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JANA’s infrastructure team has been researching the green hydrogen sector and discuss in this article the key factors that will influence its future role and the commercial hurdles that investors should consider when looking at the green hydrogen sector.
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.
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
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.
Figure 2 – Potential decarbonisation use cases for Hydrogen
These use cases stem from key properties of hydrogen including:
Despite the current hype around hydrogen, there are still technical and commercial challenges involved in commercialising of green hydrogen on a large scale.
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.
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.
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.
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