In May this year, the European Union (EU) set out its plan to eliminate its dependence on Russian fossil fuels by 2030. Its REPowerEU directive put hydrogen at the forefront of its clean energy transition. The €300bn ($310bn) strategy drastically scales up the use of renewable hydrogen, calling for the import of 10 million tonnes of the alternative energy source and an equal amount from domestic production.
Increasing renewable hydrogen is part of a raft of measures to meet the continent’s energy needs. The directive also calls for the import of liquefied natural gas from non-Russian suppliers and larger volumes of biomethane imports, as well as increased domestic production. All these measures could remove at least 155 billion cubic metres of fossil fuel gas use, which is equivalent to the volume imported from Russia in 2021.
Nearly two-thirds of that reduction can be achieved in a year, the EU estimates. The EU will also pump €27.6bn into the development of electrolysers that produce hydrogen, as well as distribution infrastructure.
Russia’s invasion of Ukraine has arguably done more to accelerate Europe’s transition away from fossil fuels than any other geopolitical event in recent history.
The continent’s heavy reliance on Russian energy – it imports 45% of its natural gas from Russia – has laid bare how vulnerable it is to energy supply-chain shocks. With concerns growing that Russia will further stem natural gas flows into Europe this winter, the EU has been forced to act decisively.
The fact that renewable hydrogen is at the centre of the plan to wean itself off Russian oil and gas has sent the clearest signal yet to investors that the alternative energy source will play a central role in the continent’s future energy mix. “In Europe, there is further increased appetite to invest in hydrogen, to speed up the hydrogen economy,” says Geert van de Wouw, managing director of Shell Ventures, the corporate venturing arm of oil and gas company Shell.
Hydrogen’s origins
Hydrogen is well established as a source of energy in the heavy industrial sector, where it has been used in industrial processes, such as refining, for decades. Most of it is still produced using fossil fuels and green hydrogen, which is produced through electrolysis using renewable electricity, is still a nascent market because of the high costs of production.
Global Corporate Venturing helped the European Investment Bank earlier this year put together a report, Unlocking the hydrogen economy –stimulating investment across the hydrogen value chain, which looks at ways to stimulate investment in the low-carbon hydrogen industry.
Hydrogen has had a bumpy ride in the venture capital community. Ten years ago, venture capitalists invested heavily in electrolysis and fuel cells, but most of those investments failed because of a lack of customer demand. “There is some scar tissue that VC is trying to survive,” says van de Wouw.
But the potential for hydrogen is fundamentally different compared with a decade ago. Government support for hydrogen, particularly in Europe, and industrial customers’ willingness to pay a premium for green hydrogen because of the increased cost of fossil fuels, are driving appetite, he says.
Shell Ventures has invested in six hydrogen startups in the past 18 months. These include ZeroAvia, a designer of a hydrogen fuel cell system for use in aviation; Verdagy, a developer of water electrolysis technology for large-scale production of green hydrogen; and Strohm, a maker of composite piping for high-pressure hydrogen pipelines.
Industrial applications
The industrial sector will be the first large user of green hydrogen, says van de Wouw: “The VC sector believes Europe, especially, will become a best bet for low-carbon hydrogen in industry, particularly where synergies can be harnessed to target multiple sectors at once.”
Shell is positioning itself to become the leading supplier of green hydrogen for industrial and transport customers in Germany. Last year it started up an electrolyser in Rheinland, Germany. The technology uses renewable electricity from offshore wind farms to produce up to 1,300 tonnes of green hydrogen a year, initially for use in a refinery.
The use of renewable electricity to produce hydrogen is key to it becoming an integral part of the low-carbon energy system. Industry players are looking to curtailed wind and solar as promising sources of carbon-free generation for green hydrogen production. Curtailing wind, or discarding it, is a common occurrence in countries with large-scale wind farms.
In the UK, wind energy is regularly wasted because it cannot be transported to users due to congestion on the electricity network. Using this curtailed energy to power electrolysers for hydrogen production is seen as a solution to avoiding this wastage.
Hydrogen is also a way to store renewable electricity as an alternative to batteries, which have limited capacity for storing energy over long periods. “As the marginal cost of renewables becomes too high with the deeper electrification of the energy system, there will be an overbuild of wind and PV,” says van de Wouw. “Consequently, electrolytic hydrogen becomes unavoidable at some point.”
Amazon primes its investments
For AP Ventures, the world’s largest independent hydrogen venture capital fund, it is an “exciting time” to see today’s growth in the sector, says Andrew Hinkly, managing partner. “Interest in the sector has moved even faster in the past six months, particularly in Europe, through a recognition that resilience is critical to energy systems around the world.”
The venture fund started in 2012 as the corporate venturing arm of mining company Anglo American. Seeking future demand for the precious metals it mines, Anglo American saw the potential for hydrogen to create a market for its products. Precious metals, such as platinum and iridium, are used in fuel cells, sustainable aviation fuels and electrolysers.
AP Ventures was spun out of Anglo in 2016, so that it could expand and collaborate with other corporates. It is now a fully independent venturing firm with 12 limited partners, including Anglo American and corporates Mitsubishi and Sumitomo. Through two funds, totalling $400m in commitments, AP Ventures invests in 24 hydrogen technology companies.
It made three investments last year, with Amazon’s Climate Pledge Fund, a $2bn corporate venturing fund, launched in 2020.The Climate Pledge Fund is interested in hydrogen startups that decarbonise aviation and shipping fuels. Among its portfolio companies are Infinium, which develops carbon-free electrofuels that can be used in aeroplanes, ships and trucks; and Amogy, a startup that develops ammonia-to-hydrogen cracking technology, which can be used in fuel cells to power ships.
AP Ventures is particularly interested in hydrogen startups that use existing infrastructure, as this lowers costs and speeds up adoption. One promising area is the use of ammonia as a hydrogen carrier. Ammonia, a compound made up of hydrogen and nitrogen, is easy to store and transport using existing storage tanks and pipelines. At its destination, hydrogen can be extracted from ammonia and combusted in a modified gas turbine plant to generate electricity. A catalytic converter is needed to eliminate the nitrous oxide emissions.
Earlier this year, Japanese power company JERA put out a global tender for 500,000 tonnes annually of carbon-free ammonia. It will use the fuel to reduce carbon emissions at a thermal power plant. “That one act by JERA has sent a massive signal to the energy trading community that there is huge potential for the intercontinental transportation of ammonia for use in power production,” says AP Ventures’ Hinkly.
Market observers caution that large-scale production of green hydrogen is still a long way off, though. Judging by the time it has taken other new energy systems to capture 1% of global energy use, green hydrogen will not be in commercial use until the 2040s, estimates Shell Ventures’ van de Wouw.
Infrastructure is key
Given this long timeframe, his unit focuses on applications that can reach commercial use in the next five to 10 years. These include infrastructure technologies in the areas of compression, storage and transportation. “Novel ways of transporting and storing hydrogen are ways you can bring down the cost curve before you think about implementing new types of electrolysis,” says van de Wouw.
Finding alternatives to the precious metals, such as lithium used in electrolysers, will also be critical. The cost of precious metals used in hydrogen production has soared as global demand increases. Researchers at Manchester Fuel Cell Innovation Centre in the UK are investigating alternatives to precious metals. Bringing down the cost of materials and renewable electricity will be critical for hydrogen to reach commercial scale. “A hydrogen economy does not exist today. It is being developed, but we need to develop it properly,” says Amer Gaffar, director of Manchester Fuel Cell Innovation Centre.
While commentators see the industrial sector as the first adopter of green hydrogen technology, transportation is next on the agenda. Amazon’s interest in hydrogen for aviation and shipping is a clear signal that it sees the technology as a way to decarbonise its value chain.
Air travel is one area of transportation where the use of green hydrogen in the production of sustainable aviation fuel is viewed as the only solution to decarbonising jet fuel in the short term, mainly because of the lack of alternatives, according to Steve Taub, managing director of the corporate venturing unit of JetBlue Technology Ventures, which has invested in Universal Hydrogen, a startup developing carbon-free aviation fuel.
European directives that require airlines to blend sustainable aviation fuels into the existing aviation fuel mix are driving investment in electrolysers and zero-carbon hydrogen production, says AP Ventures’ Hinkly.
What will take much longer is the deployment of hydrogen fuel-cell aircraft. The large amount of energy needed to lift larger aircraft off the ground is still a challenge, although ZeroAvia is planning test flights of a 19-seater hydrogen fuel-cell aircraft. It will take decades to design hydrogen-fuelled aircrafts, says Taub.
Sustainable aviation fuels, by comparison, are in use today. Taub sees hydrogen as a long-term investment that has a viable future –a sentiment shared among corporates facing carbon restrictions around the world.
“We want a front row seat on how it develops. To the extent we can help by providing our expertise, we will do that,” says Taub.
