There are way more exciting opportunities for hydrogen than transport.
TL:DR
Stop guessing and start moving. An infinite number of reports talk about hydrogen as desirable but impractical, and attempt to guess if and when it would be viable. Everyone seems to be in agreement that once hydrogen production is cost competitive, it can and should win wherever batteries struggle. So there’s a huge opportunity to jump on both ends: the applications and production. The current narrative about production falsely reduces options for mass hydrogen production to either wind or natural gas. The truth could not be more different. With so many compounds containing hydrogen (not least among them water), so many natural and chemical pathways to get to it, it is inevitable that we will achieve vastly cheaper production of hydrogen than (for example) fossil fuels, which require literally moving the earth to unlock, before the extremely costly process of refining them even begins. At the same time, the narrative around application is focused on civilian automotive, whilst heavy industrial applications seem to make far more sense.
What’s currently wrong with hydrogen?
Hydrogen is expensive to produce, comically hard to transport and famously explosive.
There’s almost nothing to be done with hydrogen which does not require hardware and or wetware, and worse, most solutions to these various problems only make economic sense at scale, once plant infrastructure costing millions has been put in place.
Moreover, hydrogen has consistently lost ground to batteries in almost every energy storage market, to the point that most people consider “batteries” and “energy storage” as synonymous: and this is without batteries really even changing very much over the last 50 years, slowly churning incremental impovements to Lithium Ion.
Some of the fundamental mechanisms involved in unlocking and storing hydrogen (for example, its interaction with platinum group metals) are barely understood, whilst other approaches involve complex nanostructures or suffer an energy efficiency disadvantage.
Hydrogen ranks alongside biofuels and solar technology in investors’ minds. From a VC perspective, you may aswell put the capital into a hydrogen blimp and light a match.
So, should we care about hydrogen?
Probably yes. Lithium Ion, Petroleum and Natural Gas have also had their fair share of explosions and fires. Hydrogen’s one of the only fuels which can be produced and burned completely cleanly, requiring only energy, oxygen and water, and producing only water and oxygen when releasing energy. It’s versatile, releasing energy through both hot combustion (e.g. in rocket engines) and “cold” combustion (e.g. in fuel cells), can be transmitted as a liquid or a gas, via both chemical storage (LOHC, Ammonia, Methanol) and pipeline (like natural gas). 1kg of compressed hydrogen contains over 200 times more energy than 1kg of LiOn battery which is why it is already used in drones and boats. And transportation of the stuff is almost irrelevant as hydrogen has the potential to be produced anywhere at a marginal cost approaching £0, either from renewables or fossil fuels.
When does hydrogen make sense?
There’s another energy format which can be consumed cleanly and transported easily, produced anywhere, but which is much less explosive: that’s electricity stored in batteries. As a result, hydrogen, right now, makes little sense anywhere that it can be substituted for batteries. It also doesn’t really make sense in competition with Natural Gas, which is cheaper and has an infrastructure advantage.
To give an idea of the cost difference: natural gas retails at just under EUR 2 /kg. In contrast, hydrogen prices vary from EUR 7 /kg via electrolysis to just over EUR 2 /kg for Coal gasification. A critical factor here, however, is the extent to which natural gas is subsidised. Should governments cave to pressure and transfer just 10–30% of these subsidies, we may well see renewable Hydrogen (e.g. from wind) acheive parity [ref].
The world has fixated on batteries vs. fuel cells in cars, and this simply may be the wrong angle. Wired, for example, has seemingly only covered the use of hydrogen in transportation, as though this was the main use of liquid or gaseous fuels.
Although the initial focus has been on replacing hydrocarbon fuels, we should recognise that there are bigger fish to fry. For instance, in cases where the timeframe to obsolesence of existing oil or coal-derived fuel-based systems is greater than 20 years. These are typically commodity markets with expensive, concentrated infrastructure which is heavily optimised for fuel, and where electrification represents a technical and commercial barrier, such as steel, cement, fertiliser production, aerospace. Moreover, sunk costs aside, these industries also require the sort of rapid discharge rate that batteries and grid infrastructure struggle with, even when the capacity exists. There are therefore sectors where limited retrofit to hydrogen is likely far more cost effective.
As a specific example, the fertiliser market does not need to be convinced to switch to hydrogen, being the biggest market already, paying $165bn for hydrogen each year. This means that production and transmission technologies which can compete on price have an early adopter market. It also means that if for example you can produce ammonia directly at the farm, you have a significant advantage. Imagine compact systems producing carbon-free fuel for heavy farming vehicles whilst simultaneously producing fertiliser, perhaps using farm waste itself and water as feedstocks.
What’s stopping hydrogen?
There are two main reasons why hydrogen has not replaced hydrocarbons: price and infrastructure. Whilst pipelines for natural gas already exist, they can only take up to around 10% hydrogen before problems start. To fully convert pipelines and transportation infrastructure will cost the world economy trillions of dollars. On price, both the cost of the fuel and the cells need to become comparable to existing systems, either through falling cost of production (of fuel and cell), rising petrochemicals prices (e.g. due to falling supply) or some gov intervention (carbon pricing).
More generally, hydrogen and related words (fuel cells, clean tech, biofuel, catalysts) are tarnished by two decades of extraordinary losses. Venture Capital in clean tech is ruled by the false axiom of “if it lost money in the past, it will lose money in the future”, contrary to all prior experience of technological progression. The central problem for invetors is to gauge when “the timing is right” for hydrogen. The cleantech doldrums are part self-fulfilling prophecy, part policy/public perspective, part science.
Our perspective is that enough has changed in the science, policy and public perspective over the last 10 years that there are huge opportunities for contrarian value investors to combine under-valued IP and veteran management teams to make interventions that make a difference.
What’s the most impactful intervention?
In all but niche applications, renewable hydrogen production costs more than fossil fuels. This is a key bottleneck. It persists because the two mainstream processes for its production require, as an input, “ready”, primary energy supplies. Electrolysis requires electricity input, and steam methane reformation requires natural gas. As long as this is the case, hydrogen production as an endeavour in itself will be intrinsically more expensive than direct supply of that same electricity or gas. The only way they become viable is for grid balancing, which all but guarantees that hydrogen will remain niche as it depends on feed in tariffs and competes with every other form of energy storage (gravity, pumped hydro etc.)
Beyond these two approaches, exploration of materials for the sulphur iodine process, nuclear production and biological production all hold promise. In particular, combining chemical, biological and physical processes could allow extreme efficiency gains. The possibilities for multidisciplinary approaches multiplex when you also consider opportunities in production of hydrogen carriers (such as the Birkeland-Eyde process, inspired by lightning).
Why believe in cost effective hydrogen production?
Firstly, the combinatorial space is large, and many of the technologies (such as nitrogen fixing bacteria, photobioreactors, better enzymes, non-noble catalysts) are being developed in alternative sectors, so there’s an opporutnity to piggy back this R&D for other applications.
Secondly, hydrogen and hydrogen carriers seem to be amenable to local or decentralised production, as they use commonly available feedstocks, meaning many of the logistical concerns about hydrogen are likely less impactful than suspected.
Thirdly, whilst refinement of existing fossil fuels is at this point, extremely well-optimised and operating at scale, many forget that the processes for drilling oil wells, refining crude oil and raw gas and moving them from whereever they happened to be (often in the middle of oceans, thousands of miles from civilisation, or on the wrong continent) are highly energy intensive and in reality, chemically expensive in themselves: the global minima for O&G is definitively far higher than at a similar level of development for hydrogen. We can see the effect of this in the entry of Chinese chlor-alkali electrolysis manufacturers to the hydrogen market, instantaneously bringing the cost of full scale electrolysis down by a factor of 6 [ref].
Finally, because the material inputs required in the renewable production of hydrogen and its carriers are, in many places, almost unlimited (sunlight, waste heat, water, nitrogen, carbon dioxide), the marginal cost of hydrogen production could approach $0, implying non-linear returns in systems which approach this sort of efficiency.
If you’re passionate about addressing the climate crisis, and would like the time and impetus to explore challenges like this, DSV has a partnership to build the companies that will determine the future of zero carbon fuels, jointly funded by the British, Scottish governments and some of the largest energy companies in the world. If you co-found a company whilst working with us, there’s up to £500k of investment, and at least £100k in grant funding, plus the further opportunity to carry out 6 figure industrial proof of concept work. Follow this link to stop guessing and start moving.
