Where will hydrogen succeed - and when should investors be wary?

Hydrogen looks set for a starring role as industries seek to cut carbon emissions to net zero by 2050. The lightest and most common element in the universe can fill many of the energy and feedstock roles currently reserved for fossil fuels, but investing in some of them could prove risky. Low-carbon hydrogen is being proposed for applications ranging from substituting the high-emissions supplies currently used in the production of ammonia and other chemicals to replacing natural gas in domestic heating and cooking.

The vast predicted demand for hydrogen projects globally looks like good news for investors, but experts warn not all use cases have equal merit – and some may be highly inefficient. “Hydrogen can be used in different applications that might make sense from a decarbonisation perspective, but whether they make sense from an efficiency or cost perspective is subject to debate,” says Roland Rott, Global Head of Sustainable Investing Research at J.P. Morgan Asset Management.

This debate relates to how energy efficient it is to use low-carbon hydrogen for applications where other options are available. Today, most hydrogen is made from methane or coal, with a big carbon footprint, because this is the most efficient method. One way to reduce emissions is by using carbon capture and storage technology, but this requires energy and adds cost. Another is to create hydrogen by a completely different route, using electricity to split water via electrolysis.

If the electricity comes from renewable sources, then this route – which creates so-called green hydrogen – can have zero emissions. But it is much less efficient than using renewable energy directly. Taking efficiency into account, some proposed hydrogen applications start to look less than ideal. Take the use of hydrogen to power fuel-cell cars, for example. Although carmakers have sought to market eye-catching hydrogen fuel-cell models, the amount of energy required to power the vehicles undermines their environmental credentials.

Well-to-wheel efficiency

An analysis by the European clean transport campaign group Transport & Environment shows that the well-to-wheel efficiency of a green hydrogen fuel-cell car is just 33 per cent. This means if 100 kilowatts of renewable energy is allocated to a hydrogen fuel-cell car, 67KW will be lost in electrolysis, fuel storage, electricity conversion and so on, and only 33KW will be used to power the vehicle. By comparison, a battery electric vehicle has well-to-wheel efficiency of 77 per cent. Hence, the energy needed for a single hydrogen fuel-cell car could power more than two battery electric vehicles.

There is an even greater efficiency loss when hydrogen replaces natural gas for domestic heating, an application in which it is possible to use highly efficient heat pumps. Setting aside the fact that today’s gas distribution networks cannot carry pure hydrogen, hydrogen-based heating is 5.5 times less efficient than using heat pumps for the same volume of heating.

According to the Hydrogen Science Coalition, a group of independent academics, scientists and engineers, providing the 70 gigawatts of heat that the UK needed in the winter of 2021 would require 26GW of offshore wind if produced with heat pumps, but 367GW using hydrogen. Such numbers make it clear that hydrogen is likely to have a limited role, if any at all, in domestic heating in the foreseeable future.

No-regrets applications

“Investors are turning to us, as an asset management firm, to provide insights on what applications could really make sense and break through the hype around hydrogen,” says Rott of J.P. Morgan Asset Management, which has published a primer detailing the role of hydrogen in the energy transition, describing the likely value of different use cases. The primer shows that low-carbon hydrogen will be important in replacing traditional supplies used in existing chemical and industrial processes, as well as in steelmaking and shipping and as a source of long-term energy storage.

Conversely, the physical efficiency constraints on hydrogen production mean it will be uncompetitive in use cases that can be electrified, such as domestic heating and passenger cars, and questionable in applications such as short-haul aviation. “If I’m investing in projects, then I would look at ‘no-regrets’ applications where there’s a clear role,” says Adithya Bhashyam, a hydrogen analyst at BloombergNEF.

What is a no-regrets application for clean hydrogen today? “Anywhere hydrogen is used as a chemical feedstock and not as a source of fuel is probably ‘no regrets’ because there really is no option,” Bhashyam says. That is where smart investors will want to look until the dust clears over other use cases.