IGCC flags risks to investors but makes case for engagement across value chain.
The global hydrogen industry is on the brink of a sustained take-off, but there are risks for investors as well as opportunities.
That’s the conclusion of a major report from the Investor Group on Climate Change (IGCC), which represents institutional investors in Australia and New Zealand that collectively manage funds totalling US$3 trillion.
A low-carbon hydrogen industry in Australia could export to nations in the Asia-Pacific region including Japan, Singapore, South Korea and China, said the IGCC.
“However, there are considerable risks of making major investments in the hydrogen industry given the complexities of the evolving energy landscape,” it added.
Difficult to decarbonise
Hydrogen power is attracting increasing interest and investment around the world. The UK arm of professional services firm Deloitte noted: “Hydrogen can offer a clean energy solution to parts of the economy that are difficult to decarbonise. Think industrial processes, industrial and domestic heat and hard-to-electrify transport (such as heavy-duty vehicles or ships).”
It is, Deloitte added, “the most abundant element in the universe”.
The IGCC forecast rapid growth in the hydrogen industry between now and 2050, driven by three main factors. First is rising demand for cleaner energy in those sectors such as manufacturing and heavy industry, where it is difficult to mitigate the polluting effect of energy sources.
Second is likely demand from countries with relatively poor access to renewable energy sources as a result of climatic conditions or land constraints, or both.
Third are increasingly binding emission-reduction agendas that are incentivising the use of hydrogen.
Hydrogen: grey, blue and green
The IGCC noted that the domestic political context is increasingly supportive of the hydrogen industry, adding: “The Australian state and federal governments have consistently articulated that hydrogen is expected to play a key role in achieving emissions-reduction targets.
“It is critical that Australia maintains alignment with its own decarbonisation ambitions by setting strong national targets and directing public funds to produce hydrogen that meets sufficiently low-carbon and emissions intensity thresholds.”
At the point of use, hydrogen is emission-free, but producing it requires energy to separate it from other elements in water and fossil fuels. To gauge the environmental impact of hydrogen, scientists have created three categories: grey, blue and green.
Grey is the “dirtiest” form of hydrogen. It is brought about through a process called steam reforming, which produces greenhouse gas emissions. At present, this is how most hydrogen is produced, although blue and green hydrogen is expected to predominate in Australia.
Blue hydrogen follows the same process, but a large proportion of the carbon produced is captured and stored underground, thus blue hydrogen is classified as low carbon.
Green hydrogen is the cleanest of all as it uses electricity from renewable sources, thus is classified as being carbon free.
South Australia received 60 proposals in response to its A$593 million hydrogen jobs plan for Whyalla, a green hydrogen plant already touted to be the world’s biggest. The hub will include a 250-megawatt (MW) electrolyser and a 200 MW hydrogen-fuelled power station. Other projects under development in Australia include the A$4.7 billion Gladstone green hydrogen and green ammonia production and export facility. The project could generate up to A$17.2 billion in hydrogen exports and create as many as 550 jobs during construction. Australian green hydrogen company Hysata recently closed a Series A funding round with A$42.5 million.
Green hydrogen is also growing internationally, with Scottish Power announcing plans to build a £150 million green hydrogen plant in Felixstowe, on the East coast of England. When operational, the plant will produce up to 100 MW of power from green hydrogen from 2026. Shell has also announced plans to construct a 200 MW renewable hydrogen plant in Rotterdam in the Netherlands.
Shell says it will be will be the largest renewable hydrogen project in Europe; in addition to using a 200 MW alkaline electrolyser it will also be powered by the yet-to-be-built 759 MW Hollandse Kust Noord offshore wind farm in the Dutch North Sea, producing up to 60 tonnes of hydrogen. However, the project has been criticised is some quarters as it will be used reduce emissions from oil production rather than supporting decarbonisation of otherwise sustainable industries.
Three types of risks
The report noted: “The costs of producing green and blue hydrogen vary significantly and depend on the number of inputs. There was some optimism that blue hydrogen would have been the comparatively cheaper form of hydrogen production; however, this is unlikely to be the case going forward.”
The IGCC identified three main areas of investment risk. The first is linked to the relative infancy of the technology and its lack of a long track record. The IGCC wrote: “This risk increases the costs and the need for detailed due diligence in every transaction. “
The second was “regulatory risk”, which includes the lack of a price for carbon, which would have spurred the adoption of technologies such as hydrogen, and the continued existence of subsidies for fossil fuels.
The third risk to investors lies in hydrogen investments’ long return horizons and high-risk profiles. “The hydrogen industry has high levels of risk and does not yet provide the secure long-term revenue streams that investors need to unlock private capital in a highly capital-intensive industry.”
Elsewhere, the IGCC listed the technical and financial obstacles to the commercial exploitation of hydrogen: “Difficulties in storing and transporting hydrogen, including challenges in using existing domestic gas pipelines to transport hydrogen; Costly end-user plant upgrades and retrofits; Insufficient transmission infrastructure; Slow regulatory and approval processes.”
But the report also identified a range of opportunities for investors to get involved in the development of Australia’s hydrogen industry. These include engaging with investee companies, both hydrogen producers and users, to ensure a low carbon profile, advocating for robust emissions policies and engagement with their industry associations.