How do investors feel about a hydrogen market that is expected to be valued at $300 billion by 2027? In short, mixed... but sentiment is certainly strengthening.
As the world recovers from what the International Monetary Fund (IMF) called the worst economic depression in nearly 100 years, and Big Oil faces soaring environmental pressure, the allure of hydrogen has intensified. This is especially true for green and blue hydrogen, which both support climate goals to varying degrees. Hydrogen use overall is expected to climb seven-fold by 2050, according to the International Energy Agency (IEA).
Against this backdrop, there is understandable interest among investors. This is especially true in regions like the Middle East, which want to capture a first-mover advantage in becoming a hydrogen hub. Examples this year in the Middle East alone include the start of the Abu Dhabi Hydrogen Alliance - by ADNOC, Mubadala, and ADQ. The alliance aims to spur the emirate’s role as a leader in green and blue hydrogen.
In Saudi Arabia, Air Products, ACWA Power and NEOM, signed a $5bn deal for a world-scale green hydrogen-based ammonia production facility powered by renewable energy. And Oman’s OQ, with its partners, will produce 25GW of renewable solar and wind energy to generate millions of tons of green hydrogen per year.
On the fence
What is equally understandable, however, is other investors’ hesitation. For some, it is a case of too much change too soon. Many are just getting to grips with renewable markets amid the energy transition; adding another market to the list is a step too far, especially in a pandemic. This certainly applies to many investors who have long specialised outside energy markets, or in Big Oil for decades, and now find they face a steep, green learning curve.
Plus, the cost of building a 'hydrogen economy' tends to be higher than other sources of low-carbon energy, such as solar and wind. And hydrogen is generally a riskier bet than other greener energy markets, with both green and blue hydrogen largely untested as sizeable and scalable projects. Of course, these in turn often demand bigger, longer-term financial commitments too.
Security in track record?
The narrative of hesitation among investors that hovers over hydrogen is not a new one. It echoes the initial to-and-fro that surrounded the development of renewables – an even harder sell in what was then a world of $100/bl of oil. Eventually, after more than a decade of stagnated moves, the push by climate activists and pioneering investors paid off.
Solar power prices have fallen by more than 90 per cent over the last decade, according to Bloomberg Green. This marks a dramatic turnaround for a niche market that only the most adventurous of investors deemed worthy.
As seen in renewables, the greater investors’ support, the greater the scale and efficiency of the market, and the more competitive the cost. Renewable power is increasingly cheaper than any new electricity capacity based on fossil fuels.
Not even the most optimistic climate activist or the most reluctant investor could have imagined this new dynamic 10 years ago. There is no reason the same push will not pay off for the development of green and blue hydrogen markets.
Proactive steps must be made to help investors quickly feel more comfortable, notably when it comes to regulatory goalposts. For example, Europe’s comprehensive 'Hydrogen Strategy' defines clear goals within relatively short timelines, giving investors more clarity and tangibility. As the world grapples with the economic and social impact of the pandemic, such markers from governments and regulatory bodies are invaluable.
Plus, policy schemes, such as contract for differences (CfDs) or regulated asset-based models, can be used to help provide greater certainty to investors across various parts of the hydrogen supply chain, Deloitte has said. The same applies to stimulating innovation and research to help integrate different energy systems and to provide a system-wide view of hydrogen’s role.
Clearly, there is still a long way to go. For one, the cost of producing hydrogen from renewables will need to fall by more than 50 per cent to $2-$2.5/kg by 2030 to make hydrogen a viable alternative to conventional fuels, detailed S&P Global Ratings. This is achievable with solar or wind production costs of $20-$30/MWh and a 30-50 per cent cut in the cost of electrolysers.
This ambitious target is certainly doable, but not without more investors taking a seat at the hydrogen table. The sooner those seats are filled, the sooner costs will fall and a market that many are calling the 'oil of the 21st century' can truly flourish.