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Hydrogen Energy: A zero carbon fuel alternative

Hydrogen alternative

As countries and corporations navigate a complicated path to reduce the impact of carbon in our lifestyles, hydrogen is increasingly capturing the spotlight as a route to meeting international net-zero targets. Hydrogen has been a key focus for some time, but it remains a costly option. What might it take to achieve the energy transformation necessary for a better future, and where do the market opportunities lie?

Renewed confidence

Hydrogen is the simplest and most abundant element we have access to, by some margin. Its unique energy-carrying characteristics have been the focus of attention by government, industry and commerce for decades but, more recently, energy, transport and manufacturing sectors are exploring its potential as a low-carbon solution in global energy transition.

This hydrogen ‘climate megatrend’ was the subject of discussion at a Barclays Energy and Infrastructure webinar in February 2021, where the Bank’s Equity Analyst for the European energy sector, Lydia Rainforth, and Thomas Fureder, Managing Director at Barclays Investment Bank, tackled the challenges and opportunities presented by new production technologies and the wider implications for investors.

Rainforth’s overarching premise is that, while hydrogen can’t be the sole solution to a net-zero world, it represents a vital tool in the box to achieve it. The challenges lie in building the economies of scale required in its production process. The focus on COP26, the UN climate change conference now scheduled to take place in November 2021, has also focused minds on energy transition and the need to turn net-zero pledges into reality.

“Pressure is growing for the world to move to a lower carbon future and demand for those scalable alternatives to fossil fuels really has intensified, and hydrogen is gaining momentum,” she explains. “If I put it into context, for us to be on the pathway to achieving the goals set out in the Paris Agreement, and net-zero emissions, we need to achieve the same reduction in CO₂ emissions that we saw in 2020 but without the sharp step down in GDP.”

By any standards, this is a tall order. But it is partially addressed by recent Barclays research, which takes into account three forecasting scenarios over 30 years. ‘Deadlock’, ‘development’ and ‘dynamism’ respectively charts the worst, likely and best-case scenarios for transitioning to hydrogen in a net-zero context.

“Development is what we see as the more likely scenario right now,” says Rainforth. “It doesn’t quite get us to that Paris Agreement target of limiting global warming to 1.5ºC, compared with pre-industrial levels, but it represents a significant tightening of where we are in terms of the existing policies.

“This development scenario indicates nearly an eight-fold increase in hydrogen demand from where we are today, and an annual market that would be worth over £1tn by 2050,” she adds. 

Ultimately it would help us save about five gigatonnes in CO₂ emissions per year, which is a reduction of 15% a year. So, it is one of the technologies that can make a big difference.

Lydia Rainforth

Equity Analyst European Energy Sector

From hype to hope

The hydrogen production process, however, remains a stubbornly complex one when taking into account the relative costs and carbon impact involved. Black hydrogen – produced using coal – is cheap, but severely damaging at scale. Brown hydrogen is produced using natural gas and is marginally cleaner, while the blue hydrogen process captures and stores the carbon from natural gas.

The gold standard production model involves renewables-powered electrolysis to create green hydrogen. But given its highly expensive and small-scale impact to date, international carbon reduction targets will most likely have to be achieved through both blue and green hydrogen.

Interest in hydrogen is not new – so what is special about it now? Rainforth says the imperative for net zero has propelled the hydrogen debate forwards, and so regulation is one aspect at the heart of it. Beyond this, companies are driving interest by exploring their own diversification strategies. There is a potentially significant win for those businesses that can achieve economies of scale in green hydrogen production.

“The hydrogen story is being driven by broad economic development in areas such as heating and industry, rather than just one unique area,” explains Rainforth. “Whereas 20 years ago, we were thinking purely about passenger cars.” The confluence of increasing hydrogen demand, environmental regulation and the likely surge in electrification suggests to her that.

2030 to 2040 is going to be the decade of hydrogen.

Lydia Rainforth

Equity Analyst European Energy Sector

Confronting the costs for a greener future

For now, solving the cost conundrum remains an ever-present challenge. As Rainforth outlines, mainstream (natural gas) hydrogen production equates to approximately US$1 per kg. Blue hydrogen is always going to be more expensive than brown hydrogen given the additional production steps with the cost in the region of US$2/kg. The cost of using electrolysers for green hydrogen is higher still at present, in the range of US$4-6 per kg.

Both blue and green hydrogen are set to play a role in the hydrogen economy, with blue helping to deploy the fuel at scale. Longer term though, the focus needs to be on making electrolysis a cost-competitive, zero-carbon solution. “There will be points in time where, as we balance out renewable electricity, we’ll get negative periods of power prices,” she explains. “Merchant power pricing will potentially drop, and if you’re in that US$10-15 range, you start to see how quickly the cost of green hydrogen can come down.”

The landscape for investors

Thomas Fureder strikes an optimistic note on the future industrial use of hydrogen, given that he feels there was the political will to tackle this head-on – both to address decarbonisation as an imperative and to prevent industry losing interest and seeking alternative routes. Facing down this challenge, he says, becomes a choice between active decarbonisation or progressive deindustrialisation.

  1. “My first thesis is that deindustrialisation will be avoided by politicians focusing on subsidy regimes to help the industry to decarbonise,” he argues.
        
  2. Secondly there is uncertainty around the best application of hydrogen: “If you have not scaled up your production enough, do you really then use hydrogen for heating or would you use it rather for industrial processes that might be more value added?”   
        
  3. Fureder’s third point concerns the transport sector – and while municipal transport networks might become useful adopters of hydrogen, the heavy players in aviation and maritime would need to be on board to drive its future success.

So, what are the implications for investors? It’s important to follow the industry, says Fureder. In the early stages, it’s the businesses aligning with blue/green subsidy regimes from governments to form industrial clusters that stand to benefit in the longer term. Then, as scale increases, he says, “you need a wind farm or a solar park to feed it if it involves green hydrogen production. So, there will be a massive demand on the renewables side in addition to all the electrification.”

Transportation is a smaller area and very localised, but it too remains very interesting territory for investors, says Fureder.

Hydrogen hotspots

Although industry will most likely lead the way in hydrogen’s expansion, Rainforth and Fureder also reflect on the geographical implications for growth.

“We’re at the very start of what will be a multi-decade journey across the board,” believes Rainforth.

“Europe, I think, is one area to watch given the commitment to net zero that they have and the desire to build out infrastructure. In the UK blue hydrogen makes quite a big difference, and from an oil and gas perspective, Norway, Denmark, UK, have a lot of natural gas resources. If they can still monetise those resources and produce them in a lower carbon way, that could make a real difference.

“Chile, too, is making quite a big push into hydrogen, based on their renewable ability to produce it there.”

Fureder’s own take reflects the way logistics and supply chains may develop. Germany, he says, is for example not best-placed to be a producer of hydrogen – therefore the challenge is how to import it to Germany, which industries to focus on, and where is best to produce it.

“If you conducted a market study of where to produce hydrogen, it’s typically a combination of solar and wind. This might mean using countries like Morocco and Saudi Arabia, and the coastal regions of Australia,” he argues.

The case, therefore, for hydrogen is clear from a zero-carbon perspective. But the session discussion recognised the unanswered questions about sustainable economies of scale, and where the most impactful focus should be to drive its growth.

All eyes will now be on industry’s biggest players and how they can utilise the global political sentiment that demands a greener future for all.

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