Exploring the Hydrogen Economy

By Martin Copeland
Published October 13, 2020 | 4 min read

Hydrogen or ‘Hyprogen’?

At the 2015 Paris Agreement, the world set a goal to limit the average global temperature increase to “well below” 2 degrees Celsius above industrial levels. To meet this ambitious target, greenhouse gas emissions need to be halved by 2030 and ‘net-zero’ reached by the middle of the century. To meet net-zero goals, massive fuel-switching, primarily through the electrification of everything, will be critical. Electrification can get economies up to possibly ~80% of net zero goals, but hydrogen is “a non-optional component” of the transition to Net Zero, in the words of the UK’s Committee on Climate Change.

Recently, against a backdrop of multiple governments’ “build back better” and “green recovery” post COVID messaging, financial markets have become acutely focused on the potential of hydrogen as the “missing link” to address the dual challenge of providing more energy for a growing global population, while producing fewer emissions. UK listed ITM Power, for instance, which manufactures hydrogen electrolyser systems, has seen its valuation skyrocket five-fold in the last year, and Powercell, the Swedish manufacturer of fuel cells, is also up by 500% in the last 18 months.

But despite the continuing investor clamour, the economics of hydrogen as a fuel source remain challenging today. The high profile fall from grace of fuel-cell truck company Nikola, whose valuation briefly exceeded that of Ford soon after its June NASDAQ de-SPACing, may also have taken some of the sheen off the hydrogen hype.

Grey, blue or green?

But hydrogen production in reality is nothing new. As the most abundant element on earth, hydrogen has long been produced from Natural Gas or coal through steam methane reforming (SMR) and used extensively in hydrocracking to produce road transport fuels and in Ammonia and methanol production. But Hydrogen today represents only circa 2% of the primary energy mix. BP’s latest Energy Outlook Net Zero scenario has this increasing to 16% by 2050.

However, hydrogen production to date has been so-called “grey” (from gas) or “brown” (from coal) hydrogen with 9kg of CO2 emissions for every kg of hydrogen produced. The Net Zero future of hydrogen therefore belongs to the “Blue” and the “Green” variety. Blue hydrogen combines traditional SMR based production from Natural Gas (methane) with Carbon Capture and Storage to offset the by-product CO2. Blue hydrogen is in particular seen by Global Oil Majors as a key extension of legacy global gas businesses. Green hydrogen represents the real excitement and the long-term vision for a Net Zero world. This form of hydrogen production relies on the use of renewable power to electrolyse water to produce hydrogen entirely free from the carbon chain. The rapid penetration of hydrogen into the global energy mix will also see challenges to the market position of traditional Oil Majors and energy companies, as the industrial gas majors: Linde, Air Products and Air Liquide encroach on the domain of the Majors and NOCs.

Applications – three broad strands

Interest in hydrogen is also driven by the multiple new end-market applications which stand to benefit from its high energy density carbon free combustion. These largely fall into three broad strands: Mobility, Industry and Power to X.

In Mobility, beyond the use of liquid hydrogen as rocket propellant, this includes the use of hydrogen in segments where EV penetration is challenged, such as aviation, rail, heavy duty trucking and shipping. In aviation the Hyflyer project and its lead partner ZeroAvia (whose hydrogen fuel cells are produced by Powercell) recently achieved the first hydrogen-electric test flight and is well on the way to its goal of commercial operations by 2023. In the maritime world, Norwegian shipping company Havila is in the process of retro-fitting a cruise liner with hydrogen fuel cells for carbon free cruising on the Fjords.

Industrial applications will see hydrogen continue to be used in fuel production, but increasingly this will be for the hydrogenation of animal and vegetable fats to produce renewable diesel and jet fuel. Other industrial applications being studied include highly energy intensive industries such as cement manufacture (especially where offsetting CCUS is not practical) and in the decarbonisation of the steel industry, either to replace metallurgical coal PCI in conjunction with biomass in blast furnaces, or to replace fossil fuels in DRI combined with Electric Arc Furnaces. The announcement by Orsted and Yara of plans for a green hydrogen ammonia project in the Netherlands, subject to agreeing the right regulatory framework is another industrial application example.

But the application garnering possibly the most excitement around hydrogen is the critical role of hydrogen in so-called Power-to-X value chains. These concepts see hydrogen as an intermediate component in energy value chains. As a light, storable, energy dense, storage vector hydrogen becomes an efficient and versatile ‘gaseous battery’. In a world of almost limitless and cheap renewable power generation, mass scale green hydrogen production achieves genuine electrification of everything thanks to a hydrogen ‘middle man’, and also helps to balance grid demand in renewable dominated systems. Hence power to liquids is achieved through the manufacture of synthetic fuels from green hydrogen and CO2 (as with the Sunfire / Norsk e-fuel project in Norway). Power to power applications use hydrogen as a grid level storage (similar to current pumped hydro or compressed air storage solutions) with stored hydrogen and fuel cells helping to balance wind and solar powered grid intermittency.

Regulatory rocket fuel?

The science is clear and the potential that hydrogen can play in a net zero future equally so. However, today the economics is less clear; materially higher carbon pricing and/or other forms of government subsidies such as the proposed green hydrogen CfD being considered in the UK, will be needed to kick-start the industry. A potential Biden administration may also herald increased government support and faster adoption in the US, with the presidential candidate’s climate plan calling for “using renewables to produce carbon-free hydrogen at the same cost as that from shale gas”.

In the meantime, such is the weight of investor demand for hydrogen stories, that no doubt there will be more winners, and few losers, in the hydrogen ecosystem, even if cashflow and profits remain some way off.

Martin Copeland

Martin Copeland
Head of EMEA Energy, RBC Capital Markets

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