When most people think of renewable energy, they envision battery-powered vehicles or wind turbines. But there's another energy source on the scene and it's starting to pick up steam. Hydrogen could become the next dominant player in the renewables space as macro tailwinds drive adoption, affordability and innovation, according to the BNY Mellon Mobility Innovation team.
Although hydrogen can be found everywhere from the air to the ground, and even in space, it is bound to other elements; therefore, it needs to be extracted before it can be a viable energy source.
Traditionally, it's produced using fossil fuels such as natural gas, oil, and coal. But demand has been picking up to produce hydrogen through electrolysis, a process which relies on electricity to split water into hydrogen and oxygen. Currently this method only accounts for 1 per cent of all hydrogen production, but according to the team, for hydrogen to be truly green, it will need to be produced using renewable resources.
"While the necessary infrastructure is still in its infancy, we're seeing strong commitments to research and development across the world, supported by both fiscal and political policies," says portfolio manager Rob Zeuthen.
"The main issue is the current lack of infrastructure as well as the higher cost of manufacturing green hydrogen. Once that infrastructure expands and the overall demand increases, we believe its cost will come down to a competitive level."
One of the most prevalent themes accelerating the demand for green hydrogen is the global migration to net-zero carbon emissions. Many regions around the world have tilted government policies towards hydrogen investment. So far, the most aggressive region has been Europe, according to the team. The EU Green Deal1 is targeting up to €470bn cumulative funding for the renewable hydrogen ecosystem by 20502.
The funds will be directed toward three areas:
• Getting green hydrogen production up to 10 million metric tons by 2030
• Increasing electrolyser3 production capacity to 6 gigawatts (GW) by 2024 and 40GW by 2030
• Creating a euro-denominated market for renewable hydrogen
China is also a big proponent of building infrastructure to make green hydrogen a viable energy option. It is aiming to have one million hydrogen-powered vehicles on the road by 2030, up from the current 5,0004. Likewise, it is also targeting 10 per cent of its energy to come from hydrogen by 20505.
In the United States, the picture is somewhat different, but progress is being made in some states. "While the US doesn't have a formal nationwide hydrogen plan yet, we do expect something to be released from the Biden administration," says Mr Zeuthen.
"However, California has a policy that green hydrogen in the transportation industry must be 50 per cent by 2030 and 90 per cent by 2050."
The US Department of Energy (DoE) estimates that the hydrogen economy can bring in US$750bn per year by 2050 and create over three million jobs in the US alone6.
On top of that, the agency also projects hydrogen technologies, such as fuel cells, which use hydrogen to generate electricity, can bring in global revenues of US$2.5 trillion by 2050. The DoE says cumulative hydrogen infrastructure spending on production, storage and transportation could reach $11 trillion by 2050.
Are we there yet?
Compared to battery-powered vehicles, one advantage of fuel cell electric vehicles (FCEVs), powered by hydrogen, is faster refuelling times, resulting in less disruption to a driver's route. Although cost is not ideal, since FCEV trucks are roughly three times as expensive as their diesel counterparts, it could come down to 1.2X diesel by 2030, according to the Hydrogen Council7.
In order to power vehicles with hydrogen, fuel cells8 are used to convert it into electricity. They are then put into a stack to increase voltage capacity. Because the stack makes up half of the costs within the hydrogen fuel cell system, improved technology will be needed to enhance affordability, according to the team.
Another advantage of FCEVs compared to battery-powered trucks is a lighter powertrain system, resulting in the ability to haul more cargo, the team adds. Because the battery electric system can be heavier, it can impact a truck's payload capacity9 which ultimately has negative economic implications for trucking companies.
While battery powered EVs are all the rave when it comes to passenger vehicles, hydrogen will likely be better suited for larger commercial vehicles at first.
"We see the trucking industry, particularly the medium and long-haul segments, being the most compelling area for green hydrogen as fuel, as we transition to a zero or lower emissions world," adds portfolio manager Frank Goguen adds.
"We also see growth potential in buses and trains due to having fixed routes whereby the refuelling infrastructure can be positioned for easy access."
More than just transportation fuel
While hydrogen is expected to gain traction in transportation, it already serves a multitude of uses. Currently, it's used as a chemical feedstock (raw material) in industries such as oil refinement and the production of ammonia, methanol, steel and cement, as well as food/pharmaceuticals.
"These industries will continue to use hydrogen as a feedstock while newer applications will use it as a power source. This includes transportation segments such as buses, trucking, rail, air and marine, as well as energy storage used for stationery, and backup power to the electricity grid and data centers," Mr Zeuthen adds.
While there should be no shortage of demand, the cost of green hydrogen has been a key impediment to practical application. But as innovation progresses, its cost should reach parity with fossil-fuel based hydrogen by 2030, according to the Natural Resources Defense Council10.
"Scaling up fuel cell and electolyser production capacities will reduce the cost of hydrogen, as will the declining cost of renewable-sourced electricity. Eventually this will lead to pricing at, or below, fossil fuel parity, making it economically viable," Mr Zeuthen concludes.
Footnotes:
1A set of policy initiatives by the European Commission with the goal of making Europe climate neutral in 2050.
2IHS Markit: Europe emerges as leader in hydrogen economy. December 15, 2020.
3A system that uses electricity to break water into hydrogen and oxygen in a process calls electrolysis.
4Automotive World: China looks to repeat EV success with fuel cell vehicles. March 8, 2021.
5Renewable Energy World: Hydrogen is expected to account for 10 per cent of China's energy network by 2050. August 26, 2019.
6IHS Markit: US demand for hydrogen may quadruple by 2050: NREL. November 16, 2020.
7India's energy transition towards a green hydrogen economy. December 2020.
8A fuel cell has three layers, being the cathode, anode, and electrolyte membrane (which is similar to an electric vehicle's lithium-ion battery layout). Hydrogen flows through the anode and oxygen goes through the cathode. On the anode side, a catalyst (such as platinum) breaks the hydrogen into electrons and protons, with the protons passing through the membrane and electrons into a circuit for electricity and heat generation. On the cathode side, the protons, electrons, and oxygen combine to produce water.
9The maximum amount of weight you can safely add to a truck's cargo area in addition to its empty weight.
10Institute for energy economics and financial analysis: IHS Markit says green hydrogen will be cost competitive by 2030. July 16, 2020.
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Not for further distribution. This is a financial promotion and is not investment advice. Any views and opinions are those of the investment manager, unless otherwise noted. The value of investment can fall. Investors may not get back the amount invested. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. In Singapore, this document is issued by BNY Mellon Investment Management Singapore Pte. Limited, Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the Monetary Authority of Singapore.
AP3828-24-08-2021 (3M)
