Hydrogen is gathering more momentum than ever. Considered a key contributor in reducing emissions to reach net zero by 2050, demand for green hydrogen is skyrocketing across key applications. The sector is also receiving an enormous flow of public money. Just last month, the European Commission announced the launch of a European Hydrogen Bank (EHB), while in the US the Inflation Reduction Act (IRA) is providing a ten-year tax rebate per kilogram of green hydrogen produced, and new projects are being announced every week. Followed by government interest, private investors and VCs are pouring funds to spur growth in startups.
The boom in funding in the past 2 years can be majorly attributed to technological advancement in producing hydrogen and its application in hard-to-decarbonize sectors. While we don’t expect the same growth in 2023, we still expect the hydrogen sector to outperform the industry owing to the momentum from public investments and growing demand. It is important to note that 2022 was a record year in climate tech investment, despite the slowdown for tech and the entire startup ecosystem – but the market conditions seem to be catching up also with climate in 2023. As per the data from the Net Zero Insights platform, VC investment in the hydrogen sector in the first quarter of 2023, shows a 50% YoY decline, compared to Q1 2022.
The Hydrogen Value Chain.
Looking away from the glamour, it is important to note that hydrogen is an energy carrier and not an energy source. Hydrogen is important because it can be transported, stored, combusted, or used as feedstock, very much similar to traditional fossil fuels. For hydrogen to be a viable alternative, establishing a hydrogen value chain is essential.
Total venture funding in hydrogen startups over the last five years has grown tremendously, from $0.7 billion in 2018 to a staggering $10.4 billion in 2022. The majority of this funding has been in the fuel production and utilization steps of the hydrogen value chain. However, it’s worth noting that funding for the storage and distribution steps of the value chain has also seen growth in the last five years, especially in 2021.
The Hydrogen Infrastructure Challenges.
Most of the hydrogen produced today is consumed close to where it is generated. As the demand for hydrogen and the scale of production grows, more hydrogen infrastructure will be needed to meet the demand. Even though hydrogen can be produced almost everywhere, its competitiveness across regions varies. According to a report by the Hydrogen Council, there is a 5x difference between the lowest and the highest-cost hydrogen production locations. There needs to be a better match between the best locations for hydrogen production and demand centres. This makes the storage and distribution of hydrogen a critical challenge area in the near future. Developing the infrastructure for hydrogen storage and distribution is not a minor undertaking: it is challenged by the low volumetric energy density of hydrogen and its low boiling point. The hydrogen infrastructure includes pipelines, compressors, trucks, ships, liquefaction and conversion plants, storage tanks and underground storage facilities. The level of growth of green hydrogen demand required to meet climate commitments will require innovation to scale up the supply chain.
The breakdown of funding shows where investors are placing their bets in the hydrogen value chain. In the past 5 years, hydrogen fuel production and utilisation have seen humongous growth. The use of hydrogen in energy is relatively new, it has a long history of use in various industrial processes. Hence the supply chain, even though limited, was existent for production and utilisation. There is a 22x and 9x growth in storage and distribution respectively, but the investment numbers are not catching up to the future demands of the hydrogen economy.
Infrastructure is believed to be in the government domain, something that needs capital investments. As mentioned earlier, the physics of hydrogen gas is more complex, making the situation not so straightforward. There are evolving needs in the hydrogen infrastructure, which will require innovative solutions to build an economically sustainable link between production and utilisation. For instance, liquefying hydrogen is an energy-intensive process, consuming 30-40% of its energy, and so is its regasification. There needs to be a more efficient and effective way to scale the transport of hydrogen over long distances. Such innovative solutions are being developed by startups working in this space, making them a very important piece in the hydrogen economy puzzle.
Startups and Funding in Hydrogen Storage & Distribution.
Note: some startups working in the storage and distribution sector do not specifically fall under the above major technology groups or are working at the intersection of value chains, and are classified as others.
Widespread use of hydrogen in this decade would require retrofitting and repurposing of existing natural gas networks, as well as building new dedicated hydrogen infrastructure. Over time, as demand for hydrogen rises, the cost advantages of producing large volumes of hydrogen in areas with high wind and solar resources for electricity generation or with the potential to store CO2 could drive hydrogen infrastructure development, including by fostering international markets for hydrogen trade. Long-distance transportation networks may need to be developed, using pipelines where possible, and ships for longer transport distances, which will require the conversion of hydrogen to a higher volumetric density form, i.e. liquefaction or conversion to ammonia, liquid organic hydrogen carriers (LOHC) or synthetic hydrocarbon fuels. The final use will influence the choice of transportation option, as energy losses vary between the different hydrogen carriers. As per an IEA report, the most feasible way to move hydrogen economically is as a gas, by pipeline.
To ensure a reliable energy system, hydrogen storage is necessary to balance fluctuations and ensure the security of supply. Popular approaches are geological and tank hydrogen storage. As per data from the platform, tank storage is the most funded technology in hydrogen storage. The storage of large quantities of hydrogen underground in mined salt domes, aquifers, excavated rock caverns, or mines can function as grid energy storage, referred to as Geological Hydrogen storage.
Hydrogen startups raising investment from energy corporations.
Out of over 800 investors who participated in financing rounds in hydrogen startups globally, 108 invested in companies developing solutions across the storage and distribution steps of the hydrogen value chain. While investors range from asset managers to public bodies, corporations appear to be making the strongest bets. Looking at the top 20 investors by capital invested in hydrogen storage and distribution, 11 are industrial players – of which six are leaders in the oil and gas industry.
Hydrogen is increasingly viewed as a key player in the transition to a cleaner, more sustainable energy system. As a result, a growing number of investors are turning their attention to startups focused on hydrogen solutions. In fact, out of over 800 investors who participated in financing rounds in hydrogen startups globally, 108 invested in companies developing solutions across the storage and distribution steps of the hydrogen value chain.
These investors come from a wide range of backgrounds, including asset managers and public bodies. However, corporations appear to be making the strongest bets on hydrogen infrastructure. Among the top 20 investors by capital invested in hydrogen storage and distribution, 11 are industrial players. Of these, six are leaders in the oil and gas industry.
This trend highlights the growing interest of traditional energy companies in diversifying their portfolios to include more sustainable options. It also suggests that these companies see a future for hydrogen as an important part of the energy mix.
However, the increasing investment in hydrogen is not without its challenges. The technology is still relatively new and there are a number of hurdles to overcome, such as reducing the cost of production and developing more efficient storage solutions. Nonetheless, the growing interest from investors is a positive sign for the industry and could help accelerate the development of a sustainable hydrogen ecosystem.
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