Hydrogen is booming: 3 things investors need to know to reduce their risk

By Jake Hiller

The U.S. Infrastructure Investment and Jobs Act has set off a flurry of competition among states for a piece of the $8 billion in direct funding and tax credits the law provides for four “hydrogen hubs.” Last week, Louisiana, Oklahoma and Arkansas announced a joint bid, and New Mexico said it will also join the fray.

The role proposed for hydrogen in the EU’s climate transition plan lays the groundwork for a surge of investment there as well. China is in the race, too, with $20 billion in public funding already made available to projects.

A parallel rush to hydrogen is underway in the private sector. According to the Hydrogen Council and McKinsey, more than 350 large-scale projects worth $500 billion have already been announced, with hydrogen investments growing by roughly $1 billion per week. As Goldman Sachs recently wrote, “Policy, affordability and scalability seem to be converging to create unprecedented momentum for the clean hydrogen economy.”

How can investors boost the potential of their hydrogen stakes?

Hydrogen has a number of strengths as an energy carrier and decarbonization pathway. Its ability to generate both heat and electricity, its high energy content relative to its weight and its potential for storage either as a liquid or a gas make it particularly attractive for hard-to-abate sectors such as steel, cement, shipping and aviation.

Its most important climate claim to fame is that it can theoretically be produced, stored, transported and used without generating carbon dioxide emissions, potentially making it a low-carbon alternative to fossil fuels.

Yet there are important unknowns to deploying hydrogen at scale. Since hydrogen as a large-scale climate solution is so new, stakeholders must rapidly identify and deploy science-based best practices to avoid unintended consequences that could negate the intended benefits. Investors will need to keep up with these emerging issues and best practices to reduce their risk.

As research, engineering and analysis continue to advance, three key considerations should inform hydrogen investment and application. To deliver on hydrogen’s promise, project backers should:

  1. Critically assess where hydrogen is the smartest option, prioritizing deployment to hard-to-decarbonize sectors.

Many factors determine which clean energy technology makes the most sense for a given use case — and investors must be clear-eyed on where hydrogen can best compete.

For many applications, such as residential heating and powering passenger vehicles, electricity will be more economical, more efficient and better suited to climate, environmental and community objectives than hydrogen.

Hydrogen should be prioritized for uses where alternative decarbonization pathways aren’t clear, such as the high-heat manufacturing processes needed to make steel and cement, and as an alternative fuel for shipping and aviation.

By focusing on applications for which hydrogen adds unique value, project backers can increase the chances that their investments will generate sustained returns.

  1. Bring climate science to bear in investment decision-making, informed by appropriate metrics and models.

Hydrogen is an indirect greenhouse gas: When released into the atmosphere, it contributes to climate change by increasing the amounts of other greenhouse gases such as methane, ozone and water vapor.

While this information is not new, it has been largely overlooked in the investment rush to hydrogen. The technology’s atmospheric impacts have not been studied nearly as much as those of GHGs like CO2 and methane, but as the industry grows, so will scrutiny of its emissions.

New research by EDF scientists shows that the near-term climate-warming effects of hydrogen are widely underestimated. (The paper is available while undergoing scientific peer review.)

Near term, hydrogen is 100 times more potent than an equal amount of CO2 emissions over a 10-year period. This is far higher than what the standard metric shows, and it reveals that hydrogen leakage can contribute to warming considerably more than currently thought.

  1. Support companies that address leaks throughout the value chain via robust design, comprehensive monitoring and rapid repair to verify climate performance.

Current hydrogen leak detection focuses on safety — monitoring mainly for large leaks indoors and near people. But hydrogen molecules are small and difficult to contain, so they can leak into the atmosphere at smaller but still significant levels. And monitoring equipment is not yet commercially available to measure hydrogen concentrations at the parts-per-billion level necessary to evaluate climate impacts.

In practice, the benefits of transitioning to hydrogen depend on real-world leak rates. EDF’s analysis shows that if leakage can be held to a minimum, hydrogen could yield an 80% decrease in warming in the first five years compared to fossil fuels. But with high leakage, hydrogen emissions could cause nearly twice as much warming in the first five years after switching compared to staying with fossil fuels.

The science is clear: Leak monitoring is critical for all hydrogen infrastructure.

Here we can learn from the experience of the natural gas industry, where high rates of methane leakage can negate the potential climate advantages of natural gas over coal. As hydrogen infrastructure is built out, operators should avoid and monitor for leaks from the start rather than risk having to retrofit systems after they’re already built.

EDF’s research shows that the choices being made today in the emerging hydrogen industry can lead to vastly divergent climate outcomes. Investors will succeed by backing projects that build on hydrogen’s strengths and are guided by the evolving science. They can also play a catalytic role by supporting companies that are commercializing and deploying technologies needed to detect and eliminate leaks.

In the global rush to hydrogen, smart money will use climate science to identify the most promising opportunities and avoid deployments that lead to missteps and dead ends. In so doing, investors will be best positioned to avoid costly mistakes as critical segments of the global economy transition to a clean energy future.

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