Sizing the hydrogen infrastructure investment opportunity

Hydrogen will play a key role in the energy transition, but lower costs and government support are needed for it to become a major opportunity.

Hydrogen has quickly transformed from a niche prospect into a global opportunity as many and varied countries commit to reaching net-zero greenhouse gas emissions by 2050 or earlier. The universe’s most commonly found element is expected to play a crucial role in the climate-neutral economies of the future – as shown in many recent scenarios and roadmaps – because renewable energy will not be enough to meet ambitious net-zero and decarbonisation targets.

Last year, many countries introduced hydrogen strategies. Europe has recognised hydrogen as essential to supporting its commitment to reach net-zero by 2050 and has set clear targets to increase electrolysis capacity. In July 2020, the European Commission released its Hydrogen Strategy as part of its European Green Deal to tackle climate change.

A big opportunity?

Expansion into hydrogen and carbon capture and storage will be required to decarbonise energy intensive sectors such as transportation, heating and high energy industries like steel and chemicals. In combination with renewable electricity, it has the potential to entirely replace hydrocarbons in the long run.

Dan Watson, head of sustainability at Amber Infrastructure Group, says hydrogen is a “great solution” for at-scale electricity storage to smooth peaks in energy demand – and so ensuring that power resources are available even when the wind is not blowing, or the sun is not shining. Furthermore, hydrogen can be seasonally stored and transported cost-effectively over long distances by ship or pipeline.

Martin Bradley, senior managing director of Macquarie Infrastructure and Real Assets, is optimistic about the role the element will play in the race to net-zero targets. He believes the hydrogen landscape has “evolved significantly” and has been underpinned by a global shift of regulators, investors and consumers towards decarbonisation.

“This momentum exists along the entire value chain and is accelerating cost reductions for hydrogen production, transmission, distribution, retail and end applications,” he says. “We are energised by the strong sense of momentum and believe it is critical to act now if we are to achieve the various net-zero targets that have been set.”

“It has proven exceedingly important that any support scheme provides long-term visibility and stability”

Martin Bradley
Macquarie Infrastructure and Real Assets

While Macquarie does not believe hydrogen is the only low or no-carbon solution, the manager sees it as a key piece of the decarbonisation puzzle. “Importantly, low-carbon hydrogen will also help to meet our increasing energy demands with supply,” Bradley says.

For Amber’s Watson, while there are many potential applications, the hydrogen opportunity should focus on hard to abate sectors. He believes there are “real opportunities” to decarbonise domestic heat, heavy transport and heavy industry. While hydrogen does not directly result in a reduction of energy use, it can provide climate-friendly solutions to meet energy demands that are otherwise difficult to supply.

For example, hydrogen energy can be economically stored for longer intervals than current battery technologies, while distributing an equivalent quantity of hydrogen energy through a pipeline is considerably cheaper than transporting through electricity wires, says Bradley.

There are many other uses, he adds: “Hydrogen has an existing and further potential role in many industrial processes, such as chemicals and steel production, where electrification is difficult. And for long-haul transportation, including ocean shipping and aviation, hydrogen is a sustainable option where electric battery technologies are not adequate.”

Finally, as hydrogen is a tradable commodity, it can be shipped to regions with insufficient renewable energy potential to help them reach their net-zero targets.

Variances among countries

While hydrogen is expected to play a big role in achieving net-zero carbon emissions globally by 2050, there will inevitably be variances across countries. As Watson says, the opportunities “will differ between countries and regions”, which will depend on “several factors such as resources available, existing infrastructure and skills of respective workforces”.

Bradley thinks that large gas consuming countries, including Germany, the UK, France and Italy, are likely to lead with investment in low-carbon hydrogen, and that the Netherlands is also an important transit country. Furthermore, he says North Sea economies and the “olive belt” have advantages on energy costs and are also likely to be early adopters of low-carbon hydrogen.

“We believe Europe has what it takes to be a real leader. However, it’s critical that there are coherent strategies and support mechanisms. It has proven exceedingly important that any support scheme provides long-term visibility and stability. Unexpected alterations or retroactive changes tend to harm the progress of emerging sectors,” Bradley says.

Gas pipelines

If hydrogen is used to decarbonise the gas grid, it could reuse the existing infrastructure rather than having to build it from scratch, which would be very costly. Bradley believes existing gas pipelines could be used for transporting hydrogen as a lot of the infrastructure is already there.

“We have functioning gas networks that can be used to enable a low or no-carbon hydrogen future,” he explains. “Today, heating for domestic properties and industry accounts for half of the UK’s energy consumption and one third of its carbon emissions (83 percent of homes use gas to keep warm). There is an obvious opportunity to blend hydrogen into the current natural gas network.”

Macquarie is working with gas distribution companies within its portfolio to explore the viability of hydrogen through pilot projects, including blending and developing carbon capture storage infrastructure to carry hydrogen to industrial areas.

“These pilot projects are relatively small and early stage, but they are a unique platform to build first-hand experience, relationships and be a relevant voice in the policy-making context,” says Bradley.

“A number of projects are being developed at scale, but I think the biggest issue right now is the economics today don’t make sense”

Jaspal Phull

Cadent, which runs the UK’s biggest gas distribution network, is leading the way on this with its hydrogen pilot, HyDeploy, which is a pioneering hydrogen energy project designed to help reduce UK CO2 emissions and reach the UK government’s net-zero target for 2050. It includes the development of a hydrogen pipeline and the creation of the UK’s first carbon capture and storage infrastructure. CCS is an important technology to achieve the widespread emissions savings needed to meet the 2050 carbon reduction targets.

Watson says this pilot, blending hydrogen with natural gas, is very innovative: “As the first live demonstration of hydrogen in homes, HyDeploy aims to prove that blending up to 20 percent volume of hydrogen with natural gas is a safe and greener alternative to the gas we use now,” he says.

Crucially, it is providing evidence that customers will not have to change their cooking or heating appliances to take the blend, which means less disruption and cost for them.

“It is also confirming initial findings that customers don’t notice any difference when using the hydrogen blend,” says Watson. “If that is the case, it will create a significant market for hydrogen production and help scale the UK’s hydrogen ambition.”

Government support is needed

The investment needed to support the expansion of the low-carbon hydrogen economy is considerable, but it also comes with a high degree of uncertainty around regulation, market design, demand and supply, and revenue support.

Hydrogen’s role in the energy transition will largely depend on its costs coming down. Today, it is still double or triple the cost of energy equivalents such as gasoline or diesel, but new technologies are usually expensive initially to compete with current sources – as was the case for solar and wind power versus coal.

Redington’s senior vice-president for real assets manager research, Jaspal Phull, says that while hydrogen will play an important role in decarbonising global energy systems, it is currently challenging.

“What will make it difficult is that looking at the time horizon and economics of hydrogen, the conversion agenda is quite challenging. A number of projects are being developed at scale, but I think the biggest issue right now is the economics today don’t make sense,” says Phull.

“Looking back 10-15 years ago, the economics of wind and solar did not make sense and we are where we are right now because of the carbon subsidies and the cost curve has come down.”

With hydrogen, there will need to be a big change in the cost curve just like for wind and solar, says Clearbridge Investments director and portfolio manager David Pow.

“For demand to ramp up, and also for utilisation to ramp up, would require the costs [of hydrogen] to come down. That would be more like back-end loaded growth rather than very linear across the next three decades,” he says.

The current cost of green hydrogen – in US dollar per kilogram terms – is somewhere around $4.

“For it to have more parity with blue and grey hydrogen, it would need to come down to $1-2, which is what Europe has forecast by 2030,” says Pow. “Some more bullish forecasts even say that potentially by 2025 we will reach cost parity of green hydrogen versus blue and grey hydrogen.”

Costs can be brought down through supportive government policy and regulatory frameworks, to enable faster adoption by the private sector.

“The need for hydrogen policy support is similar to the renewables industry in the early 2000s, or the electric vehicle industry in the 2010s, and now the energy storage market,” says Bradley. “The good news is that we know these measures work and we can see how they can support low-carbon hydrogen in becoming mainstream.”

Hydrogen will clearly play an important role in the global move to net-zero, but there are still many cogs needed to be turned for the hydrogen economy to really take off. The greatest challenge is to avoid setting the industry on a slow ramp-up trajectory, which in turn could be detrimental to the success of the hydrogen economy, says Bradley.

“Government support schemes must be progressed swiftly to grow demand for the low-carbon hydrogen economy and build investor confidence in its value chain.”