Green hydrogen: Hype or hope?

The advent of green hydrogen is being heralded as the saviour of the world’s net-zero ambitions. The molecule itself is no different to its grey counterpart, which is produced by steam methane reforming and already used extensively in industry.

But while grey hydrogen emits somewhere between 11.1kg and 13.7kg of CO2 equivalent for every kilogram of hydrogen produced, green hydrogen, in theory, emits none. This is because green hydrogen is produced by splitting water into hydrogen and oxygen using an electrolyser, powered exclusively by renewable sources of electricity.

“Green hydrogen is powered entirely by renewable energy, so it generates no polluting emissions into the atmosphere and is the cleanest and most sustainable hydrogen,” says Scott Mackin, partner and co-head of the sustainable investment team at Denham Capital.

The ability to produce green hydrogen molecules is widely deemed to be critical to the energy transition because, while wind and solar have proved transformative to power generation, it is vital that we are able to decarbonise other high-emitting industries ranging from chemical refineries and transportation to construction.

“Electrification is important, but it can only take you so far,” says Himanshu Saxena, chairman and chief executive of Lotus Infrastructure Partners. “Hydrogen can be used to green many hard-to-abate sectors that are hard to electrify.”

Thomas Engelmann, head of the energy transition at KGAL, agrees: “Decarbonising our societies and economies is arguably the biggest challenge of this century. However, large parts of the economy cannot be decarbonised directly with green electricity.

“Sectors such as heavy industry, with huge energy needs to process heat from burning fossil fuels, are notoriously difficult to electrify. The same holds true for heavy duty transportation. Moreover, there is a lack of grid infrastructure to transport green power from areas of production to centres of demand.”

Green hydrogen, meanwhile, can be used to decarbonise these industries via several power-to-X pathways. The power refers to a renewable source of energy, while the X refers either to a product such as methanol or ammonia, or the application of the product such as mobility, heat, power or chemicals.

“Green hydrogen can be used as a combustion fuel in industrial or mobility applications, or be reconverted to electricity in a fuel cell,” explains Engelmann. “As a feedstock, clean hydrogen can replace grey hydrogen in industrial processes, such as refining.

“Taking things one step further, clean hydrogen-based derivative products, such as ammonia, methanol or Fischer-Tropsch-based e-fuels, can serve as sustainable feedstocks and ­fuels. For example, green ammonia can be used for fertiliser production while synthetic jet fuel produced from green H2 can replace fossil-based kerosene in aviation.”

Cost curves and subsidies

But it is important to not get carried away; green hydrogen is not necessarily the panacea that we would like it to be. Significant challenges persist if it is to reach its theoretical potential, and the biggest inhibitor to the scaling of the green hydrogen economy today is one of cost.

“Producing a green hydrogen molecule currently costs between three and four times the cost of producing a grey hydrogen molecule,” says Laurent Fayollas, deputy head of Ardian Global Infrastructure and president of the firm’s green hydrogen initiative, Hy24. “Even if you account for the need to buy certification to cover the cost of carbon emissions, the cost of producing green hydrogen is nearly double.”

The obvious way to tackle this cost impediment is through scale. “Just as we have seen with renewables, the more projects that are developed, the lower the cost of equipment becomes,” Fayollas explains. “And just as with renewables, the way to stimulate this activity is with subsidies, at least at first.”

The US has taken the lead with an extensive tax credit regime designed to support the growth of its green hydrogen economy outlined in the Inflation Reduction Act. Other jurisdictions, meanwhile, are considering their response.

“Government intervention will be critical to stimulating the growth of green hydrogen, and it has been positive to see governments promoting green hydrogen, directly and indirectly,” says Mackin.

But despite strong political will globally, opinion as to the best way to support the fledgling industry remains divided and the rules of the game unclear. “On the production side, the best way of providing support in my view would be a contract for difference, bridging the difference in price between green and grey,” says Fayollas.

Saxena, meanwhile, adds that a lack of clarity regarding what is required to qualify for tax credits under the IRA is severely limiting investable opportunities. “It remains to be seen what will be deemed green,” he notes.

The chief point of contention is the way in which the renewable energy source is integrated with the electrolyser. “If you connect the renewables project to the transmission grid which then feeds the electrolyser, it becomes a question of tracking whether the electricity used really does come from wind farms or solar plants.

“Once electrons are on the grid, it can be very hard to tell. The IRS, which is responsible for implementing the tax credit regime, may decide that if just one molecule is grey then the tax credit doesn’t apply. That approach would materially diminish the number of investment opportunities in the space, forcing vertical integration where the wind or solar farm would have to be directly connected to the electrolyser. The cost there would be substantially higher and fewer projects would make sense.”

The other possibility is that the IRS decides it is possible to take power from the grid, but there would need to be some form of certification, verifying that a project meets tax credit requirements. “In that scenario, it would be possible to build wind and solar farms where the natural resources are optimal and the hydrogen projects closer to where the demand is and a lot more will get done,” Saxena says.

Investable opportunities

Despite this uncertainty, the green hydrogen universe is still becoming of increasing interest to infrastructure investors today. But where exactly are the investable opportunities?

If the lack of clarity in subsidy and tax credit regimes can be resolved, Saxena sees opportunities up and down the green hydrogen value chain. “It starts with the renewable energy required to produce the green hydrogen, of course. Then there are the electrolysers. Capital will also be required to build out mid-stream assets so that hydrogen can be both stored and transported to where the demand is,” says Saxena.

There would also be opportunities to convert hydrogen to ammonia or methanol so that it can be transported overseas. Saxena notes that Lotus has invested in all parts of the value chain, with the exception of electrolysers to date. Among the firm’s investments is a salt cavern network to be used for hydrogen storage.

Fayollas, meanwhile, categorises green hydrogen opportunities in two main buckets. “First, there is a local play, whereby you can develop a large electrolyser supported by renewable energy generation close to the industrial demand, for example a steel manufacturer. That reduces the cost of transport.

“The alternative is to first think where you can access cheap green energy, in other words those locations where there is lots of wind and lots of sun, which could mean Chile, the Middle East, North Africa or Australia. And then producing hydrogen, ammonia or ammonia methanol and transporting those products to centres of demand, for example in Europe, the US and elsewhere.”

There will also be opportunities to invest in green hydrogen to support the decarbonisation of transportation, but this sector remains challenging, says Fayollas.

“It is a chicken and egg situation. To be able to produce H2 cars, light commercial vehicles and trucks, commercial manufacturers are asking for refilling stations at scale to facilitate this rollout. Massive availability schemes supported by states would be needed to develop the associated infrastructure.”

“Hydrogen can be used to green many hard-to-abate sectors that are hard to electrify”

Himanshu Saxena
Lotus Infrastructure Partners

Indeed, the chicken and egg analogy is oft-cited when it comes to the nascent green hydrogen industry. “The manufacturers of electrolysers are waiting for the first large orders to be able to finance the expansion of production capacities. But their potential customers will not order until they have identified viable business models with a reasonable risk-reward ratio,” says Engelmann.

There are other reasons to suggest that the green hydrogen story may have a bumpy start. There are safety concerns associated with the compression required to store and transport green hydrogen. There are also challenges associated with the impact of intermittent renewable energy on electrolysers, together with uncertainty regarding which electrolyser technologies will ultimately reign supreme.

These questions will become increasingly pertinent as banks are asked to take a view on this burgeoning market. “When it comes to underwriting and financing, there will be a lot more discussion about the longevity of the technology. So far, these projects haven’t really been taken to the banks, but when they are, there will be questions around who is selling the electrolysers, what their credit rating is and whether they can offer long-term contracted maintenance to ensure ongoing efficiency,” Saxena says.

“We have seen similar evolutions in the battery storage market as the market decides who is bankable and who is not.”

Believe the hype?

Indeed, Saxena sounds a note of caution around the excitement that is undeniably building around the green hydrogen ecosystem. Despite substantial pending government support schemes, he believes many are still underestimating the costs and complexities of producing and transporting the molecule.

“There is a great deal of excitement,” he says, “but it isn’t always supported by the facts.”

In particular, Saxena cites the escalating price of renewable energy, the single largest variable in the cost of producing green hydrogen. “As recently as a couple of years ago, the cost of renewable power was hovering at $20 to $30 per MWh in the cheapest markets in the US. Today that same power costs between $40 and $50.

“A lot of that has been driven by the cost of installing wind turbines, which has gone up materially. The downward cost curve of renewable power has been completely reversed in the past 12 months.”

Furthermore, there are competing sources of demand for that renewable energy in the form of buying interest from corporates and utilities. “If a hydrogen developer is competing with Amazon to buy power from a wind farm, that competition is going to be stiff. Amazon has strong credit and can sign a 15- or 20-year deal, after all.”

Hydrogen transportation and storage costs are also an issue. The places where renewable energy is most abundant are generally not close to load centres. Hydrogen pipeline networks don’t exist in any meaningful sense, however, and if you find yourself trucking hydrogen long distances in diesel fuelled vehicles, that clearly defeats the sustainability objective.

Despite these misgivings, Saxena does believe green hydrogen will have a role to play in the energy transition, albeit one focused on locations at the intersection of renewable resources and customer demand, rather than on blanketing entire regions with green hydrogen projects.

“Green hydrogen is going to be part of the future. But the journey isn’t going to be as smooth as people think.”

Mackin also concedes that most forecasts have two cases for how we achieve net zero – with and without explosive green hydrogen growth. He adds that while there is a strong use case for heavy transport and certain industrials, other green technologies are likely to compete in the decarbonisation of industry as well.

“Manufacturers of electrolysers are waiting for the first large orders to be able to finance the expansion of production capacities. But their potential customers will not order until they have identified viable business models”

Thomas Engelmann
KGAL

“Overall, it will take a village of technological changes to bring about net zero. Green hydrogen will undoubtedly have a significant role to play.”

Others are more bullish still. “Green hydrogen can absolutely live up to the hype. If it does not, it would mean that we would never ever achieve our climate goals. I don’t even want to imagine that,” says Engelmann, who cites data he says proves that green hydrogen is on the right track.

Production capacity grew to more than 109 kilotonnes per annum worldwide in 2022. That is an increase of 44 percent over 2021. Meanwhile, from 2022-23 production could reach a growth rate of 165 percent, according to analytics firm GlobalData.

Engelmann says that in Europe at least, the time for investors to enter the green hydrogen market appears to be just right. “In light of the Ukraine crisis, rising natural gas prices and the imminent risks of climate change, the EU and its member states consider green hydrogen to be crucial, and are considerably accelerating their efforts to promote this emerging markEt by way of new legislation and support schemes.”

“It isn’t a question of hype,” says Fayollas. “If we want to reach net zero by 2050, this has to happen. If we continue with the emission levels of today, we will already have broken the 1.5 degree temperature rise threshold in 10 years’ time. It isn’t about green electricity or hydrogen. We need both. And quite frankly we are already too late.”