Low-carbon hydrogen presents attractive alternative investment opportunities for infrastructure investors – Boston consulting group.
In spite of the lingering effects of the COVID-19-induced economic downturn, rising inflation, and geopolitical implications of Russia’s invasion of Ukraine, infrastructure investment, the fastest-growing alternative asset class, has lived up to its promise and proven its resilience.
From December 31, 2019, to December 31, 2022, infrastructure investments delivered an annualized total return of 7.36%, including both cash yields and valuation increases, and even generated positive returns in the challenging 2022 environment.
This explains why fundraising in 2021 grew by 50% over the previous year, while investments in other alternative assets—such as real estate (-25%), private equity (-21%), private debt (-10%), and venture capital (9%)—have grown at a significantly slower pace. Infrastructure investors have assets of $1.1 trillion in the energy and environmental, transport and logistics, digital infrastructure, and social infrastructure sectors under management.
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According to a global study of infrastructure funds conducted by Boston Consulting Group (BCG) and EDHECinfra in the third quarter of 2022, 67% of general partners say that they plan to increase their investments in the renewable energy sector over the next three to five years.
The full results of the study are highlighted in a new report published today, titled Building the Green Hydrogen Economy, which explores the risks and returns that infrastructure investors generated in 2022, along with the emerging opportunities for investment in the hydrogen industry.
Wilhelm Schmundt, BCG managing director and partner, and global lead for infrastructure investment, said:
As the world works to stay on track with the Paris Agreement, and governments rebuild infrastructure with an eye towards ensuring carbon-neutrality, the infrastructure investment market will continue to expand,”
“Hydrogen is turning into a lucrative alternative investment opportunity and a logical extension for funds with a mandate to develop sustainable resources.”
An Emerging Opportunity in the Hydrogen Industry
To reach net zero by 2050, low-carbon hydrogen is a novel option to decarbonize industries with hard-to-abate emissions, such as basic chemicals, aviation, steel production, shipping, and long-haul road transportation.
While gray hydrogen is generated from natural gas or methane, low-carbon hydrogen is produced through electrolysis powered by renewable energy sources such as wind or solar, or fossil fuels paired with carbon capture and storage.
In 2021, demand for hydrogen was around 94 million tons—most of it in the form of the less environmentally friendly gray hydrogen. But by 2050, the demand for low-carbon hydrogen will approach 350 million tons per year. To meet the world’s decarbonization goals, BCG calculated that the public and private sectors must invest $6 trillion to $12 trillion in assets between 2025 and 2050 to produce and transport low-carbon hydrogen.
Although investment opportunities will extend across the hydrogen value chain—from feedstock development and generation to hydrogen transportation and storage—$300 billion to $700 billion of that amount must be deployed by 2030.
Four Strategies to Gain First-Mover Advantage in the Hydrogen Industry
Historically, early investors have generated higher returns by being the first to move into infrastructure sectors. In the renewable energy industry, firms that invested in wind energy and solar power generation in the early 2010s reported higher internal rates of return than those that did so in the following decade.
The report details four investment strategies that can help investors gain early-mover advantage in the emergent hydrogen industry and outperform others:
- Follow subsidies and invest only in countries and segments of the value chain where policymakers have developed or plan to create monetary mechanisms that will limit their risks.
- Shift the technical execution risks associated with investing in low-carbon projects to seasoned partners.
- Create a portfolio by investing in various hydrogen-related projects to generate synergies that will help each one perform better.
- Expand risk appetite to gain early momentum.
Frank Klose, a BCG managing director and senior partner, said:
Hydrogen has long been regarded as a key part of the quest to create a sustainable planet and now, it may finally be poised to have its moment to shine, which should attract savvy infrastructure investors.
Low-Carbon Hydrogen Presents Attractive Alternative Investment Opportunities for Infrastructure Investors, BOSTON, March 21, 2023
