- There is a lot of hype about green hydrogen, but in the fine print, it is about renewable energy projects that might eventually involve green hydrogen.
- The numbers make clear that green hydrogen is at least 10 years away and that there are other ways to store excess cheap renewable energy (e.g. grid-scale batteries).
- Blue hydrogen (made from gas with carbon capture) is often included in clean hydrogen discussions, but carbon capture is less real than green hydrogen.
- 10-year agreement between Google and AES shows grid-scale battery storage and hydro, coupled with renewable power has arrived for 24/7 power supply.
- Investors need to look at the problem that hydrogen could solve (energy storage and transport) and consider other carbon-free solutions in their investment decisions.
The headlines, that make me think I’m living in a parallel universe, keep coming. Almost every day I see headlines concerning a $multibillion green hydrogen development that ends up being a major renewable energy project involving wind and/or solar PV plus batteries, with a throwaway at the end about green hydrogen. In my world that is describing a major renewable energy project that could end up involving green hydrogen, should green hydrogen prove to be a viable commercial option. The reality is about major renewables development, while the green hydrogen is at best an intention (hope?) at this stage.
There is massive hype surrounding the emergence of a hydrogen economy, partly I suspect because the fossil fuel industry (especially gas) is aware that its future is uncertain, with an increased focus on emissions reductions. Hydrogen offers the possibility of staying within the comfort zone of the gas industry and may provide a means for prolonging the use of gas. Two recent reports have drawn attention to the importance of positioning when evaluating emerging hydrogen technologies. One report from Norwegian group Rystad Energy “Rystad Energy Transition Report: Hydrogen Society”, concludes that hydrogen can only be successful if battery technology fails and it will involve substantial hydrogen production from natural gas (“blue gas” if combined with CCS (Carbon Capture and Storage)) in the initial stages. Another report from Bloomberg New Energy indicates that hydrogen can have a future in competition with gas, but it ignores competition with renewables and batteries or other storage technologies. It is the questions that are asked that predicate how the likely success or failure of the hydrogen economy is positioned. Here I give my take on these two reports. I think investors in the energy space need to think through these issues as they are critical for anyone considering energy investment (especially as regards heat, electricity and transport). This means that investors need to look beyond the hydrogen story to understand where it might, or might not, fit.
Confronting numbers about cost and efficiency
A Bloomberg NEF Blog “Liebreich: Separating Hype from Hydrogen- Part Two: The Demand Side” makes the point that even if the current hype for green hydrogen production scale up succeeds, at the end of the day it needs customers and green hydrogen is going to have to compete with all other solutions.
The numbers are not promising. The blog makes clear that green hydrogen could be used for lots of things in industry, transport, power and heating. The competition is not existing technologies (e.g. natural gas), which largely involve significant emissions, but for the future, solutions also need to be zero-carbon.
For energy storage hydrogen has ~50% round trip efficiency, while energy storage in batteries and pumped hydro have a round trip efficiency of ~80%. These numbers mean that hydrogen leads to much greater energy losses on storage than other technologies. The scale of pumped hydro and battery storage is significant, with EIA reports indicating 21.9 GW pumped hydro and 1.4 GW of battery storage in the US in Nov 2020. Significantly, large scale battery storage in the US is expected to increase by 4 GW in 2021 (i.e. ~3 fold increase on 2020 figure within a single year), and this is just the start of scale up of large battery storage.
Think about these numbers if you are considering hydrogen as an energy storage system. Battery manufacturers and grid scale providers (e.g. Tesla (NASDAQ:TSLA), AES (NYSE:AES), Fluence (a Siemens (OTCPK:OTCPK:SIEGY)/AES (NYSE:AES) energy storage company)) are worth considering, because just as has happened in the personal transport sector, batteries are assuming a commanding position long before hydrogen is beyond proof of concept. To give a sense of current activities in the renewables plus battery space, AES has just announced a 10 year agreement to supply 24/7 carbon free energy for Google (NASDAQ:GOOGL) Data Centers in Virginia. This involves 500 MW of renewable energy plus battery storage. This involves energy powering the Google facilities to be 90% carbon free on an hourly basis.
The above efficiency considerations address making the hydrogen (in the future from renewable energy) and then turning it back into energy. But this is not the whole story.
If hydrogen is to be used for transport there are further costs and losses as the hydrogen gets transported, moved to a fuel cell vehicle and then converted to electricity. This requires a new energy distribution network, whereas electricity requires just an extension of the existing electricity network. An electric power line costs a third of a hydrogen gas pipeline. High Voltage Direct Current power can be sent over 1000s of kilometers with modest losses. This is the reason that the Hydrogen Council has been lobbying for some time to involve Governments in the hydrogen story. Simply put, hydrogen can’t compete with other low carbon technologies.
The transport story gets worse as a fuel cell is ~60% efficient, whereas an electric motor is 95% efficient. And a fuel cell is a much more complex energy conversion system than an electric motor. Many proponents of hydrogen (fuel cell) cars overlook that these are actually electric cars, which make the electricity to charge the batteries on board from hydrogen via a fuel cell, rather than just using a big battery. The losses from using hydrogen mount up. Most hydrogen promotion leaves out various steps along the pathway from making hydrogen to its end use.
It gets really tough when one considers the market for home and low temperature industrial heating. Electrically driven heat pumps consume 4x less energy than hydrogen for heating. I find it hard to see how hydrogen will be able to compete with such a massive disadvantage. The Rystad Energy report makes this clear. And while heat pumps traditionally work for low temperatures (less than 60C), there are indications that heat pumps may be able to increase their temperature range up to 280C.
A recent study of energy use in European industry, covering 92% of European Industry CO2 emissions found that 78% of these emissions could be electrified with today’s technologies and 99% reduction is possible with technologies already under development. Industrial emissions are supposed to be in the too hard basket for electrification.
My conclusion from the above considerations is that with dramatic cost reductions for renewable electricity from solar PV and wind, in the relatively short term the need for fossil fuels and hydrogen will be substituted for by electricity. We are entering the age of electrification of everything.
Traditional hydrogen companies
The long term players in hydrogen (e.g. Ballard Power Systems (NASDAQ:BLDP), Plug Power (NASDAQ:PLUG)) have enjoyed major share price appreciation with the hype around hydrogen (year on year Ballard up 65%, Plug up 579%), but in the past month, there has been a substantial correction (Ballard down 33%, Plug down 24%). Investors in these companies might pay attention to see if this downward trend continues. Ballard and Plug both have substantial focus on the use of hydrogen for transport applications, an area where batteries are clearly dominating.
Investing is a very personal business. You need to think carefully before committing cash. Hydrogen is a risky area because it is clearly not viable currently. Investors are interested because the best returns come from getting in before the pack. When one digs into the hydrogen investment opportunities, one mostly sees Governments putting down cash in the hope of jump starting a new industry, while cautious companies hold back on spending until they see some clarity about returns. I’ve indicated previously that a major player in European hydrogen is RWE Aktiengesellschaft (OTCPK:RWEOY), but that company is holding back from getting in too deeply until there is more clarity about financial outcomes. My take is that this might be the prudent course of action for investors at this time. I’m unconvinced that hydrogen is an opportunity that stacks up.
I am not a financial advisor but I do follow closely the transitions happening in energy and transport, especially taking into account that these transitions are not only about cost but also emissions reductions. If my commentary provides context for you and your financial advisor when making investment decisions in this area, please consider following me.
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