The Paris Agreement - an international treaty on climate change - sets a key objective for signatory countries to reduce greenhouse gas emissions and limit increases in global temperature in this century to 2 degrees Celsius above preindustrial levels. In a 2018 special report, the Intergovernmental Panel on Climate Change went further and recommended that countries must bring carbon dioxide emissions to net zero by 2050 to keep global warming to within 1.5°C of pre-industrial levels. Key to achieving these targets is what is commonly referred to as energy transition - the switch from a fossil fuel-based energy system with high carbon emissions to a carbon neutral system.

However, the path to decarbonisation is not without challenges. While renewable energy sources such as wind, hydro and solar are forming an increasingly significant part of the energy mix, it is far from a standalone solution as certain inherent features of renewable technologies, such as higher capital costs, geographic constraints (and the energy loss and infrastructure costs in transmission), transmission grid limits and unstable or time constrained output, will likely prevent them from entirely displacing fossil fuel energy, at least in the foreseeable future. The inherent shortcomings of traditional renewable energy sources have forced the energy supply industry (in addition to maintaining fossil fuels within the energy mix to balance supply needs) to consider solutions for, among other things, storing surplus energy, long-distance transportation of energy and alternative fuel to decarbonise hard-to-abate emission heavy sectors.

Hydrogen has the potential to help address some of these problems. In January 2017, the Hydrogen Council succinctly summarised the benefits of hydrogen, saying: "Hydrogen is a versatile, clean, and safe energy carrier that can be used as fuel for power or in industry as feedstock. It can be produced from (renewable) electricity and from carbon-abated fossil fuels. It produces zero emissions at point of use. It can be stored and transported at high energy density in liquid or gaseous form. It can be combusted or used in fuel cells to generate heat and electricity."1 Though hydrogen only represents a small share of the energy market today, many developers, financiers, governments and other market participants are betting that hydrogen could become a key part of the energy transition.

The Asia-Pacific market has embraced the potential of hydrogen, with countries such as Australia, China, India, Japan, Singapore and South Korea heavily backing it. With increasing frequency, nations, states and corporations in the region have been announcing hydrogen initiatives. South Korea was an early mover, with President Moon Jae-in unveiling a country-wide hydrogen blueprint in 2019 and declaring "now that the hydrogen economy has begun to emerge, it is important to take the lead in the global market. The hydrogen economy roadmap is a blueprint for leaping to become a world leader".2

More recently, the Singapore government was quoted on July 7 2021 as saying: "A key strategy for Singapore in our transition to a low-carbon future is the adoption of low-carbon technologies, such as hydrogen."3 and the Prime Minister of India, Narendra Modi, announced on August 15 2021: "We have to make India a global hub for green hydrogen production and export."

This momentum has resulted in some market commentators predicting that hydrogen could supply up to 25% of the world's energy, and become a US$10 trillion market, by 2050.4 In the much nearer term, Fitch Solutions have commented that substantial growth opportunities abound for green hydrogen in Asia-Pacific, with Asia's hydrogen electrolyser capacity alone projected to reach up to 10GW over this coming decade.

It is clear that there is an ideological and political impetus for establishing hydrogen as a key component of the energy mix as part of the movement towards a carbon neutral environment. But there remain various challenges to overcome to make such ambition a reality.

What is hydrogen

In the context of the energy sector, hydrogen is a product that can be utilised as an energy carrier, a fuel for power and a feedstock for industrial products such as ammonia and plastics. It is produced by various methods and it is the underlying manufacturing process of the hydrogen product that gives rise to the different types of hydrogen - commonly associated with specific colours. The main types or colours of hydrogen products are brown, grey, blue and green.

Green hydrogen is considered the "green" standard for the energy transition and achieving a net zero carbon energy economy. However, the costs of producing it are currently considered to be two to three times more expensive than blue hydrogen.5 The simple economics of this is the main reason why around 95% of the hydrogen produced globally currently comes from brown or grey sources.6

The likely key for hydrogen to play a meaningful role in the energy transition in Asia-Pacific (and, indeed, globally) is for it to be deployed in one or more of these areas:

  • Energy storage - Hydrogen can be converted to, and from, electricity and can be stored for long periods as either a gas in high-pressure tanks or a liquid under cryogenic temperatures. By storing hydrogen in this way, the use of hydrogen can be ramped up and down to match the output of existing non base-load energy sources. At least initially, storing and utilising hydrogen in a local country manner is likely to be the most practical and economically viable usage of hydrogen before long-distance and/or cross-border storage for hydrogen becomes available at scale.
  • Power - It is possible to use hydrogen in gas turbines - either in addition to, or in substitute for, natural gas - to generate electricity. In some Asia-Pacific countries - including Australia, China, Japan and South Korea - there are plans, and indeed, some regulatory mandates, to mix hydrogen in low concentration with natural gas to be used in existing pipeline networks. More modern gas turbines are already able to accept fuel blends that include up to 50% hydrogen and some turbine manufacturers are aiming to deliver turbines in the near future that could run entirely on hydrogen.
  • Industrial feedstock - Hydrogen is required in many industries as a feedstock for industrial processes. In these industries, its use is defined by its chemical characteristics, rather than its ability to provide energy. Some examples of hydrogen being used as a feedstock include ammonia plants, petrochemical and petroleum refineries and metal processing plants. Among the multiple industrial products, ammonia as a clean fuel that does not require high-pressure or cryogenic storage is gaining favour in the global shipping industry. International shipping and logistic companies are reportedly collaborating with local utilities to develop green ammonia supply chains with large-scale ammonia plants aiming to sell their offtake to industrial users in other jurisdictions.
  • Transportation - Transport vehicles - aircraft, trains, vessels, buses and automobiles - are currently among the biggest contributors to emissions. Hydrogen fuel cell electric vehicles (FCEVs) reduce air pollution since they have zero tailpipe emissions and can be carbon emission-free. For personal cars, hydrogen is complementary to other alternatives, such as electric vehicles and advanced biofuels. The use of hydrogen as a fuel may help decarbonisation efforts in this area in a way that battery technology or electrification have only had limited success so far. Hydrogen buses and vehicles are becoming an increasing feature of the traffic flow in a number of locations (such as Tokyo).

Hydrogen and project finance

As momentum continues to grow around hydrogen, investors in the development and deployment of hydrogen will be presented with a range of financing options, across both the debt and equity markets. Indeed, there are already a number of hydrogen related corporate finance, project finance and capital market financings that have been announced in recent months.

While every transaction has its unique challenges to resolve and work through, it does seem like there will be financial solutions that can be tailored accordingly for each step in the hydrogen value chain. Upstream production of hydrogen is likely to be conducive to project financing, midstream pipelines and energy storage assets are likely candidates for bonds and infrastructure fund financings, and the downstream end-use of hydrogen - either as an industrial feedstock or in the power or transportation space - may have the greatest range of options, depending on the applicable investor's approach to financing.

Although there is and will increasingly be significant potential liquidity in the bank market for hydrogen project financings, banks will need to make hard-headed decisions on how to allocate scarce capital and management time as they are presented with an increasingly diverse array of energy transition projects. It's reasonable to expect that they will tend to focus their efforts on projects where they see a pipeline of follow-on deals - for example green steel, where the expectation is that once the first project financing is closed a strong pipeline will follow, or green ammonia.

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1 - See: uploads/2017/06/Hydrogen-Council-Vision-Document.pdf

2 - Article headed "President Moon unveils new energy roadmap for 'hydrogen economy'". NNA Business News dated 18 January 2019.

3 - Speech by Tan See Leng at Chile and Singapore LowCarbon Hydrogen Webinar on July 7 2021.

4 - See: gs-research/green-hydrogen/report.pdf

5 - See: Dec/Making-Green-Hydrogen-a-Cost-Competitive-ClimateSolution

6 - See: Agency/Publication/2020/Nov/IRENA_Green_hydrogen_ policy_2020.pdf

Originally published by Project Finance International November 3 2021

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