13 October 2021
In their search for ways to reach net zero emissions, governments and industry are increasingly looking to low-carbon hydrogen to play an important part of an energy transition. Its potential has been seen by more than 40 countries that have developed national hydrogen strategies, double what it was at the start of the year.1
Low-carbon hydrogen is seen by many European countries as key to decarbonising hard-to-abate sectors, like heavy industry or shipping. It also offers synergies with other CO2 abatement solutions such as clean electrification and carbon capture.
To this end, the EU is investing €30 billion in clean hydrogen production capacity by 2030, €1.3 billion as part of its Clean Hydrogen Partnership to advance the commercial viability of hydrogen trucks and shipping, and a further €20 billion to boost clean vehicle sales by installing two million hydrogen and EV charging stations by 2025.3
But there are challenges to bringing about the efficient and cost-effective deployment of low-carbon hydrogen as a new energy source. Certainly, green hydrogen is currently more expensive than fossil fuel alternatives. However, this is changing. "There are three main factors which are driving the green hydrogen hype," says Kate Vidgen, Global Head of Industrial Transition and Clean Fuels in Macquarie's Green Investment Group.
The first of these is the falling cost of electrolysers, driven by technological improvements and manufacturing scale. Perhaps more important is the second, being the falling cost of renewable power, which is expected to account for approximately 70 per cent of lifecycle costs of hydrogen production of green hydrogen.
This can form a virtuous circle as hydrogen could make renewable energy projects more economic – by becoming an alternate way to monetise wind and solar, avoid curtailment and allow offshore wind to be built in areas that might otherwise require expensive transmission infrastructure. Hydrogen production can also happen flexibly, in response to electricity grid supply and demand, creating opportunities for earning additional revenue streams and reducing costs by participating in ancillary service markets.
“The UK is looking at the energy transition more holistically, and that’s good for hydrogen. Many developers are now combining their hydrogen teams and their offshore wind teams to identify synergies of expertise and development,” says Vidgen.
The third element playing a role in reducing the cost of hydrogen is the increasing level of support that governments globally are willing to provide. This support is expected to play a key role in helping the industry achieve scale.
“The need for policy support for hydrogen is similar to the support needed by the wind industry over a decade ago. Governments can again play a critical role in driving down the cost of this technology by providing strong support from the early stages,” says Peter Durante, Head of Technology and Innovation at Macquarie Asset Management.
Germany and the Netherlands are two countries pursuing ambitious hydrogen policies, with gigawatt-scale targets for electrolyser production by 2030 supported by large concessional funding heavily focussed on industrial decarbonisation in steel, chemicals and cement.4
The UK is starting from a strong position. “The advantages presented by the UK’s oil and gas heritage should not be understated,” says Vidgen. “As hydrogen projects move from development to production, operational, technical and safety expertise will be critical.” Experience and technical expertise gained from North Sea oil and gas production will be valuable here, she adds.
This offshore experience can also be applied to help the UK continue to grow Its world-leading offshore wind sector. “We have enough wind resource in the North Sea to power all the energy needs of the UK,” says Martin Bradley, Senior Managing Director, Macquarie Asset Management.5 “Much of this new capacity could be used to grow green hydrogen production.”
Alongside new revenue streams for renewable energy projects, hydrogen could also play a role in helping legacy infrastructure support the energy transition. Both offshore gas infrastructure as well as onshore gas grids can form part of a future hydrogen network, protecting jobs in these parts of the economy and helping to avoid hefty decommissioning costs. Some estimates suggest the tax relief associated with decommissioning assets in the North Sea is likely to cost the UK Government around £24 billion.6
Growing domestic demand will be critical to establishing the UK as a centre for excellence for the hydrogen transition, and there are already a number of projects making the most of this opportunity.
For example, Cadent, a Macquarie Asset Management portfolio company and the largest gas distribution network in the UK, has already partnered with other providers of natural gas infrastructure to build the UK’s first homes whose boilers, hobs and cookers are entirely fuelled by hydrogen.7,8
In addition, Cadent’s HyDeploy project has successfully demonstrated that hydrogen can be safely blended up to 20 per cent in volume with natural gas, allowing it to be distributed through current infrastructure and used by existing home cooking and heating appliances.
According to Bradley, “With more than a third of the UK’s emissions originating from heating homes and businesses, and the majority of the infrastructure available for re-use, it makes sense that these gas networks play a role in decarbonising the economy.9 Blending inhome heat can stimulate the demand side of the equation, providing a stronger economic rationale on the supply side market for an earlier ramp up of hydrogen production.”
Cadent is also supporting the creation of the world’s first hydrogen industrial cluster in the Northwest of England through HyNet.10 This project aims to reduce carbon emissions from industry, homes, and transport, while supporting economic growth in the region.
117 million tons of hydrogen were produced globally in 2018 and Bloomberg NEF estimates that global demand could grow 40 per cent by 2030. In a net zero scenario, production could increase eleven-fold by 2050.11
Part of this demand will be driven by industrial and commercial users looking to decarbonise equipment, with everything from on-site diesel generators to heavy goods vehicles potentially transitioning to hydrogen. However, realising this transition will require significant investment, and not only in alternative fuel cell powerplants and vehicles.
“The investment opportunity and capex requirement extend beyond the fuel cells into a wide range of ancillary equipment such as storage and refuelling assets - including liquefaction, hydrides and compression, bay storage and gas transmission assets,” says Ben Glover, Executive Director, Macquarie Sustainability and Waste. He points out financial services companies could play a unique role in bringing together hydrogen supply and demand to create a packaged, all-in-one solution that simplifies the transition to hydrogen.
“There's a really significant capex spend that is needed to transition and future-proof clients who want to move towards hydrogen fuel adoption as part of their decarbonisation strategy.”
According to Glover, this creates a generational opportunity for the United Kingdom to participate in the job creation required to support the manufacturing, assembly, installation and operation of this diverse set of assets.
Finding solutions to these cost challenges will be one of the hurdles that will need to be overcome if we are to make the most of hydrogen's considerable momentum. However, if they are overcome, hydrogen could make up a significant part of the UK and Europe's energy mix.