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Clean hydrogen scale-up needs big balance sheets behind it – BofA

Taking clean hydrogen into mainstream requires strong government support and oil majors’ financial clout, America’s second biggest bank says

Bank of America has set itself a goal of deploying $1.5tn by 2030 to accelerate the transition to a low-carbon, sustainable economy, and it expects the emerging hydrogen economy to form an important part of this initiative as it helps to guide its clients through the energy transition. Hydrogen Economist spoke to Julian Mylchreest, executive vice chairman, global corporate & investment banking, and Thomas Milner, a managing director in the bank’s Natural Resources Group, about the investment landscape and future outlook for the clean hydrogen sector.

Set the scene for us in terms of Bank of America and hydrogen.

Mylchreest: The place to start, and this goes to the heart of how we see our role here as a bank, is our commitment to put at least a trillion more dollars of capital to work in terms of our environmental and business targets by 2030. And we hope that is not only going to be us committing capital, but also us delivering on advice and helping people access the capital markets.

We should all want hydrogen to work—whether it is blue, green, or whatever colour of the rainbow. And if it does, we want to be front and centre as a bank with our capital, our advice and our ideas.

$1.5/kg – ‘Golden target’ for clean hydrogen production

For the globe, for Europe, wherever there are those sectors which are going to be tough or impossible to convert to electricity, that is where hydrogen is going to be the key. If you want to take coal out of steel making or if you want to decarbonise shipping, it is going to be essential. Or take a look at the potential storage role in the power space—again, there is a big role to be played by hydrogen.

We do not know quite what the direction of travel is going to be or the speed of travel, but we want to be part of making something happen, because it is very hard to see a net-zero outcome where hydrogen does not play a meaningful role. It is just a matter of when and how.

What needs to happen from an investment perspective to scale up and take hydrogen into the mainstream?

Mylchreest: It needs a government framework and set of incentives to scale and drive the development of the necessary infrastructure, but in the meantime you will see industrial clusters developing around ports, advantaged industrial sites and where there is good access to renewable power. And those clusters are going to be the first places where we look to provide more and more support as a bank because they work already and are internally sustainable, bankable, projects where equity and debt capital can start to flow.

More broadly, there are also enough funds starting to emerge which are ready to put small chunks of risk capital to work towards all of this, especially as they see some of these bigger cluster projects moving. Our equity research events and investor days around hydrogen have been among the most attended events in the last year—so the interest is there and capital is there; it is just looking for the right way to play

But ultimately, to get to scale fast you need very strong government support and/or you need the big players to support it with their balance sheets. It is scale that is going to be needed to really start to drive down costs, as we saw in solar and wind. And scale needs infrastructure and some big cheques, which are going to need to either be underwritten by government or be strategic bets from the very biggest corporate balance sheets that have a vested interest in seeing hydrogen scale.

And in that regard, it will be interesting to see what the shareholder pressure and societal pressure will be on the big oil and gas companies and utilities and so on to actually say: we will swing our balance sheets behind making this happen.

Because in an economic sense, it is a bit like us saying as a bank that we are not just doing green finance because it is the right thing to do, it is also making us money. Likewise, I would argue some of these big corporates should also see the economic incentive to make things happen—especially given the opportunity for blue hydrogen as well as green hydrogen in the short-to-medium term. And it is not just the integrated listed oil and gas companies, it is also the nationally owned state companies.

If the big players swing their capital firepower behind hydrogen, that is going to be the easiest way for all the big banks to swing in on a very large scale behind it as well, using funding from existing big balance sheets support to a lot of big players. That for me is the moment when hydrogen takes off and goes mainstream and to scale.

Europe is emerging as a hub for the manufacture of electrolysers, with several independent companies looking to expand. How do you see this market playing out?

Milner: In the electrolyser space, that is really where the stocks have been particularly flying. Money has flowed to those names and we think will continue to flow, even as prices and multiples ease off a little.

What you have seen in recent weeks, though, are two main concerns coming up for the independent electrolyser manufacturers. One is scale and two is competition.

“Governments need just to set the agenda, define the framework and enable players to make those early riskier bets, build initial clusters and build comfort to see some major infrastructure roll-out and investment” Mylchreest

The market overestimated how quickly the roll-out on the infrastructure side would be when it came to demand. So there has been a steady and meaningful increase in the tempo of contracting, and also the scale of the contracts are going from sort of a 10MW to the 100MW+ now and aiming for gigawatt-style projects.

But the problem is there have been no major announcements of someone saying: we are going to put a hydrogen fuel pump in every single one of our fuel stations globally. There has been no kind of catalyst of that kind of scale, which I think the market was expecting.

The problem for these (independent electrolyser manufacturing) businesses is that they are massively cashflow negative. For lenders of any stripe, be that Bank of America or indeed local banks, it is very hard to lend to a business that cannot support that sort of leverage, or any leverage. And so they have to effectively fund themselves out of equity holders, whether that be strategic partners or through the equity capital markets. And that has a much higher cost of capital than obviously going through debt.

And this leads into the competition issue. The competition on the divisional side has been coming from behind from a technology perspective and a relevance perspective. But ultimately, they have many built-in advantages over the independent manufacturers.

The creation of a functioning hydrogen market requires joined up investment in supply, infrastructure and demand. How challenging is this?

Mylchreest: For me, this comes back to my earlier remarks—any hydrogen projects are good projects regardless of colour as they are going to make the market for hydrogen bigger, see demand grow, make investment happen and enable costs for green hydrogen, in particular, to start to come down. And as markets scale, money will flow and will lead to more projects and more investment. Governments need just to set the agenda, define the framework and enable players to make those early riskier bets, build initial clusters and build comfort to see some major infrastructure roll-out and investment.

And I focus in particular on infrastructure, because hydrogen infrastructure is not in place. You look at what enabled solar costs and wind cost to come down, and that was government incentives and just huge demand for your product. But importantly, there was an infrastructure already in place which you could just connect your solar panels or your wind power to, or there was a short spur required for that.

So I think this is going to take the same government incentive to be put in place as we saw early doors to drive wind and solar—it is going to take that kind of push. Indeed, there is even more of a requirement to actually invest in the infrastructure than there was when you were going through that same process with solar and wind.

Different markets are also going to grow at different speeds and in different ways. Advantaged markets—such as northwest Europe and the Nordics, the Middle East, Australia, and maybe the US—should move first and fastest. Some will go straight to green, others will lead with blue or even stay with blue for a while.

Many of the green hydrogen projects get the biggest press and profile—and they are the future, no question, and where we need to get to as soon as we possibly can—but there are also a growing number of blue hydrogen projects and these are likely to be investor-ready and more bankable sooner than many of the major green projects that will follow.

What else matters apart from creating that demand and infrastructure? Cost and speed of innovation. One of the big questions across all different colours of hydrogen, and on the on the green side especially, is how fast you believe that cost curve is going to come down from $4/kg or $5/kg down to $2/kg and below to $1/kg.

On the blue side, it is all down to progress on carbon capture and storage, which has been nascent, and then it is down to whether governments are going to insist on going straight to green even if it takes longer to scale—or do what I think makes sense in markets with cheap gas, namely to go all-in on blue as well as green

Milner: What I would say is that everybody is taking hydrogen seriously. There are a lot of conversations occurring across our clients’ businesses, both in terms of what it means perception-wise but also how they can use it to make money as the technology develops.

The problem is everyone is coming through pretty much from a standing start. That is why you are not going to suddenly see a huge ramp-up between now and 2030. The potential post-2030 is obviously significant. And there is a spot now for government to kind of set out what our goals should be and the use of hydrogen in a more detailed roadmap—not just in this country but across the world in multiple different geographies—and how we can get ready for that over the course of the next nine years, so that we do have wide-scale infrastructure deployment in 2030. It is a proven technology. In many ways it has just lacked scale and commerciality up until this point.

And to me, the demand has to come first. That requires infrastructure to be put in place and that requires direction in that infrastructure—not just in terms of mobility but in terms of utilities and more broadly across society as a whole.

Can you expand on your expectations for the clean hydrogen cost curve?

Milner: You have to look at the cost of production, the cost at the pump and the cost of delivery. Some of those factors are in the control of the electrolyser manufacturers. And there is a logic to say that, as demand ramps up, costs should come down just from economies of scale and particularly on the proton exchange membrane [PEM] side.

"The costs of hydrogen produced at source versus where it is delivered to could see quite a meaningful divergence, much like you see in LNG today" Milner

Alkaline is well-established already, so you may see some unit cost reductions there. But I suspect that the most meaningful reductions are going to be in PEM as a combination of the technology and manufacturing processes improve.

But then, ultimately, the cost of renewable energy is going to be a key factor. So you will see some markets where hydrogen, and green hydrogen production in particular, could be extremely cheap, such as the Middle East with its substantial amounts of solar, and Spain as another example.

But it will be cheaper to power green hydrogen with solar in Spain than it will be to do so from offshore wind in the UK, so there will be a discrepancy in costs there. And then the other element is the transportation. So you may have geographies such as the Middle East, where blue or green hydrogen can be produced in abundance and needs to be shipped, much like LNG is today.

And obviously there are a number of different carriers that are possible, such as ammonia or liquid hydrogen. But ultimately, even if you do get all clean production costs down to $1.5/kg—which is sort of seen as the golden target—you are still going to have up to a dollar’s worth of costs on conversion to the carrier.

You have got a dollar and maybe up to two dollars in terms of the actual shipping costs. You are actually looking at an all-in cost of somewhere between $3/kg and £4/kg. You can see costs coming down as utilisation goes up, but there are a whole host of costs associated with carrying and infrastructure.

The costs of hydrogen produced at source versus where it is delivered to could see quite a meaningful divergence, much like you see in LNG today.

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