A decade into the energy transition and progress is clearly being made. Those areas where cleaner technologies are readily accessible – such as renewable energy and electric vehicles – are gaining momentum. Yet, the energy transition involves decarbonising all areas of the economy and some parts are harder to address.
Could green hydrogen be the key to broadening the energy transition into these hard-to-reach areas?
Progressing the energy transition
The latest reading of the World Economic Forum’s Energy Transition Index (ETI), which considers the energy system performance of 120 countries, highlights some encouraging developments. Over the past decade, over 95% of countries have improved their ETI score thanks to increased clean energy investments and improved regulatory frameworks. So while we can take heart that some clean energy industries are maturing, there are still major challenges ahead.
The energy transition is not just about decarbonising energy generation, it’s also about transforming the wider energy system through increased electrification, greater energy efficiency, the introduction of new technologies, and a decentralised infrastructure including how we distribute and store energy.
Green hydrogen has the potential to help accelerate many of these areas, but this can only be achieved if some significant hurdles are overcome.
Abundant, clean energy potential
Hydrogen is the simplest and most abundant element on the planet, and has the capacity to store and deliver large amounts of energy. Yet, hydrogen is rarely available in its free molecular state of H2 – it is obtained by stripping the hydrogen component out of other chemical elements, such as methane and water. And herein lies the challenge.
Traditionally, extraction processes emit significant amounts of carbon due to the energy used in ‘grey’ hydrogen production methods. But by exclusively using clean energy in its production, ‘green’ hydrogen can be formed.
As a carbon-free source of energy, green hydrogen has some distinct advantages over renewable sources. It can be transported over long distances, stored for lengthy periods and some existing fossil fuel infrastructure, such as gas pipelines, can be adapted to handle it. And it is these attributes that help explain the rush of excitement around the gas, as it can be utilised in areas where renewable energy has achieved little impact so far.
Emerging hydrogen applications
The potential uses for hydrogen are wide-ranging. Currently, hydrogen is predominantly used by the chemical industry in the production of ammonia – a foundation for nitrogen-based fertilisers – and the refining of petroleum products. Here, a switch from grey to green hydrogen should be relatively simple. Other industrial applications would see green hydrogen serve as a replacement for natural gas or coal. This could be hugely consequential for energy-intensive industries such as steel and cement manufacturing, and would have a material impact on the decarbonisation of the built environment.
It also offers a credible alternative to electrification in reducing the carbon emissions of long-haul transportation, considering the size and cost of the batteries required for this. Hydrogen fuel cells – which emit only water vapour – offer a significant range advantage over lithium-ion batteries, while also being lighter and occupying less space, presenting a favourable option for commercial road freight. Hydrogen also presents a clean fuel option for aircraft and ships, again due to its lightness versus batteries. However, this emerging solution is still in its infancy and it could be some time before we see commercially available hydrogen-powered planes.
Finally, hydrogen is seen as a viable option for long-duration energy storage. Working in conjunction with renewable energy sources, stationary hydrogen fuel cells can be used to balance out supply when demand peaks or to supplement less-dependable solar supplies in the darker, winter months.
Overcoming challenges to growth
Amid so many impactful applications, why isn’t green hydrogen used more widely today? The answer is threefold: supply, infrastructure, and cost.
A lack of supply is the first hurdle. Today, less than 5% of global hydrogen production is green. To meet expected demand, the green hydrogen system will need new production facilities, plentiful clean energy sources, specific or repurposed transport / pipelines and storage infrastructure. But the major impediment slowing the uptake of green hydrogen is cost. Today, green hydrogen costs 2-3 times more than grey hydrogen. However, with electricity input accounting for much of its production cost, falling renewable power costs will narrow the gap quickly. And with larger production facilities, design standardisation and insights from early adopters, green hydrogen could be cheaper than grey by the end of the decade.
Getting there will rely on huge public and private sector support, but significant steps are already being taken. Some 680 large-scale hydrogen projects, equivalent to USD 240 billion, have been planned for 2030 and this number will be extended further thanks to strong governmental support. For example, the Biden Administration’s Inflation Reduction Act offers a USD 3 per kg green hydrogen tax credit that will immediately make green hydrogen much more competitive; meanwhile China, having opened the world’s largest hydrogen station in 2021, has listed hydrogen as one of its ‘six industries of the future’.
Investing in the hydrogen economy
With its potential to reduce global greenhouse gas emissions by a third in the coming decades, green hydrogen is a clear pathway to a carbon-neutral future. And this emerging green hydrogen trend offers varied opportunities for investors.
At BNP Paribas Asset Management, our Energy Transition Strategy predominantly invests in companies which provide technologies or services to facilitate energy efficiency and decarbonisation. Our Environmental Strategies Group believes green hydrogen will be at the forefront of the transition to a low-carbon economy, and it remains one of their highest conviction ideas today, particularly as support from public institutions should help to de-risk projects and reinforce their long-term growth prospects.
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