The Coming Wave of Hydrogen Investment

 

Takeaways:

  • We need a massive increase in investment to keep to the 1.5°C warming target for 2050
  • The 390 green hydrogen electrolysis projects currently under development globally will produce ~8Mt of H2 per annum by 2030 – This needs to increase 10x to achieve the 80Mt p.a. called for by 2030 under the IEA roadmap.
    Assuming all of the government pledges for 2030 are achieved this will still only produce ~180GW of electrolysis capacity – only 21% of the required 850GW in the IEA plan.
  • The UK is a key technology hub in the sector and we expect to see a rapid increase in investment opportunities over the coming 3 years.

In the last week alone we have seen a flurry of hydrogen related stories in the press from JCB investing £100m into a new hydrogen engine, Ineos committing to a £2.3bn investment in green hydrogen all the way to a £1m Earthshot prize won by a small Italian electrolyser company. With the much-publicised COP 26 meeting just around the corner it is unsurprising to see a step up in the news flow surrounding investment into low carbon energy projects. Within this sphere the fuel source attracting the most attention is undoubtedly hydrogen. In August this year the UK government released the eagerly awaited, and somewhat delayed, UK Hydrogen Strategy Report. The report follows about a year behind a similar initiative from the major European countries and the EU itself, and around 2 years behind Australia, Japan and Korea. One assumes that the impending global climate talks in Glasgow concentrated the minds of the authors to get the project over the line. Unfortunately this pressure is still being felt by those producing the government’s ‘Net Zero Emission Plan’ which at time of writing is yet to be published, although expected any day.

While a useful guide to the current UK hydrogen ambitions, the recent strategy report was quite short of new information. From a financing perspective each of the funds discussed in the paper had already been announced in the Prime Minister’s ‘Ten Point Plan for a Green Industrial Revolution’ in November last year, which included;

  • £1bn Net Zero Innovation Portfolio (with around 10% for hydrogen as a key priority area)
  • £240m Net Zero Hydrogen Fund
  • £315m Industrial Energy Transformation Fund (first announced in 2018)It appears then that the Hydrogen Strategy Report brought only an incremental investment of;
  • £20m Industrial Fuel Switching Competition
  • £60m Low Carbon Hydrogen Supply 2 Competition

The focus of the report is the UK’s aim to pursue growth in hydrogen production from both blue (produced from traditional fossil fuels but with carbon capture technology), and green (produced from renewables) sources. The intension being to get to 5GW of low carbon hydrogen production by 2030 – around 4.5% of the expected total energy requirement of the UK. The ambition is to create a sufficiently attractive subsidy structure that will attract around £4bn of private investment into the space. Details of the scheme are not yet known as we remain in the consultation period but given the successful process for wind farms over the past decade the prospects here look reasonably good.

On the current global trajectory, we are not even getting close.

While the combination of different funding sources and production milestones in the reports provide some much needed clarity this is unfortunately not likely to satisfy the visitors to Glasgow in December. They are hoping for a lot more… A LOT MORE.

To put this in perspective we need to look to the recent Global Hydrogen Review from the International Energy Agency (IEA). The report, which follows on from their prior ‘The Future Of Hydrogen’ goes into great detail (>200 pages) about the required adjustments that need to be made, and the likely role of hydrogen, in achieving the Net Zero by 2050 target. On the current global trajectory, we are not even getting close.

To put this in perspective we only need to look at a comparison of the requirements under the IEA’s plan (NZE) vs the reality of the current level of pledged projects (APS). As fig 1 below shows, even by 2030 we are on track to fall well behind:

Fig 1 – Carbon Capture and Storage – Scenario Analysis 

Global Hyrdrogen review 2021

Source: IEA 2021, Global Hydrogen Review, All rights reserved


Green Hydrogen runningwell below the IEA Targets

Adding together the currently announced pledges for hydrogen in transport the total reached 0.4% of demand by 2030 rising to 6% by 2050. In a normal industrial transition this would appear realistic, but this is not a normal transition. Compare these figures to the net zero requirements of 2.6% by 2030 and more than 25% by 2050 and the drastic shortfall is clear. In few places is the shortfall starker than in water electrolysis which uses a DC electric current to separate the oxygen and hydrogen constituents. The process emits no greenhouse gases and is an important contributor to the net zero ambition. However, the current trajectory of planned investment (let alone actual projects) falls well below the IEA targets:

Fig 2 – Electrolysis Capacity in 2030 – Scenario Analysis

Electrolysis Capacity in 2030 - Scenario Analysis

Source: IEA 2021, Global Hydrogen Review, All rights reserved

Clearly this is only one area requiring funding under the net zero scenario and the IEA outlines the scale of the task ahead:
“There is also a need to accelerate technology innovation efforts. Several critical hydrogen technologies today are in early stages of development. We estimate that USD 90 billion of public money needs to be channelled into clean energy innovation worldwide as quickly as possible – with around half of it dedicated to hydrogen-related technologies.” (My underlining).

Assuming this is even close to correct, with around $45 billion of investment into hydrogen-related technologies needed “as quickly as possible” it is not hard to see why the segment is garnering so much attention from the investment community.

 

UK AHEAD OF THE CURVE

The positive news for UK investors is that we are extremely well placed to take advantage. Hydrogen development, and particularly CCUS (Carbon capture, utilisation and storage) are relatively advanced both here and in the Netherlands, as outlined by the recent Hydrogen Trade Mission to the UK organised by the Ministry of Foreign Affairs of the Kingdom of the Netherlands – and by the fact that of the 47 large scale hydrogen carbon capture projects globally, 23 are based in these 2 countries.

At Torvius we are engaging with the small scale hydrogen projects of today that will benefit from the coming tsunami of investment to become key participants in the journey to net zero.

COP26 needs to mark a significant turning point in ambition if we are to achieve the IEA targets.

We aim to play a small part in building greater collaboration between innovation and investment to help reach those targets.

For more information please contact info@torvius.com.