July 12, 2021 • Paul Rodden • Season: 2021 • Episode: 28
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In episode 028, Let’s Talk About The Economics Of Hydrogen, Four Technologies That Are Accelerating The Green Hydrogen Revolution and Some Good Opportunities For Investors That Want To Dip Their Toes In The Water. All this on today's hydrogen podcast.
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Today, let's talk about the economics of hydrogen and some companies and technologies that are making investment returns better and better. All of this on today's hydrogen podcast.
So the big questions in the energy industry today are, how is hydrogen the primary driving force behind the evolution of energy? Where is capital being deployed for hydrogen projects globally? And where are the best investment opportunities for early adopters who recognize the importance of hydrogen? I will address the critical issues and give you the information you need to deploy capital. Those are the questions that will unlock the potential of hydrogen. And this podcast will give you the answers. My name is Paul Rodden. And welcome to the hydrogen podcast.
So I've been getting asked more and more frequently about my thoughts on investing in the hydrogen space right now. And so I thought I would take just a little time to chat with you about it and give you my take at a very high level. And while I'm chatting about this, there is something to keep in mind, this is still a very new market. So it's important to take all this with a grain of salt, as small changes in technology can vastly change the economic spectrum of hydrogen. And first, I'd like to start off with the green versus blue argument, which one should I invest in. And that really does depend on when you're looking for your return. So if you're looking to invest in projects, and are wanting a shorter return on your investment, blue is the only way to go, as green has quite the uphill battle right now to be economic.
But what does it mean to invest in blue hydrogen projects. On the project side, there are companies looking to transition gray hydrogen refineries, into blue, and investments in those projects pair well, with companies looking to invest in carbon capture, as that becomes the biggest hurdle these refineries need to make. Or you can look at the technology itself. And the companies that are trying to generate hydrogen from any kind of natural gas, whether it be renewable or drilled. Now investments in this space, require quite a bit more capital, and would most likely be looking for funding from private equity. Now, all of this is not to say that green hydrogen isn't worth investing in, but that the ROI on those projects are most likely going to be quite a bit farther out. Now, that again, comes with a big caveat, the technology won't change.
So that being said, the World Economic Forum has an article about four technologies that are accelerating the green hydrogen revolution. And as I mentioned previously, the challenges surrounding green hydrogen are reduced knowledge on optimum design and return on investment, limited specialized workforce and high operational costs, high energy losses, and those willing to take the hydrogen once it's been produced. But the World Economic Forum believes that there are four technologies that can cure these issues, the first being digital twins, before committing capital, investors want to know which system configuration will optimize their return. From photovoltaic cells to electrolyzer capacity to buffers such as energy and hydrogen storage, multiple variables must be considered. Digital twins can model multiple designs and scenarios, including variables such as weather, off taker demand, volatility, and local infrastructure, current and future, optimizing each design to maximize the return on investment and minimize risk. Estimates indicate that a digital twin analysis can optimize capex by 10 to 15%, whilst reducing risk by 30 to 50%.
Along with a marginal change in op x. The second technology is monitoring and control, energy consumption, plant performance production rates, purity and storage are among the key performance indicators for hydrogen production, which require visibility to ensure efficient production. Artificial Intelligence can offer rapid anomaly detection using intelligent alarms, sensors on assets to monitor KPIs and asset health and cloud based remote monitoring beyond control rooms. Providing the real time monitoring of plant operations and asset health, coupled with remote control of assets can reduce costs by 10 to 20%. Through lower energy consumption, and a streamlined workforce. Leverage monitoring models consistent with design digital twins, allows investors to see where they stand regarding the business plan and to take action to reduce eventual losses. Another technology is advanced analytics.
Analytics can transform data into business intelligence with actionable insights for green hydrogen, churning and learning through data from plants, tanks, pipes, energy off takers, and even the weather and the application of plant level or fleet level analytics can provide corrective action recommendations to maximize yields. Energy losses can be prevented by forecasting failures and optimizing electrolyzer uptime. Thus increasing revenues and decreasing OPEX. Leveraging analytics models consistent with their digital twins, allows investors and bankers to close the design loop and take strategic and tactical decisions to optimize their returns. The last technology they highlight is certificates of origin. Guarantee of origin is a prerequisite for monetizing green hydrogen by certifying the renewable nature of all consumed electricity. Ai monitored installations can leverage near real time data to automate input to guarantee of origin issuers. This avoids manual processing, offers more confidence in reliability, and increases future proofing.
As more and more certification evolves toward real time in automation. AI can also ensure end to end traceability along the entire lifecycle of the green hydrogen from cradle to grave. Now, what's interesting to me about this list is that it is all software driven, and not once discussing the implications of new materials technologies coming out, that could reduce costs of either the electrolyzers, or the materials used in solar farms and wind farms. Next, I'd like to talk about different industries and how different industries could also use hydrogen. So many times in this podcast, I highlight transportation as a main user of hydrogen. It's easy to overlook other industries that could in should be utilizing hydrogen on an everyday basis.
In an article for Forbes. James Morris writes about hydrogen being focused on cement and steel and not cars. Now, while I do believe that hydrogen fuel cell vehicles are better for the environment, when you consider the full carbon lifecycle of the hydrogen, versus what it takes to create lithium ion batteries, but in this article, James Morris showcases that even if battery electric vehicles are more efficient, there are better uses for hydrogen than just transportation. And this really does bring up anything that uses a blast furnace. Blast furnaces used in the steel industry currently use coking coal, and that contributes 7% to global emissions.
This is an application that can't be replaced with batteries, where it can with hydrogen, Volvo, for example, is working with SSAB to decarbonize the steel it uses in its car manufacturing. And another industry that directly needs hydrogen is the cement industry. Cement also contributes seven to 8% to global co2 emissions. The production of clinker used in Portland cement, like steel manufacturing, is another process requiring high temperature furnaces, which again could use hydrogen instead as a zero emission alternative to coal.
Now, outside of industry, where are some good opportunities to jump into the hydrogen space for investments? Previously, I've talked about the Defiance Next Generation Hydrogen ETF, there's now a new one in this space, the Direxion Hydrogen ETF. These ETFs are both structured fairly similarly, with both funds having six of their top 10 holdings in common. And while the defiance ETF had a rocky start, it's now at $4 per share since mid May. Another option to look into is the Blue Star Hydrogen and Next Gen Fuel Cell Index, whose top five components include AFC Energy, Plug Power, Fuel Cell Energy, Bloom Energy, and SFC Energy, all of which are willing to triple digits when looking at their last 12 month performance.
Okay, well, that's it for me, everyone. If you have any questions, comments or concerns about anything I've said in today's podcast regarding the economics of hydrogen, please come and visit my website at thehydrogenpodcast.com. And let me know I would really like to hear from you. And as always, take care. Stay safe. I'll talk to you later.
Hey, this is Paul. I hope you liked this podcast. If you did want to hear more, I'd appreciate it if you would either subscribe to this channel on YouTube, or connect with your favorite platform through my website at www.thehydrogenpodcast.com. Thanks for listening to very much. Appreciate it. Have a great day.