The rise of Green Hydrogen, where are we now? - Transcript

- Welcome to the Industries in Motion podcast from RBC Capital Markets.

Where we take the time to explore what's new and what's next in today's fast moving industries to help you stay ahead of the curve.Please listen to the end of this podcast for important disclosures.

My name is Peter Dawkins and I'm a product manager here in London with RBC Capital Markets. And today, I'm delighted to be joined by Erwan Kerouredan a vice president in our European energy team.

Erwan has been with us since 2018 and is responsible for coverage of our renewable energy names. So firstly, Erwan, I just wanna say thank you very much for your time today. We appreciate you joining us. And I'm actually really excited for today's subject as I think the last few years have seen explosive growth.

And now, it's a subject that is as topical as it has been in perhaps decades.

And that's green hydrogen. But before we kick off and get into the Q&A,I thought it might be helpful for some of our listeners to just pause briefly and maybe give a quick high level recap of hydrogen and what it might mean and and also walk us through gray, blue and green hydrogen.

- Yeah, sure. So, thanks a lot, Peter, for having me on. So, very briefly, on hydrogen basics. So hydrogen is the most abundant element of the universe.It reacts readily with oxygen releasing considerable amounts of energy and water as a byproduct. There are two main ways to produce hydrogen. The first one is from natural gas via a process called Steam Methane Reforming.

And the second, from electricity via water electrolysis.And that gets me to that to speak about the colors. I'm sure you've seen like gray, green, blue and all that.And that creates a lot of confusion in people's minds.So, very quickly on those colors.Green hydrogen is essentially another name for electrolysis with the condition that this electricity has to come from renewable sources such as wind and solar. And then when it comes to the two other colors, blue and gray.

So, gray is essentially producing hydrogen from fossil fuels. So from natural gas you have steam methane reforming like I said, but carbon emissions are not captured. And then blue is this process where you see the emissions being captured by carbon capture and storage mechanisms.

- Thank you, that's honestly very, very helpful. And I think now that we've set the scene,this is a subject that I know you've written on extensively over the past year.So I thought it might be helpful if we just take a step back and maybe discuss some of the key focus areas that your clients have been discussing with you over the past few months.

- Sure. So, green hydrogen is a fast growth and relatively new area within the energy sector. So we consistently receive a lot of questions on demand drivers and demand growth prospects as well as supportive regulation. And as we look specifically, into 2021 and 2022, this past two years, and this is usually with more seasoned energy investors, we tend to get questions around the timing of large purchase orders for green hydrogen or shall I say electrolyzers, which is the equipment that perform the electrolysis that I just mentioned earlier.

And even though most share the longer term growth story thesis around hydrogen and green hydrogen investors are keen to see the industry take up from purchase orders, contracts and awards perspective. And then following on from that the conversations tend to center around differentiation potential in this sector. And we get a lot of questions from investors on potential barriers to entering that space. And this was actually the focus of our deep dive picking leaders, which we published in September last year when we expanded our coverage.- That's great.

So, you mentioned that investors are waiting for those purchase orders or those contracts and awards to come through. What are you thinking in terms of that for 2023?

Is this the year where we see a lot of momentum a lot of growth or what are you expecting for 2023?

- Yes, so there could be bumps along the way. And as I said in your initial question, it's a fast growth area. So, one caveat is that the interest rate environment, which may affect growth talks and green hydrogen is no exception, could affect the sector from an equity perspective. But outside of that, we're very constructive longer term. We expect the green hydrogen sector to grow substantially over the next decade driven by a range of factors including a push from governments and corporations to reduce carbon emissions.

And since 2020, we've seen a real regulatory momentum towards green hydrogen with a landslide of supportive policies at state and regional levels in the EU and also in the US with the recent introduction of the Inflation Reduction Act. And where hydrogen production tax credit dramatically improve the economics of green hydrogen. We expect the trend to drive meaningful growth for electrolyzer manufacturers going forward. So like super bullish longer term. And getting back to the purchase orders question, we did see a pickup definitely in 2022 and we see it continuing in 2023.

- So it sounds like there's a very supportive backdrop from a regulatory perspective, from the government's perspective and I'm sure we've all seen quite a bit of discussion about corporations reducing their carbon emissions.

But if we look at maybe the demand side of the equation or who ultimately, is using this hydrogen, where do you see the biggest drivers of growth for the industry over the coming years?

- Yeah, so this is a question to be asked again and again. So, while much of the publicity is on hydrogen use as an energy medium for say cars replacing fossil alternatives such as diesel and gasoline is not where demand is coming from. Looking at Europe for instance, 90%. So 90, 90% of demand for hydrogen actually comes from refining and chemicals. Where hydrogen is used as a feed stock. And a key fact is that 98% of hydrogen produced today is not green, but rather gray or blue. And that is not produced from renewable sources. So, the major growth opportunity from green hydrogen is actually shifting from non-green to green hydrogen in those sectors.

- And I think that's fascinating, because I think if you were to ask a number of individuals the first thing they think of when they think of green hydrogen is trucks or some of those heavy industrial uses. And so I think it's very interesting to find out that so much of it is actually used in refining. I know that you've published on this quite a bit recently as well. And so, why actually is hydrogen used in the refining sector and why is this such an important topic for us to follow? - Sure, so we estimate that refining represents roughly 45% of hydrogen demand in Europe.

We focused our recent work on Europe, because this is where you have industrial concentration as well as emissions regulation and skyrocketing gas prices over the past few months, which have offered compelling incentives for corporations to actually accelerate green hydrogen adoption. In this sector, so hydrogen has been used for decades in refining and it's present in key parts of downstream operations.

Happy to dive in detail into that, but very simply put, it's used to enhance refining processes and make fuels compatible for blending and compliant with tighter environmental specifications.

- And I think that's probably a really important point. It's not just about replacing non-green fuels, but it also is about helping to take the existing processes and making them the more green themselves. So I think that's really interesting. I think it's very probably difficult to fully contextualize given how fast it's growing, but how big do you think this green hydrogen opportunity is for the refining sector and who do you think would be the key beneficiaries?

- So, tackling the European refining industry as a whole, we estimate a requirement of approximately 11 gigawatt of electrolysis capacity if all the refineries transition to green hydrogen. And note that this is RBC assessment and this is fairly conservative compared to other sources such as numbers communicated by the likes of Repsol and all that in the refining space. But this 11 gigawatt of requirement compares with roughly four gigawatts of electrolyzer capacity currently in place in Europe and North America. So, that just gives you an idea how demand compares to supply. In our recent deep dive, we have assessed the hydrogen development plans across the 93 active refineries in Europe. And interestingly, 39 facilities, which represent approximately 47 of Europe's capacity. So almost half, have advanced some form of green hydrogen development plans. Within this group, 24 facilities are at an advanced stage of development with selected manufacturers or investment commitment from partners and or public funding support.

In terms of beneficiaries, we believe that manufacturers with the ability to execute a proven product line

and technology will likely be at an advantage.The proximity to cheapen renewable to cheapen abundance,sorry, renewable power and demand for hydrogen will also be at an advantage and will also be a differentiating factor. Although we note that some buyers may choose the technology irrespective of a manufacturer's location and build electrolysis capacity onsite for larger needs. - That really just does give you a perspective of how massive and rapid that growth will be if you need almost 200% growth in the installed capacity just to meet refining in Europe's demand. Let alone all of the other factors we might think about with respect to hydrogen use. And I think all of this sounds really quite positive, but I guess if we play devil's advocate here and we take another look at the industry, what are you worried about? What do you think perhaps the biggest risks for the green hydrogen industry are today? - Yeah, so there are two two main risks that we think about. So, a key takeaway from our recent initiations and follow up meetings with the CEOs and CFOs of our companies under coverage is that the US has become overnight the most attractive market for green hydrogen. And this has to do with the recent adoption of the Inflation Reduction Act and the Hydrogen Production Tax Credit, which like I said earlier, dramatically improved the relative economics of green hydrogen. So I guess the underlying message here is that regulation is key. And right now it's extremely constructive, especially in the US. But any reversal of regulatory support, especially in the US and Europe, could impact the sector and manufacturers.

Then the second risk,and this is more relevant for developers, players in Europe and North America, has to do with competition. And there is a longer term risk of rising competition coming from Chinese manufacturers, which could potentially impact margin expansion potential and commoditize the sector. That's very interesting and I think the thing to me that it sounds like is that there's a lot of growth coming, but it really is uncertain how that growth may unfold over the coming years and decades. And I just wanna thank you for your time today because this has been incredibly interesting. The past few years in this space have have seen monumental change and it's quite clear that the coming years and decades we'll see even greater change.And so, I'm very excited to see what happens for green hydrogen in 2023, and yes, thank you, Erwan for your time today. - No worries, thanks a lot, Peter, for having me. It was a pleasure.

- What else lies ahead in today's ever-changing markets and industries? We will be keeping track right here on Industries in Motion. If you'd liked today's discussion and would like to hear more on similarly fascinating topics, make sure you subscribe to Industries in Motion wherever you listen to your podcasts.

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- This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or a solicitation and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.

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