How Investors Can Help The World Get Hydrogen Right
This post was written by Beth Trask, Vice President for Global Energy Transition, EDF, and Leslie Labruto, Managing Director of Sustainable Finance, EDF.
The hydrogen economy is rapidly emerging as a cornerstone of global decarbonization.
Hydrogen’s potential to deliver clean, versatile energy across key industries has generated significant investor interest, with over $680 billion in projects announced around the globe.
That comes to more than 1,500 projects worldwide, with Europe leading the way with 617 projects and North America following with 280. End-use applications for these projects vary from fertilizer production and steelmaking to transportation and electricity generation.
However, as this market matures, understanding the nuances of both the climate science and investment trends driving the hydrogen economy becomes increasingly crucial. It’s important for investors to be asking the right questions.
4 key considerations for hydrogen projects
Hydrogen is carbon-free, but it is not inherently climate-neutral nor environmentally friendly.
Producing hydrogen is a complex, highly energy-intensive, and potentially polluting process — even when it’s labeled as “clean.” And hydrogen itself is an indirect greenhouse gas that contributes to global warming when it leaks.
Depending on many factors, hydrogen can deliver a range of outcomes, from significantly better for the climate to even worse than the fossil fuel status quo.
Environmental Defense Fund’s recent report, Hydrogen Beyond the Hype, shares the following guiding principles for decision-makers considering hydrogen projects:
- We have an opportunity to get hydrogen right — before new systems are built at scale globally. Now is the time to establish the practices needed to maximize hydrogen’s benefits for the climate, ecosystems and human society, while minimizing its risks.
- Hydrogen should be used where it can cost-effectively reduce the most climate warming at the lowest possible risk. Deployment of hydrogen should be evaluated against non-hydrogen alternatives (such as electrification or improving energy efficiency) to guide limited resources to applications where hydrogen provides the greatest benefits (such as maritime shipping, where there is currently no solution other than hydrogen-derived fuels to achieve sector-wide decarbonization).
- Hydrogen must be evaluated based on a full system-level assessment. Assessments by investors, developers and third parties should consider the climate impact of all gases emitted while producing, moving, storing and using hydrogen. This includes methane, carbon dioxide and hydrogen itself. Assessments should also examine hydrogen’s other potential risks and benefits, including air quality and ecosystem impacts, and economic and social factors on local and global levels.
- Hydrogen systems should be designed to minimize leaks and other emissions. Emissions of all climate-warming gases throughout the hydrogen value chain — from production to handling to use — must be minimized to avoid compromising the intended climate benefits. And these emissions need to be monitored, reported and verified.
Why this is a critical moment in hydrogen’s rollout
The hydrogen economy is moving fast, but there is still time to make sure new projects are evaluated according to their actual benefits and risks — rather than just the hype.
According to the Hydrogen Council, as of May 2024, just over a quarter of announced projects had progressed past what’s known as a “final investment decision,” a major milestone that marks the decision to move forward with construction.
So what does the investment landscape look like now, and how can the investors fueling the hydrogen economy incorporate the guiding principles above?
Private investors serve a key role in driving innovation, expansion and growth. Venture capital firms fund early-stage startups developing groundbreaking hydrogen technologies and business models. At this stage, investors can ask developers and startups how climate benefits — or harms — affect the business case for their projects.
Private equity firms often invest in more mature companies with established technologies and revenue streams. These firms should also evaluate projects, companies and developers with both a financial and climate lens.
More specifically, during the due diligence process, investors can ask about ways companies and projects are tracking and minimizing leaks and emissions, while also evaluating whether hydrogen is the most appropriate technology compared with other clean energy solutions.
Complementing private capital, institutional investors such as pension funds, insurance companies and sovereign wealth funds are increasingly recognizing the long-term potential of hydrogen.
Their substantial capital and risk management expertise contribute to the market’s stability and growth. So it is essential that they build their own internal knowledge, and build on the work of venture capital and private equity companies to ensure these even larger influxes of capital are guided by the principles listed above.
This is our chance to get hydrogen right
As governments and corporations set aggressive climate targets, the demand for clean energy solutions is escalating.
In particular, green hydrogen, produced using renewable energy, is capturing global attention because it presents a fossil-free pathway to decarbonize industries that are hard to electrify.
Improving due diligence — making sure investors take climate impacts into account — is essential for supporting the hydrogen market, achieving decarbonization goals, preventing investments with poor returns, and avoiding unintended consequences for the climate.
As the hydrogen market continues to evolve, we anticipate even greater investor interest and a wider array of investment opportunities — but these must be taken with eyes wide open, alternatives considered and critical climate risks mitigated.
