The evidence is solid: The world is serious about climate change and the hardest-to-abate emissions are moving into the spotlight. Green hydrogen in particular – broadly defined as hydrogen produced by an electrolyzer using a renewable electricity source – is gaining attention because of its broad array of applications and potential to decarbonize industries facing some of the most difficult problems. This attention is driving a massive uptick in investment dollars, with upwards of $240B of announced investments in 2022. The majority of these investments are focused on scaling up production capacity, with the remaining going towards end use applications (25%) and transportation and distribution (10%).
Government incentives, such as those in the Bipartisan Infrastructure Law, have driven even more interest. Last year, the US government outlined $9B in funding for the development of regional hydrogen hubs. Hub planning groups submitted their first of several applications and are operating full steam ahead with their planning process.
Additionally, with the passing of the Inflation Reduction Act (IRA) in mid-2022, the US government introduced a $3 per kg tax credit for green hydrogen, further incentivizing companies to transition towards lower carbon intensity hydrogen. Consequently, we are seeing more and more production capacity announced. Most recently, AES and Air Products unveiled a $4B mega-project in Texas, making it the largest green hydrogen production project in the US. There is currently about 1 Mt of global green hydrogen production capacity; Some have anticipated upwards of 95 Mt capacity needed for the net zero scenario.
While the wide consensus is that yes, we will surely benefit from green hydrogen production at scale, there’s an implied caveat: Will demand for green hydrogen materialize at the pace and volumes anticipated?
Many in the industry reference hydrogen as the all-purpose “Silver Bullet” for the green economy. Others are cautiously watching the market boom and waiting to see how demand and supply shake out as they reach market-ready levels. There are also those squarely in the “bust” camp that are betting that demand won’t materialize given competing solutions and a declining, but present, green premium. With the help of Katie Clasen, Buoyant took time to research this space. She outlines that while we generally believe that hydrogen will indeed be our key to decarbonizing otherwise hard to abate industries such as steel or ammonia, it is still vulnerable to potential boom and bust cycles. The scenario we anticipate: green hydrogen will thrive in hard-to-abate industries, such as steel or ammonia, but struggle with adoption in other downstream end-use applications based on the following factors:
1. The competing "Electrify Everything" momentum2. The improving, but present, green premium3. The significant transportation constraints due to its low volumetric energy density
1. The competing "Electrify Everything" momentum
2. The improving, but present, green premium
3. The significant transportation constraints due to its low volumetric energy density
To better understand how digital opportunities will play a role in scaling the green hydrogen economy, we have mapped the value chain and the key players below – and, in our linked Medium post, what we see as the core challenges to each sector. This mapping is meant to be largely demonstrative and not exhaustive. We welcome thoughts on additions to this list, and in particular, would love to hear from entrepreneurs or operators who are actively impacting this space.
Developers: Project developers and companies planning the broader hydrogen hub ecosystem. Most of today’s market activity lies here.
Producers: Companies taking on the role of owning and operating green hydrogen production assets.
Storage and Transportation: Players that enable efficient movement of hydrogen for either domestic or international exchange.
End Users: While hydrogen is often referred to as the green economy “Swiss Army Knife” because of its many potential applications, it’s possible that high demand in certain sectors won’t materialize due to competing “electrify everything” trends.
Taken together, all of these players will have a role in the creation, adoption, and ultimate economic viability of green hydrogen. And like almost all things in our global economy, digital applications will be applied across the full value chain to scale, produce, and deploy green hydrogen more efficiently.
To scale the green hydrogen economy to the levels anticipated, we believe that digital infrastructure will be needed to support the exchange of hydrogen, largely to complement certification of origin schemes that provide the transparency necessary for trade. In addition, we anticipate the emergence of digital solutions focused on improving existing project development processes, given the massive market action in project planning alone. We hope our research will further illuminate how we expect the market – and opportunities of digital solutions – to materialize.
To read more about our hydrogen research, visit our Medium post here.
The Lighthouse is a resource for climate tech updates and a channel for us to regularly share our perspective on Buoyant’s investment thesis and industry sectors. We know we are not alone in producing great content and will amplify the voices of others by highlighting those resources we find thought-provoking.
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