How hydrogen can power renewable change

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With hydrogen tipped to play an important role in the global transition to renewable energy, Walter Scott investment manager Ashley-Jane Kyle takes a look at the market and assesses recent developments.

Over the last couple of years, a surge in the number of new projects and a flood of capital into the hydrogen industry suggests the pace of development is increasing fast. Yet, as with many other sectors, factors beyond its control may influence the pace of its development.

Among these, Russia’s invasion of Ukraine has had significant economic consequences – including the triggering of huge volatility in the price of crude oil and natural gas.

Such price gyrations highlight the fragility of the global energy market. Commentators have speculated these ructions could curtail the movement towards renewable energy by encouraging a return to coal and oil.

Yet we think it likely some countries will look to restart their own exploration and production of fossil fuels to secure supply, which is worse for the environment, but potentially better than having to import fuels which are carbon intensive, to transport.

However, at the same time, many of these countries may also look to accelerate their investment in renewables to cut emissions and diversify away from particular geographical areas such as Russia or the Middle East.

In the renewable energy space, solar, wind and tidal often take the limelight, overshadowing another fuel with a long history. Hydrogen, the lightest and most abundant element in the universe, was identified as a discrete substance in 1776 by scientist Henry Cavendish1  and given the name ‘hydrogen’ by Antoine Lavoisier in 17832. The first hydrogen fuel cell, in which oxygen reacts with hydrogen to produce energy and water, dates back to 18383.

Hydrogen offers a number of benefits in the energy market. It supports the transition towards lower-carbon sources of energy from natural  gas, it can be used as a store of renewable energy and it can be generated using renewable energy by electrolysis. Another benefit, particularly pertinent at this time of conflict in Ukraine, is that hydrogen trade flows are unlikely to become ‘weaponised’ or ‘cartelised’. Hydrogen can be produced from many energy sources across a wide variety of locations worldwide, so the trade in hydrogen is unlikely to lend itself as easily to geopolitical influence as has been the case with oil and gas4.

Flexible fuel

Hydrogen is considered a relatively flexible fuel which can be compressed into gas or liquefied to make it easier and cheaper to transport. Currently, most hydrogen is used in chemical plants or refineries, but it will have a future role to play in transport, especially in hard-to-electrify areas such as heavy-duty freight, trains and buses, ferries and ocean-going shipping.

It has been suggested that by 2030, hydrogen-powered vehicles could achieve cost parity with internal combustion engines, leading to a significant expansion in their use5.

At the moment, most hydrogen is  produced from natural gas, so-called  ‘grey’ hydrogen or, if combined with the process of carbon capture and sequestration (storage of carbon dioxide so it is not released into the atmosphere), ‘blue’ hydrogen.

The most environmentally friendly type is ‘green’ hydrogen, produced using sustainable energy from water molecules broken apart by the process of electrolysis  into hydrogen and oxygen.

We are still in the early phases of the development of green hydrogen. The costs of production, both in terms of a renewable energy source and the electrolysis infrastructure, are still high. Research suggests the cost of producing hydrogen from renewables will need to fall by more than 50 per cent to make it a viable alternative to traditional energy6.

However, this could occur over the next decade as substantial amounts of investment are flowing into the industry. About US$65bn has been earmarked for hydrogen production over the next decade, with Germany, France and Japan set to be the biggest investors7.

The hydrogen industry is presently experiencing a significant growth spurt around the globe with more than 520 projects announced in 2021, up 100% from 20208.

More than 15 countries across Europe, Asia and North America have integrated hydrogen into their national strategies with significant stimulus plans. In April 2022, the International Renewable Energy Agency (IRENA) estimated hydrogen could provide 12% of the world’s energy needs by 2050.

A study by the Hydrogen Council, established in 2017 as a global CEO-led initiative bringing together leading companies to promote the use of hydrogen, suggests the global hydrogen market could be worth €2.5 trillion by 2050.

Hydrogen is therefore likely to become an increasingly important part of the global renewable energy mix and a number of leading industrial gas groups are active in the production, transport, storage and distribution of hydrogen and are supporting the  growth of green and blue hydrogen.

Among the factors encouraging change in the hydrogen sector, government policy is an important driver of hydrogen adoption by industry in the European Union where regulation requires refiners to use 100% renewable electricity in new plants.

Supply contracts

Refiners, therefore, have no option but to use green hydrogen and  a number of companies are signing 15-year supply contracts. However, the rules for European steelmakers are less strict, allowing low-carbon alternatives.

As the European industry gradually recognises that sufficient renewable capacity is not being added quickly enough, management teams are becoming more pragmatic. In this respect, blue hydrogen offers significant near-term emissions reduction, cost savings over green hydrogen, the ability for customers to meet regulatory and internal carbon life cycle assessment requirements, as well as the potential to charge end-customers a premium for low carbon products.

Beyond Europe, another example of ambitious hydrogen energy production is a new US investment by a leading industrial gas group in a liquid hydrogen production plant in North Las Vegas, Nevada, due to come on stream soon. It is  the first large scale investment dedicated to the hydrogen-fuelled mobility market in the US, which includes automobiles, buses, coaches, forklifts and heavy- duty vehicles. The plant is aiming to produce 30 tons of liquid hydrogen and supply 40,000 vehicles every day by 20259.

The start-up of this plant is a significant step in decarbonising the transportation sector in the west of the US, and will use biogas, landfill gas and waste-water treatment gas, rather than natural gas, to drive down carbon emissions.

Turning up the gas? European hydrogen development in focus

1 National Library of Medicine. Hydrogen. 2022 website.

2 ACS. The Chemical Revolution of Antoine-Laurent Lavoisier. * June 1999.

3 Michelin. Jules Verne’s dream. January 2022.

4 IRENA. Hydrogen Economy Hints at New Global Power Dynamics Tweet. 15 January 2022.

5 Hydrogen Council. Path to hydrogen competitiveness: A cost perspective. 20 January 2020.

6 S&P Global. Green hydrogen costs need to fall over 50% to be viable: S&P Global Ratings. 20 November 2020.

7 FT. Hydrogen power forecast to bring new dimension to energy geopolitics. 15 January 2022.

8 Hydrogen Council/McKinsey & Company. Hydrogen for net zero. November 2021.

9 Ibid.

10 UK Government. UK government launches plan for a world-leading hydrogen economy. 17 August 2021.

Important information 

https://www.bnymellonim.com/outlook/global-disclosure/

GE1041411 Exp: 06 January 2023

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