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Hydrogenic Infatuation

Over the course of the year, the world seems to have fallen in love with green hydrogen. The concept behind this so-called ‘transformative fuel’ is admittedly seductive: electricity generated from renewable sources is used to liberate hydrogen from water through electrolysis; the hydrogen is compressed or liquefied for storage; it can then be distributed when and where required through a largely existing gas infrastructure and used as a clean fuel, either through combustion or through fuel cells.

The consensus is that hydrogen’s primary use will be transportation, when heavy vehicles are used intensively over long distances: buses, trucks, rail, marine and air. In addition, green hydrogen could replace the ‘dirty’ or grey hydrogen produced from the reforming of fossil fuels and used in industrial processes. Last but not least, green hydrogen can be used as an energy storage solution.

All of a sudden, green hydrogen is featuring as one of the critical solutions to the world’s environmental challenges by the International Energy Agency (including in its 2020 World Energy Outlook published this week), the 2019 EU Green Deal package leading to the EU Hydrogen Strategy, Germany’s environmental policy, the Biden campaign and China.

The challenges related to green hydrogen are generally fairly acknowledged, namely production, storage and distribution costs. The solution is scale: the more the world invests in hydrogen in the coming decades, the more likely this fuel will represent an economically viable source of energy and energy storage by 2050. The bigger the bet, the more likely it is to succeed.

That is an inherently dangerous proposition. Vaclav Smil, a Canadian academic whose views on energy have been endorsed by Bill Gates, reminded readers of The American Scientist (2011) that the energy market is prone to contagious infatuations: oil, biofuels, fuel cells (2000 vintage), nuclear power, concentrated solar power, carbon capture… The energy world is full of great ideas experiencing booms and busts as well as false starts or renaissance.

Granted, there may be an alignment of stars around green hydrogen at present: environmental and fiscal government policies, a now proven technological concept and a growing number of corporate sponsorships (see the Hydrogen Council, for example). At a time when no one seems to believe that the planet is on the path to net zero emission by 2050, investing in hydrogen is a no-brainer. But the size of the bet for governments and corporates must be rationally dimensioned from a capital allocation perspective, noting that the geopolitical consequences from the emergence of a global hydrogen market will bring their fair share of twists and turns.

More generally, there appears to be a trend to focus on the supply side of energy, in particular power generation, when considering carbon dioxide abatement opportunities. In this respect, the potential to reduce energy demand, including through energy efficiency, may be underappreciated, possibly because reducing the demand for energy requires deeper, often unappealing changes in business and consumer behavior. And yet, this avenue provides robust, well-established and often cheap CO2 abatement solutions which have generally not been subject to hype cycles.

Seeking to achieve net zero emissions by 2050 leaves no room for infatuation. A diversified approach to the implementation of ambitious measures targeting both the supply and demand side of energy must be followed. There will be great investment stories on both sides of the market equation.

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