Investing in Hydrogen: Fuel for Thought
Investing in Hydrogen: Fuel for Thought
Momentum behind hydrogen, which has been variously described as the “Swiss army knife” of energy, and the “silver bullet” for decarbonisation, is building. In particular, for so-called “green hydrogen”, regarded as the cleanest type of hydrogen. So, what exactly is hydrogen, and what variants currently exist? Why is it so important to the energy transition, and why, in our view, does it represent a potential long-term investment opportunity?
Defining hydrogen
Hydrogen is a natural, flammable gas and the most abundant chemical element, accounting for around three quarters of the mass of the universe. It is also a hugely important source of secondary energy, that’s to say, an energy source derived from the processing of “primary energy” sources like natural gas, and coal for electricity, or oil for heat, which are found in nature. Secondary energy sources are also known as “energy carriers” due to their ability to carry energy from one place to another in a usable form. In the case of hydrogen, its uses extend even further to include energy storage.
Hydrogen is carbon free when converted to electricity and it finds multiple applications, principally in three areas; heavy industry (e.g. steel, cement and petrochemical manufacturing), transport (e.g. to power heavy vehicles) and power generation (allowing to store renewable energy).
As an environmentally friendly alternative to fossil fuels, its potential in supporting the clean energy transition cannot be overstated. It is estimated that hydrogen could contribute to 20% of CO2 emissions reduction targets by 2050 (in a net zero scenario) by decarbonising hard-to-abate sectors such as steel, chemicals and long-haul transport – where reducing emissions is currently problematic1.
But, for that to happen, the way hydrogen is produced must itself become zero-carbon.
Hydrogen, being a secondary energy source, cannot be “cropped” directly from nature, and must be produced. The energy industry uses colour codes to distinguish between the various hydrogen production processes.
These include, but are not limited to:
Grey hydrogen
The majority of hydrogen (c.95%2) currently produced is grey hydrogen, which is created by separating methane or natural gas through a process known as “steam reforming”. The snag with grey hydrogen is that its production generates a significant amount of greenhouse gas emissions, and does not entail the use of carbon capture and storage (CCS), a means of mitigating climate change by capturing carbon dioxide emissions from industrial processes and then storing them underground. It is therefore not compatible with net zero.
Blue hydrogen
This uses the same steam reforming process as grey carbon, but with the addition of CCS. Its considerably lower carbon footprint makes it naturally preferable to grey.
Green hydrogen
Green hydrogen is produced through water electrolysis using electricity generated by low carbon primary energy sources, such as renewables or nuclear. Today, green hydrogen only accounts for around 2%3 of global production, owing to production costs, which are currently higher than grey.
Costs, though, are falling, and green hydrogen will be cheaper to produce than grey hydrogen by 2030, according to the International Energy Agency (IEA), owing to decreasing renewable prices and economies of scale with increased adoption of electrolysers.
Scaling-up green hydrogen production and utilisation is therefore a major challenge for the net zero transition.
Unprecedented momentum
Across the world, the momentum behind hydrogen, and particularly green hydrogen, is strong and growing as countries strive to meet emissions targets and enhance energy security.
Hydrogen is deemed by the EU to be critical in achieving its objectives of reducing greenhouse gas emissions by at least 55% by 2030 and achieving net zero emissions by 2050.
The EU Hydrogen Strategy, published in 2020, for instance, aims to “decarbonise hydrogen production and expand its use in sectors where it can replace fossil fuels” and to grow the share of hydrogen in the energy mix from 2% today, to 13-14% by 20504.
The European Commission’s REPowerEU plan, unveiled in May 2022 set a target of having 20 million tons per year of available green hydrogen by 2030.
More recently, under new ambitions proposed by the European Council in March 2023, 42% of hydrogen used in industry should come from renewable fuels in 2030, increasing to 60% in 2035. Moreover, the share of hydrogen from fossil fuels consumed in the EU should not exceed 23% in 2030, and 20% in 2035, versus approximately 95% today5.
In the US, great progress is also being made in fast-tracking the development of a hydrogen economy. The Inflation Reduction Act (IRA) provides a tax credit of $3 per kilogram, for hydrogen produced with renewable energy and nuclear energy. This should improve the financial returns of dedicated low carbon energy assets.
The Infrastructure Investment and Jobs Act (IIJA), passed by the Senate in 2021, provided $8 billion in funding to create regional low-carbon hydrogen hubs, $1 billion for an electrolysis program to reduce hydrogen production costs, and $500 million each for creating hydrogen manufacturing and hydrogen-recycling equipment supply chains.
A trillion-dollar opportunity?
Globally, demand for hydrogen is expected to see a sixfold increase from today’s levels, to 530 million tons per annum under a 1.5 degrees scenario6.
That means that governments and companies will have to invest more than $6 trillion to 2050 to produce and transport enough low carbon hydrogen to meet demand in Industry, Transport and Renewables balancing in power grids.
This unlocks investment opportunities that extend across the hydrogen value chain from production to transportation and storage.
There are of course many challenges that lie ahead. Production of green hydrogen needs to become more efficient and less expensive. And this will require an acceleration of renewables capacity.
But the momentum is there, with governments and companies across the world pushing forward the development of what could become a multi-trillion dollar industry.
1. Hydrogen for Net-Zero: A critical cost-competitive energy vector, November 2021
2. Energyeducation.ca / Types of hydrogen fuel
3. Gouvernement du Québec: Government information and services / Energy production, supply and distribution
4. European Commission, July 2020 – A hydrogen strategy for a climate-neutral Europe
5. European Council, March 2023 https://energy.ec.europa.eu/topics/energy-systems-integration/hydrogen_en
6. Source: International Energy Agency (IEA), NZE scenario; BCG - Investment Strategies for the Hydrogen Age, March 2023
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