Gaining headwinds in the race toward green hydrogen: it’s vital to focus on geography – Brian Walsh, WIND Ventures.
The sustainable, cleantech energy landscape looks much different today than it did just one year ago. Hurdles of price, technology, infrastructure, and policy are falling one by one, as corporations, oil majors, and startups steadily move into the space.
Big oil, at least in the EU with the likes of Shell, BP and others, has joined utilities in the energy transition, making billions in investments into renewables and hydrogen projects. In 2020, solar became the world’s cheapest source of electricity, cheaper than coal ever was. Leading corporations—Amazon, Microsoft, Apple, and Google—have made aggressive climate pledges to become carbon neutral or negative. The Biden Administration committed to low-carbon technologies, more R&D support, creating green jobs, and accelerating the energy transition.
As part of this, “green” hydrogen produced from renewable energy sources has become a big topic in the global conversation. Green hydrogen offers a pathway to store renewable power in large quantities and to decarbonize sectors that rely on liquid fuels today.
Gaining headwinds in the race toward green hydrogen: it’s vital to focus on geography – WIND Ventures
Blue, green, and everything in between
It’s important to note that not all hydrogen is created equal. Most hydrogen today is “blue,” produced using coal or natural gas, resulting in, potentially high, carbon emissions. Less than 5% of hydrogen today is green, created using renewable energy to power electrolysis, the process of using electricity to split water into hydrogen and oxygen with electrolyzers.
Interest in producing green hydrogen is increasing rapidly, driven by several factors. Sectors such as shipping, trucking, aviation, and agriculture can’t be decarbonized with renewable energy and storage alone due to costs and battery weight. Another factor: the best renewable energy sources are often located far from demand. Green hydrogen offers a liquid, highly mobile storage and distribution option in getting renewable energy to where it can be used.
Currently, one of the main challenges is simply to make enough of the green kind: the world is still far short of the quantities needed to meet potential demand. This boost in demand has driven a significant increase of 351% in median startup valuations in 2020 versus prior years in the green hydrogen space – a signal that venture investors are trying to capitalize on the newfound interest.
Driving down costs to make green hydrogen competitive
While promising, green hydrogen is still expensive, driven primarily by the cost of renewable energy, capacity factors, and the expense of electrolyzers. There are also financing, operation and maintenance, compression and storage costs to consider.
Today, green hydrogen costs $3 to $7 per kilogram (kg) to produce. At $2/kg green hydrogen can compete with current transportation fuels. At $1/kg, it can compete against natural gas for heat and power applications. The production costs still need to decrease significantly to reach these tipping points.
The promise of renewables + electrolyzers
For cleantech-focused venture investors, there is a natural play. Electrolyzer technologies powered by renewable energy sources have the potential to reduce capital expenditures and accelerate the timing of green hydrogen’s impact and profit potential.
The good news: renewable energy is becoming more plentiful. McKinsey predicts that solar and wind generation will grow 5-10% faster than other power-generation technologies in the next five years.
Venture capitalists can help play a role in further lowering costs. We could attempt to open up niche markets, such as urban wind, but this would likely only offer incremental improvements. We could also invest in technologies such as hydropower and geothermal that provide consistent baseload power to enable green hydrogen plants to produce hydrogen (and revenue) 24/7. This would lower costs a bit more.
Better electrolyzers can drive costs down
One big area where VCs can help is by investing in electrolyzer technology, the key enabling tech for green hydrogen. There is a tremendous amount of improvement to be realized in costs, performance, reliability, and form factor to take green hydrogen into much larger markets with the objective to decarbonize.
Today, there are three primary types of electrolyzer technologies: proton exchange membrane (PEM); solid oxide fuel cell (SOFC); and alkaline, each with tradeoffs in terms of costs, efficiencies, operating conditions, safety, and so on. There is a lot of room for innovation, and the winners have yet to be established. Electrolyzer companies with advantages in technology, knowledge, and talent will have a meaningful impact in how green hydrogen markets develop.
Geography plays a bigger role
All things considered, there are essentially two approaches to investing in the green hydrogen space. One option is to support new electrolyzer technologies that can drive costs down long-term with a new, steeper, cost curve. This strategy is inherently riskier, but the reward could be higher. New electrolyzer technologies will no doubt emerge, but these could come with bankability and integration challenges that could affect commercialization timelines.
Another tactic is to support existing electrolyzer technology and focus on scaling to higher volumes, relying on more incremental electrolyzer innovations and economies of scale. The decision between these two approaches, somewhat surprisingly, depends on geography, even more than the electrolyzer. Roughly 55% of green hydrogen cost is electricity; only 30% is the electrolyzer itself. As a result, the cost of renewable energy has almost a twofold impact in driving down the cost of green hydrogen.
That’s why success with the economies of scale approach requires abundant, cheap renewable energy resources. The important thing to keep in mind is that these resources—both solar and wind—are unevenly distributed around the world. For example, Saudi Arabia ranks high for solar (86% better than Norway) while Norway ranks high for wind (182% better than Saudi Arabia).
Start with a focus on geography
There are some, although not many, geographies, such as Chile and California, that rank highly on the list for both solar and wind. These areas will be rewarded over geographies with lesser resources or with strengths in just solar or just wind in green hydrogen production using existing electrolyzer technologies for two reasons because it offers the lowest renewable energy costs, as well as a capacity factor benefit as solar and wind resources, are ‘on’ at different times of every day. This compounding benefit has a tremendous impact on the resulting cost of green hydrogen.
The green hydrogen market is likely to develop quickly, so aligning technology approaches with a geographic focus will be the smartest approach. A geographic strategy, at least in the short term, will create the biggest impact.
About Brian Walsh
Brian Walsh, is head of WIND Ventures the newly established corporate venture capital arm of COPEC, one of the leading energy companies in Central and South America. WIND Ventures provides startups and scaleups in the new mobility, energy and retail sectors with ‘unfair’ access to Latin America.
Source: emailed
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