Investing in the future of hydrogen

With an opportunity as significant yet embryonic as hydrogen, successful long-term investments in hydrogen players will require scrutiny and selectivity. So, how should private investors approach this theme? What are the risks? And is it possible to identify future winners?

To help investors navigate these potentially choppy waters and capture the hydrogen opportunity, Lombard Odier recently held an online event dedicated to exploring the future of hydrogen power.

Opening remarks from Fabrice Adrien, Head of Centralised Advisory, Lombard Odier

“The fact that hydrogen is the Next Big Thing when it comes to the climate transition isn’t news. Indeed, the idea of a hydrogen economy isn’t even a new concept; but its lustre has come and gone over time. Hydrogen initially drew attention during the oil shock of the 1970s, and again as excitement around alternative technologies reached a peak in the early 2000s. Today, following the launch of the Hydrogen Council of early adopters in 2017, hydrogen is once again the object of renewed interest.

“Given our historic ambivalence around hydrogen, one would be forgiven for thinking that its days in the spotlight are, once again, numbered. However, this time, the hydrogen hype is backed up by the development and adoption of new, increasingly viable hydrogen technologies, coupled with increasing commitments from public authorities to accelerate the industry in the years to come. As such, we believe the time is finally right for hydrogen to begin an ascension that will culminate in its becoming a crucial component in our future sustainable energy mix and journey toward net zero.

“That said, with the future of hydrogen still so unclear, we also believe that enthusiasm should be tempered by caution.”

Q&A with Marie Owens Thomsen, Head of Global Trends and Sustainability, Lombard Odier

Why have climate considerations put hydrogen back in the spotlight?

Every day, we see countries and companies making promises around what they’re going to do for climate change.  Often these commitments are hard to compare, but the least ambiguous is the goal of achieving net-zero emissions by 2050. In order to reach that goal, we have to make a full fossil fuel exit. The sectors where this will be the most challenging are those that use energy directly in their industrial processes. This means you can’t simply replace that energy with a renewable alternative. In these hard-to-abate industries, hydrogen will play a vital role in the transition to net zero.

In that context, what makes hydrogen so interesting?

Hydrogen has to be produced – it does not exist in a ready-made fashion on Earth. When produced with renewable energy, there are no CO₂ emissions. This the first marvellous feature of “green” hydrogen. And unlike batteries—which lose energy over time—you can store hydrogen from one season to the next. Since supply of renewable energy tends to be intermittent, green hydrogen would provide an excellent way of storing excess energy until it’s needed.

However, only 4% of the hydrogen produced today is green—the rest is produced by burning fossil fuels, mostly natural gas. So, the world is now engaged in building up the capacity to produce far more green hydrogen, and with scale, its cost will come down. 

You said that hydrogen will play an essential role in decarbonising hard-to-abate industries. Can you give some examples?

Hydrogen can be used to fuel a range of vehicles, including passenger cars, though we don’t think it’s likely that hydrogen will catch up with battery electric vehicles. Today, there are around 25,000 hydrogen cars on the road compared with 7.5 million battery-powered electric cars, despite the former beating Tesla to the market.

However, heavy-duty commercial transport is another matter. In aviation, for instance, where batteries are too big and heavy to make electric planes a realistic prospect in most use cases, we can easily imagine a future where hydrogen fuel has superseded jet fuel as the industry’s go-to energy source.

Other areas where hydrogen is likely to become important is in the production of green steel, green cement, and so on. And one can also use hydrogen to heat buildings.

What technical problems do we need to solve?

To get the absolute price down, we have to lower the cost of the renewable energy to be used in the production process. Then, of course, we need to build capacity so we can benefit from economies of scale.

In its natural form, hydrogen is very voluminous. While a kilo of hydrogen gas contains three times as much energy as a kilo of petrol, it would also fill a space of 11 cubic metres, which means we would need huge trucks to transport it that way. So we usually store and transport hydrogen in liquid form – hydrogen becomes liquid at -253°C – or the hydrogen can be put under pressure whereby it is compressed and takes up less space. You can even store hydrogen in chemical products and metals.

The problem is that all of these methods add additional processes, which means transportation and storage costs can be as high as production costs. As such,  there is a trade-off between centralised production which would be more cost efficient but would come with higher transportation and storage costs or, on the other hand, decentralising production which would be more expensive in terms of installation costs but transport and storage could be largely avoided.

Where are we with hydrogen right now, where do we need to be, and how do we get there?

Today, hydrogen accounts for around 2.5% of global final energy consumption¹. If we’re going to hit net zero by 2050, we think that number will need to be somewhere between 20 and 25% of our overall energy mix.

But to achieve that goal, we need new technologies, which, in turn, requires extraordinary vision, regulatory support and, we believe, investment in the order of 11 trillion dollars. The encouraging fact is that, today, we already spend almost that amount in the fossil fuel sector. Simply by reallocating that spending to the renewable energy sector, most of the investment needs could be met.

Of course, this won’t be easy. For a start, we still subsidise the fossil fuel industry to the tune of 6.5% of global GDP, despite 190 countries having signed the Paris Agreement². For comparison, we spend just 4.5% of global GDP on education. So, fossil fuel subsidies are a clear obstacle to the success of the other measures we’re trying to put in place. If we want hydrogen to become competitive sooner, we have to stop doing this.

How big could the hydrogen economy become?

It will become big once the price comes down. The latest forecast from Bloomberg is that, in most markets, the price of hydrogen could be below one dollar per kilo by 2050³. They based this on the cost of solar, which has decreased spectacularly over the past ten years, and is expected to fall further. We hope to see the same trend with other forms of renewable energy.

Today, we consume about 70 million tonnes of hydrogen per year⁴. By 2050, we’ll need to be able to consume around 700 million tonnes—about ten times as much. The revenue associated with this new activity mightn’t surpass that of the oil sector, but it could be close. In 2019, oil and gas represented 3.8 % of global GDP, while hydrogen could represent 3% of global GDP by 2050—assuming development goes smoothly⁵.

This won’t happen overnight. When it comes to general deployment of hydrogen for most use cases, any likely timeline will take us close to 2050. Right now, the EU has the most compelling plan for developing and scaling up hydrogen, while the Paris Agreement contains the strongest framework for pushing this sector forward globally.

What about investment?

Last year, investors got very excited about hydrogen stocks. However, we have to understand that price volatility will continue to be a feature of this sector until we get a better picture of who will emerge as market leaders.

It’s currently very difficult to value hydrogen companies, as many have yet to make a profit. So no matter how much research you do, investing in the hydrogen sector also requires a leap of faith—much as the tech sector did 20 years ago. That said, unlike the tech sector, we have a precise idea of why we’re investing in hydrogen: to reach net zero by 2050. And, thanks to the Paris Agreement, we also have a large number of countries that have expressed a desire to develop a hydrogen industry.

While 2020 was a year in which the economic challenges of hydrogen began to seem more manageable, it’s still hard to say where the industry will go in the near future. So while arguably any portfolio could benefit from some exposure to hydrogen, its share is perhaps best kept small and sized in accordance with the uncertainty that still characterises the sector.

¹ The Future of Hydrogen – Analysis - IEAQ&A: A Hydrogen Strategy (europa.eu)
² https://reneweconomy.com.au/6-5-global-gdp-spent-subsidising-fossil-fuels-12m-every-minute-78351/
³ https://www.bloomberg.com/graphics/2020-opinion-hydrogen-green-energy-revolution-challenges-risks-advantages/
⁴ https://news.climate.columbia.edu/2021/01/07/need-green-hydrogen/#:~:text=Approximately%2070%20million%20metric%20tons,processing%2C%20metallurgy%2C%20and%20more.
⁵ The Future of Hydrogen – Analysis - IEA

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