The UK government recently launched its first-ever vision to kick start a world-leading hydrogen economy which it hopes will support over 9,000 UK jobs and unlock £4 billion investment by 2030.
The UK's leading environmental, social and governance investment media title, ESG Investor, has been looking at hydrogen and its potential for investment. In this article, Osborne Clarke's UK head of energy and utilities, Matthew Lewis, commented on how hydrogen has the potential to represent a sizeable part of the route to net zero.
Matthew's expanded comments on hydrogen can be found here:
Why is it important for investors to back the development of hydrogen-based technologies?
"Private sector investment has a huge role to play in reaching UK climate targets. The approach of the UK government has consistently been to encourage and unlock private investment in various sectors to contribute towards net zero targets. Without private sector investment in technologies aimed at decarbonising the economy, the chances of the UK reaching net zero by 2050 (and achieving a 78% reduction in emissions on 1990 levels by 2035) are practically non-existent. Though investment in hydrogen-based technologies is by no means the only route to decarbonisation that will be of interest to investors with an eye on ESG, hydrogen has the potential to represent a sizable part of the route to net zero, as has been acknowledged by the UK government and the Climate Change Committee.
"The scaling up of the hydrogen market and emergence of new hydrogen-based technologies is also a real growth area for investors. The government's hydrogen strategy suggests that 20-35% of the UK’s energy consumption by 2050 could be hydrogen-based – given that demand for energy is predicted to rise significantly as we transition towards the use of power in areas such as transport and heating, this represents a significant amount of energy that the government expects to be generated from hydrogen each year."
How may hydrogen-based technologies contribute to the transition to net-zero? E.g. hydrogen fuels, etc. Examples of particular sectors that are reliant on developments in this area? E.g. transport, oil and gas.
"The beauty of hydrogen as a means to decarbonise the UK economy is in its adaptability across a broad range of technologies. As hydrogen is a gas it can be applied in many of the same ways as natural gas or other liquid fuels are currently, and can be used in fuel cells or to generate heat or electricity. It can also be stored and transported with relative ease. Though the most effective applications of hydrogen to reduce the carbon footprint of existing activities remains the subject of research and debate, there is a lot of potential for hydrogen to be used in sectors where electrification or other decarbonisation options are not as readily available – for example in heavy industries where extreme heat is required during production (eg. steel and cement). It also has potential to be used for heating and cooking in domestic settings, and can be blended with natural gas for this purpose to aid the gradual transition away from reliance on fossil fuels.
"It is important to note however that not all hydrogen is created equal in terms of its contribution to net zero targets. "Green" hydrogen, which uses renewable energy to fuel the electrolysis process is carbon-neutral, but other forms of hydrogen production which use gas or even fossil fuels have an associated carbon cost, and so the carbon created has to be captured and stored or used elsewhere to ensure the process isn't adding to the problem . The role that hydrogen has to play in meeting net zero targets will in no small part depend on how that hydrogen is created."
What are the current downsides of hydrogen? E.g. expense, complexity, etc.
"Most of the downsides of hydrogen are a result of the market being in its relative infancy, and the fact that the full potential (and possible limits) of the technology and its application to different areas of the UK economy are not 100% understood. Though the government has made it clear that it wants to support the development and marketability of hydrogen production, the form and extent of regulation of the hydrogen industry is not currently known which might act as a deterrent to market entry. The cost of low or zero carbon hydrogen production also remains significantly higher than using fossil fuels (which is why carbon capture and use or storage may have a role to play). Plans to promote the role of hydrogen are undoubtedly premised on the assumption that these costs will come down as a result of innovation and reaching economies of scale. This technological uncertainty is another downside of the hydrogen market as the actual production capacity of relatively new technologies that aren't yet tested at scale may not be fully understood. Finally, there is the question of investment models. Infrastructure investors and lenders need contracted income to support their investment cases. It's not clear at the moment that there is a scalable offtake or long term revenue model. Hopefully the government consultations will identify the right support mechanisms to allow this market to find a solution."
For more information on how Osborne Clarke's team can advise you on investment in hydrogen and other sources of energy, please contact Matthew Lewis.