Has Hydrogen's Time Finally Come?

Australia’s energy sector may be at a new tipping point. As we continue to see transition across the value chain, the federal government has made investment in the industry a central plank of its economic recovery plan. In May, Energy Minister Angus Taylor released the government’s technology roadmap, which has received bi-lateral support due to its focus on backing low emission energies to grow jobs and the economy.

The roadmap explicitly calls out hydrogen, stating the government’s medium-term ambition to scale Australia’s domestic hydrogen industry, including through developing technical leadership. We also see growing interest from some of the world’s biggest energy companies in staking a claim in Australia’s emerging hydrogen market.

But while hydrogen offers great potential to lower Australia’s emissions and build a strong new export revenue stream, it’s an energy source that also comes with plenty of hype and a lot of questions. So, has hydrogen’s time really come? Perhaps, but its wider adoption will come in waves and depend on how it is used.

Which markets will come first?

The reality is that hydrogen is as hydrogen does; like most fuels, it is an input to processes, not an end in itself. Taking Australia’s hydrogen economy to the next level is all about three core markets – industrial use; gas markets and heavy vehicle transport.

Industrial use: For industries that use a lot of electricity – including chemicals and petrochemicals; food manufacturing; and transportation – hydrogen’s potential as a lower cost, less carbon-intensive energy source is appealing. In particular, production of ammonia offers the biggest market for hydrogen. Electrolysis now enables hydrogen to completely replace natural gas in its production. With our analysis tipping demand for ammonia to increase 25% by 2025, off the back of growth in mining and agriculture, there may be potential to grow use of hydrogen even further. The market is emerging quickly but is still not competitive without subsidy. However, costs of hydrogen production are expected to come down by 2025, depending upon improvements in the cost of grid-connected renewables and technological advances in electrolysis.  

Gas markets: Injecting hydrogen into our gas pipelines could help deliver cheaper, cleaner energy to Australian households but it’s a complicated process, with several technical and regulatory barriers to overcome first. Challenges include knowing just how much hydrogen could be safely blended into the gas network – one Jemena and ARENA demo is hoping to power 250 NSW homes with up to ~10% green H2 – and the need to recalibrate gas meters. Our view is that these issues, as well as figuring out injection points, will soon be overcome by industry, and that hydrogen will be in strong demand by gas wholesalers in Victoria, NSW, Queensland and South Australia; the latter being the first state to formally include hydrogen in its future energy plans. The Australian Gas Infrastructure Group CEO Ben Wilson says the blending of hydrogen and gas may be an important “stepping stone” to developing an export industry.

Heavy vehicle transport: While it looks like the small to medium vehicle market will be captured by electric vehicles, heavy vehicles look ripe for hydrogen fuel in the rush to decarbonisation. Large mining companies have long explored the possibility of hydrogen-powered fuel cells as a replacement fuel for diesel in heavy vehicles, and many cities (though none yet in Australia) are moving to switch their bus fleets to fuel cell electric vehicles (FCEVs). FCEVs are better suited to heavy transport than other battery technologies, due to their faster refuelling times, greater range and lower weight. With transport contributing about 17% of Australia’s carbon emissions, hydrogen’s potential to help meet decarbonisation goals, as well as deliver cost savings to operators, see it attracting increased attention from both government and major auto manufacturers. For those thinking about hydrogen for heavy vehicles, it’s worth remembering that the economics work better where refuelling stations are centralised, where fleet replacement can be done in one hit, and where the technology maturity curve of weight/power is presently settled. This means that forklifts work right now, centralised heavy vehicles in mine sites and industrial trade zones are starting to work, and long-haul freight is not yet there. 

Getting ready for the energy market of 2025

The key question for investors is, of course, when to pull out the cheque book, and it’s a difficult one to answer. For those seeking to invest in the next big thing, there is little doubt that hydrogen’s day is coming. The hard bit is, as always, how far ahead of the curve can someone safely invest and still meet investment mandates. 

There is no doubt that the economics of hydrogen are improving, through a combination of government subsidies, technology-driven cost reductions and development of supply chains; current work suggests a tipping point of 2025 – which probably means 2023 in this case. Certainly, the combination we are now seeing of improving economics and favourable policy will see our country’s hydrogen economy fully open for business within the next five years at the latest.  

It isn’t hard to see why governments are excited about hydrogen. Australia has the potential to become a large player in exports, if we learn lessons from the rapid growth of our LNG export industry and make the most of existing trade partnerships. Domestically, using hydrogen in our energy and industrial sectors could help Australia achieve its 2030 Paris Agreement emission targets.

The challenge for investors is how to prepare for the opportunities to come, while balancing the inevitable risk. It’s worth noting that there will be first mover advantage in securing export contracts early, even before the market is fully ready. Global demand for hydrogen – particularly green hydrogen – is forecast to grow significantly by 2050, with China, Japan, and South Korea, expected to the primary demand markets. 

As the transformation of the energy ecosystem continues, hydrogen is set to play a bigger role – Australia is well-positioned to make the most of this, if we move now to build the policy and economic environment to encourage its growth. This is one of those rare moments in time when smart government intervention makes a lot of sense, and best focused on the pinch points of electrolyzer capex and efficiency, transportation costs and open access to end markets. As always, clear focus means sharp policy and an eye for intervention with a scalpel rather than a broadsword. 

What are your views on hydrogen? Is it time? Message me or comment below.