Has hydrogen finally come of age?
In August 2022, the US Senate passed the most significant clean-energy bill in the country’s history, providing tax credits for hydrogen production that experts believe could open the industry to an avalanche of investment.
A month earlier, Brussels agreed to spend €5.4bn on a hydrogen project funded by 15 member states, including France and Germany. Margrethe Vestager, the European Union’s executive vice-president responsible for competition policy, told reporters that the project was “crucial because hydrogen technology has the potential to replace some of the fossil fuels that we see today”.
These and other recent announcements mark a tipping point in the long-debated role that hydrogen could play in solving the 21st century’s ultimate puzzle: how to transition to a net-zero economy and put a stop to global warming. But with interest in the now decades-old technology rising faster than it has done in years, what should investors make of the potential for hydrogen? And is it still too soon to commit?
According to the Hydrogen Council, a body comprising some of the world’s leading oil companies and global industrial groups, hydrogen could abate 20 per cent of all projected CO2 emissions in 2050. Moreover, with more than 520 large-scale hydrogen projects underway – equivalent to $160bn of direct investment – it predicts global demand for renewable and low-carbon hydrogen could grow by 50 per cent over the coming years.
“By 2030, this would translate into an annual CO2 emissions abatement equivalent to the total volume of CO2 emitted by UK, France, and Belgium combined,” the Council said in a recent report with McKinsey and Company, the global consultants. So-called green hydrogen, produced using electrolysers powered by renewable energy, has caught policymakers’ imagination – not least for its potential in providing clean energy for hard-to-abate sectors such as steel, cement, aviation and shipping.
Yet it accounts for only 1 per cent of total hydrogen production, with the overwhelming majority still produced using fossil fuels such as natural gas and even coal. As research and consultancy group Wood McKenzie noted as recently as 2017, global hydrogen production contributed more CO2 emissions than Germany or the global shipping industry per year.
Current hydrogen production and carbon footprint
César Pérez Ruiz, Head of Investments & CIO at Pictet Wealth Management, says that hydrogen, in particular green hydrogen, has great potential for the future – both as a valuable tool for helping the global economy achieve net zero, as well as from an investment perspective. But he says it may still take longer to reach its full potential than the typical one-to-two-year horizon many investors favour.
“The technology behind hydrogen is already there, there is a huge growth in the capital willing to back production equipment, but we don’t yet have the scale,” he says. “Costs have started to come down but we are still several years away from reaching a a tipping point, and this means that investors have to take a long-term view.”
Indeed, with current prices at about $5 per kilo, green hydrogen needs to fall to about $2 per kilo to compete with fossil fuels. For that to happen, electrolyser plants, as well as the associated supply chain required to produce it, need to become cheaper – a change that experts see happening only after 2030.
Malik Zetchi, Financial Analyst and expert in energy, metals and mining at Pictet Wealth Management, adds that a second reason to view hydrogen as a longer-term investment is that today’s hydrogen industry is fiercely competitive but also fiercely fragmented – largely because the natural process of consolidation that takes place as an industry matures has not yet begun.
On top of that, barriers to entry remain relatively low. The technology of using electrolysers fed with green energy to separate hydrogen molecules from the oxygen molecules in water – a process that produces zero carbon emissions – is relatively simple, further encouraging newcomers vying for a piece of the market. The result is a complex topography of pure and hybrid players, and profitable and loss-making companies, that makes it very challenging to pick tomorrow’s winners and losers. “It’s a crowded and competitive marketplace, and more competition is coming,” says Zetchi.
Finally, while hydrogen has attracted unprecedented interest in recent years, and current production of roughly 100mn tons is expected to more than double to 223mn tons by 2050, with some scenarios even predicting up to a sixfold increase, it is still unclear exactly how big a role it will ultimately play in the world’s transition to a net-zero economy. That unknown, says Pérez Ruiz, means that for all the promise that hydrogen holds, it may yet be some time before the best way to invest in the industry becomes clear. “Hydrogen is one of the tools in the toolkit, and it’s an important one,” he says. “But there are many paths to net zero, and we are still at the beginning of the journey.”