The Canadian pension fund says nascent hydrogen market has strong potential, with some investors exiting “too aggressively”.
The Canada Pension Plan Investment Board (CPP Investments) has made its first hydrogen energy investment as it shifts focus from decarbonising power-related energy investments to heat-related energy investments in its portfolio.
CPP Investments, which manages C$570 billion (US$432 billion) in assets, has invested an initial €130 million (US$145 million) into hydrogen project developer Power2X, which funds green molecule projects such as green hydrogen, methanol and ammonia.
Speaking to ESG Investor, Bruce Hogg Managing Director, Head of Sustainable Energies at CPP Investments, said it was already heavily invested in renewable energy power, but it was cognisant that 80% of global CO2 emissions that were energy-related are not from the power industry.
“Heat-related energy use has become an increasing area of focus for us when thinking about global decarbonisation requirements,” said Hogg. “We are quite thoughtful that there’s going to be multiple paths and multiple solutions to drive decarbonisation, including green hydrogen.”
Green molecules, referring to green hydrogen and its derivatives such as green ammonia, are often touted as a direct replacement for process feedstocks or transportation and heating fuels. Green hydrogen is seen as a potential important future renewable energy, with Japan aspiring to become a hydrogen economy. However, the market is nascent and there are question marks over its viability.
Very little green hydrogen exists today and the path to driving down high production costs and driving demand is unclear. Data from risk management firm DNV predicts that deployment of hydrogen as a direct heating source for industry will be the largest single usage case for it by 2050. It currently accounts for less than 1% of global hydrogen consumption.
Hogg said PowerX2 was attractive as it provided different green molecule solutions in markets with potential for strong demand. This included displacing grey ammonia for fertiliser production in Spain with green ammonia and developing a €1 billion solar and hydrogen plant.
“They target projects where there’s strong core offtake economic demand and fundamentals to support the use of green molecules. Driving that cost effectiveness is a core function of what you’re displacing.”
Reflecting on the investment community’s hesitancy with the hydrogen market, Hogg said some people, including the investment community came out “too soon, too aggressively”.
“It has to make sense for the end-user,” he said. “And we’ve been seeing a lot of the fundamentals pushing towards green molecules.” These included energy security concerns and the desire from industrial customers to decarbonise their products.
This is CPP Investment’s second major decarbonisation-related investment announcement this year. In February, it acquired California oil and gas producer Aera Energy with asset manager IKAV.
“This is a really exciting opportunity for us,” said Hogg. “And represents that this is an energy evolution, not a rapid decarbonisation.” Aera Energy has targets to decarbonise its oil and gas production through producing a carbon sink.
The first stage, said Hogg, is replacing gas that has been burned with steam to produce oil. And ultimately, decarbonisation will be done through replacement with solar and capturing carbon on site.
Hogg said over time as oil fields decline, it would have excess carbon capture storage that could be sold to third parties and the solar used to produce oil could be sold as clean power.
“The economics move from producing oil, which is in decline, to sequestering third party carbon and generating clean energy for the grid.”
CPP Investment’s sustainable investments real assets portfolio also added a Californian wind project and a long-term energy storage project last yea
2.48% or C$14.5 billion (US$11 billion) of CPP Investment’s total assets under management is exposed to renewable energy producers, compared to 3.84% or C$21.9 billion exposed to fossil fuel producers.