Hydrogen: The substance of the future

Be it green, blue or yellow, businesses and governments will only be able to reach their ever more ambitious net-zero goals by extensively utilizing clean hydrogen. The first and lightest element on the periodic table looks destined to get an enormous boost in the decades ahead. The hydrogen megatrend requires billions worth of investments and presents investors with interesting long-term opportunities.

Hydrogen color theory

Light, versatile, energetic, elixir of life, highly flammable – these are just some of the many attributes ascribed to hydrogen. Hydrogen occupies first place on the periodic table of the elements, and it has also gained prominence in recent years in the public consciousness. That’s by no means by accident because the deployment of “clean” hydrogen is likely to become imperative on the road to decarbonization and attaining ambitious net-zero goals. Green hydrogen will play a particularly important role in this context. Green hydrogen is produced through electrolysis, a process that separates water into its constituent elements – hydrogen and oxygen – using electricity generated from renewable sources. Green hydrogen is considered low-carbon-intensive; only the equipment needed to produce it – e.g. electrolyzers, pipes and cables, tankers – continue to have a certain CO₂ footprint. But many other color variations of hydrogen are also considered CO₂-neutral. To produce blue hydrogen, the CO₂ generated in the process of manufacturing climate-harming gray hydrogen from natural gas by means of steam methane reforming is captured and sequestered. Turquoise hydrogen is manufactured by thermally cracking methane into hydrogen and solid carbon – instead of CO₂ – via a process called methane pyrolysis. In order for the manufacturing process to be CO₂-neutral, the heat supply to the high-temperature reactor must come from renewable energy sources and the carbon must be permanently sequestered. White hydrogen occurs naturally and is also a byproduct of certain chemical plant processes. Orange/yellow hydrogen is based on organic substances such as biomass, biogas and biomethane. Red/purple hydrogen, on the other hand, is manufactured by means of electrolysis using electricity from nuclear power plants.

Versatile

Hydrogen is versatile and can be used both as an energy source and as a raw material in chemical and industrial processes. Hydrogen theoretically can also be used as a seasonal or temporary energy storage medium. However, since only 40% of the energy input is recovered when hydrogen is converted back into electricity, this potential use for hydrogen is likely to have limited real-world application. Other energy reservoirs have a much higher efficiency ratio (pumped storage hydropower plant: 80%; battery: 100%). Clean hydrogen is predestined, in contrast, for use in the transportation industry anyplace where using a battery is more expensive or hardly feasible. The aviation industry, for example, is pinning its hopes on hydrogen replacing kerosene. Hydrogen-powered airplanes are admittedly still a long way off, but Airbus is engaged in intensive research into this technology. The European aircraft manufacturer wants to bring a 100- to 200-seat hydrogen-powered passenger jet onto the market by 2035. Hydrogen-powered tractor-trailers could gain currency much sooner than that. Inside a fuel cell, oxygen and hydrogen atoms are combined into water. This conversion frees an electron, creating electrical energy. US-based electric-truck startup Nikola is teaming up with Bosch to develop a 40-ton hydrogen-powered truck with a range of up to 800 kilometers. The truck is already being tested by a group of pilot customers including the Anheuser-Busch brewing company. Clean hydrogen will also become indispensable in the manufacturing industry in the future to decarbonize production processes and meet the Paris climate protection targets. For energy- and CO₂-intensive industries like steel and chemicals, clean hydrogen presents the only way to make climate-harming production processes that still rely on the use of natural gas or coal today climate-neutral. Companies in the steel industry have resolved to invest billions to replace the traditional CO₂-intensive blast furnace route for steelmaking with a hydrogen-based direct reduction process. The chemical industry is on the verge of taking similar steps.

Multitalented (1/2) | Hydrogen is essential to many products

Production of clean hydrogen and its applications

Source: Kaiser Partner Privatbank

Multitalented (2/2) | Hydrogen has versatile uses

Share of hydrogen in final energy consumption in 2050

Sources: Bloomberg, Kaiser Partner Privatbank

Hydrogen partnerships…

However, the journey to a future of cleaner energy is a marathon, not a sprint, and is fraught with obstacles because green hydrogen faces a lot of competition – electric cars, heat pumps and industry will also need a lot of wind and solar energy in the future. Moreover, many countries will have to import hydrogen on a large scale in the future. Industrial titan Germany, for example, will likely only be capable of covering around 30% of its green hydrogen needs on its own in the long run. Germany accordingly has embarked on a flurry of “hydrogen diplomacy” lately and in the meantime has signed hydrogen partnership deals with Australia, Morocco, Chile, Saudi Arabia, Norway, Canada and Turkey. A hydrogen future particularly presents opportunities for emerging-market countries, many of which provide ideal conditions for producing clean hydrogen due to their geographic locations. India wants to become a hydrogen superpower and to meet “at least 10%” of worldwide demand for green hydrogen by 2030. But Africa is also moving into the spotlight. One example is Namibia – that country’s sparsely populated 2,000-kilometer-long Namib Desert along the Atlantic coast offers distinct location advantages for the production of wind and solar power.

…and hydrogen infrastructure

It’s foreseeable that enormous quantities of hydrogen will have to be transported between countries and continents in the future. However, seaborne transportation of “pure” hydrogen poses formidable technical challenges and probably will be only one part of the solution. Unlike liquefied natural gas (LNG), hydrogen must be cooled not to “just” –162°C, but to –253°C to become liquified. The low temperatures and the high pressure of around 700 bars required to liquefy hydrogen impose severe stresses and strains on the materials employed and have been difficult to put into practice thus far. Moreover, liquefaction consumes around 40% of the energy content of hydrogen. The farther the transport distance and the longer the storage time, the greater the energy expenditure and the less efficiency. In comparison, it is easier to transport hydrogen derivatives like green ammonia and green methanol, which can be shipped using infrastructure that already exists today and do not necessarily have to be re-cracked at their point of destination because they are directly utilizable for processes in the chemical industry or even as a source of energy. Finally, transporting hydrogen in special storage media called liquid organic hydrogen carriers (LOHCs) could become another alternative. Under this method, hydrogen is absorbed into and stored in a non-flammable carbon-based carrier fluid and is released when needed. LOHC technology is currently being tested in pilot plant trials, but is not expected to be scaled up until after 2030.

Hydrogen boom in sight | Rapidly growing demand

Demand for hydrogen in the net-zero scenario, in million metric tonnes

Sources: Bloomberg, Kaiser Partner Privatbank

A bearer of hope, but with risks

Alongside maritime infrastructure, massive investments will also need to be made on land in the years ahead to build the necessary transport capacity for clean hydrogen. Today’s natural gas pipelines could lay the groundwork for a future hydrogen grid. Germany, for example, has enacted a “grid development plan” that envisages the creation of an 8,000-kilometer-long network of conduits by 2032, 80% of which would consist of repurposed natural gas pipes. The German hydrogen grid is slated to grow to an overall length of 13,000 kilometers by 2045 for an estimated total cost of EUR 18 billion. However, similar to the challenges facing seaborne hydrogen transportation, going the pipeline route likewise presents obstacles to overcome and requires substantial research and investment because this bearer of hope also harbors risks: when hydrogen escapes into the atmosphere, it harms the climate much more than carbon dioxide does. Hydrogen does not have a direct climate impact, but it does exert an indirect effect because it alters the composition of the Earth’s atmosphere. Hydrogen in the atmosphere reacts with hydroxide molecules to form water, leaving less hydroxide for reactions with greenhouse gases. This causes the ozone concentration in the atmosphere to increase and results in a slower decomposition of climate-harming methane. Over a period of 20 years, hydrogen’s indirect climate impact has 33 times the climate impact of carbon dioxide. There is no consensus yet on the question of what standards are needed to prevent hydrogen from escaping into the atmosphere. Since hydrogen itself is not a greenhouse gas, its effects had been ignored until recently. Moreover, instruments to precisely measure escaping hydrogen have yet to be developed.

Huge investment needs

The International Renewable Energy Agency (IRENA) projects that green hydrogen will meet around 12% of the world’s energy demand by 2050 and will be used in the chemical, steel and cement manufacturing industries, in fuel cells, and in air and heavy-load transportation. The investments needed to build an infrastructure for the production, conversion, transport, storage, and distribution of green hydrogen are estimated to amount to a gigantic USD 4 trillion. The Hydrogen Council, a consortium of 150 companies (including BP, Airbus, Microsoft and Clariant) that want to accelerate the deployment of hydrogen in industry and transportation, lists a total of 534 green hydrogen projects (as of September 2022) with a total investment volume of USD 240 billion that are slated to go into operation by 2030 and will reportedly supply 26 million tons of hydrogen per annum, one-third of the quantity needed to stay on the path to net zero. The net-zero path envisages demand for 660 million tons of hydrogen in 2050. If all of the announced projects through 2050 are added together, they amount thus far to only 6% of the needed production capacity. This strikingly illustrates how enormous the investment needs are, but also how huge the attendant investment opportunities are. A lot of money has to and will flow to the hydrogen industry in the coming decades. This is inevitably bound to benefit manufacturers of electrolyzers, the plants that separate water into hydrogen and oxygen with the help of (green) electricity. Other statistics spell out the potential: In Europe, electrolyzers with an aggregate capacity of only around 200 megawatts are currently in operation. According to Bloomberg, global electrolyzer manufacturing capacity was increased by 1 gigawatt last year. In 2030, manufacturers reportedly will be able to deliver electrolysis plants with an aggregate output of 85 gigawatts. Up to 4,000 gigawatts of electrolysis output must be installed worldwide by 2050 to reach net zero.

Investment needs… | …present investment opportunities

Investments in green hydrogen until 2030, in USD billion

Sources: Hydrogen Council, McKinsey, Kaiser Partner Privatbank