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More Than a Pipe Dream?

Green hydrogen has huge potential and multiple use cases, but cost concerns and operational risks linger.

The world’s net zero future depends on introducing and upscaling clean technologies to neutralise and/or replace the hardest-to-abate CO2 emissions produced by carbon-intensive industries.

Among the most exciting is green hydrogen, as it’s “one of the only forms of delivering energy which can be genuinely climate neutral”, says Rahab Paracha, Sustainable Multi-Asset Investment Specialist for Rathbones Greenbank.

Green hydrogen is produced when electrolysis – the process of breaking down water into hydrogen and oxygen – is powered by renewable energy. When hydrogen is burned to release stored energy, the only waste product is water vapour. That energy can then be used to heat homes, power industrial processes and be used as fuel for vehicles.

However, around 95% of global hydrogen production still comes from fossil fuels, according to an International Renewable Energy Agency (IRENA) report. Grey hydrogen is one of the dirtiest, as it’s produced through steam reforming, which involves heating methane. Blue hydrogen – widely considered the ‘bridge’ to green – is made the same way, but a large proportion of the CO2 emitted is captured and stored underground, thus it’s awarded a ‘low-carbon’ label.

“If we really want to be carbon neutral, then even blue hydrogen can only help us in the short term,” says Thomas Engelmann, Head of Energy Transition at German asset manager KGAL.

Transition costs

The International Energy Agency’s (IEA) 2050 roadmap calls for 306 million tonnes of green hydrogen to be produced each year, which will require annual investment in pipelines and hydrogen-enabling infrastructure to increase from US$1 billion today to US$40 billion by 2030.

Governments are working to stimulate the level of investment necessary to upscale green hydrogen in line with the IEA’s 2050 scenario.

“More than 30 countries now have national hydrogen strategies – with more in the works – and we’ve seen some progress towards making these a reality through the introduction of targeted incentives,” says Isabella Hervey-Bathurst, Portfolio Manager for Schroders’ Global Climate Change strategy.

The EU published its Hydrogen Strategy in 2020, which commits member states to installing at least six gigawatts (GW) of renewable hydrogen electrolysers and producing up to one million tonnes of green hydrogen between 2020-24. The EU’s REPowerEU plan introduced the Hydrogen Accelerator, with the aim of producing ten million tonnes of green hydrogen by 2030, while importing an additional ten million from other countries.

The UK published its Hydrogen Strategy in 2021 to drive forward the country’s ten-point plan for net zero transition, pledging £4 billion to invest in blue and green hydrogen technologies by 2030.

These initiatives are essential both to scale capacity and cuts costs. “Lack of available renewable energy and hydrogen, low technological readiness, and high production, distribution and storage costs are likely to severely limit large-scale production and commercialisation of green hydrogen, especially without the guarantee of continued government support,” said Moody’s in a recent report.

Although the price of green hydrogen has often been cited as a barrier to its widespread use, costs are expected to fall.

Grey hydrogen costs around US$1 per kilogram, compared to US$2.5-6/kg of green hydrogen, Big Four accountancy firm KPMG said. The IRENA report noted that the cost of green hydrogen produced by solar and solar/onshore wind hybrid projects will eventually fall to below US$1/kg for most regions by 2050 under optimistic scenarios, and to around US$1.30/kg under more pessimistic assumptions.

Despite its reservations, Moody’s cited power companies, chemicals and steel sectors “as well as short-distance maritime and aviation and long-haul, heavy-duty transport” as having high levels of adoption potential.

“The breadth of use cases for green hydrogen to assist heavy industry in decarbonising, as well as its role in managing the transition to renewables with electrolysers supporting existing grids means it will play an important role in the energy transition,” Kate Vidgen, Global Head of Industrial Transition and Clean Fuels for Macquarie Asset Management’s Green Investment Group, tells ESG Investor.

Circular argument

Green hydrogen infrastructure needs to be developed ‘hand in hand’ with renewable energy capacity, according to experts.

“Much of the heavy lifting of the energy transition will be done through the roll-out of renewable energy – the development of green hydrogen depends on it,” says Hervey-Bathurst.

A recent report by KGAL noted that just 0.5 GW in electrolysis capacity has been installed globally, adding that 850 GW needs to be in operation by 2030 to generate the amount of green hydrogen needed to achieve net zero by 2050.

Renewable energy used to produce green hydrogen must not detract from the availability of electricity for other essential uses, such as domestic consumption, an IRENA report warned. Yet it will take a lot of energy to produce green hydrogen at the scale needed, it added, noting that over 10,000 GW of wind and solar power will be needed by 2050 for green hydrogen production and trade.

Fortunately, there is a circular nature to the renewable energy and green hydrogen partnership, as the latter can be fed back into renewable energy systems as a solution to wind and solar power’s intermittency issues.

“Any excess electricity from wind or solar power – which is hard to store – can power the electrolysis to create green hydrogen gas, which can then be stored and fed back into the grid for future energy needs when demand rises,” says Rathbone’s Paracha.

Green hydrogen isn’t the only solution to renewable storage, notes Aanand Venkatramanan, Head of ETF Investment Strategies at Legal and General Investment Management (LGIM), pointing out that sustainable batteries can be just as effective (and cheaper) over short, regular intervals.

But it can have an important role. In cases where a lot of green hydrogen can be stored during a windy season, if the wind then drops for an extended period of time, that stored green hydrogen “offers a long-term balancing aspect, whereas you don’t want batteries to be lying idle, so they should be used more dynamically at shorter intervals,” he says.

A number of green hydrogen-renewable energy projects are in the process of being developed.

In the UK last month, green hydrogen energy solutions provider Protium announced the planned expansion of its Tees Valley Net Zero Project to nearly 70 megawatts (MW) in electrolysis capacity, which will be used to supply low-carbon electricity to local manufacturers, utilising Protium’s existing renewable energy generators across both solar and wind. It’s scheduled to go live in 2026.

Aquaterra Energy and Seawind Ocean Technology recently signed an agreement to develop a large offshore floating wind and green hydrogen production project. Based in Italian waters, HyMed is expected to produce 3.2 GW of renewable energy by 2027 and is intended to be the first of a number of future collaborations between the two companies, including a 300 MW hydrogen production project in southwest Greece.

HyMed is currently in its first phase of permitting and its grid connection and environmental impact assessments are underway.

Out of the blue

Commercial utilisation of hydrogen isn’t a new concept. “It’s already been used in significant quantities in industrial processes globally,” says Chris Sim, Managing Director of Energy Investment Banking at Investec. The problem is that the hydrogen being used in such large quantities isn’t net zero-aligned.

From a low-carbon transition perspective, this means there are opportunity for investors to support the firms in high-emitting sectors that are adapting parts of their business operations to utilise green hydrogen. These include oil refining, as well as steel and cement manufacture, as well as installing infrastructure to directly produce green hydrogen.

“We know that hydrogen works in these industries,” says Randeep Somel, Portfolio Manager at M&G Investments.

“Although this has predominantly been demonstrated through fossil fuel-based hydrogen, it should be clear to investors that hydrogen can be used at scale. Now it’s a case of making sure that the hydrogen used at scale is green.”

Early adopters include firms with the steepest net zero pathways. Oil and gas major BP partnered with Danish renewable energy firm Ørsted to develop an electrolyser for green hydrogen at its Lingen refinery in Germany. From 2024, the 50 MW project is expected to produce one tonne of green hydrogen per hour – the equivalent of 9,000 tonnes a year. BP noted that the project could be expanded up to 500 MW at a later stage to replace all of Lingen’s fossil fuel-based hydrogen.

BP has also acquired a 40.5% stake and operatorship of the Asian Renewable Energy Hub (AREH), a large green hydrogen project which aims to install 26 GW of solar and wind farms. Once fully in operation, it will produce 1.6 million tonnes of green hydrogen a year or nine million tonnes of ammonia.

But hydrogen has hurdles to overcome as an agent of transition.

Investment will be needed in the appropriate transport infrastructure, warns Isobel Edwards, Green, Social and Impact Bonds Analyst at NN Investment Partners (NNIP), who cites the risks of pipe leakage.

“Even though hydrogen is not a direct greenhouse gas, it can act as an indirect greenhouse gas if it leaks out of pipes and reacts with hydroxyl radicals in the atmosphere. Normally, these hydroxyl radicals react with methane in the atmosphere, neutralising its effect, but if they are used up by reacting with the hydrogen, more methane will be left in the atmosphere. So, we really need to make sure we don’t rush infrastructure and make sure all possible leaks are under control and sealed off.”

As well as this, ‘natural’ gas is around 8.5 times denser than hydrogen and therefore requires less effort to move along the pipes. This means that a number of green hydrogen plants will need to be built near to the area it will be supply with clean energy, rather than serving a whole nation.

Going green

Using green hydrogen to produce extensively used materials will bring widespread opportunities to decarbonise. The benefits of ‘green steel’, for example, will reach beyond steel manufacturers to car manufacturers and the real estate and construction sectors.

“However, manufacturing green steel is very expensive,” says Somel. “Which is why the US Inflation Reduction Act (IRA) is so exciting.”

Signed into law in August, the US$379 billion bill has pledged to grant US$3 credits per kilogram of green hydrogen produced over a ten-year period. Steel, which is produced with coal in the US at around US$590 per tonne can now be produced at US$560 per tonne with subsidised green hydrogen. Subsidies for blue hydrogen will also be offered, but these will be lower (around US$1 per tonne).

“The costs for green hydrogen will eventually fall – as they have for solar and wind – once the infrastructure is in place. But incentives such as those offered through the IRA are sorely needed in the near-term,” says Somel.

In June, GravitHy, a green iron and steel company, was launched with plans to mobilise €2.2 billion worth of investment to own and operate a green iron plant in France. Subject to regulatory approvals, construction will commence in 2024, with the plant fully operational by 2027 and annually producing two million tonnes of direct reduced iron (DRI). The DRI will then be used on-site as feedstock for green steel or traded global as hot-briquetted iron (HBI).

“We see a strong interest for green steel from off-takers looking for ways to reduce the carbon footprint of their products,” says Jacob Ruiter, Managing Director of EIT InnoEnergy’s European Green Hydrogen Acceleration Centre (EGHAC), which co-launched GravitHy.

“Securing this demand can take away uncertainties and help to make the business case viable.”

EGHAC, which was founded and is run by EIT InnoEnergy and supported by Breakthrough Energy, is a group working to decarbonise hard-to-abate industrial value chains through green hydrogen, ammonia, methanol and aviation fuel projects.

Companies in carbon-intensive industries increasingly understand that their industrial processes have to become more sustainable, says KGAL’s Engelmann.

“The world needs to rethink its industrial processes. Green hydrogen presents the opportunity to do so.”

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