The decarbonisation of the global economy is no small objective and, with governments and businesses alike increasingly focused on achieving ‘Net Zero’ by 2050, the scale of what is required has become ever clearer. Our world and its economy are built on carbon-based fuels. To move away from this and build on the progress already made, a number of technologies need to be employed to replace the carbon-based ones we currently depend on.
Clean energy, in the form of solar and wind power, are well-established and growing strongly. Increasingly we hear how the UK has gone for long periods without using electricity generated by coal. Clean energy produced in this way also needs battery technology on a large scale to store energy that otherwise might go to waste, which can then be released back to the grid when the sun is not shining or the wind is not blowing.
This requires investment and upgrades to storage infrastructure and grid transmission. Even with these in place, there will be areas of the economy, such as shipping and heavy goods vehicles, where battery technology is not going to be suitable to enable decarbonisation. These areas of the economy are increasingly likely to be decarbonised through the use of hydrogen.
Hydrogen was discovered in 1766 by Henry Cavendish, who described it as “inflammable air”. As is often the case with discoveries or a new technology, they are not necessarily adopted or developed immediately and can remain unloved for long periods of time. Eventually, through necessity or progress in other areas, their potential is dusted off and pushed into the limelight.
Versatile potential
Hydrogen is potentially very versatile and, within an economy, can be used for anything from transport or heating to powering industry and in electricity sectors. All these are often parts of an economy that are high CO2 emitters.
The great thing about using hydrogen as a fuel is that it burns producing just water as a by-product. A lot of work has already been undertaken into the hydrogen fuel cells and, like batteries, these fuels cells can be used in small devices or scaled up for industrial use. For transportation it offers probably the most efficient way to decarbonise large vehicles such as buses, trains and ships.
One interesting fact about hydrogen as a fuel cell is that from an efficiency point of view – in other words, the input/output ratio – it stands at 26%. Compared with batteries at 69%, that is quite poor, yet the internal combustion engine operates with an efficiency rate of just 13%. So, while hydrogen at this point in its development may not appear to be particularly efficient compared with batteries, it is already twice as efficient as the internal combustion engine.
With the potential for hydrogen so clear and the urgency around climate change and decarbonisation being pushed ever higher up the political agenda and integrated into all aspects of the economy and our lives, governments are starting to commit to building a hydrogen economy – which indicates significant confidence in the idea.
Cost of production
The EU, for example, is aiming for hydrogen to become an intrinsic part of the energy system by 2030. Although the cost of production of hydrogen is currently high, it is anticipated – and as has been seen with both solar and wind – costs will fall rapidly as adoption takes place and technologies develop. Over the last 10 years, according to research by Lazards, utility-scale solar has come down in cost by 89% and wind by 70%. As a result, it is expected the same cost reduction will be seen in hydrogen.
There is a problem, however – most hydrogen is produced using fossil fuels, which is far from ideal as it is a CO2-intensive process. This means of producing hydrogen is known as ‘grey’ or ‘brown’ production. There is also ‘blue’ production, in which fossil fuels are still used but the CO2 emitted is captured and stored. The goal, however – and which is already in play – is ‘green hydrogen’, which is generated through the use of renewable energy.
If we can produce hydrogen in this way, then it is virtually emission-free. The process works by using electrolysis to split water into oxygen and hydrogen – the power to do this being generated by renewables. The drawback at present is the cost, which is the highest of the three methods. Again, however, this cost is expected to reduce rapidly.
Another factor that should play to hydrogen’s strengths is that, thanks to schemes such as the EU’s ‘Carbon Cap and Trade’, the cost of carbon for polluters – who have to pay for their emissions – is only going one way and that is up. As the cost of carbon rises, then, carbon abatement technologies should become more cost-effective.
Higher carbon price
This scheme is designed to push industry to decarbonise, so a higher carbon price will be beneficial for hydrogen production. An example of the commitment to incorporating hydrogen into an economy can be seen in the UK where, under the government’s Climate Change Committee’s scenario, hydrogen use will increase tenfold by 2050 and be large enough to generate as much electricity as the country generated in total in 2017.
While it is still early days for the development of hydrogen as a viable power and fuel source within an economy, the advantages are clear. In combination with clean energy from renewables and battery storage, the final piece of the global decarbonisation jigsaw is falling into place, which will allow for extensive decarbonisation of our world.
And from an investment perspective there are a number of themes – production, distribution and applications – which in turn will have subthemes. If the outlook for hydrogen is as bright as is currently thought, then within these themes there will be stocks that perform very well. For now, however, the investible options are limited, so it is an area we will be watching closely.
One final thought is just how quickly all of this will happen. From the climate’s perspective, it needs to happen fast, and perhaps it will as technology evolves and is adopted ever more quicky these days. That is not to say, if you blink you will miss it, but – best guess – it is not too far away.
Tim Cockerill is investment director and head of responsible and values-based investing at Rowan Dartington
