A closer look at the green hydrogen market

Hello from New York and happy Olympics to everyone. While I have a slight partiality for the winter sports, I have many fond memories of watching the summer Games, stretching back to the original “Dream Team” men’s basketball squad in Barcelona in 1992. Good luck to Paris and all the athletes in the days ahead.

For today, I delve into the green hydrogen market. Few clean tech sectors are as battered as this one, which has fallen from grace since a peak of investor enthusiasm in 2021. The head of one of the best-funded hydrogen start-ups told me about the case for optimism after a spate of troubling headlines for the space.

But first, a scoop on where investors at Goldman Sachs are placing their latest green bet.

Sustainability reporting

ESG software provider raises $120mn from Goldman Sachs

As Europe forges ahead with big sustainability reporting regulations, from the Corporate Sustainability Reporting Directive (CSRD) to the deforestation regulation (EUDR), big companies such as IBM and Salesforce are selling software that companies can use to prepare filings required under these new rules.

Now Goldman Sachs is jumping into the action by taking a minority stake in osapiens, a German ESG software provider specialising in CSRD, EUDR and CSDDD, another regulation requiring companies to report on a host of global supply chain risks. Osapiens, which services clients such as Bosch and Coca-Cola, said today that it had raised $120mn in a fundraising round led by Goldman Sachs Alternatives.

Alberto Zamora, co-founder and chief executive of Mannheim-based osapiens, told me the aim was to also assist companies with improving their sustainability goals, rather than only reporting on them.

The number one worry for clients today was reporting, but “we help them get better and improve the key performance indicators”, Zamora said.

With other European laws like the General Data Protection Regulation (GDPR), reporting is “black and white”, Zamora said. Companies are either in compliance or not.

But in sustainability “the work starts [once you are compliant] because you need to get better every year”, he said. “And we think one day maybe shareholder value will be created.”

The sustainability reporting sector is increasingly competitive, with big software-as-a-service companies bulking up. But niche operators are also jostling to compete.

renewable energy

Green shoots for green hydrogen

The year 2021 marked peak enthusiasm for hydrogen as a clean energy. That year the Hydrogen Council, a Brussels-based lobby group, predicted there would be $500bn invested in hydrogen projects by 2030. Investors looking to bet on the space could turn to “Hdro”, the ticker symbol for an exchange traded fund that tracks Bloom Energy, Plug Power and other hydrogen companies, which launched in the same year.

Three years later, the buoyant leader of the periodic table behaves more like lead. The Hdro ETF has lost 81 per cent of its value since its 2021 debut. This month, an EU report found that the bloc’s hydrogen goals were “overly ambitious”. And earlier this month Fortescue, the Australian mining company run by billionaire Andrew Forrest, said it would drop its ambitious hydrogen commitment for 2030 after realising its goal of producing 15bn tonnes of green hydrogen a year was too optimistic.

Now, with the hydrogen euphoria washed out and gloom in vogue, it makes sense to take another look at the sector. As a brief reminder, green hydrogen is produced through electrolysis using renewable energy. Today, however, the vast majority of hydrogen production is produced from fossil fuels, in a process that accounts for about 2 per cent of global greenhouse gas emissions.

Green hydrogen advocates hope that by displacing fossil-derived hydrogen production — and through new cases from steel production to seasonal energy storage — this sector can play a key role in the energy transition.

For an inside perspective on the outlook for the sector, I interviewed Raffi Garabedian, chief executive and co-founder of EH2, a California-based hydrogen provider for industrial businesses, founded in 2020. Last year, EH2 raised $380mn from Temasek, Microsoft’s Climate Innovation Fund and others. It was one of the biggest fundraising rounds ever for a hydrogen business, according to data provider Crunchbase.

Garabedian was quick to acknowledge that it had been “extremely difficult” for the hydrogen sector to reach expectations set several years ago.

“Everything is taking longer than people thought,” he said. “Grand schemes for huge international projects have fallen off the radar.”

However, green shoots for green hydrogen are breaking through. The US Department of Energy announced this month a $12.6bn investment in hydrogen projects in California. The funds will go towards cutting carbon emissions at the state’s three big ports by replacing diesel-powered cargo-handling equipment with hydrogen fuel cell equivalents, California’s governor said.

San Francisco this month also launched what it said was the world’s first hydrogen-fuelled passenger ferry (aptly named Sea Change).

Elsewhere, government regulations have started to spur interest in green hydrogen. In Australia, the country’s largest polluters are required to cut emissions along certain guidelines or pay to offset their carbon in the country’s carbon trading scheme. Australia’s regulation “is driving real, local green hydrogen projects, which is a bright spot today”, Garabedian said. “There is a really fertile paradigm in Australia for a limited number of projects.”

Despite the fact that US companies face far fewer regulations demanding that they decarbonise, hydrogen buyers there are still interested in bolstering their sustainability reports, Garabedian said. For example, one of EH2’s clients provides sustainable aviation fuel for a company that wants to cut down flight emissions, he said.

One area of particular excitement around hydrogen has been green steel. As we reported from Sweden last year two well-funded start-ups, Hybrit and H2 Green Steel, have been developing plants using green hydrogen produced using abundant Swedish clean electricity, in place of coal-burning blast furnaces. Some companies are willing to pay more for green steel — again to bolster their eco-friendly credentials.  

Inevitably, our conversation shifted to politics, and the threat Donald Trump poses to the Biden administration’s clean energy incentives. The 2022 Inflation Reduction Act included a new tax credit for green hydrogen with benefits linked to how much companies produce.

But the qualifying rules for the hydrogen tax credit were not worked out until earlier this year. With the US facing a presidential election in November, no one is willing to invest in building anything that would benefit from the tax credits, rendering them temporarily useless, Garabedian said. “The politics of the situation have postponed the utility of that tax credit.”

Government efforts — whether carrots or sticks — are crucial to supporting the hydrogen market. While natural gas prices have plummeted in the past two years hydrogen, by contrast, is “simply too expensive to produce and transport”, consultancy Wood Mackenzie said this month.

For now, green hydrogen development needs to happen on a smaller scale to build momentum that can convince investors to consider funding bigger projects, Garabedian said.

“My point of view is the serious people who are really thinking critically about projects in green hydrogen have rolled up their sleeves,” he said. And with global warming continuing to break records month after month, decarbonisation needs are only growing. “The long-term fundamentals have not changed; they have only been amplified,” Garabedian said.

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