Friday, 05 November 2021 08:20

Before you invest in Hydrogen

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With the Glasgow climate summit around the corner the market is buzzing with excitement surrounding hydrogen.

Investors should ask themselves whether this is the next ‘big thing’.  But before rushing into the new Hydrogen ETF, or buying Fortescue Metals on the basis of their interest in hydrogen, investors should pause for thought.

Hydrogen is seen as being crucial to achieving net zero carbon emissions given that when burned, hydrogen emits mainly water.

Jodie Bannan an Investment Analyst with Platinum Asset Management says that the first thing to consider is hydrogen is not a primary energy source that exists by itself in nature. It requires primary sources of energy (coal, natural gas or renewable electricity) to split it from oxygen in water or carbon in hydrocarbons. This means there is energy lost with each conversion and transport to end use and this needs to be considered when thinking about suitable applications. 

Natasha Thomas a Portfolio Manager at Ausbil Global Infrastructure highlights that there are two main ways to make hydrogen – via electrolysis of water which uses a great deal of electricity to split water into hydrogen and oxygen, or reforming natural gas into hydrogen and CO2.

Hydrogen made from electrolysis of water using renewable electricity is labelled ‘green’ hydrogen and according to Thomas is more expensive.  Market cost estimates range between US $5.00 - $8.00 per kgH2, with the price estimated to fall to US $1.25 - $2.70 per kgH2 by 2030.  This is attributed to the falling costs of renewable electricity generation and scaling up electrolyser manufacturing.

Thomas compares this with market cost estimates for ‘grey’ hydrogen (from steam methane reform) at US $1.00 - $1.75 and blue hydrogen (steam methane reform followed by capturing and storing the CO2 by-product underground) which costs US $1.40 - $2.45 per kgH2.

Bannan believes that a hydrogen price of around US $1.50 per kgH2 is needed to put it on parity with fossil fuel depending on the use.

 

 

In 2020 the International Energy Agency (IEA) reported that demand for hydrogen was 90 million tons.  Bannan said that about 48% was produced using natural gas based steam methane reform, 30% is a by product from oil refining, 18% using coal and 4% from water electrolysis.

In terms of the uses for hydrogen today, currently over half is mixed with nitrogen to make fertiliser or used in oil refining and methanol production.  

In looking to the future Bannan believes that new opportunities for hydrogen applications come from the growing need to eliminate CO2 emissions from process industries that are hard to electrify such as steel, cement and gas fired power plants.

Thomas adds that other future uses are likely to include transportation either as hydrogen-based fuels for shipping and aviation or as hydrogen fuel cells for electric vehicles.  As global transportation currently generates 24% of direct CO2 emissions from gasoline and diesel combustion, the use of green hydrogen would significantly reduce emissions.

Despite the momentum in hydrogen around the world, its place in the global energy mix still has many unknowns.  The IEA forecasts by 2050 hydrogen could make up 10% of the global energy mix and Bloomberg NEF forecasts that green hydrogen by 2050 could be cheaper than natural gas in some regions.

This brings investors to the opportunities in the hydrogen sector.  Bannan says there are traditional companies such as industrial gas companies that transition to hydrogen production over time.  Then there are technology pure plays such as fuel cell makers, electrolysers and carbon capture companies.  New technology is required to lower the cost of hydrogen production and the technology companies are often building capacity ahead of demand which is a key risk to consider.  Most of the technology companies are estimated to be loss making for the next five years.  These companies may not have the balance sheet to fund themselves or are reliant on government funding or tax incentives which may be unreliable. 

If investors believe that green hydrogen will be successful, Thomas believes the biggest opportunities are in the renewable energy sector which provide electricity to hydrogen production.

Energy infrastructure companies such as natural gas pipeline networks and equipment storage providers that may already be supplying the gas sector already, also stand to benefit from hydrogen and may be a lower risk of gaining hydrogen exposure.

The developments in hydrogen have some way to go. Any delays in rolling out green hydrogen could be met with scepticism, but investors would be brave to bet against its progress.

 

 

Every month, Mark Draper (GEM Captial) writes a column for the Australian Financial Review.  This column was published in the first week of November 2021.

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