investment viewpoints

    What’s next for clean hydrogen investments?

    What’s next for clean hydrogen investments?
    Pascal Menges - Head of Equity Investment Process and Research, Client Portfolio Manager

    Pascal Menges

    Head of Equity Investment Process and Research, Client Portfolio Manager
    Paul Udall - Portfolio Manager, Global Equities

    Paul Udall

    Portfolio Manager, Global Equities

     

    Need to know

    • The growth potential for green hydrogen is clear: energy majors BP and Iberdrola are investing in plant capacity and China and the EU are emerging giants of the clean-power source.

    • Since February 2021, investments in advanced hydrogen projects have nearly doubled to USD 150 billion and announced production capacity in low-carbon hydrogen has increased by 60%1.  

    • LOIM is exploring investment opportunities in green and blue hydrogen power via our Climate Transition equity strategy. We are analysing the industry in search of further growth opportunities.

    Global momentum

    Surging gas prices, bust utility providers and eye-watering energy bills for consumers – the power crisis in Europe is biting hard. At a time like this, the case for accelerating the green-energy transition is clear.

    But transitioning to a low-carbon economy requires more than ditching fossil fuels in favour of solar or wind power. It also means accelerating investments in storage and further clean-energy sources. Green-hydrogen, generated from water by a renewables-powered electrolyser with zero emissions, is emerging as an essential fuel for the transition.

    Take Iberdrola and BP2, for instance, which recently announced investments in new green-hydrogen power-generation plants in the Iberian peninsula and the UK respectively. BP, one of the world’s largest oil-and-gas companies, is also considering green-hydrogen production at refineries in Germany, Spain and the Netherlands3, and aims to capture 10% of the low-carbon hydrogen market in key geographies by 20304.

    BP is not alone in its sector. Several oil-and-gas companies worldwide are pouring billions into the hydrogen business with expectations that it could replace hydrocarbons in power generation, heavy industry and transportation, such as trucking and shipping.

    When this will happen depends on how fast cost-reduction technologies make the new energy source scalable and how quickly companies and governments embrace hydrogen as part of their decarbonisation strategies. Still, forecasts from the International Energy Agency suggest that about 10% of global energy consumed by 20505 will be derived from hydrogen.

    In this transition, green hydrogen is being hailed as a disruptor: it has a versatile use, can help hard-to-abate companies decarbonise and also provide energy producers with a new line of business aligned with governments’ net-zero targets. 

    Globally, the forecast for total capacity delivered by green-hydrogen projects under development has more than quadrupled to over 15 gigawatts from 3.2 gigawatts in only the one-year period ended August 2021, according to Wood Mackenzie, a global energy research and consultancy firm6.

    While green hydrogen is currently a small part of the global energy mix, expected major reductions in production costs in the coming years could make generation, storage and transportation and export companies attractive investment opportunities for discerning investors.

    The World Business Council for Sustainable Development and the Sustainable Markets Initiative also announced a hydrogen pledge during COP 26 last year to drive growth in demand and supply of hydrogen as key part of a future net-zero system. Under this, pledges have been made by 28 companies ranging from mining to energy, vehicle and equipment manufacturers to financial services. The announced pledges equate to nearly one quarter of the decarbonization potential for hydrogen by 2030, as estimated by the Hydrogen Council.

     

    Green hydrogen superpowers

    With countries representing more than 80% of the global economy pledged to net-zero targets, governments are competing to emerge as the first green-hydrogen powerhouse. More than 30 countries have committed to hydrogen strategies and allocated funding to implementing them7.

    Europe remains the centre of hydrogen development, accounting for more than half of announced projects and estimated investments of USD 130 billion. Still, all other regions grew faster proportionally with over 75% increase in project announcements8.

    China, for instance, is fast emerging as a hydrogen giant and expects the power source to comprise 10% of its energy share by 2050. It has also commissioned the world’s largest green-hydrogen project, planned for completion next year, and has announced more than 50 large-scale hydrogen projects. This amounts to over USD 180 billion in committed or announced investments9. About half of China’s announced projects will support transport, a key sector in its energy-transition plan.

    Green-hydrogen investments have accelerated in China on expectations that the market will boom as industries and consumers switch to lower carbon fuels after the nation announced its target of net-zero emissions by 2060 and peak carbon emissions in key sectors by 2030.

    Global electrolyser sales are expected to quadruple in volume in 2022 to between 1.8 to 2.5 gigawatts from last year, with China accounting for two-thirds of demand, driven by state-owned enterprises keen to show compliance with national decarbonization goals, energy intelligence firm BloombergNEF said in a forecast last month.

    Chinese companies are following the solar-power development playbook: slashing prices and production costs, increasing installations and accelerating new technologies using government funding and policy support for hydrogen projects. Also electrolysers, like solar panels, are relatively inexpensive and easy to mass-produce in China owing to lower cost of labor and raw materials.

    Additional factors that could drive the adoption of renewable hydrogen in China include the nation’s scale-up in clean-energy production from a total capacity of 500 GW in 2020 to 1,200 GW by 2030, according to the Hydrogen Council, a global CEO-led initiative of more than 130 companies committed to the commercial development of the hydrogen economy.

    China has also committed to developing a high-quality transmission grid and expanding its storage capacity to ensure it has the flexibility needed to increase the share of energy produced by renewables.

     

    Hydrogen Council insights

    With strengthening climate ambitions, momentum in hydrogen development has been boosted as a key energy transition pillar, according to the Hydrogen Council.

    Since February 2021, large-scale clean-hydrogen projects amounting to over 10 million tons of total capacity by 2030 have been announced, covering about one-third of total clean-hydrogen demand growth expected in the next decade10.

    Further highlights from the Hydrogen Council report include:

    Globally, 131 large-scale projects have been announced since February 2021, taking the total to 359

    • Total investments in projects and across the value chain amount to an estimated USD 500 billion through to 2030. Investments in projects at a ‘mature’11 stage have nearly doubled to USD 150 billion since February

     

    Source: Hydrogen Council Insights, July 2021

     

    What are the opportunities in the hydrogen value chain?

    We are exploring potential investment opportunities in blue and green hydrogen through our Climate Transition equity strategy. The clean-energy source also factors into our core investment conviction in the transition to a CLICTM economy that is Circular, Lean, Inclusive and Clean economy and aligned with meeting the zero-emissions challenge.

    We are interested in companies in carbon capture technology, renewable power generation and electrolyser manufacturing space. In addition, the broader set of opportunities linked to hydrogen includes infrastructure comprising storage, distribution and transport and applications including fuel cell manufacturing, mobility, buildings and steel sector.

    To conclude, while the hydrogen economy mostly offers opportunities related to our Climate Transition strategy as a new source of clean energy, some applications could be positive for our Natural Capital strategy as well for example in the space of green fertilizers or green chemicals. But it is still early days.

    We at LOIM, have thoroughly mapped the opportunity set and are ready to capture all opportunities in hydrogen as market conditions allow.

    Discover more about our Climate Transition strategy here.

    sources.

    1. Hydrogen Insights Report, July 2021
    2. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document
    3. https://www.bloomberg.com/news/articles/2021-11-29/bp-plans-green-hydrogen-base-in-u-k-as-transition-speeds-up
    4. https://www.bp.com/en/global/corporate/news-and-insights/reimagining-energy/hydrogen-and-the-energy-transition.html
    5. Executive summary – Global Hydrogen Review 2021 – Analysis - IEA
    6. https://www.woodmac.com/news/opinion/the-promise-of-green-hydrogen/
    7. Hydrogen Insights Report, July 2021
    8. Hydrogen Insights Report, July 2021
    9. Hydrogen Insights Report, July 2021. Announced investments comprise investment directly associated with publicly announced projects, while committed investments includes additional investment that will be required to reach government ambitions and indirect investments that will be needed from Original Equipment Manufacturers and suppliers to support the required direct investment.
    10. Updates from the Hydrogen Council in collaboration with McKinsey & Company, July 2021
    11. ‘Mature’ means that the investment is either in a planning stage, has passed a final investment decision, or is associated with a project that is already under construction, commissioned, or currently operational, according to the Hydrogen Council.

     

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