Reflections on the “new hydrogen economy”

I begin with my history with hydrogen.

As a chemical engineer, working on an oil refinery, hydrogen was an incredibly valuable chemical, that due to its reactivity could be used to remove all sorts of impurities from oil, and also to transform low value fractions of oil into more useful and valuable products. But hydrogen had issues. Its’ very reactivity made it dangerous, liable to cause explosions. Also, as the lightest element, it took up a lot of volume. To get around this, you compressed it to extreme pressures. That was expensive in terms of electricity, but could be done. However, another property of hydrogen is that it attacks steel. The hydrogen molecule is so small, it wanders through the steel crystals and in the process weakens the steel. This is well known – its called hydrogen embrittlement, and to get around it, you use special alloys. But these are expensive. Hence, oil refineries that need the hydrogen manufacture it as close to possible as where they will use it.

Much later in my career, I was attempting to develop biofuels for Sweden’s heavy duty transport. Incidentally, the specific chemical was called DME, but what is more relevant was that it was a replacement for fossil diesel in a truck engine. Our rational for the mission that we were working on was that to achieve carbon neutrality Sweden (and any other country trying to go to zero) urgently needed a solution for trucks, and biofuels (particularly DME) were the only practical option. Others had different views. Elon Musk said that he would produce a battery-driven semi. Expert opinion was that this was highly unlikely/impractical in the next few years. Another option was electrified roads, where trucks would hook up to a cable as they motored along. This was achievable, and in fact has been demonstrated in Sweden. I have a business contact who manages eRoadArlanda. However, it requires laying the electric cables along vast numbers of arterial roads. And what happens when the truck drives off the artery? Also, there are issues that need to be solved with the business model. eRoads have potential, but are tricky.

The final competing solution was hydrogen fuel cells. These have been around for decades, and work well. But they had two problems. Firstly, the physical and chemical properties of hydrogen, as discussed above. Secondly, the cost of the hydrogen. Ferociously expensive.

Given this, we felt confident that our solution was attractive. However, it required incentives to keep the biofuel price low, and it required long-term policy clarity from the government. Neither were forthcoming, and the biofuels vision did not progress far.

These subsidy and consistent policy factors are also relevant for hydrogen, which is why I raise them.

The European Commission and political arms of Europe have been working on the technical and political challenges in decarbonising the economy. Evidently they are not particularly keen on biofuels as a solution. Biofuels do have issues. Early, first generation biofuels took products out of the food chain. And the bio needs to come from somewhere, which gives many people a concern about deforestation.

Hydrogen is therefore a preferred solution for Europe. In July, the Commission released its Hydrogen Strategy. At about the same time, the European Council settled on the Green Deal, pledging to spend very large amounts on greening the economy. Suddenly the EU had both a roadmap to a technical solution, the apparent political will to drive it and some of the finances in place. For those who hadn’t been watching this ball, as if out of nowhere, hydrogen became the overnight success. Of course, much hard, long work had gone into creating the outcome.

For companies that had been doing the hard work in a little-known sector this has had a spectacular influence on their share price. In recent weeks, Nordic Green News has reported on Powercell, Cell Impact and Nel’s share prices. As the charts above show, prices which were flat in 2019 suddenly became volatile, as money poured in. Prices doubled or more before peaking in July. Now they are falling again, likely due to financial players taking profits.

So, what is the future for the companies and sector? Sadly, there is no easy answer to this question. In the very short term they have experienced a great deal of exposure and a massive boost in confidence about their long-term future, driving up their share price. Some companies have taken the opportunity to raise new capital. Some have restructured to position themselves for growth. Some have done both. But once this initial glow fades, the challenge will be how they manage their real business opportunities and their investors in a period that will last many, many months, possibly years. Because while the very long term future has become one of fantastic opportunity, the immediate reality has probably not changed a great deal. The fact remains that relative to competitor fuels, hydrogen is still very expensive. And although potential customers for these SMEs will now pay a lot more interest to their products, not so many will be purchasing them, because the overall cost of ownership of e.g. a hydrogen fuelled truck – is still completely uncompetitive with diesel.

The EU Commission recognises this in its strategy, and gives significant space to describing the sort of “demand side support” policies that are required. Realistically, experience suggests that it can take some years for such policies to be negotiated and then to become law. Until then, the industry needs to survive either by itself, or with government handouts.

This situation is not helped by the industrial horizon in which the technology must mature. Typically plants take several years to plan and develop. As many wind developers complain, planning permission can be a long, arduous struggle. And for the learning cost curve to kick in, as the Commission expects, many plants must be built to learn from inefficiencies in earlier designs. Listening to Bloomberg New Energy Finance on a webinar earlier today, they believe that it can take at least a decade for a “hydrogen economy” to mature, on the assumption that the politicians continue to provide maximum support and incentives.

It will be a long road ahead.

Sean is responsible for Mundus’ strategy and commercial activities. He began his career in the oil industry Australia. After working internationally in commercial roles with BP in South Africa, the UK and Singapore he moved to Sweden with his family in 2009. He worked in business development and then as the Strategy and Growth Director for NASDAQ Commodities from 2009 to 2015. Sean holds an engineering degree from Adelaide University and an MBA from the Darden Business School at the University of Virginia.