Should You Invest in Hydrogen?
Hydrogen Vs. Natural Gas For Electric Power Generation
What is the big fuss with hydrogen?
The renewable energy proposition is as follows: hydrogen generated from renewable energy can provide grid-scale energy storage similar to that provided today by natural gas. This will overcome the limitations presented by other renewable energy sources e.g. the intermittency limitation of wind and solar power. This hydrogen proposition has garnered increasing interest from investors and has potentially significant implications for investors in natural, gas, and industrial equipment spaces. Hydrogen is not only attractive for grid power but also for transportation with a big drive to develop fuel cell vehicles.
Hydrogen is classified as grey, blue, or green depending on how it is made. Hydrogen produced from fossil fuel with CO2 released is classified as grey. Blue hydrogen is sourced from fossil fuel with CO2 captured. Green hydrogen is captured from renewable energy with no CO2 emissions. The hydrogen source in question when people talk about the future hydrogen economy is green hydrogen. A popular method of producing hydrogen is by electrolysis, which requires 39.4 kWh of input power to produce one kg of hydrogen provided the electrolysis process is 100% efficient. If this electric current is produced by a renewable source then the hydrogen is considered to be green.
How does hydrogen compare as a fuel?
The energy content of gas is measured in BTUs (British Thermal Unit) and hydrogen has about 30% of the energy content of methane. It takes 3.3 cubic feet of hydrogen to deliver the same energy as one cubic feet of natural gas.
However, when hydrogen is burned to produce power, no CO2 is produced…
A mixture of hydrogen and natural gas in the fuel stream can reduce the CO2 output. In such cases, 75 % H2 by volume is required to achieve a 50% reduction in CO2 due to the difference in energy content. Another major pitfall of using hydrogen as a fuel, is that hydrogen has handling and safety issues whilst methane does not. Hydrogen can cause embrittlement of metals, and deterioration of plastic and rubber seals.
Can hydrogen be produced on scale?
For hydrogen to be a worthwhile investment, it must be generated, transported, stored, distributed, and combusted. To date, all of these steps are in routing operation on an industrial, if not grid scale.
Worldwide annual production of hydrogen currently stands at about 70 million metric tons (MMT).
Steam methane reforming accounts for about 95% of hydrogen production today. This method generates 5.5 kg of CO2 per kg of H2, so is not attractive for zero-net carbon goals in the absence of cost-effective carbon capture. And given cost-effective carbon capture, it’s easier to just generate grid power directly with natural gas.
So what about blue or green hydrogen?
There are multiple small scale demonstrations of generation and storage of hydrogen, with power generated from fuel cells. For example, solar power generated hydrogen has been demonstrated in the French Alps. Hydrogen has been added to the fuel mix for gas turbines and the primary turbine vendors — Mitsubishi Power (MHI), GE (GE), and Siemens (OTC:SEIGY) — all expect to provide turbines to burn 100% hydrogen. The H21 Leeds City Gate Project plans to use blue hydrogen to replace natural gas for heating and cooking for 1% of the U.K. population by 2030. So yes, hydrogen can be produced on scale.
What is the economic practicality of using hydrogen as a fuel?
The current cost for producing hydrogen by electrolysis is approximately $4–6/kg, which works out to about $32–48/MMBtu. This has the potential to drop to $1/kg ($7.4/MMBtu) with industrial-scale manufacturing of electrolysis equipment before 2050.
Natural gas is priced at ~ $3/MMBtu and a preference for green energy isn’t enough to overcome a 10x cost premium. However, this may be sufficient to overcome a 2–3X cost premium provided by improved electrolysis processes, especially if a carbon tax is at play. It is thus feasible to assume that the natural gas cost advantage might disappear by 2050. Indeed, institutional investors, such as the Climate Action 100+ investors group (which represents $47 trillion in assets), are increasingly including environmental factors in their investment criteria and could further bolster a net-zero grid.
Investor Takeaways
- Green hydrogen is technically feasible on an industrial scale.
- Costs will come down enough by 2040 or 2050, that a willingness to pay a 2–3x green premium will bridge any cost gap with natural gas.
- The scaling up required to power the required electrolysis capacity makes it unlikely that hydrogen will displace a significant amount of the natural gas used to generate electricity by 2050.
- A large amount of energy would be required to generate the green hydrogen to replace natural gas. In the U.S. this would be largely solar whilst in Europe, this will be mostly wind. Solar investments that do well without hydrogen should do even better with it.
- The actual turbine market is split among three very large players: Mitsubishi Power, Siemens, and GE. Whether their turbines continue to burn natural gas or transition to hydrogen over a couple of decades seems unlikely to move the needle.
- The best opportunities may lie in electrolysis companies, like Nel ASA or ITM Power, although I would consider these very speculative. I would consider all the electrolysis companies candidates for acquisition by large industrial firms — Mitsubishi, Siemens, etc.
