Rahab Paracha, Rathbones Sustainable Multi-Asset Investment Specialist
Hydrogen is the simplest and most prevalent element in our universe. Yet turning it into clean energy is complicated indeed, notes Rathbones sustainable multi-asset investment specialist, Rahab Paracha.
In 2021, there was more than one ‘C’ that dominated the news headlines.
The COP26 climate conference in Glasgow in November led many countries to make new and pretty punchy carbon reduction commitments to keep the faith with the Paris Agreement – that is, limiting climate change to significantly less than 2 degrees Celsius above pre-industrial levels, preferably 1.5 degrees. Big changes are needed to meet these targets, and it isn’t so clear how this will be done. The International Energy Agency (IEA) predicts global energy demand is to rise 50% by 2050, so new ways of generating large amounts of clean energy are critical. This is why many people – rightly or wrongly – have high hopes for using hydrogen, especially in industries like transport, steel, cement and agriculture.
Hydrogen is the lightest and most abundant element, estimated to make up almost three quarters of the mass of the visible universe. It acts as an energy carrier which means it can store and deliver usable energy when burnt – and most importantly it burns cleanly. Unlike fossil fuels which release carbon dioxide, when we burn hydrogen (to release the stored energy) the only waste product is water vapour (as the hydrogen combines with oxygen).
However, while abundant, hydrogen normally doesn’t exist by itself in nature, so it has be produced from compounds that contain it. Ways of doing this include using fossil fuels (e.g. coal or natural gas), nuclear power, biogas and renewable power such as solar and wind.
Shades of hydrogen
Most of the hydrogen produced today is ‘grey’, where natural gas or methane is split into hydrogen but also carbon dioxide. Per tonne of hydrogen, about 10 tonnes of CO2 are generated as waste and released into the atmosphere – not a huge help in reaching net-zero after all! In fact, around 6% of current global natural gas usage produces hydrogen in this way.
There is also ‘blue’ hydrogen, where the carbon dioxide is captured after the reaction and stored underground via industrial carbon capture and storage (CCS). But typically only 80-90% of the CO2 can be captured, at best. One of Shell’s blue hydrogen plants manages to sequester just 48%, giving it the carbon footprint of 1.2 million petrol cars. There are also considerable costs to storing carbon underground.
You’ve then got the holy grail: ‘green’ hydrogen. This method uses electrolysis to break down water into hydrogen and oxygen, therefore no carbon emissions. If renewable energy is used to perform the electrolysis this method is genuinely climate neutral.
The future is green – or is it?
It seems to be a no-brainer then that green hydrogen will be essential in helping economies achieve net zero emissions by 2050 and reach the goals of the Paris Agreement. So, what’s stopping us?
Green hydrogen is currently expensive and inefficient – which is why it contributes only around 1% of all hydrogen production. There’s an immediate energy loss because it takes a lot of power to break the chemical bond between oxygen and hydrogen. This means, on average, the cost of hydrogen per kilowatt hour is greater than the electricity it’s derived from. Today, there are merely a handful of green hydrogen projects that are commercially viable, and many in the industry believe it won’t become widely viable until at least 2030.
As is often the case, if we want the ‘hydrogen economy’ to help our journey to a low-carbon future, we need a little help from the government to put the regulations and policies in place to incentivise investment and consumer take-up. Encouragingly, this seems to be happening. According to a report from the Hydrogen Council, at the beginning of 2021 over 30 countries had released hydrogen roadmaps. That had led to 200 hydrogen projects and governments worldwide had committed more than $70 billion in public funding. This includes the UK.
Last summer Britain launched its first ever vision to kick start a world-leading hydrogen economy. The vision is a “twin track approach,” using both blue and green hydrogen to phase out fossil fuels rather than green alone. It’s argued that blue hydrogen can be used as a low-carbon transition tool until green hydrogen becomes more commercially viable. That seems prudent, given the challenges in generating fully renewable hydrogen and the need to make progress on emissions right now. But it’s crucial that blue hydrogen generation isn’t captured itself by energy producers that may use it as a means to stay relevant and prolong the lifespan of their existing, dirty assets.
Rahab Paracha is part of the multi-asset team at Rathbones, headed up by David Coombs. David will be one of the panellists at The Scotsman’s free Annual Investment conference on Tuesday 29th March. In association with Rathbones and Franklin Templeton – Click here to register