Infradebt first featured green hydrogen in our newsletter two years ago (see Q4 2019). Green hydrogen seemed an over the horizon issue then, there has been a lot of talk and some action in Australia since. This article recaps our key conclusions from 2019 and updates the outlook (and key issues for investors) based on what we know now.
Hydrogen is the most abundant element in the universe. What makes it attractive in the 21st century on earth is that it is a fuel that when burned produces water rather than CO2. Above and beyond this obvious climate change benefit, hydrogen is also quite flexible. It can be burned and, hence, is useful for industrial processes which rely on heat (such as steel or cement making) and it can also be passed through a fuel cell (or burned in a turbine) to produce electricity or power transport.
The key challenge with hydrogen is cost. Currently, most hydrogen is produced by the steam reformation of natural gas (which produces lots of CO2). Green hydrogen – produced by the electrolysis of water – is very expensive. It is expensive due to the cost of electrolysers and the input electricity (and electrolysis is an inefficient process – with significant energy loss through waste heat). Furthermore, given that most hydrogen won’t be used where it is produced, there are further costs from compression/liquification or conversion to ammonia (which is easier to transport) and then transportation.
The National Hydrogen Road Map indicated a current supply cost for green hydrogen of approx. $6/kg. This equates in a $/GJ – which is how Australian’s quote gas prices – to $50/GJ, or in $/MWh – which is how we quote electricity prices – this is $180/MWh. This is very expensive and wouldn’t be commercially viable.
Back in 2019, the Infradebt view was that hydrogen didn’t make sense for stationary energy. Turning electricity into hydrogen and then back into electricity is fundamentally inefficient. Anything that can be powered directly from electricity should be. While falling electricity costs will make hydrogen a lot cheaper to produce, it doesn’t improve hydrogen’s competitive position for the purposes of electricity generation and supply.
Our view then, and it remains today, is the opportunity for hydrogen is in segments that can’t be electrified (think heavy transport etc). The opportunity for Australia is that we have massive low-cost renewables potential. This is an opportunity to replace jobs/export income lost from the inevitable decline in coal/gas exports with hydrogen exports (or exports of minerals processed with our cheap hydrogen).
What’s Happening Now
In the last two years there has been tremendous activity in the hydrogen space. According to the CSIRO’s HyResource website there are 18 projects operating or under construction and they are tracking a total of 84 projects in various stages of development. That is an enormous amount of activity for a process that generates a gas fuel at 5-10 times the price of its fossil fuel equivalent.
These projects are being developed largely by the private sector, but usually with government/university grant funding or involvement. The sheer number of projects shows both the private sector and government are treating the potential for hydrogen seriously.
Infradebt’s hydrogen outlook
We still believe hydrogen has an important role in hard to abate sectors like long distance/heavy transport and sectors that need direct heat energy (eg steel) not just electricity.
In our mental model of the changes required to hit net zero by 2050, we see renewable electricity and electrification as the low hanging fruit. Thus, we expect the 2020s to be focused on electricity generation, with hydrogen not to hit its stride until the 2030s or 2040s. Interestingly (or perhaps perversely) the government’s policy agenda seems to be trying to do this in reverse.
While rapid rollout of green hydrogen would be a wonderful thing for the planet, there are a couple of concerns for investors. First, early projects will be less efficient and more expensive than later projects. While technological progress is fantastic for society, this competitive dynamic is a challenge for early investors in what are long-lived projects (and a key reason for government support).
Second, while costs will come down over time, even after these initial trial projects, costs will be well above fossil fuel cost parity. Thus, there is a challenging intermediate decade or two, where hydrogen needs to scale up while being more expensive than fossil fuels.
This seems quite uncertain in a country without a carbon price. If hydrogen is to be an export industry – it seems paradoxical for Australia to build a green hydrogen export industry – which is inherently built on the assumption that foreigners will value emissions externalities differently to ourselves. Perhaps this is the ultimate form of ‘relying on the kindness of strangers’.