Despite the uptick in valuations experienced by most companies connected to hydrogen in the past year, the base-case for investing in this sector locally still remains largely untold. But before getting into the distinction between different types of hydrogen, it’s important to take a big-picture look at this dynamic clean energy.
For starters, hydrogen’s primary use today is as feedstock in chemical and industrial processes. But countless other applications include clean and heavy-duty transport, materials handling, and stationary power systems.
Turning grey hydrogen green
Hydrogen can be produced from almost all energy resources, and the Global Hydrogen Council predicts it could supply 18% of the world’s energy by 2050. Today’s use of hydrogen in oil refining and chemical production is mostly covered by hydrogen from fossil fuels, with significant associated CO2 emissions.
Best estimates suggest the world produces around 115 million tonnes of hydrogen, comprising 69Mt directly and 48Mt as a by-product of other processes. The main uses are for production of ammonia (chemical code NH4) and fractionation in oil refining.
Hydrogen, or “grey” hydrogen as it’s often called is produced from natural gas, using a process called steam reforming, which emits greenhouse gas. Much of the investor attention around hydrogen today centres on how this grey hydrogen – which accounted for over 95% of hydrogen production in 2019 – can be replaced by “green” hydrogen.
Then there’s a different technique that doesn’t generate CO2, which creates what’s known as “turquoise” hydrogen. While steam reforming can capture 80% to 90% of the CO2 it produces, this CO2 is then stored or used in other processes, which is how “blue” hydrogen is created.
What’s of particular interest to investors is the alternative method of electrolysis, which involves liberating the hydrogen with electricity from renewable sources. The trouble is, given the current production costs of around $6.50-$7.50 a kilogram, the economies of scale around electrolysis are challenging.
Multi-billion dollar industry
While most of the companies active in the hydrogen economy globally are using steam reforming to produce hydrogen, there are also companies focusing on fuel cells powered on hydrogen or flexible fuel cells.
Closer to home, Australia’s chief scientist Alan Finkel has described hydrogen as “Australia’s next multi-billion dollar export opportunity”. He’s encouraged by the EU’s plans to build 6GW of green hydrogen electrolysers in the next four years.
With one eye on the untapped local market, Australian companies – including BHP Billiton Nickel West, Engie Renewables Australia, and Woodside Energy – have been tapping sizeable hydrogen funding made available by the Australian Renewable Energy Agency (ARENA).
Despite 100% emission-free energy still being early stage locally, Woodside Petroleum CEO Peter Coleman suggests Australia takes its cue from the rapidly expanding Japanese and Korean markets for gas and LNG. What these markets reveal, adds Coleman, is a consolidated foundation on which to prepare for a “green” hydrogen future.
If you’re looking for a pure-play entry into Australia’s hydrogen sector, the options remain limited. The beauty of Perth-based, Hazer Group’s (ASX: HZR) commercialised technology is it uses an iron ore catalyst to decompose methane into hydrogen molecules and solid graphitic carbon, and this unique process has attracted some early, albeit modest, funding.
Investors who understand the difference between Hazer’s process and the most common process, which involves heating natural gas (methane and ethane) to 1,100 degrees in the presence of steam – which for every tonne of hydrogen produced, 10-12t of carbon dioxide are emitted – have helped to nudge the company’s share price more than 160% higher in the last year.
Hazer’s CEO Geoff Ward claims the 100-150t abatement credit it expects for every tonne of hydrogen produced will be a valuable selling point for the early-adopter market.
Meantime, while Hazer is in the process of building a commercial demonstration plant, South Australia-based Leigh Creek Energy (ASX: LCK) is focussing on “grey” (fossil fuel derived) hydrogen, but with a kicker in the tail.
Leigh Creek Energy plans to monetise the value remnants of an old coal mine with large proven and probable gas reserves. While managing director Phillip Staveley expects to produce the gas at a knockout price of $1/kg, the company still needs to decide whether to pursue multi-billion dollar commitments to hydrogen or urea.
Another aspirant focussed on Australia’s green hydrogen future is Infinite Blue Energy. The company plans to become Australia’s first commercial scale green hydrogen company, and is expected to IPO on the ASX sometime during calendar 2021 with an expected valuation of $50 million-plus. Upon completion, the company’s landmark Arrowsmith Hydrogen project is expected to produce over 25 tonnes of 100% clean green hydrogen daily.
Local toe hold
While hydrogen is still emerging from the starting blocks here in Australia, the local market can take some encouragement from the colossus of investor money it’s been attracting globally. Before a litany of newcomers follow Blue Energy to market, now is the time to start mastering the dynamics on which this exiting sector are being built.
As anyone who has being studying Australia’s burgeoning lithium market will attest, the spoils typically go to those who get in early. Unlike the ASX-listed lithium sector, there are no crowded trades in the hydrogen space, but taking an early position and hanging on, may prove to be a prudent move.