6 July, 2021 / Comment
What investors should know about clean energy’s next advancement
By Kelly Bogdanova, RBC Wealth Management-US, vice president & portfolio analyst
RBC's Kelly Bogdanova provides a guide to hydrogen opportunities
As the transition from fossil fuels to clean energy gains momentum, hydrogen is surfacing as an important component and investors are taking notice.
This versatile, clean-burning element supports carbon reduction and the transition toward lower- and zero-carbon energy production. Hydrogen can help reduce emissions from fossil fuels and heavily polluting industries. Importantly, it also has the potential to improve the reliability of renewable energy.
In the coming years, hydrogen’s versatility, use and promise is expected to expand as it:
- Flows through natural gas pipelines. Some existing pipelines can safely carry a mixture of 5-15% hydrogen with natural gas without damaging the infrastructure, according to RBC Capital Markets;
- Reduces emissions in heavy industries such as chemicals, steel, iron, and cement production, as well as crude oil refining;
- Becomes a key component of local industrial power supply chains that incorporate wind, solar, and other green energy solutions; and
- Helps to power transportation systems such as truck fleets, trains, industrial equipment (e.g., forklifts), ferries, tug boats, ships, and airplanes.
Sizing up the hydrogen opportunity
RBC Capital Markets estimates global demand for pure hydrogen is about 70m metric tons, with about 95% consumed by the oil refining and chemicals industries. An additional 45m metric tons of hydrogen demand comes from mixtures of hydrogen with other gases, mainly used for heat and electricity.
And demand for pure hydrogen is expected to increase even more meaningfully in coming decades, though the forecasts and scenarios vary widely, from a 267% increase to a 10-fold increase by 2050.
The degree to which hydrogen demand will grow depends on how weak or strong governments’ clean energy and hydrogen policies are, and how coordinated. Importantly, demand will also depend on how much cost improvement occurs through hydrogen innovation relative to competing energy sources.
Government policies and innovation will play outsized roles
Bloomberg New Energy Finance (BNEF) estimates that building on existing piecemeal regulatory approaches with support from governments will enable hydrogen to meet 7% of global energy needs by 2050 compared to the low-single digits today – not an insignificant proportion.
For hydrogen to take off over the longer term and become a much greater component of total energy supply, significantly more will have to be done. Strong and coordinated government regulations and incentives, and significant funding would be needed to build scale and advance technologies. Corporations will need to be proactive and seize the opportunity. Public and private expenditures of $11trn would be necessary to push hydrogen’s role up to 24% of global energy needs by 2050, according to BNEF.
Key industries are innovating
Investment opportunities are forming in four broad categories:
- Heavy industry applications, particularly in the chemicals, steel, other heavy metals, and cement industries where carbon emission reduction will be essential to achieve global goals;
- Oil refining and natural gas industry uses, including pipeline companies;
- Hydrogen for local industrial supply chains and power generation based on electrolysis from wind, solar, hydro, and nuclear power sources; and
- Transportation industry innovations. Companies, startups, and research institutes are looking into and testing hydrogen-based fuel cells and internal combustion engines to power medium- and long-haul heavy-payload truck fleets, commuter and freight trains, industrial equipment (e.g., forklifts), ferries, tug boats, ships, and airplanes.
The potentially most consequential innovations and uses of hydrogen in the next five to 10 years will likely take place in carbon-intensive heavy industries—steel, chemicals, natural gas, and power generation. Progress is already being made. For example, a multinational chemical company in partnership with a Sweden-based steel maker has successfully replaced liquefied natural gas with hydrogen as feedstock in the production process—a first for the industry.
There are also a number of hydrogen initiatives in the power industry. The H21 project, a UK government partnership with a Norwegian energy firm and a UK gas distributor, would bring a 12.5 gigawatt hydrogen-based power plant to Northern England.
Bottom line: There is opportunity in hydrogen
Hydrogen has rapidly become more than just talk. Many businesses ranging from startups to major industrials have committed to an accelerated increase in production and to innovative applications.
For hydrogen-related investments, investors should focus on opportunities that are likely to find their way to market in the next five to 10 years and are not as dependent on substantial, coordinated long-term government subsidies that have yet to be designated or allocated.
What is H2?
- Is the most abundant element in the universe
- Is clean-burning, colorless, and odorless
- Has a flame that is invisible to the naked eye
- On earth, exists only bonded with other elements (i.e., water: H2O)
- Is the lightest element, so it has low density or mass by volume (only 15% as dense as gasoline)
- But it has high energy density (almost 3 times more than diesel or gasoline)–meaning a greater amount of energy stored in its mass
- Is an energy carrier, not an energy source
- Can store energy, which allows it to function as a battery to complement renewable energy and smooth out intermittent supply and demand mismatches of solar and wind power
- Has diffusibility (i.e., it can spread more easily than natural gas)
- Can penetrate through porous metals, including some types of steel and iron pipes
- Can be stored and transported within certain limitations
- Has a combustion potential (auto-ignition temperature) similar to natural gas and much higher than gasoline vapor
- Generates no carbon emissions on its own.
- The amount of carbon emissions involved in hydrogen production depends on the source used to extract it (hydrogen from coal has high emissions; hydrogen from wind power has very low to zero emissions)
Source – RBC Wealth Management, RBC Capital Markets, U.S. Department of Energy
The hydrogen rainbow
The major types of hydrogen classified by colours:
|Types of H2||Production source (feedstock) and select production processes|
|Brown||From coal; traditionally has not involved carbon capture and storage (CCS) but can through coal gasification|
|Gray||From natural gas through thermochemical conversion|
|Blue||From natural gas via steam reforming; uses carbon capture and storage (CCS) to minimize CO2 emissions|
|Turquoise||From natural gas via methane pyrolysis; H2 and solid carbon are the outputs, both of which have uses|
|Yellow||From nuclear power via electrolysis and other methods|
|Green||From renewable electricity (solar, wind, and hydro) via electrolysis of water; breaks down water into hydrogen and oxygen|
Source – RBC Wealth Management, RBC Capital Markets, U.S. Department of Energy, EWE AG, World Nuclear Association
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