Creating an investable market for the world's most abundant element is the key to net zero

Green hydrogen is at the heart of the fight against climate change, particularly for sectors that are difficult to decarbonise, such as steel, cement, and the chemical industry. Hydrogen is classified as 'green' when it is produced through electrolysis powered by renewable energy. However, the world's most abundant element is still a nascent asset class as investors consider the most relevant use cases for hydrogen and the role of competing technologies. In areas where solar and wind are providing the lowest cost of energy such as Northern Sweden and Southern Spain, green hydrogen production is already starting to become cost competitive. This is like what we have seen in the past with the development of solar energy. Scale is what matters most, in this context. We need to bring volume into the electrolysis market to bring cost down. The first auction under the European Hydrogen Bank is a great step forward in this respect.

Three key demand drivers

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However, power prices are only one factor determining demand for green hydrogen. We see three primary drivers:

First, customers are scrutinising the global carbon footprint of their suppliers. Take steel, for example. The cheapest steel comes along with the heaviest CO2 load, originating from China. For clients based in Europe that option is increasingly unacceptable. Europe, in turn, encourages green hydrogen and its use in the local steel industry. This dynamic is playing out across other sectors as well.

The second driver involves independence of energy supply. It has emphasised our reliance on fossil fuels. Green hydrogen has a significant role to play in ensuring energy independence and security.

The third driver is the cost benefits of decarbonisation. The price of CO2 is never going to go down, at least not in Europe, where regulation will continue to drive up CO2 levies. This is a strong and motivating factor. Take the mobility sector, for example. Here we see a tremendous push towards the adoption of electric vehicles. But heavy transport, shipping and aviation are not viable for electrifying. This is where hydrogen-based e-fuels have a role to play.

Government subsidy programmes, in particular EU feed-in tariffs have played a vital role in bringing down the cost of wind and solar power over the past two decades. We see strong signals that the European Commission and national governments adopt an equally proactive policy when it comes to the development of green hydrogen. The European Hydrogen Bank will establish a full hydrogen value chain in the EU, alongside the Net-Zero Industry Act. Those industries that make early decisions to redirect or focus on cleantech deployment will benefit.

First auction under the European Hydrogen Bank

To achieve the 10 million tonnes of domestic renewable hydrogen production foreseen in the REPowerEU plan, total investment needs are estimated at EUR 335 billion-471 billion including EUR 200 billion-300 billion needed for additional renewable energy production. The vast majority of this will come from private funding, but public funding (through the EU financial instruments and state aid) can play an important role in leveraging private investment, especially in the early days of establishing the hydrogen market. At the end of November, the European Commission launched the first auction under the European Hydrogen Bank to subsidise the production of renewable hydrogen in Europe, with an initial EUR 800 million of emissions trading revenues, channelled through the Innovation Fund. Cumulation with other types of aid from participating member states will not be possible, to ensure a level playing field for all projects regardless of location. This will prevent fragmentation at the early stages of the European hydrogen market and reduce administrative costs for upcoming national hydrogen support schemes.

Grid parity achieved – what’s next

We already have achieved grid parity in a growing number of markets. Efficient storage solutions for the electricity generated are what we need now. The future is going to look like what we have already seen in the last 25 years in the generation of solar power.

Currently, both battery storage and Power-to-X technologies are still in an early stage of development. Broadly speaking, Power-to-X means converting power into something else (x). This is where green hydrogen comes in. It can be used as a fuel for combustion or as a feedstock for industrial processes. The technology converts green power into liquid carbon-neutral fuels which, unlike power, can be stored easily and relatively inexpensively. We expect both technologies to reach a mature stage and be ready for industrial application in different market segments soon.

In the case of battery storage, manufacturers are relying on economies of scale, and here, too, leaps can already be observed that are causing the costs per unit to fall sharply.

As for Power-to-X, we see different approaches in this emerging storage technology, namely based on their intended industrial application: power-to-gas, power-to-liquid, power-to-fuel, power-to-power, power-to-chemicals and power-to-heat. They all should create opportunities for long-term storage options and substitute grey hydrogen, methane and other synthetic fuels for fossil energy sources in transportation, chemical processing and heat production.

Commitment to carbon neutrality is key driver of GH2 demand

The commercial prospects for green hydrogen and other Power-to-X products are closely linked to the global commitment to limit global warming and depend on the level of ambition to achieve net zero. A 2021 study by Danish engineering group Ramboll, commissioned by the Danish Energy Agency, estimates the global investment required for these technologies at between EUR 375 billion and EUR 1,418 billion in capital expenditure for Power-to-X. The price declines we've seen in the solar market over the last 20 to 30 years herald an encouraging development. We've seen this happen before with solar investments.

The COP-28 agreement underpins the need to decarbonise our economies and lays ground for a new era of implementing the Paris Agreement. From an investor’s perspective it further boosts the chances for upscaling green hydrogen adoption as the agreement calls for a tripling of renewable energy capacity and doubling energy efficiency improvements by 2030. Timing for investments in green hydrogen has never been more favourable.