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The next energy market disruptor, green hydrogen is moving at lightspeed and global investment, with strong policy support and replication of the solar learning curve, is adding to the momentum.

The outcome is as inevitable as it is overdue

In this ongoing global energy system transformation, the outcome is as inevitable as it is overdue.

A number of factors are accelerating the shift from the current green hydrogen (GH2) cottage industry to the global gigawatt-scale commercialisation that will take place this decade.

Energy cost deflation

Investors understand the power of experience curves, coupled with ongoing technology innovation and massive manufacturing supply chain scaling up.

The power of industry disruption was proven with mobile phones and the internet. Now the focus is on decarbonising energy, propelled even faster as the power and transport sectors converge, with ongoing deflation in battery costs and improved performance.

Thanks to surging fossil fuel commodity prices in 2021 – e.g. coal rose at one point by 500%, LNG tenfold – the cost of solar modules increased by 50%. This makes 2021 the first year in which solar costs didn’t fall by 10% year-on-year and is probably a 12-18 month ‘blip’, with solar module costs likely to halve again over this coming decade.

China is massively committed to dominating zero carbon growth industries of the future. It is on track to quadruple global polysilicon manufacturing capacity by 2024 vs last year. Solar installs globally could double or treble again within three years.

Solar installs globally could double or treble again

Tie this to the huge change in the economics of GH2 and ever-lower variable renewable energy (VRE) costs, and we have electricity market deflation and disruption.

Australia is clearly showing the world’s electricity market the future. On sunny days –10am to 3.30pm daily – electricity prices are now negative. EVs, batteries and pumped hydro can absorb some of this negative cost electricity, but low-capacity factor GH2 facilities will profiteer on spilled electricity as electrification of everything drives decarbonisation.

Electrolyser manufacturing is scaling up

The move from tiny batch manufacturing to gigawatt (GW) scale manufacturing is moving at lightspeed, a key driver of the expected massive initial capital cost reductions in GH2.

Nel moved from 40 megawatts (MW) to 500MW in 2021; ITM Power from 100MW to 1000MW in 2021. In October 2021 Thyssenkrupp targeted a fivefold expansion to 5GW of manufacturing capacity online by 2025 and in the same month FFI and Plug proposed 2GW of manufacturing capacity at Gladstone, Australia.

Electrolyser facilities are scaling up, too

Electrolyser unit sizes are moving from 0.2MW to 5MW – a massive twentyfold scaling up again. BNEF estimates electrolyser capacity globally at 15GW by 2024.

Global production was 70MW in 2020, which itself was a doubling from the previous year, according to the IEA.

The capital cost of electrolyser units will come down dramatically with manufacturing supply chain scale and facility scaling up.

The capital cost of electrolyser units will come down dramatically

In February 2020, the largest operational GH2 facility (10MW) opened in Japan. In January 2021 Air Liquide opened a 20MW facility in Canada.

At the same time as this facility was commissioned, construction started on a 100MW facility in Germany and Shell’s Rhineland electrolyser, known as Refhyne. Assuming completion on time, this is another fivefold expansion in just four years.

In January 2022, thyssenkrupp and Shell announced a 200MW unit in Rotterdam, to be commissioned by 2024/25 – another doubling even before the 100MW facility is built.

New Zealand is even more ambitious, with Meridian and Contact Energy proposing a 600MW facility for a 2025/26 start-up.

IHS Markit in mid-2020 aggressively predicted 100MW facility sizes by 2030 – 18 months later that timetable has been accelerated five years.

All-in electrolyser capital costs by 2030 could be down 50% from today, or even 80%. And the learning experience will be huge, with tenfold expansion every couple of years.

Government decarbonisation commitments give GH2 policy support

Last year’s ambitious pledges for net-zero emissions by mid-century were staggering, if long overdue. With this comes the policy framework to reset the rules of industry engagement, destroying some companies’ social licence to operate. It is also accompanied by government funding of ever-larger pilots.

Last year’s ambitious pledges for net-zero emissions by mid-century were staggering

China pledged peak emissions by 2030 and net zero emissions by 2060. Japan and Korea pledged net zero emissions by 2050. These countries are Australia’s largest fossil fuel export destinations, and so now a trade risk for Australia.

On 30 December 2021 China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) committed the five largest utilities in China (and the world) to have more than 50% of their total capacity (not generation) in renewable energy by 2025, just three years from now. They will probably double China’s VRE installs annually.

Japan’s JERA and MHI this month announced government approval and sponsorship for two GW-scale pilot projects for 50% ammonia co-firing of coal-fired power plants, central to Japan’s pledges.

Although the U.S. is late to the GH2 party, President Biden announced the Department of Energy’s Earthshot of $1 for 1kg of clean H2 in one decade in October 2021. This is predicated on electrolyser capital costs dropping 90% this decade, coupled with renewable energy costs dropping another 60%.

Pricing of CO2 emissions is building, globally

Most economists agree the most effective way to deal with climate change is to price in this massive externality. Currently, fossil fuel firms and their product users don’t pay the externalised cost of CO2 emissions.

That is changing with a trebling of the EU emission trading scheme (ETS) price in 2021 and, interesting in the absence of policy, a trebling of the Australian carbon credit unit (ACCU).

The huge momentum in CO2 pricing globally over 2021 demonstrates the snowballing of policy, finance and technology. The EU ETS at one point last year trebled to a record €90/tonne, a tenfold rise in five years.

The EU ETS at one point last year trebled to a record €90/tonne

The largest ETS in the world was launched in July 2021 in China, and in January 2022 government reports already suggest a pending significant tightening of free permits.

In Australia gas company Santos expects taxpayers to subsidise its carbon capture for enhanced oil recovery (CCUS-EOR). In the rest of the world, CO2 remaining an un-costed externality is rapidly losing currency.

Corporate commitments require a credible pathway, and global investors are demanding corporates now have a credible path to zero carbon with credible interim targets.

The world’s largest financial institution, BlackRock with US$10 trillion of assets under management has demanded all corporates it invests in have credible short, medium and long term plans dealing with CO2 emissions, a path to net zero emissions, alignment with the Science Based Targets initiative (SBTi), observance of the Task Force on Climate-related Financial Disclosures (TCFD) and newly formed International Sustainability Standards Board (ISSB) standards, and a ramping-up of the Climate Action 100+, corporate engagement and proxy voting.

Global finance is pivoting

The end game of decarbonisation is inevitable and investment opportunities are measured in the tens of trillions of dollars. Global finance, policy, technology and economies of scale are combining to create this long-overdue surge of momentum.

Looking back, the pivot point was probably last year

Looking back, the pivot point was probably last year with the shift to a 1.5°C target, from the 2.0°C of 2020.

In his 2022 letter, BlackRock’s CEO Larry Fink talks of a tectonic shift of capital. More than US$130 trillion of collective financial capital has been pledged globally to net zero emissions by 2050.

Global finance is amoral, but Larry Fink now accepts that BlackRock has a fiduciary duty to clients to manage a clearly known, key long term financial risk.

The momentum is underpinned by the ongoing wealth hazard of investing in fossil fuel firms.

When a supply chain shock combines with a huge economic rebound in China’s economy, we all suffer the costs of surging fossil fuel commodity prices. Big firms profit, short-term. But over a decade, fossil fuel shares are down (like ExxonMobil’s) despite it being the world’s largest ever bull market.

The world’s largest investor in zero emission energy systems, NextEra Energy with US$15 billion annual capex in grid and renewable energy, has massively outperformed.

Some argue fossil fuels are a necessary evil – but when doing the wrong thing costs you money, investors move on.

The stock market bubble in GH2 companies over 2020 was followed by a 60%+ correction in 2021. But these firms are still well up on a three-year view, e.g. 1226% for ITM Power or 1740% for Plug Power.

These firms used growing investor excitement to do substantial capital raising

More importantly, these firms used the growing investor excitement to do substantial capital raising in 2021, giving most of these start-ups huge cash reserves to fund operating losses, and capex to deliver scaling up on manufacturing. Thyssenkrupp in January 2022 detailed its proposed GH2€5bn initial public offering.

Investors are punting and risk capital is moving, despite the losses and lack of a clear path to viability.

Pricing an industry disruption is very difficult, but funds are flowing. As with the internet and mobile phone disruptions of old, investors are backing massive GH2 momentum over profitability, for now.

By Tim Buckley, Director of Energy Finances Studies Australasia & South Asia, IEEFA

This is an extract from a presentation Tim Buckley gave to the ‘3rd Hydrogen Production, Storage & Infrastructure Development Global Summit‘ on 19 January 2022. It was published in Asian Power.

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Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective.

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