Chris Walker: the green hydrogen hype is real and investors are primed

I am getting rather tired of climate change deniers rubbing their hands together with glee and stating that the current energy crisis demonstrates that renewable energy isn’t working. The current crisis is global, affecting those who have and haven’t invested in renewables and with many complex causes including Russia manipulating gas supply and Asia outbidding Europe in liquified natural gas markets.

Having said that, as Carlos Torres Diaz, head of gas and power markets at energy research firm Rystad Energy observed this week “Definitely the strong growth in renewable power generation is affecting the prices and the power mix.” Apparently wind power in the UK has dropped from its average contribution to national energy of around 20% last year to a mere 7% in recent weeks. What do countries do when the wind stops blowing?

The problem lies in the inadequacies of current energy storage technologies. This should be at the top of every politician’s agenda. As Deloittes noted in a recent report: “Energy storage isn’t just about integrating intermittent wind and solar output: battery solutions, which can be deployed rapidly and with pinpoint precision, can be used to make the overall grid more efficient and resilient, regardless of the generation sources. This makes the storage story all the more compelling.”

Another crucial element to this is incorporating hydrogen into energy planning. Unlike renewables, hydrogen has potentially superior storage capabilities. Indeed, much of the existing global infrastructure we have created for fossil fuels could be adapted to delivering hydrogen energy to areas where we need it.

It should be clear here that there are many different types of hydrogen. A recent report by consultants Arup and the GIIA (the Global Infrastructure Investor Association) lists eight different ones, colour-coded in a veritable rainbow. The colours relate to how they are produced, from black and brown hydrogen created from burning coal to the holy grail of “green hydrogen” created by electrolysis using renewable energy which separates the hydrogen from oxygen in water molecules. Unfortunately, 98% of current hydrogen production is from the wrong sort. But this could change.

The potential for hydrogen really is enormous. The Arup report is clear: “There are some applications where electrification is clearly not feasible and where (hydrogen) is the preferred solution” including refineries, chemical/fertiliser production and “processes requiring high temperature heat where fossil fuels are currently used, including steel and cement production.” There is also potential hydrogen use in aviation, locomotive, and maritime fuels, basically any area of transport where existing battery-based options are limited.

While your next car will be electric, it could be the one after that is hydrogen. Fuel Cell Electric Vehicle (FCEV) technology offers passenger vehicles powered by hydrogen. The US department of energy which is supporting research states: “FCEVs are fueled with pure hydrogen gas stored in a tank on the vehicle. Similar to conventional internal combustion engine vehicles, they can fuel in less than 4 minutes and have a driving range over 300 miles.” Toyota has already made a model available, the Mirai.

This reach by hydrogen into every corner of the global economy has dramatic implications. The IEA’s paper Net Zero by 2050: A Roadmap for the Global Energy Sector, suggests  hydrogen will “meet 10% of total final energy consumption by 2050.” Personally, I am inclined to think this is an underestimate and prefer the upper end of the World Energy Council’s forecast. That is 25% of global energy needs by 2050.

Pause a moment and think about that, and how much investment might be involved.

No wonder forecasts of billions are fast becoming trillions. The Hydrogen Council estimates a cumulative $300 billion by 2030, while the Energy Transitions Commission, says the amount will reach approximately $15 trillion by 2050. Yes, that’s trillion. Launching their Hy24 initiative this week Ardian and FiveTHydrogen went even further stating “$100 trillion in hydrogen investments will be required to meet net zero goals by 2050.”

No wonder Mathieu Chabran, founder of Tikehau Capital, tells me energy transition is "the greatest opportunity in my lifetime as an investor." His "conviction is that the industry best placed to mobilize such vast amounts of capital so quickly is asset management." After all, that amount is less than 10% of the world’s savings. "It's time to create investment strategies that address the climate emergency." Something Chabran is clearly doing.

This is why the Hy24 initiative is so important. Until now, the prevailing mantra among “hydrogen heads” was that private capital would need a little help from governments to get the ball rolling. This is because as Deloittes argue in making hydrogen attractive to investors – “Investors are used to dealing with some degree of uncertainty…(but) a more coordinated approach across government and businesses (is required) to provide greater certainty…investments will earn a return.”

The argument is the sheer scale of investment required, and the way hydrogen development reaches across geographies and different industries requires co-ordinated international government action. It will also require some public money. “By providing revenue certainty (they)…could significantly lower the cost of capital for hydrogen (as) has been achieved in the offshore wind and wider renewable power sectors.” Deloittes suggests schemes used there such as contracts for differences. Many in the hydrogen sector want more.

Kevin Chin, the CEO of Arwana, the international B Corporation investment group, and Executive Chairman of Vivo Power, the sustainable energy solutions company, certainly thinks so: “We've seen this movie before. What’s needed is government action in the same way that governments created the solar industry through well-targeted subsidies. 

We need green hydrogen to be developed with the help of governments with generous tax credits and offsets…CapEx and OpEx incentives to boost cash flow.”

Unfortunately, government sums pledged so far seem small, but then perhaps capital markets will get there anyway. Pierre-Etienne Franc, Hy24’s CEO, believes this is a tipping point: “While we welcome government commitments which have now reached $76 billion worldwide, with this initiative we are seeing significant private investment capital being committed for the first time.”

For the faint-hearted there are other routes of course. Considering the explosive demand for hydrogen, Simon Webber of Schroders suggests “perhaps the simplest business and investment opportunity will be…the equipment market for all the new electrolysers.” Last year that market was worth just $250m. He estimates at its peak it will be closer to $25billion. And as with the original gold rush, it may be “the shovel makers” that make the most money.

I hope there will be some ‘nuggets’ this time for the prospectors as well.

 

Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.