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Hydrogen has long been touted as a solution to the world's green energy needs, but other solutions have taken precedent before now. However, in the past 24 months, green hydrogen has seen another wave of interest and investment as the world looks to transition to a greener future. EdenTree fund manager, Thomas Fitzgerald, discusses the outlook for this growing industry.

The Hydrogen Revolution

Thomas Fitzgerald Thomas Fitzgerald Fund Manager
Opinion

The Hydrogen Revolution

Thomas Fitzgerald

Thomas Fitzgerald
Fund Manager

Hydrogen, the lightest and the most abundant chemical element in the universe, is far from a recent discovery. The molecule was first discovered in 1766, and separated for the first time in 1800 by Sir W. Nicholson and Sir A. Carlisle. However, hydrogen’s potential as a versatile, transportable, and storable energy carrier has garnered significant investor, corporate, and political interest over the past 24 months. As of today, hydrogen remains mostly used as a feedstock in industrial uses (oil refining, ammonia and methanol production, and steel production). As such, it currently plays no role in the energy transition. Yet hydrogen is storable, energy-dense, and importantly produces no direct emissions of pollutants or greenhouse gases, making it an ideal solution for a transition to a more sustainable future.

Today, hydrogen is primarily used as a feedstock within other manufacturing processes, rather than for its energy properties. Most hydrogen is derived from using natural gas as a feedstock (commonly referred to as grey hydrogen), which is a carbon intensive process, emitting ~9kg of carbon dioxide for every kilogram of hydrogen produced. Blue hydrogen is simply grey hydrogen combined with Carbon Capture & Storage, where the carbon dioxide is captured immediately after the reforming process and is then either utilised in another chemical process or sequestered, dramatically reducing the carbon dioxide emissions from steam methane reforming but still emitting 3-6kg of carbon dioxide per kilogram of hydrogen. Meanwhile, green hydrogen is produced using an electrical current (derived from ultra-low carbon sources such as wind and solar) to split water into hydrogen and oxygen with a metal catalyst. Given no fossil fuels are used during the electrolysis process, green hydrogen produces no carbon dioxide emissions.

Decarbonising the global economy is not simply about switching from fossil-fuel burning to renewable power. Instead, many sectors consume fossil fuels in order to generate high levels of heat (steel production) or as a raw material for other products (ammonia production for fertilisers). In many cases, the production process involved makes those sectors particularly difficult to electrify, while solutions to decarbonise them carry a higher abatement cost than higher carbon technologies, making them "hard to abate" sectors. However, hydrogen technologies present possible solutions where electrification will likely be insufficient for full energy transition.

The growing excitement surrounding hydrogen’s potential to decarbonise certain industries, which cannot simply switch to renewable power, including heavy duty vehicles, steel production and grid-scale energy storage has been fuelled by increasing policy support and improvements in the economics of the energy vector. Regarding the former catalyst, 2020 was seen as a turning point in terms of announced support to the deployment of low-hydrogen. While some countries already had strategies in place, in 2020 ten countries and the European Union announced formal hydrogen strategies. And as of August 2021, 13 countries have national hydrogen strategies available and 10 others are in preparation. Additionally, with power costs accounting for approximately 70% of the levelised cost of green hydrogen, further declines in the cost of wind and solar power further reduce green hydrogen costs. Declining costs will (in our view) enable transitioning with hydrogen across a number of sectors, particularly for large scale industrial users who can better navigate the transition and where hydrogen is already used today.

From an investment standpoint, allocating capital to the hydrogen revolution presents significant opportunities as well as risk. According to Bloomberg New Energy Finance (BNEF), the transition to green hydrogen could provide $11 trillion of infrastructure investment opportunities over the next 30 years and direct annual revenues of $2.5 trillion1. However, current exposure (especially green hydrogen) for major organisations remains a relatively small portion of their overall business. Meanwhile many hydrogen pure-plays are still loss-making at an EBITDA level and cash flow negative and their pathway to profitability is difficult to forecast given the fiercely competitive nature of the market and the rapid pace at which it is evolving, That said, within the Responsible and Sustainable Global Equity Fund, there are a number of holdings that are providing critical components that enable the hydrogen revolution, including Sensata Technologies (providing pressure and temperature sensors for hydrogen fuel cells) and Prysmian (cabling for hydrogen-based energy storage) and DSM (fuel cell powertrains), although these remain small in the context of their overall asset base.

At EdenTree Investment Management, our investment framework seeks to invest in companies that positively impact the planet and society, while at the same time ensuring that we remain on the right side of disruptive forces that hold the potential to transform business models, sectors and global economies more broadly. Our on-going assessment of alternative energy solutions, which hydrogen forms a part of, continually enhances our understanding of pervasive sustainability trends and the breadth of our investment universe. Ultimately, we believe that green hydrogen will become an integral component of the energy transition and as the technology scales, the visibility in the future economics and the prospects for the leaders in this area should improve.

Sources

1. BNEF (March 2020) – Hydrogen Economy Outlook