What’s the deal with hydrogen?
Just as we outgrew wood-burning stoves, then coal-burning power plants, humanity is beginning to outgrow oil. As oil and gas majors such as BP and Shell write-down their assets, lower their benchmark Brent prices and pledge to cut emissions, the future of oil appears bleak. Furthermore, as Extinction Rebellion and divestment movements sweep through cities and universities, it’s clear to see that the world wants oil out, and wants it out now. However, practicality looms large; how are we going to bridge the 80% gap in the energy sector left behind by our estranged friends Oil and Gas?
It is widely accepted that a blend of energy types will be required to pick up the slack left by oil and gas, primarily because clean energy sources tend not to be flexible, often displaying intermittency issues, geographic restrictions and scalability issues depending on the technology. Hydrogen technology sets itself apart from other energy systems as it is scalable, tangible and easy to store and transport. This flexibility gave rise to the concept of the Hydrogen Economy: a thread through the energy sector by which energy is generated, stored and delivered in the form of hydrogen and hydrogen compounds, like ammonia.
What are the types of hydrogen technology?
Hydrogen technology can be broken down into three broad areas: hydrogen generation, electrification and energy storage.
Hydrogen Generation: There are two main types of hydrogen gas; blue hydrogen and green hydrogen. At present, nearly all of our hydrogen is considered ‘blue’, meaning it is derived from fossil fuels by a combined process of steam-methane reforming and water-gas shift. Green hydrogen, on the other hand is not directly derived from fossil fuels, and some sources include genetically modified algae and biomass.
Blue hydrogen will play a large role in the beginnings of the Hydrogen Economy, as the technology is well established (due to heavy hydrogen use in industry), thus a number of natural gas reforming infrastructure projects may open up in the near- to medium-term. However, as we strive to reach carbon-neutrality in the UK by 2050, green hydrogen must take on a greater role. Biomass-derived hydrogen is a strong contender, and may be a better option than algae, which has low yield and tends to be sensitive to infection. According to a study led by Professor Niall MacDowell of Imperial College London, the use of biomass-derived hydrogen with carbon capture and storage (BHCCS) can result in up to 90% carbon capture, as opposed to the 50-60% carbon capture rate typical of biofuels. Furthermore, whilst the UK would require the removal of 47MtCO2/year to be carbon neutral, indigenous biomass alone has the capacity to remove 56MtCO2/year, thus biomass-derived hydrogen has the potential to meet green targets whilst also making a useful contribution to the energy sector.
Electrification: Whilst our everyday cars will run just fine on lithium-ion batteries instead of petrol or diesel engines, trucks, trains and trading vessels will not. Whilst lithium ion batteries are heavy, take time to charge and have a relatively low energy density, hydrogen fuel cells offer a lightweight, high-efficiency, fast-refuelling and clean alternative to fossil fuels in heavy transport vehicles. Fuel cells work by the catalytic oxidation of hydrogen compounds, creating a flow of electrons which can be used to power motors. Furthermore, fuel cells can be used to generate heat, and are often considered as a tool for combined heat and power (CHP) systems, which are highly efficient. This application is particularly useful in the UK, where approximately 85% of homes have access to mains gas which could be converted from use in natural gas transport to hydrogen transport. Research in this area is ongoing.
Power Storage: Another major use of hydrogen is for the integration of renewables into the energy grid. Large quantities of energy from sources such as wind and solar are often wasted at peak generation as excess electricity cannot be stored. Investment and improvement in battery technologies can help, particularly stable and long-lasting systems such as liquid metal batteries, however storage of energy in the form of hydrogen compounds gives much more flexibility. This storage is done by electrolysing water using the electricity generated from renewables, producing hydrogen gas and oxygen. The hydrogen (or hydrogen compounds such as ammonia) can then be transported via pipelines, avoiding energy losses through resistance altogether, and used in fuel cells wherever it is needed, be that in industrial processes, at home or in vehicles.
What are the investment opportunities?
Fuel cells offer an excellent investment opportunity. Currently valued at about 5 billion USD, the global fuel cell market is expected to exceed 40 billion USD by 2026. Established players such as Ballard Power Systems have been investing heavily in R&D (25% of its 2019 revenue), however their gross margins don’t always compare to younger upstarts such as Ceres Power, which had a gross margin of 75% compared to Ballard’s 21% in 2019. Furthermore, the expected rise in fuel cell utilization may lead to future rises in the price of platinum, which is currently used in nearly all fuel cells as a catalyst. However, due to its scarcity, research into alternative catalysts such as metal-organic frameworks (MOFs) is picking up, and we may see such catalysts eventually ousting platinum.
Whilst fuel cell technology is promising, investment in hydrogen generation is less so. At the current hydrogen price of approximately £10/kgH2 investment in green infrastructure projects such as BHCCS (£3.70/kgH2) can be profitable and sustainable. However, with a projected hydrogen value of £1.40/ kgH2 by 2030, such projects cannot be profitable in the long term without government intervention and the introduction of significant negative emissions credits (NECs) which reward companies for the net removal of CO2. Furthermore, at this price even steam methane reforming is not profitable, thus the current outlook on private sector investment in hydrogen generation is not positive.
For those in search of investments in greenfield infrastructure, electrolysis plants may provide a strong opportunity. As a key element in integrating renewables into our electricity grids, and a singularly strong link to storing and transporting energy, power-to-gas systems are bound to be in high demand. However, power to gas technology is still in its early stages of development and thus has high associated CAPEX and will take time to deploy. As such, power-to-gas may make a compelling green investment in the 5-10 year horizon.