• Economic Research
  • Real Assets
  • Solutions

Hydrogen

Back to the future

The UK is the latest country to accelerate plans to develop hydrogen in its push to reach net zero. It’s not the first time hydrogen has been flagged by the scientific community as a possible wonder fuel. So, what’s different now?

Thirteen kilometres off the coast in Scheveningen in the Netherlands sits a large oil and gas platform, known as Q13a,1 a planned test site for the world’s first offshore hydrogen plant. From it, the plan is to harness wind and solar energy to split water into its component parts – hydrogen and oxygen – via electrolysis. The essential raw material is desalinated sea water; the energy source is renewable, and there will be no carbon produced from using the output as fuel.

“The goal is to obtain valuable lessons for successfully integrating offshore energy systems to support the acceleration of the energy transition,” explained Lex de Groot, managing director of Neptune Energy, a small North Sea explorer.2

It is early days for Q13a, but the concept has similarities with one set out almost a century ago. In 1923, the biochemist J.B.S Haldane presented a paper in Cambridge3 in which he wrote: “There will be great power stations where during windy weather the surplus power will be used for the electrolytic decomposition of water into oxygen and hydrogen.” Today’s experimental ‘world first’ does not feel too far removed from Haldane’s vision.

Decarbonisation: Driving a hydrogen revolution

In the decades since, there have been waves of interest in using hydrogen more extensively, due to its specific characteristics.

Hydrogen has about three times the specific energy density than petrol or diesel

“Hydrogen has excellent gravimetric energy density - the amount of energy it stores relative to weight,” says Tony Roskilly, professor of energy systems at Durham University and lead on Network-H2, the hydrogen-fuelled transportation research network. “It has about three times the specific energy density of petrol or diesel. When you convert it in a fuel cell to produce electricity, it does not release any carbon dioxide (CO2) into the atmosphere. It is also the most abundant element on earth and a good form of energy storage, although its volumetric energy density is low. There are challenges producing it, because it is bound to other elements, and storing it for use.”

In the past, enthusiasm for hydrogen has proved overblown. This time the world looks different, with more governments committing to the net zero target.  

“In 2008, the UK committed to an 80 per cent reduction in carbon emissions by 2050, so all the hard-to-abate sectors assumed they would fall into the ‘other’ segment. That’s no longer the case. Everyone knows there is nowhere to hide,” says Nigel Brandon, professor at Imperial College, London, the electrochemical engineer leading the UK’s hydrogen and fuel cell research hub, H2FC SUPERGEN. “That brings an energy carrier like hydrogen onto the table, because it is potentially the most cost-effective way of abating carbon emissions in areas that are difficult to address, like heavy industry.”

[More on how hydrogen could help decarbonise steel and plastics here.]

Figure 1: Hydrogen: Role in routes to decarbonise
Hydrogen’s possible role in routes to decarbonise

Source: ‘Mission possible: Reaching net-zero carbon emissions from harder-to-abate sectors by mid-century’, Energy Transitions Commission, November 2018

Cost and efficiency

Meanwhile, there have been encouraging advances in the design of fuel cells, making them more efficient and durable. Other developments, like the fall in the cost of power generated by renewables, are also changing hydrogen’s prospects.

We cannot anticipate exactly how much energy will be generated when the sun shines or the wind blows

“Harnessing green energy has been a wonderful success,” says Upul Wijayantha, professor of physical chemistry at Loughborough University, whose research career has encompassed developing ways to split water using solar energy in the UK and US. “But renewables are intermittent. We cannot anticipate exactly how much energy will be generated when the sun shines or the wind blows, so we cannot anticipate the capacity of the batteries needed to store it. What do you do if you generate more energy than you can store? Use the excess to generate hydrogen.”

But generating hydrogen from renewables does not solve the challenge unless viable options are developed to store and transport it to suit end users.

Figure 2: Hydrogen: joined up thinking
Hydrogen: Joined up thinking

Source: ‘Hydrogen solutions’, Siemens Energy, 2020

Sources of hydrogen

Another issue is where the hydrogen will come from. Today, both natural gas and coal are major sources. “The cheapest way to produce hydrogen is by steam methane reforming at a high temperature, which creates grey hydrogen and CO2. Around 95 per cent of the hydrogen we use now is produced this way,” says Rick Stathers, senior environmental, social and governance (ESG) analyst and climate lead at Aviva Investors.

Until we perfect CCS, the timeline for widespread hydrogen uptake is likely to be extended

“Blue hydrogen is an alternative: it also involves steam methane reforming, but the carbon is captured or utilised,” adds Stathers. “But industrial carbon capture is an early stage technology, and there is comparatively limited capacity to carry it out.” (More on carbon capture and sequestration (CCS), here.)

“We need to be clear-eyed about this,” says Max Burns, senior research analyst for industrials at Aviva Investors. “Cheap and plentiful natural gas from the US, Russia and the Middle East is a likely feedstock for hydrogen, but this does little to reduce greenhouse gas emissions. Until we perfect CCS, blue hydrogen is really ‘greyish’ hydrogen with dubious green credentials. The timeline for widespread hydrogen uptake is likely to be extended.”

Green hydrogen is the optimal option from an environmental perspective, produced from splitting water using renewable electricity. “We only produce a very small amount of hydrogen in this way now; it is less than five per cent overall and not cost effective at the moment,” says Stathers.

Figure 3: Hydrogen production pathways for energy transition
Hydrogen production pathways for energy transition

Source: ‘Hydrogen for Australia's future’, Commonwealth of Australia, 2018

Scaling up

The question then is: How rapidly could the economics of green hydrogen production change? “The consensus is that green hydrogen could reach cost parity with hydrogen produced from fossil fuels and CCS by around 2030,” says Stathers.4 “It could be the cheapest form by 2050. That implies a potential cost reduction of 60 to 70 per cent in the next 30 years. But the cost curve could change faster: that depends on policy factors like the price of carbon and how the market develops.”

Hydrogen needs to be stored in pressurised tanks or in geological sites underground

To be effective at network scale, hydrogen needs to be stored in pressurised tanks or in geological sites underground. In Europe, meaningful amounts could be stored in underground salt caverns5, in cavities as tall as the Eiffel Tower.6 There are already sites of this type in operation. “We store hydrogen in that way to provide strategic reserves for petrochemical operations,” Brandon explains.

Other challenges include distribution and safety. Diatomic hydrogen is small and liable to escape, but work on whether it would be possible to use the existing gas network is ongoing.

“Further work is needed, but the upgrade of our gas networks has been going on for years on a rolling basis,” says Roskilly. “All our old cast iron pipes are being replaced or relined with polyethylene pipes. Once this is done, there should be no issues for the transport of hydrogen. The upgrades are well advanced.”

When it comes to safety, Roskilly believes hydrogen is “as safe or safer than the other fuels we use, either for transport or in our homes. There are safety risks, but these can be managed, just as we do for natural gas. And there is no risk of carbon monoxide poisoning when hydrogen is used in a boiler.”

From chemical to energy source and energy store

If hydrogen’s role changes from being one chemical in the industrial mix to an energy source and store, the implications could be game changing.

“From an investment perspective, you can gain exposure to the hydrogen theme through a combination of renewable energy companies, pure play fuel cell and electrolyser producers,” says Stathers.

European industrial gas producers are expecting meaningful revenues from blue hydrogen within about five years

“European industrial gas producers are expecting meaningful revenues from blue hydrogen within about five years. We also expect to see demand for particular chemicals like polysilicon jump: it’s a critical component in solar cells, and demand could grow to fuel hydrogen production and the production of low-carbon electricity,” he adds.

In transport, the greatest potential is thought to be in areas that are hard to electrify, including long-distance freight, trains and shipping. (Conversely, battery electric vehicles are cheaper and likely to be adopted faster in the small car market.)

Another route is through the companies that will allow hydrogen to be integrated into the wider energy system. “Managing the grid is going to be a big challenge for the future,” says Richard Howard, research director at the energy analytics group, Aurora Energy. “The whole spectrum of technologies that help to run a stable system safely will become increasingly important, surprisingly quickly.”

Realising a different future

Hydrogen was dismissed as an energy option a little over ten years ago, when then US energy secretary Steve Chu said it would take ‘four miracles’ to make it a contender.7 Cost, the inadequacy of fuel cell technology, lack of high-density storage and distribution infrastructure were all obstacles in his view.

Energy consultants are asking what happens in the future when excess renewables take the cost of energy to almost nil

A decade later, there has been progress in all areas, some more than others. Most striking of all, perhaps, is that energy consultants are asking what happens in the future when excess renewables take the cost of energy to almost nil. This scenario is someway off, but worth contemplating for those keenly awaiting cheaper green hydrogen.

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our privacy notice.

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.