Interview with Thiemo Lang, Senior Portfolio Manager, RobecoSAM Smart Energy and Smart Mobility strategies.
As of today, hydrogen only constitutes a tiny fraction of the global energy mix. It is almost exclusively produced from fossil fuels, resulting in the release of 70 to 100 million tons of CO2 annually in the EU alone.1
For hydrogen to contribute meaningfully to climate neutrality, its production must become fully decarbonized. Currently, hydrogen is mostly produced by reforming methane, where CO2 is emitted. This is called “grey hydrogen”.
However, the advent of “green hydrogen”, where an electrolyzer converts water into hydrogen (and oxygen) using renewable electricity, promises to render hydrogen production completely CO2-free. Green hydrogen provides a solution for decarbonizing energy-intensive economic sectors, where reducing carbon emissions is difficult to achieve otherwise. For example, in building heating systems, in industrial processes, and also, in heavy-duty transportation (trucks, buses, trains, etc.), where thanks to its high-density property, green hydrogen can be used for storing large amounts of clean energy similar to a battery in light electric vehicles. As of today, the production costs of green hydrogen are still higher than those of fossil fuel-based grey hydrogen, but we expect this to narrow significantly in the coming years.
As public pressure is rising to limit global warming to 1.5 degrees Celsius, governments worldwide are recognizing green hydrogen’s ability to decarbonize the sectors that are difficult to abate and are aiming to accelerate the pace of hydrogen developments.
In Asia, countries like Japan, South Korea, and China all have hydrogen policies in place, including targets for fuel-cell electric vehicles, refueling stations, and hydrogen imports.
In Europe, countries like Germany, France, Spain, and the Netherlands have all formulated individually ambitious green hydrogen production targets. In addition, the European Commission (EC) has identified green hydrogen as a key element in achieving the European Green Deal and Europe’s clean energy transition where, in the short-term, it is expected to bridge some of the decarbonization gaps left by renewable electricity. Meanwhile, over the longer-term, as green hydrogen’s scale and scope increases, its share of Europe’s energy consumption is expected to grow, from currently less than 2% to somewhere between 8% in a business-as-usual scenario, and 24% in an ambitious scenario by 2050.2
Industry leaders across the transportation, chemicals, oil and gas, and heating sectors are finally realizing that green hydrogen offers them a tremendous opportunity to expand their addressable markets whilst at the same time going green.
Scaling up the hydrogen value chain, electrolyzers with higher efficiency and cheap renewable electricity will be the biggest drivers of cost reductions. Yet, to reach this scale there is a need for investment, policy alignment, and demand creation.3 Electrolyzer costs have been reduced by 60% over the last ten years, and a further halving by 2030 seems realistic.
Disregarding the cost of CO2, today’s costs for fossil-fuel based hydrogen are estimated to be about 1.5 €/kg in the EU4 compared to green hydrogen which we estimate is currently in the range of 3-5 €/kg. It is expected that green hydrogen will be cost competitive by 2030 (we estimate it will fall to 1.5 €/kg by 2030) in regions with cheap renewable electricity, without even assuming any CO2-taxes on grey hydrogen.
As hydrogen production, distribution, and the manufacturing of system components scale up, there will be many applications that help unlock green hydrogen’s competitiveness.
On the production front, scaling-up green hydrogen will naturally have a positive impact on producers of electrolyzers and fuel cells. Since renewable energy is used to produce green hydrogen, we expect renewable energy producers to also get a boost. This will likely apply to a diverse group of renewable energy producers (e.g. solar, on/offshore-wind, and hydropower), since we need a mix of different renewable energy sources to maximize the yearly operational hours of electrolyzers necessary to amortize the cost of producing the hydrogen.
In terms of the application of green hydrogen, we believe it will have the greatest impact on the transportation sector, notably for heavy-duty trucks, long-distance buses, ships, and aircrafts. Even its use in passenger cars can no longer be excluded. As an example, the South Korean car maker Hyundai5 states they have already driven cost per vehicle down by 50% from 2013 to 2019, with another 50% reduction expected by 2025. They target competitiveness with electric vehicles and combustion cars by then.6
Progress has also been made in rail transportation where one European railway maker already has a hydrogen train under operation. Moreover, a report from the EC estimates that around 46% of mainline networks are still being served by diesel technology, suggesting demand for hydrogen could increase significantly over time.7
Besides the transportation sector, the heating sector will also be significantly impacted by the widespread availability of green hydrogen. We already have the possibility to blend up to 20% of green hydrogen into natural gas grids (at least for a transition period), which would allow for the continued use of existing heating appliances with reduced CO2 emissions. Furthermore, hydrogen boilers will be a competitive, low-carbon building-heat alternative, especially for existing buildings currently served by natural gas networks.
Since not every industry can be a winner, it is only natural that some industries will suffer as green hydrogen infiltrates the market. Green hydrogen competes in areas that are traditionally supplied with oil, and to a lesser extent natural gas. These sectors will suffer, but in light of our societal goal to reduce CO2 emissions, this development is welcome.
We are currently witnessing the birth of a new industry, where different players are trying to find their place along the value chain. As green hydrogen starts to play an increasingly important role in our future energy mix and the market broadens up as a result of recent IPOs, we are seeing more and more attractive investment opportunities in companies that produce and transport green hydrogen, as well as in those that use it.
As a consequence, we have some base holdings in our portfolio of companies which we consider to be technology leaders that will benefit from the build-out of the hydrogen sector. We are particularly interested in companies involved in the production of electrolyzers and fuel cells, and in companies working on building-out the infrastructure necessary to support the hydrogen boom.
For us, green hydrogen is the last missing link necessary for establishing a truly clean energy future
Currently, these companies have approximately 5% weight in our RobecoSAM Smart Energy and Smart Mobility portfolios, which we consider to be appropriate. We take notice that these companies are quite volatile given the early stage of the industry— the market is still adapting and currently pricing-in their compelling growth prospects. Looking ahead, the industry-wide news flow will remain strong, with more partnerships and strategic alliances being announced, which should also be very supportive for these stocks.
For us, green hydrogen is the last missing link necessary for establishing a truly clean energy future. It is a high-density energy source that enables the decarbonization of carbon-intensive sectors which would otherwise be difficult to ‘clean up’. This sector will only grow in importance over the next 10 years and beyond. As investors, we are very excited to participate, as it fits perfectly into our broader Smart Energy and Smart Mobility strategies.
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