Hydrogen Delivery System Project
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Executive Summary
We are entering a period of
transition for the energy business, where winners for the next 50-100 years
will begin to emerge, and the long-term viability of other business will
falter. Vehicle fuel prices are rising
more rapidly than inflation due to increasing demand, low vehicle fuel
efficiency standards and limited cost effective alternatives to petroleum-based
fuels. Dependence on foreign nations for
oil is an economic and national security issue, leading to record trade
deficits and an economic dependence on nations that may wish the
These factors have combined to shift the regulatory and consumer environments in favor of alternative energy solutions, and against the traditional oil business. Hydrogen fuel represents one of the most promising alternative energy sources, and therefore our team has set out to investigate a potential investment in a Hydrogen Delivery System.
Hydrogen shows the most promise in solving stakeholders’ needs:
· Hydrogen is the most available element in the universe, and is contained in many of the hydrocarbon fuels that we use today for energy
· Fuel Cell technology can practically achieve 80% efficiency which is much greater than theoretical efficiencies in current combustion processes
· Hydrogen production systems can be designed to leverage renewable energy resources and energy from nuclear power plants in order to minimize CO2 and pollutants
· Hydrogen is a potential path for oil companies to diversify their energy delivery portfolio and be less dependent on oil as consumer’s transition over to hydrogen fuel cell vehicles.
Given the favorable environment and the availability of low-cost Government financing, now is the time for this Investment Review Board to consider our appropriate Hydrogen strategy, particularly for the delivery system. The Department of Energy has estimated that 70% of the retail cost of Hydrogen will be due to the delivery infrastructure. Our oil company already has an extensive delivery infrastructure for petroleum and an established customer base, providing an advantage over most competitors. Therefore, the focus of our analysis is on the necessary investments to transition the current delivery infrastructure to Hydrogen. This report will consider:
· A system architecture, to capture the recommended technologies and components that make up the target end state,
· A detailed investment analysis of where and when to transition stations under varying market conditions, and
· A financial analysis of the required investments, and likely return.
Our recommendation is to take a two phase approach to implementing a hydrogen delivery system, consisting of an Initial Phase and a Step-Out Phase. During the Initial Phase of the System, hydrogen production occurs at a large facility, is delivered by truck to a terminal facility and distributed via truck to the fuel station. During the Step-Out Phase, additional hydrogen production will be co-located at the terminal facility and delivered via truck or pipeline to the fuel station. The Initial Phase requires partnering with a hydrogen provider in order to share risk and maximize use of current infrastructure to minimize upfront costs while market adoption of Hydrogen Fuel Cell Vehicles (H2 FCV) is low (< 1%). As market adoption rates for H2 FCV’s and consumer demand for hydrogen increases, production will be moved to the terminal facility in order to flatten the distribution network, allowing the delivery system to scale cost effectively to higher demand volumes. This Step-Out Phase will necessitate construction of hydrogen production facilities at the terminal and require that a second investment decision to be made. Furthermore, the company will need to revisit the partnering arrangement made with the producer during the Initial Phase; we will need to continue the partnership with the producer, purchase the producer or take on the responsibility of production.
We performed an extensive technical evaluation of hydrogen technologies related to delivery states of hydrogen and the storage and dispensing of hydrogen. We anticipate that H2 FCV’s will store pure hydrogen gas in solid materials such as metal hydrides or in compressed gas form, requiring the architecture to support a delivery state of pure compressed hydrogen gas. Our analysis to support the Initial Phase architecture and this technical approach can be found in Sections 2 and 3.
In Section 4, our analysis of where and when to transition stations shows a moderate degree of variability in these decisions depending on market conditions of adoption rate, expected retail price, and available technologies for delivery. However, useful conclusions can be drawn about locations that will require stations in most scenarios, providing early input to ensure the company has strategically located retail outlets in these locations in advance of a transition. Furthermore, the model will have continued utility for annual planning as we are able to establish more certainty in these market conditions.
Given the recommended architecture and the analysis of where and when to transition stations, we conclude with a financial analysis of the viability of this investment in Section 5. We are able to conclude that the investment would represent a positive net present value 97.5% of the time. Meaning the cumulative probability distribution of the Net Present Value (NPV) indicates that the probability of a negative NPV to be less than or equal to 2.5%. The largest influence on the likely return is the likely retail price for H2, which we set based on projections for retail gasoline prices. Our ability to shape or control this factor through regulation, partnerships, or our oil business unit will have the largest impact the likely success of this investment.