Early days for green hydrogen for infrastructure investors

Green hydrogen is increasingly discussed as key to reducing carbon emissions and fighting climate change. Every week brings further announcements of hydrogen projects in Australia and globally.

JANA’s infrastructure team has been researching the green hydrogen sector and our view is that it will play a role in decarbonisation, however the role and scale of green hydrogen is unclear.  Key factors which will influence its future role will be: degree of cost reductions of hydrogen production; development and feasibility of hydrogen supply chain; and feasibility of lower cost alternatives for no/low-carbon solutions, such as electrification.

This article briefly discusses these commercial hurdles and areas that investors should consider when looking at the green hydrogen sector.

What is green hydrogen – a brief overview

Hydrogen today is produced mainly using natural gas in a process that emits significant CO2 emissions. This is often referred to as grey hydrogen. Green hydrogen by contrast is produced using electricity from renewable energy using proven technology and without any carbon emissions. The below exhibit notes the various ‘colours’ of hydrogen based on the production process.

Fig 1 – Key colours in the Hydrogen production spectrum

Why is green hydrogen so exciting?

Hydrogen has a wide range of potential use cases across sectors such as transportation, power, heavy industry, heating, and chemical feedstock. Replacing fossil fuels in these applications with green hydrogen is a way to move towards zero carbon emissions.  Additionally, a number of these hydrogen use cases are based on existing and proven technology, which is in use today.

These use cases stem from key properties of hydrogen including:

• Energy dense store and carrier: Hydrogen fuel cells are lighter weight than the equivalent energy electric battery, which can make them more versatile, particularly for heavy duty transportation applications which to date have been difficult to electrify.
• A “clean” gas fuel, replacing the current use of natural gas: Many of the use cases, such as building heating, gas fired power plants, and use in industry are premised on hydrogen being a clean alternative to natural gas in these processes.
• Export opportunity: Nations or businesses with access to, or a surplus of, cheap renewable energy can convert that energy to hydrogen or ammonia for export sale.  Ammonia, which can be produced using hydrogen through existing technology, is a favourable medium for export as it can be stored more energy efficiently than hydrogen and a mature market already exists globally, with large quantities used in the production of fertilisers, plastics and explosives.

What are the commercial hurdles for green hydrogen?

Despite the current hype around hydrogen, there are still technical and commercial challenges involved in commercialising of green hydrogen on a large scale.

• Price competitiveness: Green hydrogen is estimated to be currently 3-5x more expensive than existing fuel sources for most applications. Most market estimates see green hydrogen becoming price competitive with other fuel sources in the late 2020s or early 2030s, assuming a material reduction in costs for electrolysers, the key component of green hydrogen production. Access to low cost, reliable renewable energy is also a key factor impacting green hydrogen’s competitiveness.

End users might be willing to pay a ‘green’ premium for green hydrogen in the interim, particularly in industries where reducing emissions is challenging. Higher carbon pricing and emissions reduction programs might also reduce the competitiveness gap. However, these costs exclude the cost of the development of the hydrogen supply chain.

• Supply chains: Supply chains will need to be developed to handle hydrogen and transport it to end users. For example, natural gas pipelines might be able to handle a blend of 10-15% hydrogen but a higher proportion of hydrogen will need material pipeline upgrades and likely replacement. Hydrogen storage facilities will also need to be developed. Hydrogen’s chemical properties, such as high combustibility, relatively lower density and ability to embrittle steel, mean that the cost and technical difficulty of the development of hydrogen gas infrastructure may be a larger challenge than the cost of production itself in some many cases.
• Feasibility of end use: While green hydrogen has significant potential across a range of sectors, end users are in the early stages of feasibility studies and adapting their supply chains and production processes to use green hydrogen.  Sectors such as steel manufacturing and marine shipping are just starting pilot programs on the feasibility of hydrogen and products derived through hydrogen such as green ammonia.
• Regulatory and policy framework: The regulatory framework for production, distribution and usage of hydrogen has to be developed. Issues that regulators will need to manage include safety standards, quality requirements, and technical specifications for transportation and distribution. Certification standards also need to be put in place to ensure that offtakers can ensure that the hydrogen they are using has been produced from low emission sources.

The policy framework around green hydrogen is also still in flux and is connected to broader decarbonisation and climate change policies and objectives. A number of countries are announcing long term targets and incentives for green hydrogen, particularly in the European Union, but there are still a number of areas of debate, such as the level of support extended to blue hydrogen that is made from natural gas combined with carbon capture.

These combinations of challenges mean that although green hydrogen may be technically feasible in a wide variety of uses, it may not always make sense commercially.  The ultimate use of hydrogen is likely to vary materially based on geography, sector, existing energy infrastructure and availability of green alternatives, such as electrification of transport and heating.

Risk return of the hydrogen sector

Certain parts of the hydrogen supply chain such as transportation, distribution, storage and power generation are more likely to exhibit infrastructure characteristics, of stable returns and yield with strong downside and inflation protection.
Production facilities are likely to have a higher risk return profile, particularly if they are exposed to hydrogen commodity price risk and might exhibit a risk profile more similar to chemical production plants. An analogy is the natural gas sector, where infrastructure investors own transportation and distribution assets such as LNG facilities, regasification terminals, pipelines and storage assets, while production of natural gas is primarily owned by energy companies.

Access to the Hydrogen sector: Most infrastructure managers that JANA has spoken to are actively monitoring the hydrogen sector, but have not yet deployed material capital into the sector. Funds that are higher up the risk curve, such as core plus infrastructure funds and energy transition funds, are looking more closely at hydrogen. Dedicated hydrogen specific strategies are still rare given the nascent nature of the sector.

Exposure to hydrogen likely developed through existing energy exposures: Existing energy companies may invest in hydrogen, including trial projects. Gas distribution pipelines and storage facilities may be upgraded to handle hydrogen. Ports could also see hydrogen related investment due to their role in the supply chain. As green hydrogen grows in scale and needs more renewable power, renewable energy platforms will need further investment.

Conclusion: Early days for green hydrogen for infrastructure investors 

Green hydrogen has the potential to transform the energy supply chain and play a significant role in reducing carbon emissions. However, the exact role and scale of green hydrogen in the future is not yet certain.

Green hydrogen related investments are starting to be made in portfolios today and as one-off projects they may be economic.  However, the commercial viability of large-scale hydrogen has to be proven and we think, for example, it is premature to assume a wholesale conversion of gas transport and distribution networks to pure hydrogen networks, or other broad based used cases.

It is a sector that merits close monitoring given the scale of the potential opportunity, and if green hydrogen doesn’t take off in the way advocates forecast, this is likely because cheaper, zero carbon alternatives have been developed, and in that case, we all win.