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outlook for clean energy industry and hydrogen

January 2021

Hydrogen: beyond hot air

As production scales up and costs fall, a hydrogen-fuelled future is within sight.

Hydrogen is the oldest, lightest and most abundant element in the universe.

But it wasn’t until 1766 when the world learned of its potential as a power source.

In a ground-breaking experiment, the English scientist Henry Cavendish isolated the gas by mixing metal and acid to produce what he called the “inflammable air” that emitted water when burned.

Unfortunately, the world’s greatest minds haven’t made much progress since.

Efforts to turn hydrogen into a source of clean energy have been persistently stymied by the costs involved. The gas has been prohibitively expensive to produce, store and transport, which is why many experts have overlooked it as a viable alternative to fossil fuel.

Yet recent developments suggest this view no longer holds sway.

From Europe to Asia and the Pacific, governments and businesses – electricity and gas producers, utilities and carmakers – are stepping up investment to develop new hydrogen-based technologies.

Such efforts are no shot in the dark. Rather, they bear witness to advances that suggest hydrogen production costs could soon fall as steeply as those of wind and solar power.

This, the Advisory Board members of our Clean Energy strategy say, should make it easier to integrate hydrogen into the carbon-free energy mix.

Many colours of hydrogen

Hydrogen might be the most abundant of gases, but it doesn’t exist in its pure form in the atmosphere.

There are only a few ways to extract it, all of which are complicated and costly.

Today, some 95 per cent of hydrogen is “brown” or “grey” – extracted through a process in which it is stripped out of coal or natural gas by reforming methane or hydrocarbon.

Our Advisory Board members estimate these industrial processes produce as much as 11kg of carbon dioxide in indirect emissions to generate just 1kg of hydrogen. This is where "blue" hydrogen – which has a much smaller carbon footprint - can help.

The process used to produce blue hydrogen begins in the same way as that for grey hydrogen.

But where the blue variety differs from grey is that it adds an additional process designed reduce CO2 emissions associated with the hydrogen production. For this, it deploys Carbon Capture and Storage (CCS) technology which buries the carbon bi-product in underground reservoirs.

It is not cheap (see chart). Neither is it completely emission free. 

Our advisors say blue hydrogen begins to become cost competitive if carbon prices – or a cost applied to carbon polluters -- are set at around EUR60-70 tonnes of CO2 and if the industry scales up commercial CCS technology.

Hydrogen: not always green
Cost of producing hydrogen by production methods
cost of producing hydrogen

Source: A hydrogen strategy for a climate-neutral Europe, European Commission, 08.07.2020

Making hydrogen greener

Given all the environmental shortcomings of brown, grey and blue hydrogen, it is “green” hydrogen that perhaps offers the most sustainable solution.

Green hydrogen comes from water electrolysis, a process which splits water into oxygen and hydrogen, using an electric current generated by renewable sources such as wind and solar. The process produces zero carbon emission, that's why it's known as "green".

Worldwide, green hydrogen capacity has increased from 1 MW in 2010 to 25 MW in 2019, the IEA says, thanks to a dramatic decline in renewable energy costs.

The problem is that the process accounts for less than 0.1 per cent of total hydrogen production today.2

But with investment in the technology growing, the picture could change dramatically in the next decade.

The EU, which has an ambitious CO2 reduction goal, is aiming to install 6 GW of green hydrogen capacity at an estimated cost of EUR5-9 billion, scaling that up to 80 GW by 2030 with investment of up to EUR44 billion.

Cumulative investments in renewable hydrogen in Europe could be up to EUR470 billion by 2050 which would take the share of hydrogen in Europe’s energy mix to 13-14 per cent by 2050 from less than 2 per cent today.3

Our advisory board members say green hydrogen may also be a viable, long-term and large-scale solution to store excess renewable energy production, which could become a growing challenge in the coming decades as the energy mix shifts away from fossil fuels.

Due their intermittent nature, renewable energy sources will increasingly face an issue known as “curtailment”. This happens when grid operators are forced to dial back renewable electricity generation as network and storage infrastructure cannot cope with a rush of supply during a period that is exceptionally sunny or windy.

Batteries may work as a short-term storage. For longer-term needs though, grid operators have used pump storage, which typically stores and generates energy by moving water between two reservoirs at different elevations.

But the infrastructure is costly and there’s a limit to how many large-scale storages of this kind the world can build.

Hydrogen, on the other hand, can be used to capture an oversupply of renewable energy.

Electrolysers can work around the clock to produce green hydrogen using surplus renewable energy that would otherwise be “curtailed”. Hydrogen can be stored either as a gas or liquid in a high-pressure or cold tank ready to be deployed.

While much progress is still needed for hydrogen storage to become competitive, our advisors expect this could become an important niche for hydrogen in the energy mix.

Hydrogen cars on the road

Today’s mandates and policies – around 50 are in place globally – mainly focus on introducing green hydrogen into transport sector. That makes sense. Transport accounts for about a fifth of annual emissions and is the main cause of pollution in cities.

Advances in fuel cells – which work like batteries but do not need charging – are vital as that would speed up the use of hydrogen in vehicles.

But this is where hydrogen enthusiasts may need to temper their optimism.

Fuel cells typically convert hydrogen as a fuel into electricity, which then powers vehicles. However, the energy efficiency of fuel cells – measured by how much final electricity they can extract for 100 units of typically renewable power – stands at a poor 26 per cent. This compares with batteries’ 69 per cent efficiency (albeit fuel cells are superior to internal combustion engines, which operate at 13 per cent efficiency.4)

Fuel cells are at disadvantage due to the power loss they suffer during conversion processes, such as transmission, electrolysis and transport, as well as electric motor and mechanical applications.

Still, fuel cell system costs are falling dramatically thanks to improving technology and economies of scale.

This, according to our advisory board members, should promote wider application in certain vehicle types where batteries cannot economically compete due to long recharging times.

A few years ago, it cost more than USD1,000 to produce a single kilowatt of power from hydrogen fuel cells. By 2019, the cost had dropped to just USD53 per kilowatt, according to the US Department of Energy.

Our advisory board members expect that hydrogen fuel cell vehicles, used in niche medium- and heavy duty segments such as busses and trucks, could achieve total cost of ownership parity with diesel by 2028-2033.

Decarbonisation is a challenge that requires an all-hands-on-deck approach. Hydrogen may soon play a credible part.

Infrastructure also needs to expand.

At the end of 2019, 470 hydrogen refuelling stations were in operation worldwide, up more than 20 per cent from 2018.

Our advisory board members expect further growth, especially in Asia. Japan’s hydrogen infrastructure is the world’s biggest with 113 refuelling stations and the government is making a huge bet on the future of hydrogen with ambitious industrial policy and investment.

In China, the number of refuelling stations increased threefold in 2019 to 61. Chinese authorities are exploring further possibilities for hydrogen-fuelled rail after a successful pilot programme in 2019.

Hydrogen has routinely overpromised and underdelivered. But a fierce race to develop new technologies, backed by big government investments, is changing the calculus.

A battle against climate change through decarbonisation is a challenge that requires an all-hands-on-deck approach. Hydrogen may soon play a credible part in such a transition.

Pictet AM's clean energy strategy

A transition to a decarbonised economy is gaining momentum. Governments around the world have pledged to invest trillions of dollars to achieve their ambitious net-zero carbon goals, at a time when many renewable energy technologies have become cost competitive with fossil fuels.

  • Pictet AM’s clean energy strategy invests in companies supporting and benefiting from the energy transition. It aims to deliver long-term capital growth with a scope to outperform major global equity indices over a business cycle.
  • The strategy invests in broad and diversified clean energy segments, not only in renewable energy but also technologies, innovations and infrastructure supporting smart mobility, energy efficient buildings and efficient manufacturing.
  • We do not currently invest in companies which focus purely on hydrogen. Instead, we have positions in renewables utilities should benefit from increasing green hydrogen demand. What’s more, they have ambitions to move into the green hydrogen value chain from production to storage and distribution.
  • Launched in 2007, Clean Energy strategy has a track record that is one of the longest in the industry. The experienced team that manage the Clean Energy strategy sit within our pioneering Thematic Equities team that manages around USD53 billion across a range of strategies.