Topical read: Stalling hydrogen investmenthttps://www.investorschronicle.co.uk/news/2021/01/28/stalling-hydrogen-investment-highlights-technology-challenge/ Green hydrogen occupies a strange place in the energy system. As a way to store renewable energy produced by intermittent sources such as wind and solar, it is not overly effective, losing between half and 20 per cent of the power in the process depending on the technology in use.
Battery technologies such as lithium-ion and vanadium flow offer better efficiency, but mean more mineral demand, while pumped hydro and other simple technologies require hefty engineering projects, but also have better efficiency than green hydrogen.
There is already plenty of existing hydrogen capacity around the world; the problem is that it is produced using fossil fuels. Additionally, industrial demand drives the market and so price is a determining factor rather than the lowest carbon emissions. It will be another decade before demand for uses like natural gas mixing, energy storage and transport overtake industrial uses, according to BNP Paribas, assuming a very fast ramp-up in the sector.
The rush of interest last year belies how little green hydrogen capacity there actually is. A new report from Bloomberg New Energy Finance looked at energy transition investment in 2020. A fifth less money actually went into hydrogen in 2020 compared with the year before.
Investment last year was just $1.5bn (£1.1bn), compared with $139bn on electric vehicles and $51bn-worth of spending on energy-efficient heat pump installations, the report said.
Right now, the green hydrogen sector is still dominated by smaller specialised firms. ITM Power (ITM) has gone from a sub-£100m company two years ago to a valuation of close to £4bn. Its 2020 financial year sales were £4m. This spectacular ramp-up indicates that investor and government interest has got ahead of the actual industry.
In the first weeks of 2021, major companies have dipped their toes into the green hydrogen space, including Royal Dutch Shell (RDSB) and rsted (Den:ORSTED), to varying degrees.
Of course, major companies are already deeply involved in hydrogen production; just not the green kind. It is a major industrial feedstock, used in refineries and other critical processes.
The gulf between green hydrogen, produced using renewables, and grey or brown hydrogen, produced either using heavily polluting power sources or as a by-product of other processes, is bridged by blue hydrogen. This is where carbon capture and storage (CCS) technology is used to remove most of the carbon emissions. This is also a relatively untested proposition, although CCS is already in use around the world.
The problem is whether this blue hydrogen diverts spending from other carbon abatement technologies because it allows existing refineries to stay open.
The EU already plans for it to be a stopgap because renewable capacity is not high enough to cover hydrogen production, and massive subsidies or a much higher carbon price would be needed for green or blue hydrogen to be competitive against existing supply.
As retail investors go long on the hydrogen narrative – that it is sustainable and a shoe-in for government stimulus – there are still major questions over its uses.
Shifting grey and brown hydrogen to blue would be positive, as would increasing green capacity. But not if it is only being used to prolong the life of refineries and crowd out technologies that could cut carbon emissions more cheaply.