Hydrogen and net zero – which ambitions are realistic, and which are less so?

The UK government’s commitment to achieve net zero emissions by 2050 is an enormous but achievable task. It can be met if the government brings forward - and delivers - a coherent plan that gives investors the certainty they need to invest.

Transitioning the UK’s power system to renewable energy has thus far led the decarbonisation of the economy. Grid carbon dioxide (CO₂) emissions fell by more than half between 2010 and 2020 as coal left the system and renewables took its place.

Progress in other sectors (with the exception of waste management) has been very slow.

The sheer scale of the net zero ambition brings forward the need to broaden efforts, including the electrification of much of transport and heating.

What’s more, the target is for 0%, not 20%, of historic emissions. This is what opens the door for hydrogen in hard-to-electrify sectors.

Hydrogen is a flexible energy source that can provide electricity, fuel for land transportation, aviation & shipping, heat, long term power storage and chemical feedstock for industrial processes. It can be stored as a gas or a liquid and can be converted into ammonia or methanol for longer term storage. This flexibility has gained hydrogen the moniker of “Swiss army knife” in the energy transition.

The government recognises hydrogen’s potential importance, publishing its UK hydrogen strategy in August 2021. More recently, in March 2023, the UK government shortlisted 20 projects across England, Scotland and Wales (totalling 250MW of capacity) for support under the electrolytic hydrogen scheme.

Despite its flexibility, hydrogen is not a panacea. Here, we look at the realistic roles hydrogen can play, and where we are more sceptical.

The role of hydrogen in reaching net zero in the UK

Many of hydrogen’s uses are already being met by other fuels or technologies.

Clean hydrogen will have to prevail on economics, occupying niches where fossil fuels will be hard to displace. In many cases, electrification, with an ever-lower carbon grid, will be more economically efficient than hydrogen, such as passenger transport and home heating.

Conventional hydrogen is generally produced by reacting steam (H₂O) with methane (CH₄) which leads to material CO₂ emissions. This “brown” hydrogen is then captured.

Green hydrogen comes from electrolysis of water using electric energy from a clean source. Blue hydrogen seeks to capture and store the CO₂ that is released in the production of brown hydrogen.

The most obvious case is to use blue or green hydrogen where hydrogen is already in use today, such as in the petrochemical industry.

Future uses include aviation and shipping where its energy density (or that of its related chemicals ammonia or methanol) make it a plausible replacement for fossil fuels. These sectors account for approximately 4.5% of global greenhouse gas emissions and, to meet net zero, a cleaner, high energy density alternative to fossil fuel must be found.

The most likely use case is clean ammonia or methanol – which is derived from clean hydrogen – as a fuel for shipping. They can be stored relatively easily and are already transported in bulk by sea, unlike hydrogen which has been known to leak through lead.

Other substantial carbon footprint industries such as steel and cement can also be decarbonised using hydrogen. In these processes, hydrogen is used for its reducing effect in the chemical reactions, as well as its energy value. Steel and cement account for c.16% of global CO₂ emissions in aggregate, and it is difficult to imagine a modern economy without these basic materials. While some electrification is possible (electric arc furnaces, for example) hydrogen is likely to play a significant role in decarbonising these sectors. It is also worth noting that these sectors are important “anchor” elements of any industrial strategy, given the scale and investment in high skilled engineering jobs that they require.

Within the public markets, the areas that we feel are gaining most traction are ammonia for fertiliser, and other industrial uses (material handling, chemicals, steel), with fuels for shipping and aviation gathering pace as well.

Where we have our doubts

At the other extreme, there are potential uses where we question how effective hydrogen will be.

Domestic heating

The UK government’s hydrogen strategy offers some hope for those who favour the application of hydrogen in these area. Even so, we remain unconvinced it will prove cost effective to produce clean hydrogen and upgrade the transmission network to distribute it. This is not an area where we are actively looking to invest at present.

Electrification, through heat pumps, is likely a more efficient and cost-effective solution, although the thermal efficiency of the building stock will need to be improved materially.

Cars and other road vehicles

In our view, this race is already run, with electric vehicles the clear winner for domestic use. Homes already have electricity connections to power lithium-ion batteries. While there are (solvable) challenges in ensuring enough electrons are available at the right time, this is more surmountable than the distribution of hydrogen. In addition, it is simply inefficient to take green electricity, use it to produce green hydrogen, transport the hydrogen, then use the hydrogen to power a vehicle. Let the green electrons flow directly into vehicle batteries instead.

There are several other potential applications to consider.Liebreich Associates’ “Hydrogen Ladder” below provides a useful overview and shows the competing technologies in each area.

The orange boxes illustrate the potential to introduce hydrogen into gas grids to achieve things like heating more cleanly than can be accomplished with natural gas. The conclusion is that taking on the cost and risk of making clean hydrogen and using it for things done more easily with clean electricity, makes no sense.

The uses for hydrogen should instead be focused on those tasks for which clean hydrogen is the only choice.

Where to next?

There are some areas where green hydrogen will clearly play a role. How use cases pan out will only become known over the next decade or so, as policy and the relative economics of different technological approaches evolve.What is certain is that there will be significant deployment into hydrogen-related assets over the medium to long-term and this is essential to meeting UK net zero targets. This will expand beyond the production of hydrogen, and encompass investment opportunities in storage and ammonia/methanol production.

In the near term there are likely to be interesting medium scale projects that the government will support, allowing it to make informed judgments of how effective the technology is.

These “demonstrative” investments, often fostered by government revenue support, will likely provide interesting multi-hundred million pound investment opportunities. These will not, for some time, be at the multi-hundred billion pound euro scale of solar and wind.

This will be reinforced by a race between governments of European countries. We expect them to race to create and host companies to lead the technologies, keen not to find themselves “missing out”, and buying in technologies manufactured elsewhere in future. Most governments do this today with wind and solar.

It will be a key part of the “just transition” / “green job” narrative, especially in a “levelling up” context.

Schroders Greencoat aims to stay at the forefront of the evolution of the UK investment opportunity in clean hydrogen. We expect to start making investments in the short term as part of the UK government’s Hydrogen Business Model (HBM)/Net Zero Hydrogen Fund process. 

We are currently looking at a number of projects in this regime. If successful, we would be awarded contracts that contractually provide protections against operational costs and provide UK government supported inflation-linked revenues. There are similar projects coming to market across Europe, and given our scale and network of relationships we expect to participate in them.