Hydrogen's Rising Star in Decarbonisation

Hydrogen is generating tremendous excitement as a critical solution for decarbonisation and hitting net zero emissions targets. With hydrogen demand projected to grow up to 6 times by 2050, according to McKinsey research, hydrogen has the potential to reduce global emissions by 20%. This makes hydrogen a promising investment opportunity for climate-conscious investors looking to allocate capital towards green technologies.

Currently, most hydrogen production relies on fossil fuels, generating so-called "grey hydrogen". To tap into hydrogen's emissions-cutting potential, the production of clean hydrogen - both "green" from renewable electricity and "blue" from fossil fuels with carbon capture - needs to be dramatically scaled up.

The growth projections for clean hydrogen production and use are staggering. Total planned production is set to reach 38 million metric tons annually by 2030 - more than quadrupling since 2020. However, this remains well below projected demand. McKinsey estimates clean hydrogen demand could soar up to 600 million metric tons annually by 2050.

Bridging this gap between supply and demand will require massive investments. The Hydrogen Council has estimated that achieving net zero will require $700 billion invested in hydrogen by 2030. However, investment last year remained $460 billion short of this target.

Three key actions are critical to boost clean hydrogen production and close this investment gap

Reducing Production Costs

For hydrogen to compete with fossil fuels, costs must come down. Locating production where renewable electricity is cheap and abundant can help. However, land constraints for deploying large-scale renewables could limit ideal locations. Supply chain issues have also inflated the costs of building production plants. Resolving these constraints can make hydrogen more cost-competitive.

Building Infrastructure

Transporting hydrogen efficiently requires infrastructure like pipelines and refuelling stations. Repurposing natural gas pipelines can enable hydrogen transport at scale. Governments and companies need to collaborate to build this infrastructure quickly. Investment is also needed in production assets like electrolyzers to produce green hydrogen.

Increasing Investments

With investment lagging behind targets, more capital must flow into hydrogen. Purchase agreements for future hydrogen supply can help producers by guaranteeing demand. Policy incentives like production tax credits and mandated uptake targets can also boost confidence for investors. Industry players should increase production capacities and build partnerships across the value chain.

Real-World Examples

The rise of hydrogen is more than hypothetical - real-world developments demonstrate the acceleration of this industry:

• Over $50 billion was invested globally in clean hydrogen in 2021, a 20-fold increase since 2019 according to the Hydrogen Council. Corporations like Plug Power and Cummins are making billion-dollar investments.
• 500,000 metric tons of low-carbon hydrogen production capacity has been announced in Europe for 2025 - equal to 10% of the EU's 5 million ton target.
• The U.S. Inflation Reduction Act includes $9.5 billion in clean hydrogen incentives, including production tax credits. This will spur U.S. investments.
• Saudi Arabia is developing a $5 billion green hydrogen plant, powered by 4 GW of solar and wind energy, targeting 250,000 tons of annual production by 2026. This demonstrates hydrogen's potential in the Middle East.
• Chile, with its rich renewable resources, is set to become a major green hydrogen exporter. An 8.4 GW electrolyzer facility is planned to produce the world's cheapest hydrogen at $1.50/kg.

Role of Policymakers

Governments have a crucial role in enabling growth through policy:

• Uptake mandates for industries like steel manufacturing create built-in demand.
• Funding research and development reduces technology costs.
• Capital grants and tax incentives provide financial support.
• Streamlining regulation and permitting clears obstacles for new projects.

The E.U.'s hydrogen strategy, Japan's $19 billion investment target, and the U.S. Inflation Reduction Act provide models of supportive government policy.

What are the Drawbacks?

There are some important drawbacks and risks to consider regarding hydrogen energy from an investor perspective:

Technology Costs - Producing low-carbon hydrogen remains expensive compared to fossil fuel alternatives. Electrolyzers, carbon capture, and other technologies need to fall in cost to be competitive. This technology development risk could impact returns.

Infrastructure Needs - Transporting and distributing hydrogen requires building out pipelines, storage facilities, refuelling stations, etc. Constructing this infrastructure incurs large upfront capital costs for investors.

Policy Dependence - Government incentives and mandates are needed to spur hydrogen adoption. Changes in political support add policy risk and uncertainty around long-term demand.

Scaling Challenges - Reaching economies of scale in hydrogen production has proven difficult. This can negatively affect cost reductions and projected growth rates.

Competition from Alternatives - Advances in other clean technologies like batteries could make them more attractive than hydrogen for some applications.

Lack of Track Record - As a newer solution, hydrogen doesn't have an established performance record comparable to traditional energy investments. This can translate into higher perceived risk.

While the growth opportunities from hydrogen are enticing, investors should enter this market eyes wide open to the challenges. Factoring in the risks highlighted above will be crucial for investors to successfully capitalise on the hydrogen economy.

Here are the 3 big takeaways for investors regarding hydrogen:

1. Massive growth potential - Hydrogen demand could increase up to 6 times by 2050, reaching up to 600 million metric tons annually. This presents a huge investment growth opportunity.
2. Critical for decarbonisation - Hydrogen has the ability to reduce global emissions by 20% by displacing fossil fuels in hard-to-abate sectors like steel and aviation. Investing in hydrogen helps enable the net zero transition.
3. Requires substantial capital - Bridging the supply-demand gap and building out infrastructure will require around $700 billion invested by 2030. Major capital allocation into hydrogen is needed to scale the industry.

In summary, investors should recognise that hydrogen represents a rapidly expanding market and key climate solution with tremendous growth potential. Capturing this opportunity will require massive investments in production capacity and infrastructure. Companies and projects enabling the hydrogen economy stand to see surging demand and increasing revenues. But seizing this upside will depend on investors providing the necessary capital to scale up clean hydrogen and make it cost-competitive. The hydrogen industry expects and needs significant financial commitment from investors to achieve its full decarbonization potential.

Conclusion

Hydrogen provides a compelling investment case as a key enabler of decarbonisation. Real-world developments show this clean energy vector is progressing rapidly from hype to reality. But fully realising hydrogen's potential will require enormous amounts of capital to scale up production and infrastructure. This presents a tremendous opportunity for investors to allocate funds to hydrogen and accelerate the energy transition while also pursuing attractive returns. The companies and governments leading this industry will be well-positioned to excel in the 21st century net zero economy.