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Investors Playing the Long Game with Hydrogen

Hydrogen-based technology and infrastructure could be the key to unlocking net-zero futures for hard-to-abate sectors, but it won’t come cheap or soon. 

Switching electricity generation from fossil fuels to renewable energy sources, such as wind and solar, will take the world a long way toward net-zero greenhouse gas (GHG) emissions. But electrification isn’t a viable solution for every sector’s power needs.

In fact, there are “around 35% of global emissions that cannot be electrified”, according to Randeep Somel, Portfolio Manager at M&G Investments. Carbon-intensive industries such as cement, aviation, steel and heavy transportation are looking at a range of solutions, he says.

Blue and green hydrogen-based technologies will play a huge part in their transition to net zero for these sectors, experts say.

Green hydrogen is the net zero end-goal, made using electrolysers powered by renewable energy. Blue hydrogen is created using natural gas, with any resulting emissions captured and stored.

Hydrogen as a gas can be applied in many of the same ways as natural gas or liquid fuels. It can be used to heat homes or even to provide the extreme heat needed for steel and cement production.

But in the short term, both blue and green hydrogen remain costly and difficult to harness. To make hydrogen environmentally sustainable and economically viable, governments are setting out ambitions plans. The UK government, for example, recently launched its Hydrogen Strategy to drive forward the country’s 10 Point Plan to transition to net zero. It aims to support over 9,000 UK jobs and unlock £4 billion for investment in blue and green hydrogen technologies by 2030.

consultation will examine ways to overcome the current cost gap between low-carbon hydrogen and fossil fuels through the design of a preferred hydrogen business model. This should be finalised in 2022 with first contracts allocated from 2023.

Matthew Lewis, UK Head of Energy and Utilities for law firm Osborne Clarke, says this will help unlock private investment.

“Although investment in hydrogen-based technologies is by no means the only route to decarbonisation that will be of interest to investors, hydrogen has the potential to represent a sizeable part of the route to net zero,” he says.

The European Commission’s 2020 Hydrogen Strategy includes plans for expanding Europe’s electrolyser capacity for producing green hydrogen to 40 gigawatts by 2030 in order to drive down cost and encourage investment.

Hydrogen’s expanding horizons 

As of February 2021, there were 228 large-scale hydrogen projects backed by US$300 billion in combined investment through to 2030, according to a report by the Hydrogen Council and global consultancy firm McKinsey. The Hydrogen Council is a CEO-led initiative that aims to support transition to hydrogen-based energy, backed by investors such as Natixis, BNP Paribas and UAE sovereign wealth fund Mubadala.

To support the expansion of blue hydrogen technologies, further investment in the development of carbon capture, utilisation and storage (CCUS) will also be required to minimise carbon leakage and secure hydrogen’s future as a viable energy source.

Investment consultancy firm LCP has estimated that there is £12 billion in annual investment opportunities in the energy sector and sustainable technologies over the next 30 years (£350 billion in total).

Implementing the global use of hydrogen will require US$15 trillion in investment between now and 2050, according to an Energy Transitions Commission (ETC) report. The ETC is an international coalition of executives from the energy industry who have pledged to achieve net zero by the mid-century.

Around 85% of that amount will need to be funnelled into expanding the production of zero-carbon electricity which can produce green hydrogen, ETC said, noting that it will require a capacity increase of 30,000 terawatt hours (TWh). A further 90,000 TWh is needed for worldwide decarbonisation. The remaining 15% should be invested in electrolysers, hydrogen production facilities and transport and storage infrastructures.

But there are many complexities and considerations facing investors, whether investing in established companies that are in transition and developing hydrogen-based solutions or identifying newer enterprises launched to meet market demand for fossil fuel alternatives.

Investment opportunities

As part of their efforts to manage climate risks in their portfolios, many investors are looking for companies in carbon-intensive sectors that are directing capital expenditure (capex) into the development of hydrogen-based alternatives, experts say.

“Even though hydrogen is a long-term solution at this stage, we need to be investing in the companies that are involved in hydrogen-based technology or infrastructure to encourage accelerated growth,” says Somel.

Hard-to-abate sectors such as aviation are exploring how hydrogen can power their decarbonisation efforts.

Airbus is developing its ZEROe hybrid-hydrogen aircraft which will be powered by hydrogen combustion through modified gas turbine engines. The aerospace company plans to find a way to use liquid hydrogen as a sustainable aviation fuel.

Nordic and US-based steel company SSAB has partnered with Volvo Group to research and develop vehicles made of fossil-free steel. The steel will be made using both fossil-free electricity and hydrogen.

Suppliers are also looking to migrate away from fossil fuels to renewable energy using hydrogen.

For example, Norwegian state-owned energy supplier Equinor is investing in expanding its hydrogen output by building the world’s biggest hydrogen production plant with CCUS technology in the UK.

M&G invests in an electrolyser manufacturing facility, operated by ITM Power, which integrates hydrogen energy solutions to enhance the utilisation of excess renewable energy. In 2019, ITM shares cost around 20p, but the increased popularity of hydrogen has meant that the company’s value has increased by more than 2000% to £2.6 billion.

Renewable energy company Orested recently launched the H2RES facility construction project. The facility, which is expected to be built by the end of this year, will investigate how to combine electrolysers with the fluctuating power offered by offshore wind. H2RES aims to produce up to 1,000kg of green hydrogen a day.

“Investors should be asking investee companies for a strategy that shows why the company’s hydrogen technology/solution is likely to be needed when compared against other market alternatives. Hydrogen is just one way to decarbonise the economy, but they will be competing against electrification, biofuels and other technologies. To build a successful hydrogen business, the company in question will need to produce a solution that is better and/or cheaper than other alternative solutions,” says Chris Matson, Partner at LCP.

The cost of hydrogen

Hydrogen is one of the lightest and most abundant elements in the universe, containing more energy per unit of weight than fossil fuels. But the issue remains that infrastructures and operational processes for hydrogen are currently expensive.

“Low-carbon hydrogen is more expensive than fossil hydrogen today,” says Raphael Lance, Head of the Energy Transition fund at Mirova.

The EC’s Hydrogen Strategy document notes that green hydrogen can cost anything between US$3-6.55/kg, compared with US$1.80/kg from fossil fuel sources. A number of energy producers are working to bring the cost of green hydrogen down to below US2/kg.

The Hydrogen Council and McKinsey report noted that falling costs for renewables and electrolysers could see cost parity reached between green and grey (produced by coal) hydrogen as soon as 2028.

Policymakers are looking to further incentivise the growth of the market to drive down costs.

The UK government is consulting on the design of the £240 million Net Zero Hydrogen fund, which will support the commercial deployment of new low-carbon hydrogen production plants across the UK.

The EU has also predicted that the share of hydrogen in Europe’s energy mix will grow from 2% to 13-14% by 2050, anticipating cumulative investments in green hydrogen between €180-€470 billion by 2050, and in the range of €3-€18 billion for blue hydrogen.

“Driving hydrogen development past the tipping point needs critical mass in investment, an enabling regulatory framework, new lead markets, sustained research and innovation into breakthrough technologies and for bringing new solutions to the market, a large-scale infrastructure network,” the strategy noted.

The blue bridge

The problem with blue hydrogen is that it emits carbon which will need to be contained or reused through CCUS technologies.

The UK government’s decision to back both blue hydrogen projects could result in up to eight million tonnes of carbon emissions leaking into the atmosphere every year by 2050 – the equivalent of carbon emissions from a million petrol-driven cars.

A recent study by Mark Jacobson, Professor of Civil and Environmental Engineering at Stanford University, and Robert Howarth, Professor at the Department of Ecology and Evolutionary Biology at Cornell University, highlighted that the CO2 footprint of blue hydrogen is more than 20% greater than burning natural gas or coal for heat.

Further, blue and grey hydrogen are responsible for between 70 and 100 million tonnes of CO2 annually in the EU, according to the Commission’s Hydrogen Strategy.

The UK’s Climate Change Committee has recommended a “blue hydrogen bridge”. Despite still producing emissions, the committee argues that investors should recognise that it is a much-needed sustainable stepping stone that will allow companies to decarbonise at a faster rate over the medium-term, before green hydrogen-based technologies are able to be introduced at scale.

In order to speed up the transition to green hydrogen, the United Nations’ Green Hydrogen Catapult initiative aims to drive down the cost of green hydrogen to US$2 per kilogram by 2026. This will be done by companies partnering with the initiative increasing green hydrogen production by 50 times to 256GW by 2026. Founding corporate partners include renewable energy corporates Orsted, CWP Renewables and Envision.

Exercising patience

As the production of blue and green hydrogen is still “in its infancy”, investors need to be patient, taking a long-term view on their investments in these quarters, says LCP’s Matson.

Patience will be rewarded, it is hoped, as sectors that cannot rely on electrification increasingly shift towards hydrogen, CCUS and sustainable batteries over the next decade.

With the steady increase in clean energy and the utilisation of hydrogen in new application areas, such as metal refining and power generation, the global hydrogen market revenue is expected to surpass US$300 billion by 2027, according to a Global Market Insights study in April.

High-levels of investment are needed in order to ensure that companies are funnelling resources into the development of the technology and infrastructure needed to support the large-scale usage of hydrogen.

While playing the long game, short-term actions cannot be overlooked. In the meantime, investors and companies will need to maintain their focus on the transition to lower-carbon operations and products, thus reducing their absolute emissions.

“These sectors are already decarbonising, but they can’t get to that next level without that fundamental shift in technology,” says Somel.

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