Since the release of the 6th Intergovernmental Panel on Climate Change (IPCC) Report this month, hydrogen has received increased attention as governments and businesses look for solutions to combat the damages of climate change. Anyone new to the issues of the climate crisis and the current dependency on fossil fuels could be forgiven for thinking that hydrogen is a new development – but it’s not.

For a long time, hydrogen has been seen as part of the “fuel mix” for the transition to a low carbon economy and way of living. The first reported instance of hydrogen being used to create electricity was in 1842 by Welsh physicist Sir William Robert Grove[1]. But it wasn’t until 1966 that the first hydrogen cell vehicle was designed by General Motors – the Electrovan. Hydrogen has been one of those technologies which has been ‘experimented’ with for decades but has never been considered a mainstream contender for environmental and/or climate solutions. Instead, it has been and is currently used at scale across a variety of industries from oil refineries (to remove sulphur from oil based products) to the food industry (to turn unsaturated fats to saturated oils and fats) .

This is, in part, down to the costs associated with hydrogen technology but also how it is stored for use – both of which have created barriers to market entry and convenient ‘get out of jail’ cards for those resisting the move away from black energy to green energy. As other more traditional fuels have been cheaper and easier to work with (e.g. fossil fuels) and new technologies have also proven their cost effectiveness and relative ease of deployment (e.g. electric vehicles) hydrogen has been largely marginalised. But things are changing.

Does hydrogen belong in impact investing?

When the cost and storage challenges of hydrogen are considered, it’s largely unsuitable for many of the solutions needed for a low carbon transition (such as home heating). As a starting point, we need to understand hydrogen and the different technologies and approaches in creating it. There are currently four main forms of hydrogen generation:

Brown: where coal is used as the feedstock into the gasification process that creates hydrogen.

Grey: where natural gas is used as the feedstock into a steam methane reforming (SMR), partial oxidation (POX) or autothermal reforming (ATR) process that creates hydrogen.

Blue: where natural gas is used as the main feedstock into an SMR, POX or ATR process that creates the hydrogen. Carbon emitted is captured and stored using carbon capture and storage (CCS) technologies.

Green: where renewable electricity and water are used to generate hydrogen using the power of electrolysis.

Brown, grey and blue hydrogen all have significant carbon emissions embedded in the production process. Green hydrogen is largely referred to as clean*, it’s the preferred type of hydrogen for many scientists, given the collective inability currently to widely use CCS technologies and actively consider deploying blue hydrogen at scale. Current estimates place global CCS capacity at 38.5 million metric tonnes[2]. That’s less than one-thousandth of our global emissions annually which are currently estimated to be in excess of 50 billion tonnes.

Additionally, with recent discoveries about the effectiveness of existing CCS technologies (for example, Chevron’s commitment at the Gorgon facility in Australia[3] failing to deliver the volume of CCS anticipated and promised) there is widespread concern about the introduction of and use of blue hydrogen at scale. A recent study by Cornell and Stanford Universities found that the carbon footprint to create blue hydrogen is more than 20% greater than using either natural gas or coal directly for heat, or about 60% greater than using diesel oil for heat[4]. There is clearly some way to go before blue hydrogen can legitimately be considered as part of our solution set.

However, within the very challenge of blue hydrogen lies the investment opportunity in CCS: driving better technologies at scale alongside investing in alternative solutions to the burning of fossil fuels. Much like the invest / divest movement, blue hydrogen divides opinion and is an area investors need to be cautious of. The recent resignation of the Chair of the UK Hydrogen and Fuel Cell Association[5] over the body’s continuing championing of blue hydrogen is a warning sign. Citing it as an ‘expensive distraction’ and a danger to our ability to deliver on climate targets, the resignation is a timely reminder to investors to be mindful of what will really drive the change that is required and what will, to some extent, maintain the status quo where fossil fuels are concerned.

It’s not just the type of hydrogen investors need to be mindful of – it’s also its application. With the recent launch of the UK Government’s Hydrogen Strategy following its inclusion in the Government’s Ten Point Plan for a Green Industrial Revolution, and the EU’s Hydrogen Strategy – for what and where hydrogen is used has caused divergent opinions. The work of Michael Liebrich and his Hydrogen Ladder[6] is a useful reference tool for investors. Where power is concerned, hydrogen’s most effective use is in long term storage, not just for balancing but more significantly as back up for potential system wide failures as a result of extreme weather events.

This echoes many of the findings of the Climate Change Committee 2018 report on hydrogen, Hydrogen in a Low Carbon Economy[7].  Hydrogen can play a role in UK power by replacing natural gas in parts of the energy system, where electrification is not feasible or overly expensive (e.g. providing heat on colder winter days, industrial heat processes and back-up power generation). Despite some excitement about the role of hydrogen in home heating, again, electrification and technologies such as heat pumps have the advantage.

In shipping and aviation, one of the most effective uses is in the production of clean ammonia for fuel, formed from clean hydrogen and potentially for longer haul flights where battery technology limits mileage. At shorter distances though, electrification again seems to have the competitive edge over hydrogen based on the costs of deployment and the presence of existing technologies. There are already developments in short haul electrification with some of the large incumbent airlines moving into this market. In July, United Airlines announced the purchase of 100 electric planes for short haul regional flights[8].

The competitive edge electric technologies have over hydrogen in some applications is also evident in land based transportation where hydrogen is seen as less attractive and competitive given the shorter distances travelled, costs and increasing infrastructure for charging.  However, there are opportunities for hydrogen in steel manufacturing, an industry that currently accounts for about 7.2% of global greenhouse gas emissions[9]. It has been reported recently that a Swedish manufacturer has shipped its first batch of green steel to Volvo who in turn will use it in prototype vehicles[10].

Hydrogen’s applications are wide and varied. However, competing technologies in the market and the cost and storage challenges do make investing in hydrogen for certain applications unattractive. Hydrogen has a role to play in transitioning us to the low carbon future. This is clear. But investors need to be mindful of where the most material and beneficial use of hydrogen lies, alongside other investments in clean and renewable energy sources. A balanced approach to hydrogen is needed, one that sits as part of a wider energy transition strategy, so green hydrogen’s true potential can be realised.

 

[1] https://www.aps.org/publications/apsnews/201909/history.cfm#:~:text=It%20was%20a%20Welsh%20judge,Wales%2C%20to%20a%20local%20magistrate. * All forms of hydrogen production have carbon embedded in them when a life cycle assessment approach is taken.

[2] https://www.statista.com/statistics/726634/large-scale-carbon-capture-and-storage-projects-worldwide-capacity/

[3] https://www.theguardian.com/environment/2021/jul/20/a-shocking-failure-chevron-criticised-for-missing-carbon-capture-target-at-wa-gas-project

[4] https://onlinelibrary.wiley.com/doi/full/10.1002/ese3.956

[5] https://www.businessgreen.com/news/4036010/expensive-distraction-chair-uk-hydrogen-fuel-cell-association-resigns-citing-blue-hydrogen-concerns

[6] https://www.linkedin.com/pulse/clean-hydrogen-ladder-v40-michael-liebreich/

[7] https://www.theccc.org.uk/publication/hydrogen-in-a-low-carbon-economy/

[8] https://worldofaviation.com/2021/07/united-secures-100-electric-aircraft-for-short-haul-regional-flights/

[9] https://ourworldindata.org/emissions-by-sector

[10] https://www.theguardian.com/science/2021/aug/19/green-steel-swedish-company-ships-first-batch-made-without-using-coal

 

Important Information: Tribe Impact Capital LLP is authorised and regulated by the Financial Conduct Authority (“FCA”). Our FCA registration details are set out in the FCA Register under Firm Reference number 756411 (www.fca.org.uk). Tribe Impact Capital LLP is registered in England and Wales (registered number OC411984) and our registered office is 73 Cornhill, London EC3V 3QQ. This document does not provide you with enough information to make an informed investment decision. Neither does it constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. If you are not an existing client of Tribe Impact Capital LLP, this document is considered to be marketing material. Whilst this document may contain information about specific companies it is not an investment research report as defined by the FCA. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any investments. You are recommended to seek advice concerning suitability of any intended investment decision from your investment adviser. Past performance is not a reliable indicator of future performance; and the value of investments, as well as the income from them can go down as well as up. Investors may get back less than the original amount invested. Any type of impact investment will involve risk to investors capital and the expected environmental or social return may not be achieved. The information and opinions expressed herein are based on current public information we believe to be reliable; but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information herein is given in good faith but is subject to change without notice. No liability is accepted whatsoever by Tribe Impact Capital LLP or its employees and associated companies for any direct or consequential loss arising from this document. This document is not for distribution outside the European Economic Area.

 

 

Important Information: Tribe Impact Capital LLP is authorised and regulated by the Financial Conduct Authority (“FCA”). Our FCA registration details are set out in the FCA Register under Firm Reference number 756411 (www.fca.org.uk). Tribe Impact Capital LLP is registered in England and Wales (registered number OC411984) and our registered office is 73 Cornhill, London EC3V 3QQ. This document does not provide you with enough information to make an informed investment decision. Neither does it constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. If you are not an existing client of Tribe Impact Capital LLP, this document is considered to be marketing material. Whilst this document may contain information about specific companies it is not an investment research report as defined by the FCA. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any investments. You are recommended to seek advice concerning suitability of any intended investment decision from your investment adviser. Past performance is not a reliable indicator of future performance; and the value of investments, as well as the income from them can go down as well as up. Investors may get back less than the original amount invested. Any type of impact investment will involve risk to investors capital and the expected environmental or social return may not be achieved. The information and opinions expressed herein are based on current public information we believe to be reliable; but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information herein is given in good faith but is subject to change without notice. No liability is accepted whatsoever by Tribe Impact Capital LLP or its employees and associated companies for any direct or consequential loss arising from this document. This document is not for distribution outside the European Economic Area.