Hydrogen

Hydrogen is being touted as the ‘next generation gas’, and a potential solution to the net zero emissions targets set by governments around the world.

The Australian government has indicated that hydrogen will play a major role in Australia’s energy mix and a key part of achieving net zero emissions by 2050.

The private sector has already started responding to this with Australia’s richest man Andrew Forrest throwing billions of dollars at the technology.

Countries like Japan and Korea, who have limited access to renewable energy given the amount of land required for solar panels and wind farms, also see hydrogen as a way to reach net zero.

In 2022, the US has outlined subsidies for green hydrogen ($3/kg production tax credit) production in the Inflation Reduction Act and Europe brought forward hydrogen production targets in the RePowerEU plan.

Hydrogen energy could be the energy of the future, but large scale hydrogen production is in its infancy, with many projects still at the development stage rather than the construction stage.

If the last two years have been about drumming up support for the industry, we think that 2023 will be where “push comes to shove” as companies, governments, leaders and financiers look to evaluate the feasibility of making these projects a reality.

What do the analysts say

CIO Insights: Development of new energy sources will remain a focus of government policy due to climate change and security concerns (reinforced by the Russian invasion of Ukraine).

For example, the REPowerEU plan brings forward hydrogen-specific targets on energy use, transportation networks and regulation.

The European Commission now targets 10 Mt of production and 10 Mt of imports of hydrogen by 2030, while also setting aside EUR200mn for research.

In the US, the Inflation Reduction Act introduces a graduated system of tax credits based on lifecycle emissions, aimed at making “green” hydrogen cheaper than the “grey” alternative.

There is a lot to do: the IEA estimates that low-emission hydrogen production accounted for only 0.7% of total global production in 2021. (source)

Forbes: While the movement over 2022 was driven by mostly external factors, investors will need to watch for underlying improvements in hydrogen technology, which at present remains expensive and small-scale.

Moreover, a continued hawkish stance by the Federal Reserve and the potential for an economic downturn remain key risks for the theme.

What is the bear case

The bear case for hydrogen is rising inflation and interest rates could render large scale green hydrogen projects 'uneconomic’ as they require large scale solar and wind infrastructure to produce.

Hydrogen as a fuel is yet unproven, and the market for hydrogen does not exist at a large scale yet.

There are lots of hydrogen projects in development, with not much to show other than a plan and piece of land.

So with the cost of capital increasing and inflation making it more costly to produce these projects, we think that 2023 will separate the hydrogen pioneers from the pretenders.

Given it is a volatile substance, there will need to be massive upgrades to existing piping infrastructure to make it viable for domestic use, and technology upgrades to shipping options to make it viable for export.

Hydrogen is stuck in the classic chicken or egg dilemma.

Investors may be wary of investing in hydrogen projects given the lack of an existing market at scale for the product, but without hydrogen supply downstream technologies may fail to launch and government spending on infrastructure upgrades will be unjustified.

Hydrogen is where oil was in the early 1900's before the industrial revolution came along and fired the industry into gear.

We are hoping that net zero carbon emissions and energy security will be the same catalyst for the hydrogen industry.

Government subsidies, further clarity on regulations and advances in downstream hydrogen products should help the industry to get through this growing pain.

We think that a big win for the industry will be for ONE of the hydrogen projects to secure funding in 2023 with construction starting in 2024 - as a signal to the market that the hydrogen opportunity is ready to take off.