When we last took an in-depth look at the state of the green hydrogen market in December 2020 it was a nascent part of the energy transition play, with governments, fund managers and institutional investors still working out the best way to address what could be a sizeable opportunity, depending on who you asked.

The European Commission, at the time, had established bold targets, although those were dismissed by their own representatives to us then as “purely political” with “no science behind that”. For some fund managers, like Germany’s KGAL, it was something they were analysing but still considered too early, while others, such as France’s SWEN Capital Partners, envisaged opportunities on the lower end of the scale.

And in May 2022? Europe is keenly eyeing a growth in hydrogen to replace Russian gas imports, Ardian has co-launched a dedicated hydrogen fund targeting €1.5 billion and it has been joined in an investment by compatriot renewables fund manager Mirova and further institutional backing from Caisse de dépôt et placement du Québec, Canada’s second largest pension fund. And in Australia, last year saw the announcement of what will be the world’s largest green hydrogen hub, with plans to produce 3.5 million tons per year.

So, as institutional capital is meeting a favourable macro demand, it must be plain sailing for the emerging sector? Not exactly, says Janet Howard, a Canada-based partner at law firm Fasken, who also co-heads its hydrogen energy advisory team.

“A lot of attention is focused on how to build out the sector to address an increase in demand. The demand is there, it’s the supply that needs to ramp up,” she says. “It’s about how you get as much low-carbon hydrogen as the demand is calling for as quickly as possible and at the right price point. Offtakers are ready to commit and the market is becoming competitive on price.”

Where this differs to the recent past is the environment in which these conversations are taking place, according to Howard. “People were more willing a year ago to have open conversations about the potential. There were less guarded conversations. People were making the rounds to introduce themselves, their companies and technologies. Now that strategic relationships have formed, deals are getting done and work to construct projects is beginning.”

According to Tim Stock, hydrogen and clean energy director at the New South Wales government, the outlook for hydrogen as a major player in Australia’s renewables landscape has significantly improved in this timeframe since the Australian government set out its National Hydrogen Strategy in late 2020.

“I think the biggest challenge to getting infrastructure and capital to be based here is supply-chain issues. [Australia is] doing very well in signalling that our market is going to be a strong domestic hydrogen market, as well as an export player, and we need to do that in order to make sure that we can get the technology and the supply chain here or build it ourselves,” Stock says.

“There’s a massive opportunity for the hydrogen economy. It’s only picking up speed and I think everyone is seeing the value that it can provide.”

Where does hydrogen fit?

While the conversation about green hydrogen as a realistic investment has certainly moved on, conversation about its role within the energy mix is still up for debate, despite its theoretical versatility as a clean mobility fuel, as energy storage and its position within a future pipeline system.

That said, Ardian’s head of infrastructure Mathias Burghardt is certainly bullish about the future of hydrogen.

“Hydrogen will become a key energy vector and which has to account for 20 percent of the mix,” he maintains. “This energy has to be competitive if we want European industry to be competitive.”

To date, the European Investment Bank has made its intentions clear, with early investments in the green hydrogen space in December 2020 and February 2021 focusing on providing green hydrogen solutions to public transport in Denmark and the Netherlands, respectively. One of its more recent deals last month saw it provide €53 million to support producing green hydrogen for industrial use.

“It can replace fossil fuel-based hydrogen in these heavy industries,” believes Roland Schulze, managing adviser to the EIB on low-carbon energy technology. “Hydrogen can also be produced as energy storage, but I think it should come after batteries. There are many other proposals to use hydrogen to replace natural gas, but that is very much in the future.”

Some might even say that Schulze is being generous by placing the natural gas replacement proposal as “very much in the future”. The recent Mitigation of Climate Change report from the Intergovernmental Panel on Climate Change saw a role for hydrogen within storage, transport and peaking generation but was rather emphatic on heating solutions.

“Using electricity directly for heating, cooling and other building energy demand is more efficient than using hydrogen as a fuel, for example, in boilers or fuel cells,” it stated. “In addition, electricity distribution is already well developed in many regions compared to essentially non-existent hydrogen infrastructure, except for a few chemicals industry pipelines.”

And yet, in March came what will be one of the year’s largest infrastructure deals, with Macquarie Asset Management’s 60 percent acquisition of National Grid’s gas transmission and metering business in the UK for an enterprise value of £9.6 billion ($12.5 billion; €11.5 billion). MAM’s head of real assets in Europe, Martin Bradley, said it “will support the expansion of hydrogen’s role in the energy mix to deliver a competitive edge to the UK and its industry”.

Peter Durante, MAM’s managing director and head of technology and innovation, adds that while Macquarie mainly sees hydrogen’s role as a decarbonisation tool in heavy, hard-to-abate industries and transport solutions such as shipping, this UK example is a different proposition.

“In the UK, we look at hydrogen having a critical role to play in heating. We don’t think that universally applies, but we think in certain archetypes the role for hydrogen in heat is really important because of the network challenges of trying to upgrade the grid, home electrification and the costs of alternatives,” Durante says.

“The UK’s housing stocks, due to its age and design, is among the worst performing in Europe in terms of thermal efficiency. It’s not that easy or inexpensive to do sufficient building retrofits for electrification of heat, although insulation in general should be a priority. Our power grid is also not sized for heat, it’s sized for electricity. In other markets, electrification of heat might make more sense.”

There is also a reasonable degree of scepticism about pipeline retrofitting from Emmanuel Jaclot, head of infrastructure at CDPQ, although the group is analysing the role of hydrogen across its infrastructure portfolio and sees some hope in the transportation space.

“We need to make sure that our gas pipelines can take a high share of hydrogen in the future. Hydrogen is much smaller molecules and you need pipes that can resist it. The traditional steel pipes can suffer from hydrogen embrittlement,” he says. “It’s not going to be everywhere, but you will get some clusters such as dense industrial zones or petrochemical sites where it will be justified to develop some new downstream infrastructure dedicated to hydrogen. Talking to our portfolio companies in gas transmission and distribution – but also in transportation – we realised their appetite to investigate the hydrogen space as well.”

Conservative risk-takers

CDPQ’s willingness to take these steps is significant. Its first move in the sector came in February, investing in a €200 million funding round alongside Hy24, a joint venture between Ardian and FiveT Hydrogen established in Q3 2021, and Mirova in Hy2gen AG, which is developing green hydrogen fuels for maritime and ground transport, aviation and industrial applications. CDPQ’s investment represents a huge boost to this subsector as one for typically risk-averse institutional investors in infrastructure.

“As we studied the space, we became increasingly convinced that we needed to move in early. It’s clearly on the higher end of our risk scale, but we saw the combination of hydrolyser capex coming down and more appetite from offtakers to buy green hydrogen or ammonia in the market,” Jaclot says.

Ardian is certainly seeing the faith of institutional investors in the space. The Clean H2 Infra Fund, which is managed by Hy24, has a  target of €1.5 billion, a figure expected to be exceeded and a final close set for mid-2022 on its hard-cap of €1.8 billion. Strategic investors initially populated the fund, but Burghardt now says he expects a broadly equal mix with institutional investors by the time of final close, although he was non-committal as to whether all view it as infrastructure.

“They definitely see it as an energy transition allocation, which is even more important for them. For many of them, it matters a lot it’s an Article 9 fund,” he says. “European investors have to invest in these but still need a financial return. When you have a green hydrogen fund where they can expect double-digit returns, I think fundraising is quite straightforward if you have a team with strong credibility.”

It’s a slightly different picture in Australia. There appears to be plenty of private sector interest in developing new projects, but attracting institutional capital remains difficult, although there are attempts to fix this. With the launch of the Advancing Hydrogen Fund in 2020, the Australian government handed its Clean Energy Finance Corporation a mandate to invest A$300 million ($223 million; €204 million) to support the development of Australia’s renewable hydrogen industry and generate private sector investment.

To that end, the CEFC has made the first two of what it hopes will be many direct investments in the sector, investing in Australian hydrogen electrolyser technology Hysata, and committing up to A$12.5 million to zinc producer Ark Energy Corporation’s first hydrogen hub SunHQ.

“Investor appetite is certainly there for hydrogen projects,” the CEFC’s head of hydrogen, Rupert Maloney, says. “An important part of our work is investing to lead the market, taking on risks that the private sector may not yet be willing to consider and supporting the emergence of a new industry and a cleaner energy source.

“Most projects we are looking at don’t yet have the level of cashflow to attract large-scale institutional capital. However, we’re looking to prove up the risks, which in turn will allow the market to move to larger projects, crowding-in additional third-party institutional capital as the renewable hydrogen market gains momentum.”

In a further indication of investor appetite for Australian hydrogen projects, the New South Wales government recently announced that its A$70 million investment in the state’s Hunter and Illawarra hydrogen hubs and call for expressions of interest had attracted more than A$4 billion in potential investment from the private sector.

Given this, and despite the nascent status of the sector, MAM’s Durante is confident it will form a key part of investors’ energy transition allocations going forward.

“We’re major investors in wind, major investors in solar and we will be major investors in green hydrogen too. It’s not to be taken in place of anything else. It’s not going beyond wind and solar – it’s going further with wind and solar,” he argues.

Russian to cut the costs

What may be deterring others from committing to green hydrogen is the princely sum to pay to get there. According to a report from the International Energy Agency last year, green hydrogen, priced between $3 and $8 per kilogram, could cost up to six times more than grey hydrogen produced by natural gas ($0.5 to $1.7 per kg), while blue hydrogen produced using carbon capture technology is also still a cheaper method at $1 to $2 per kg.

What may come to the rescue in terms of green hydrogen’s acceleration is Europe’s natural gas struggles, which began last autumn and intensified with Russia’s invasion of Ukraine in February.

“The cost of green hydrogen will come down as projects scale. It’s not entirely clear how long that may take, although the technology needed is under development,” believes Fasken’s Howard.

“Given the increase in demand and resulting cost of oil and gas – especially in light of what is happening in Russia – it’s possible that the cost of blue hydrogen will increase. This may impact the decision investors ultimately make when evaluating the differences between green and blue hydrogen opportunities.”

According to Quinbrook Infrastructure Partners’ co-founder David Scaysbrook, the recent significant increase in the price of gas in Europe and resurgence of demand for liquefied natural gas are also contributing to the relative cost competitiveness of green hydrogen versus other alternative fuels, particularly for big volume, large-scale industrial applications.

Despite the significant gap that remains between the scale ambitions that many hold for green hydrogen and the cost at which it can currently be manufactured, Scaysbrook believes there will still be customers that sign up to buy green hydrogen at current price levels to get the industry moving.

If political targets have been successful so far in accelerating investment in the space, then the EU might have provided another boost. Two weeks after the invasion of Ukraine, it launched a significant ramp-up of renewable energy targets with RepowerEU, which included a commitment to add 15 million tons of renewable hydrogen in its system by 2030 to replace Russian gas.

“Western electrolyser prices are coming down as first projects get announced,” says Durante. “There’s been a real step down in the costs and we think that will continue over time as the industry scales. The targets will bring significant price drops.”

Work by electrolyser group Hysata, CEFC’s Maloney adds, is just one example of the breakthroughs in research and design made over the last two years, which are slowly chipping away at the cost-competitiveness hurdles still facing the sector. “We’re also seeing a scaling up of electrolyser production by global OEMs. Our sense is that there is generally a higher level of confidence in achieving production cost targets,” he says.

Once again, Burghardt is unfazed by the challenge, harking back to the experience seen with wind and solar, while he also believes the war to be an accelerator in this process.

“In 10 years, the cost of production of renewable energy has reduced by almost 10 times. In hydrogen, the scale is less than five between green and grey projects. We are much closer to market equilibrium,” he says. “Today, with the higher gas price, this gap will be even lower.”

However, the cost of renewables has spiked recently amid global supply-chain issues, which may prohibit the speed at which hydrogen becomes more cost-competitive, over the next two years at least.

“While the cost of natural gas and LNG has increased materially, making green hydrogen more cost-competitive in relative terms, right now we’re seeing higher capital costs to construct renewable energy plants. And we are still not yet at the point where manufacturers are producing electrolysers at scale to deliver mass volume unit cost. There’s a lot of metals content in the manufacture of electrolysers that has increased in price as well,” says Scaysbrook.

“The cost trend that everyone projected of electrolysers and renewables getting progressively cheaper on a continual downward slope, that’s now changed, at least for the time being. Manufacturing costs have gone up, and that is taking the wind out of the sails a little bit for near-term project economics. That is likely to push many project plans back by [roughly] two years.”

Inflationary and supply-chain pressures notwithstanding, the CEFC’s Maloney sees a strong mid-term outlook for the Australian renewable hydrogen industry.

“Australia has strong comparative advantages in renewable hydrogen with our significant high-quality renewable energy resources, a trusted position in global energy markets, good proximity to key global markets and attractive institutional investment conditions. We see hydrogen as the next step in the emissions transition and one that will only gain more investor interest as the technology and markets evolve,” he says.

Scaysbrook believes that once the trend of reducing costs for major renewable energy manufacturing is resumed, hydrogen will continue its course over the next few decades to playing a critical role in achieving industrial decarbonisation.

As governments continue to subsidise green hydrogen production, partly ameliorating some of the industry’s cost-competitiveness issues, he predicts more institutional investment in the production side of hydrogen, as well as greater customer commitment on the long-term offtake side.

“From that perspective, the prospects are quite extraordinary. In terms of a new industry evolving in alternative green fuels and fossil fuel substitution, it’s one of the biggest trends out there at the moment,” he says.

Amid a tumultuous energy space and significant hurdles of its own, turning a trend into an energy transition reality is now the task at hand for hydrogen’s backers.

Major Australian coal port weighs up green hydrogen transition

Australia’s Dalrymple Bay Infrastructure, which operates one of the world’s largest coal ports, Dalrymple Bay Terminal, is looking to transition its business to green hydrogen exports.

The ASX-listed company announced in February that it had reached a funding agreement with its major shareholders – which includes Brookfield Infrastructure Partners with a 49 percent stake – and potential project partners to conduct a feasibility study into a potential hydrogen production facility in Queensland.

“The overall concept that we’re working towards is the development of our port as a hydrogen exporting hub,” says Anthony Timbrell, chief executive of Dalrymple Bay Infrastructure. “DBT, for the last 40 years, has operated as an access terminal shipping multiple parties’ products and we have the same strategic objective for hydrogen. We want to be operating as a connection between Australian producers of hydrogen and export markets.”

Even though DBI is studying the entire supply chain and may ultimately invest in production capabilities itself, it is particularly keen to attract other potential partners to the region and promote the potential of DBT as a third-party loading facility.

“Anyone who’s looking at the hydrogen exporting market will necessarily need access to a deep-water port, and they’re not cheap to build. If we can repurpose the existing infrastructure and make other potential hydrogen producers’ supply chains more economically efficient, then we’d love to be involved in that,” Timbrell adds.

Ultimately, DBI wants to move in line with the momentum building up around the development of a hydrogen export market in Australia.

“We’re never going to be at the leading edge of the development because as infrastructure investors, we’re fairly risk averse – we are unlikely to take the ‘build it and they will come’ mentality,” Timbrell says. “But if a market starts to develop and if large customers in Asia are prepared to commit to binding long-term take-or-pay contracts which underwrite infrastructure development, then we want to be ready to take advantage of that, rather than [trying to catch up] when the market has already emerged. We want to be ready to go when that starts to happen.”