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Hydrogen - a potential winner in the race to net zero?

By Bopha Ly
Managing Director, Energy and Renewables Sydney, Australia

The most abundant element in the universe. The simplest possible form of matter. A limitless, zero-carbon energy source that can be made from water. It almost sounds too good to be true.

But is hydrogen really the solution to climate change that some are hyping it to be? Where exactly are we on the long road to a hydrogen-based economy? And how can investors best understand the potential and opportunities that a hydrogen-based energy transition offers?

Scientists have long recognised hydrogen’s potential as a clean energy source — the physics is undisputed. When burned, hydrogen releases immense heat and light and produces only water as a waste product.

Countries that have adopted hydrogen strategies have committed some USD37 billion in spending while the private sector has announced an additional investment of USD300 billion.1

Australia has the potential to be a large player in the hydrogen export market.

An abundance of solar and wind resources means Australia has significant potential to produce hydrogen at scale using renewable energy. Neighbours Japan and South Korea have committed to establishing hydrogen markets to support their ambitious net zero targets.

This potential comes as the energy transition is gaining speed globally, with world leaders and the private sector alike rallying around the target of net zero carbon emissions by 2050. Some 69 per cent of global electricity generation will be powered by renewables by 20502  and USD36 trillion of renewable energy capital investment is required to meet Paris Agreement objectives.3

Hydrogen’s potential uses seem almost limitless. It can replace fuel in cars, buses, trucks and planes, it can generate grid-scale electricity, it can be burnt to make steel — it can even be piped through to households to replace natural gas used for cooking and heating.

Hydrogen has an important role to play in the energy transition.

So, what’s standing in its way?

For all its promise, hydrogen has one major drawback — as a standalone element, it is extremely rare.
In fact, almost all earth’s vast stores of hydrogen are found as part of water or bound up in carbon compounds like animal and plant tissue and fossil fuels.4

This means hydrogen must be manufactured and there are two ways to do this.

The first is splitting water into its component elements of hydrogen and oxygen. This process — called electrolysis and essentially the reverse of combustion — takes energy. If that energy comes from renewable sources like wind or solar power, the resulting hydrogen is dubbed ‘green hydrogen’ and is a carbon-neutral energy source that can then be used for combustion or in fuel cells without impacting the environment.

The second way to make hydrogen — and currently the most cost effective5 — is by splitting it from natural gas. This process, called natural gas reforming, involves reacting natural gas with high-temperature steam in a multistage process that ultimately produces hydrogen and carbon dioxide. Hydrogen produced this way is called brown hydrogen, and the resulting carbon emissions add to the greenhouse gases in the atmosphere.

The term ‘blue hydrogen’ is sometimes used if those carbon dioxide emissions are prevented from entering the atmosphere.

So, how can investors best understand the hydrogen value chain? And where are the investment opportunities?

Today, the main uses of hydrogen are in oil refining, metals production, making fertiliser and processing food.

Most hydrogen is made where it is used, using the cheap — and carbon-emitting — natural gas reforming technique6. Hydrogen’s potential as a green fuel will require investment throughout the value chain. Clean hydrogen production facilities will need to be deployed, the resulting gas will need to be transported to where it is needed, and the end-users will need to adapt to the new fuel. Let’s look at each in turn.

From a production perspective, the critical path is the capital investment required to build the electrolysers needed to make green hydrogen.

The International Energy Agency says global capacity of electrolysers to produce hydrogen doubled over last five years to reach just over 300 MW by mid-2021. A further 350 projects under development could bring global capacity to 54 GW by 2030. And 40 new projects — with more than 35 GW of capacity — are in early stages of development.7

If all those projects are realised, global hydrogen supply from electrolysers could reach more than 8 million tonnes by 2030. And while that is a rapid pace of growth, it is well below what’s needed. The IEA estimates that based on the world’s current net zero pledges, by 2050 annual global hydrogen production will need to hit 250 million tonnes.

Right now, the economics of green hydrogen are challenging.

There is a need for investment, but it is early days. Hydrogen is going through a feasibility period with extensive government support through grants, clean gas targets, and subsidies to accelerate commercialisation. An example includes the New South Wales Government’s Energy Legislation Amendment Bill underpinning the state’s hydrogen strategy, which is projected to attract A$80 billion in private investments and open up new export markets8.

Today, the cost of producing green hydrogen is between $6 to $9 a kilogram9. The stretch goal set by the Australian government is getting the cost of hydrogen production down to $2 per kg.10

On current forecasts, a scaled-up industry could deliver hydrogen for a benchmark cost of $2 per kilogram by 2030 and $1 per kilogram by 2050.11

The hydrogen produced then needs to be stored.

Currently, hydrogen is stored as a compressed gas or as a liquid. Storing hydrogen is tricky because of its very low density. As a gas, storage requires immense pressure. As a liquid, storage requires incredibly low temperatures because it boils at 250 degrees below zero Celsius.

Investment in technology is solving these challenges. Solid storage of hydrogen absorbed into other materials is an emerging sector. The stored hydrogen then needs to be safely transported and distributed to end users.

Here, existing infrastructure can offer a solution. Pipelines and infrastructure used for natural gas are compatible for hydrogen transportation, although some upgrades will be needed as hydrogen can slowly damage the steel and welds in some pipelines.12

Another option is hydrogen tube trailers — trucks that haul gaseous hydrogen compressed into long cylinders stacked onto a trailer. This works for shorter distances but there are limitations on maximum pressure that means this method is less efficient for longer distance transportation.

Liquid tankers are the main method for longer distance transport. In a liquid tanker, hydrogen is cooled to below minus 253 degrees Celsius to form a liquid that can be vaporised again at the distribution site. Liquid tankers are more economical than tube trailers since they can hold larger masses of hydrogen and the technology has the potential to improve further with more research and investment.

Hydrogen shipping is another nascent transport method being developed. Ships would likely transport hydrogen in a compressed gas or liquified form and would be a key area for development in a hydrogen export chain.

At the downstream end, hydrogen-fuelled vehicles are an emerging sector that could eventually replace petrol and diesel vehicles.

Hydrogen vehicles can either use a traditional-style internal combustion engine and burn the hydrogen gas to pump pistons or a more efficient fuel-cell that uses hydrogen to generate electricity to power an electric motor.13

Hydrogen’s best use case is for heavy vehicles like trucks and mine vehicles and high-mobility vehicles like those used in the military. This is because hydrogen’s low weight compared to batteries provides efficiency advantages.

But hydrogen has the potential to be about more than transport.

Hydrogen turbines are already being used to generate electricity14 which means hydrogen can be used to store renewable energy, generating electricity on demand when solar and wind generation fluctuates15. Trials of this kind of application are already underway.

Hydrogen can also be used in industrial processes that require high heat like the production of steel, aluminium and ammonia. And it can be used to replace natural gas in households, running stovetops, hot water and heating.

From an investor’s point of view, it is still early days in the hydrogen economy.

The world needs zero-carbon fuels that can be cleanly produced, safely stored and transported, and efficiently used. And Australia has abundant natural resources and the chance to play a global role supplying hydrogen.

At AMP Capital, we are watching the development of the hydrogen sector closely. AMP Capital manages funds that invest in Powerco, one of New Zealand’s largest electricity and natural gas distributors. Powerco is actively engaged with opportunities for hydrogen to eventually replace natural gas in its existing infrastructure.

It is running hydrogen trials on its gas network and is connecting with its counterparts in Australia and the UK as it explores the sector.

Powerco is also involved in a number of projects investigating hydrogen and biofuels. One of the projects is Base Power Hydrogen, a stand-alone power system that consists of an electrolyser and low-pressure hydrogen storage unit integrated into a solar energy system.

Excess solar power during the day is used to make hydrogen from water. The hydrogen can then be burned in a diesel generator to generate electricity when the sun dips or supplied directly to households to power stovetops and heating.

AMP Capital is also an active shareholder in Evergen, a company that makes energy management software for homes and businesses that use batteries.

Evergen’s technology is already capable of orchestrating hydrogen-battery systems that use excess solar during the day to create hydrogen for powering a fuel cell. One of these hydrogen-battery systems is Lavo, whose cornerstone investor is Providence Asset Group, also an investor in Evergen.
This is an exciting time to be an investor in energy.

Hydrogen is enjoying unprecedented support from governments and the business community. Globally, 17 governments have released hydrogen strategies and more than 20 more have publicly announced they are working to develop strategies.16

And while the immediate investment opportunities in hydrogen are in their infancy, the sector is advancing rapidly.

Investment opportunities will either be stand-alone or organically grow out of innovative companies like Powerco and Evergen.

It may be almost 250 years since hydrogen was named — and nearly two centuries since the fuel cell was invented — but it seems that hydrogen’s time is about to arrive.

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Bopha Ly, Managing Director, Energy and Renewables, AMP Capital
  • Infrastructure
  • Institutional Edition
  • Opinion
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