From an investor perspective green hydrogen can be a real solution to real problems, but it can also be overhyped. Patience and a questioning approach will be key for investors. And while moves such as the US IRA will be short term positive, the underlying investment case is pretty much unchanged.
Summary: Green hydrogen has been in the news recently. Does this mean that it's becoming more real? Or is much of it still hype - which risks creating a bubble? The short answer is from an investment perspective, not much has really changed. Yes, green hydrogen has a real role to play in decarbonisation. And yes, recent announcements on subsidies will help get some projects off the ground. But progress will still likely be slower than many hope, and it's still not the painless panacea.
Why this is important: From a financial investor perspective it's easy to think, it's green, some forecasts suggest massive end demand, and it's now getting a lot of financial support, so it will make a good investment. And if we add a sustainability overlay, then it seems to be a solution to many of our more pressing transitions. But, we still have the reality to consider - will this investment potentially deliver us a fair financial reward? So, we need to look hard at the underlying economics. And the financial winners might not be the ones you expect.
The big theme: The simple plan to electrify everything, combined with the decarbonisation of electricity generation, will get most countries a fair way toward their net zero targets. But it still leaves a large gap, mostly from what are commonly called the hard to decarbonise sectors. This is where green hydrogen and other technologies can play a part. But we need to be realistic about issues such as cost, timing, and the practicality of many proposed end uses.
Summary of a story published in the Financial Times:
The appeal of green hydrogen can be seductive. It's possible to create a narrative where it penetrates many corners of our energy economy, replacing fossil fuels and hence reducing GHG emissions. And according to its supporters, it can be stored for long periods, and transported great distances. According to analysis from McKinsey for the Hydrogen council, a net zero system could require up to 500 million tonnes of green hydrogen annually. This is over 5x the current demand for grey hydrogen produced from fossil fuels.
But, the numbers involved in meeting this apparent demand are mind boggling. Just looking at the electricity needed to produce this amount of green hydrogen, the article estimates that this will require almost 25,000 TWH. To give this context, this is 100x the current electricity demand in the UK. And it's all got to be green, so mostly wind and solar. The investment needed for the electricity alone could total $8 trillion. But, there is good news on the horizon. A combination of subsidies, carbon pricing, and falling costs could make the economics look better.