27 October 2023

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Investing in hydrogen

Luigi Campopiano

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According to a new analysis by McKinsey, by 2050, hydrogen could help reduce 7 gigatons of CO2 emissions annually worldwide (approximately 20% of human-caused emissions), but there remains an investment gap of $460 billion to be filled.

The role of hydrogen in the broader energy transition has been explored in a series of reports prepared by the international management consulting company in collaboration with the Hydrogen Council (a global initiative led by the CEOs of over 140 leading companies in the energy, transportation, industry, and investment sectors). In a summary titled "Five Charts on Hydrogen's Role in a Net-Zero Future," McKinsey analysts demonstrated how hydrogen has the potential to decarbonize various sectors (with industry and transportation accounting for most of the potential carbon dioxide emissions reduction, as shown in the chart below), leading to a possible overall reduction of 80 gigatons of emissions by 2050. Globally, 680 large-scale hydrogen-related projects have been announced, with a total investment of $240 billion. Europe could play a significant role in achieving decarbonization goals by using hydrogen in industrial applications, transportation, and energy production. In Asia, China represents about half of the total announcements, primarily focused on hydrogen use in transportation. North America, Oceania, Latin America, the Middle East, and Africa follow in terms of project announcements.

Currently, most hydrogen is produced from fossil fuels (gray hydrogen), but to realize the potential of hydrogen as a decarbonization tool, a significant increase in clean hydrogen production will be required (hydrogen produced from renewable sources is known as "green hydrogen," and when combined with measures to significantly reduce emissions, such as carbon capture, utilization, and storage, it is called "blue hydrogen"). According to studies, the demand for clean hydrogen could grow to nearly 660 million tons per year by 2050 (the total production of green and blue hydrogen estimated by 2030 exceeds 26 million tons annually, and hydrogen production costs are expected to decrease in the next decade). Another important aspect is the steel industry (one of the highest CO2-emitting industries globally): steel accounts for approximately 8% of annual global carbon dioxide emissions, and producing it using hydrogen could reduce the sector's carbon footprint (it is estimated that steel will generate about 8% of clean hydrogen demand in 2030 and could represent nearly 20% of emissions avoided thanks to hydrogen in that year). Over 50 projects for steel production using hydrogen have been announced worldwide. However, there is still a significant investment gap to be bridged for hydrogen to fully contribute to the transition to a net-zero future (additional investments of $460 billion by 2030 are needed, calculated by subtracting the $240 billion from announced projects from the total required investment of $700 billion). Clean hydrogen production, in particular, requires more funding, with an estimated financing gap of about $150 billion by 2030.

There are various investment solutions available for hydrogen-related stocks, including L&G Hydrogen Economy UCITS ETF USD ACC, VanEck Hydrogen Economy UCITS ETF, BNP Paribas Easy ECPI Global ESG Hydrogen Economy UCITS ETF, Global X Hydrogen UCITS ETF ACC USD, and Invesco Hydrogen Economy UCITS ETF ACC.