential for scale-up and for industrial leadership and societal gains. Maybe a third message I take away from this is really this message to policymakers to make this scale-up possible with demand, with funding, with potential for trade policies.
Thank you so much, everyone, for tuning in to Time to Scale, the podcast by Cleantech for Europe. If you enjoyed this episode, please subscribe, rate and review it, share it with a friend, or feel free to send us your feedback and your questions. We'll put the links to Nils's and Sunfire's social media in the episodes. See you soon.
