ESG Focus: The Clean Hydrogen Prospect (Part 1)

ESG Focus | Dec 08 2022

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The Clean Hydrogen Prospect (Part 1)

As green hydrogen hits a tipping point, investors are turning their focus to the broader clean hydrogen prospect, and this article examines the nuts-n-bolts of the hydrogen market and its related technologies.

-The economics of green hydrogen
-The clean hydrogen rainbow
-Applications: grids, fertiliser, aviation and heavy industry
-Electrolyser market
-Hydrogen carbon-capture plays
-Storage, Transport And Infrastructure

By Sarah Mills

Clean hydrogen is shaping up as the biggest green prospect since renewables and in 2022, an energy-hungry world pivoted sharply towards the fuel, and the International Energy Agency basically gave the fuel its imprimatur.

This article (Part 1 in a series on the subject) discusses the mechanics of clean hydrogen production and its applications and challenges.

We follow up with a review of the clean hydrogen prospect – its markets and key developments domestically and overseas in Part 2.

Part 3 checks out the Australian hydrogen prospect and examines specific ASX-listed stocks, including its best-known local advocate Fortescue Metals Group ((FMG)).

A reminder to investors, this ESG column takes the long view. It does not discount positive or negative price movements in existing energy sources in the near term.

The Economics Of Clean Hydrogen

Clean hydrogen is a subset of the clean technology sector.

Clean technology reduces the use of non-renewable materials cutting waste; energy; pollution; emissions; and many issues associated with mismanagement. 

In these respects, clean hydrogen is competitive if not superior to conventional counterparts on the global ESG stage, but it is yet to prove economically competitive.

Clean hydrogen, including green hydrogen (powered by renewables), are unlikely to ever compete with renewables, short of massive improvements in catalytic technologies.

So clean hydrogen’s main competitors are fossil fuels and battery technologies.

The price of green hydrogen needs to fall to between US$0.70/kg and US$1.60/kg to be competitive with natural gas by 2050.

That compares with an average of US$3.80kg to US$5.80kg prior to the Ukraine conflict, according to Reuters. (Prices have temporarily skyrocketed due to high energy costs).

But assuming fossil-fuel prices remain elevated, observers expect the fuel to reach cost parity by 2025 as carbon markets, methane pledges, tariffs and the redirection of subsidies from fossil fuels kick in.

Green Hydrogen Is Uncompetitive Without A Price On Carbon

Unlike the rest of the world, Australia has no price on carbon, which means clean hydrogen is likely to continue to prove an unviable investment in this country for the next few years, particularly in a rising interest rate environment, in which the market is focused on risk, and prizes value over growth.

Director Climate Energy Finance Tim Buckley notes that clean hydrogen as an investment is unviable without a regulatory impost.

“There is no such thing as clean hydrogen without a price on carbon,” says Buckley.

Such imposts and subsidies are already in place in countries such as the US and Europe (we discuss this below), but Buckley expects Australia will lag for at least three years, until the government’s hand is forced by global competition.

In the meantime, advocates point out that green hydrogen costs have fallen by a factor of three in 20 years, that it took solar four decades to achieve the same result, and expect costs will fall precipitously from here (particularly from post 2025) meaning the subsidy threshold could tighten if not evaporate.

But clean hydrogen’s challenges are more than just financial, all of which we discuss below.

Not All Clean Hydrogens Are Created Equal

Clean hydrogen is a catch-all term for a range of hydrogen technologies that do not release carbon dioxide (CO2) into the air, or that release substantially lower levels of CO2 into the air.

To qualify for the EU green taxonomy, a technology must have a low carbon/hydrogen footprint of less than 36.4g CO2 equivalent per megajoule.

There are several forms of clean hydrogen being produced globally, all with varying prospectivity. 

These include a range of processes from green hydrogen (derived through electrolysis and catalysts), to bio-mass produced hydrogen, and methanol (waste to energy) hydrogen.

For ease of description, pundits have colour-coded the hydrogen market.

-Green hydrogen is derived from electrolysis using renewable energy such as wind, solar and hydro;
-Yellow hydrogen is like green hydrogen but is powered purely by solar rather than renewables generally (such as wind for example).
-Pink hydrogen is derived from nuclear energy;
-Turquoise hydrogen includes technologies that use methane pyrolysis to produce hydrogen and solid carbon, in processes powered by renewable energy and stored carbon; 
-Blue hydrogen uses carbon capture, utilisation & storage and technically scrapes into the category but given the expense of CCUS is an unlikely contender.

Green and yellow hydrogen currently occupy pole position as long-term investment prospects; while blue hydrogen languishes at the bottom, and in many instances qualifies as greenwashing.

There are other “approaches” being promoted such as mixing liquid natural gas with green hydrogen (Hydrogen 2) to be used in western power plants’ existing LNG infrastructure as a near-term decarbonisation measure. 

Hydrogen can be used in existing gas infrastructure by using up to 15% hydrogen in the mix, say observers.

The US HyGrid Project is one of the nation’s first clean hydrogen blending projects, aimed at increasing the recovery rate of H2 from methane, again pointing to the prospects of green methane in the hydrogen market.

Even further down the list given the bleak forecasts for coal production are catalysts that increase the heat from hydrogen or gas and can be retrofitted to coal and gas plants, allowing the use of existing infrastructure (a form of carbon capture technology which we discuss below). 

Biomass-produced hydrogen (using anything other than waste) is also a less environmentally positive prospect.

Four Types Of Electrolysers

The electrolyser market is likely to be one of the first beneficiaries of the next wave of green hydrogen investment.

There are four main types of electrolysers, the two main types being:

-Polymer Electrolyte Membrane (PEM) electrolysers, which use an ionically conductive solid polymer, which best suited for large-scale hydrogen production. Examples include HyLyzer and Rincircle.

-Alkaline Electrolysers use a liquid electrolyte and are better suited to small-to-medium-scale hydrogen production. Examples include HyStat, Ragain and Australia's experimental Hysata (a capillary fed electrolyser).

Both PEM and Alakaline electrolysers provide onsite, on-demand hydrogen, which is 99.999% carbon free. 

Anion electrolysers combine elements of PEM and Alkaline batteries using water electrolysis. 

Anion electrolysers are potentially a low-cost option given water electrolysis allows the replacement of conventional noble metal electrocatalysts with low-cost transition metal catalysts.

Anion technology is not yet stable, but its introduction would prove a game-changer in the electrolysis market.

Solid Oxide Electrolysers use solid ceramic material as the electrolyte which operate at much higher temperatures, but which have the potential to become more efficient.

Applications and competitors

Hydrogen has many and varied applications in an ESG world.

Renewables remain the kingpin in the green-energy production universe given even green hydrogen must be powered by renewable energy.

First off the bat, it can compete with grey hydrogen (produced from natural gas) in traditional hydrogen markets.

These include:

-glass purification
-aerospace
-semiconductor manufacturing
-pharmaceuticals
-fertilisers
-welding and annealing and heat-treating metals
-coolants in power plants
-petroleum refining (not for too much longer);
-and the hydrogenation of unsaturated fatty acids 

But the first green application mooted for green hydrogen is that of providing stability to an electricity grid powered by renewables.

While green hydrogen is being pitched as the energy-of-choice to provide grid stability, this is by no means a done deal.

Renewables advocates would argue that it would be easier and cheaper to just increase renewables infrastructure to the point of excess, meaning even on cloudy or still days, enough energy could be extracted from the system to provide grid stability. They would also advocate investment in batteries to provide further stability.

But there is a problem with batteries: they are polluting and expensive, and until dramatic innovation takes place, hardly qualify as environmentally positive.

“Acceptable” nuclear energy (as yet poorly defined) could also prove a formidable rival, but at this stage, that technology (technology that would make nuclear energy acceptable in a green world) is not available, and green hydrogen is.

Green methane pyrolysis allows the production of basic chemicals such as ammonia and methanol throughout the chemical industry, as well as offering a turquoise hydrogen option using "clean" fuel. The resulting carbon can be reprocessed into plastic and rubber products such as car tyres and mats.

(There are even more experimental uses of carbon, which we discuss below).

In this sense, green methane does count as circularity and vertical integration play.

There are some who advocate for a methanol economy in which green methanol replaces fossil fuels in transportation, energy storage and fuel cell technology given it is relatively more easily retrofittable to existing infrastructure.

But given big capital appears to be committed to green hydrogen and solar, methanol’s most likely manifestation is that of a transition fuel.

Outside of grid stability, the main applications for green hydrogen are expected to be for decarbonising heavy industries requiring intense heat or explosive energy, such as cement and steel.

Hydrogen can be used in many industries, including  power to gas; the production of green chemicals such as methanol and fertilisers (ammonia); and other liquid fuels.

Pending developments in fuel cells, green hydrogen is also being pressed as a source of aviation fuel and long-haul fuel.

At the moment, batteries are not only heavy and expensive, but do not even rate as a rival for efficiency in the air.

Theoretically, renewables could function well in this environment (flying car prototypes currently use electricity but flight times are short) and battery technology remains renewables’ Achilles' heel. 

Battery materials are increasingly expensive and the longer big capital seeks to maximise its investment in these commodities, the greater the threat green hydrogen poses to the renewables industry’s ambitions. 

It is not a big leap to move from success in hydrogen fuel cells in the air, to success on the ground, although by that time, perhaps all cars will be airborne.

For now though, battery-powered vehicles have the support of big capital, even over more efficient vehicles such as Lightyear One and Lightyear2 – the world’s first solar electric, most aerodynamic and efficient cars created in the Netherlands (I want one – the One). Lightyear includes a battery but rarely needs to use it unless garaged or travelling long distances at night.

(I digress, but to give car-lovers a feel for this market, the Lightyear One doubled in price just one year after its introduction, and appears to have a similar lustre and potential cult-status to Tesla’s Roadster, despite not boasting quite as svelte an interior.)

But the appeal of the Lightyear further reveals the threat to battery-materials markets from improvements in solar-cell design in electric vehicles, as well as solar-cell technology’s growing threat to the economics of green hydrogen.

Some hydrogen advocates also press green hydrogen as a substitute for gas in building heating, arguing that it would allow the use of existing LNG infrastructure, but this is not as simple a task as it is made out to be, and we discuss this below in the section on challenges. 

This argument appears to be one of the many red herrings floating around in the hydrogen market.

Experimental Hydrogen-related CCUS Technologies

There are a myriad of alternative grey/blue hydrogen technologies in development outside of the conventional clean-tech market described above – too many to list, but we examine some of the most interesting here.

One of the more common technologies involves heating gas hydrocarbons to a point where carbon separates from the hydrogen in solid form (a type of carbon capture), allowing the use of continuing infrastructure.

From an energy perspective, it is less attractive than other clean-hydrogen tech given it is heavily reliant on carbon-capture subsidies, and is never likely to be "economic" on its own merits.

However, if carbon-fibre technologies suddenly advanced, could open a market for recycled solid carbon backed by circularity incentives, given current solid carbon products such as graphite and diamonds are expensive. This could also prove a market for green methane (which would have the jump on gas regardless) and other hydrogen technologies.

At the moment, the quality of solid carbon derived from such processes is low, and could be used as low-cost moat filters around polluting industrial plants, etc, but if affordable technologies upgrading solid-carbon waste became available, it could prove a game-changer.

The development of carbon nano-materials is one potential use for high-quality solid carbon (if obtainable from these processes – big ifs).

Nanotubes, a subclass of Fulerenes, share many features with polymers because of their thin diameter and elongated shape and can for self-supporting macroscopic materials. 

Their prices range from US$2,000kg to US$100,000kg so the development would fit neatly into the plastic recycling play as well.

ResearchGate says carbon nanomaterials could be synthesised by splitting hydrocarbons and that these materials could displace steel, aluminium and cement while providing lightweight solutions, all of which would fit neatly into a long term recycling and energy-reduction plan.

At extremely high temperatures (4,000 degrees Celsius), solid carbon can be converted to graphite. 

A price of US$20 to $30kg could enable penetration in most of the copper aluminium and stainless steel markets.  

At $10kg they could replace steel components in vehicles. 

Below US$3kg the product is feasible in large infrastructure such as bridges, buildings and houses. 

The development of multi-walled carbon nanotubes to rival graphite anodes in conventional alkaline water electrolysis cells is another proposed technology that fits on this spectrum.

Amoltek, for example, claims it can can cut the use of rare and expensive noble metals by 50% to 70% using carbon nanofibres, while double or tripling the active surface area of the proton exchange membrane (PEM) or anion exchange membrane (AEM) used in membrane electrode assembly.

Fuel cell technology powered by solid carbon is another technology given carbon nanotubes can store hydrogen, even at room temperature. This could have implications for the transport and storage of hydrogen generally.

Science Daily notes that carbon nanotubes increase up to tenfold the amount of power a battery’s electrodes can produce compared to a conventional lithium-ion battery. 

The reporter notes these could be used in small devices and maybe eventually in big batteries. They excel where short bursts of energy are required.

Scientists are even attempting to use solid carbons and CO2 to build organometals and in various catalytic processes for transforming CO2 and incorporating it into synthetic organic molecules. The mind boggles. 

All these are experimental not commercial technologies, but we mention them because there are a plethora hitting the market, only a handful of which may prove fruitful, and it’s a matter of buyer beware.

But they would certainly explain the willingness of big capital to back carbon-capture over other more economically viable and environmentally friendly approaches, and so cannot be discounted.

But in the investment market of today, such hydrocarbon splitting technologies are about as close to greenwashing as you can get, short of largely economically unfeasible direct-air carbon capture, and most are purely aimed at catching rather generous US carbon-capture subsidies of between US$60 a tonne and US$85 a tonne. 

The US is offering US$180 a tonne for direct-air carbon capture, and what Climate Energy Finance’s Tim Buckley describes as a phenomenally generous price on methane emissions of US$1500 a tonne.

Environmental advocates would decry these technologies as a diversion of valuable resources away from investment in clean energy.

But much depends on the intent of big capital, technology and the rise of circularity.

Green Hydrogen Challenges – Transport, Storage And Infrastructure

There are many good reasons why many doubt the ability of green hydrogen to replace battery materials or prove a substitute for natural gas and other fossil fuels in existing fossil-fuel storage infrastructure.

It is lighter than natural gas (requiring larger infrastructure) and more difficult and dangerous to store and transport (requiring significant moderations). 

People talk of using existing pipeline infrastructure to transport hydrogen but this is fraught (a bullet to a pipeline, for example, or even a small leak could prove much more expensive and problematic than a gas leak) and at this stage little more than a pipe dream (pun intended).

Hydrogen is highly flammable and much of its future will depend on the strength and integrity of materials used to contain it – and so the environmental plunder continues, in a similar manner to batteries.

At the moment, the only viable storage and shipping method for green hydrogen is green ammonia. This is an extremely prospective market for hydrogen.

But technology is snowballing. Already the Swedes are delivering green steel, previously considered an intractable problem. Once this problem is solved and green steel is fully commercial, one assumes many storage and transport issues will be solved simultaneously (given blast furnaces are probably among the most dangerous environments for applying hydrogen).

The other major challenge is rising interest rates, which is hindering impact investment but the tightening cycle is expected to end next year and investors are preparing to place their bets.

This article has highlighted both the conventional, safer green hydrogen plays and some of the riskier more dubious concepts doing the market rounds, which combined provide a broad big-picture scenario of the market and its potential.

In our next article, we move from the nuts and bolts of hydrogen technologies (many of which are experimental) to the broader tangible green hydrogen prospect from a global financial perspective.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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