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Rising capital deployment to boost US green hydrogen investments: analysts


Oil and gas cash stockpiles to flow to clean tech

Green hydrogen has edge in western markets vs China

  • Author
  • Brandon Mulder
  • Editor
  • Valarie Jackson
  • Commodity
  • Electric Power Energy Transition

High oil prices in 2022 allowed legacy energy companies to stockpile incredible amounts of capital that is now being absorbed into the clean tech sector, and green hydrogen is expected to become a primary beneficiary of this financial glut in the coming years, S&P Global Commodity Insights clean tech analysts said Feb. 16.

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Fortunes for oil and gas companies rebounded last year after several years of cost-cutting necessitated by the pandemic. Between 2020 and 2022, free cash flows among North American companies jumped by more than 600%, from $32.8 billion to over $236 billion, according to S&P Global Market Intelligence data.

It was auspicious timing for this capital buildup. In August 2022, the US's Inflation Reduction Act put on tap massive amounts of money for clean tech incentives, prompting corporates to deploy rapidly increasing sums of money to clean tech activity in 2022—from $12.6 billion in September to $122.4 billion in November.

Combine these two trends, and there is a significant amount of money in the financial system available for clean tech advancements, said Peter Gardett, executive director of climate and clean tech at S&P Global Commodity Insights.

And that momentum has carried into 2023.

"To be able to see this spike in deployment up to $120 billion in November, that's remarkable," Gardett said during an early CERAWeek 2023 event. "I know that this is not a one-off deal. We've seen an even more accelerated pace of capital deployment in the opening weeks of 2023 as this money makes its way from allocators to investors to companies. It's already beginning to trigger new deals and I think we're looking at a flood of that activity in 2023."

Investment magnets

Although a rising tide of investments lifts all clean tech sectors, some are poised to benefit more than others. Which sectors will come out ahead depends on their specific technology's exposure to supply chain constraints and other headwinds to project development, said Conway Irwin, director of the Financial and Capital Markets group at S&P Global Commodity Insights.

Among the more mature clean tech sectors, solar is expected to benefit the most from this capital flow thanks to its low capex, easy installation, and recent supply chain capacity expansions.

Green hydrogen is also poised to draw a flood of investment, mostly thanks to the generous hydrogen incentives in the IRA. But the nascent hydrogen market still has many uncertainties to wrestle with before it can reach a bonafide commercial scale.

"All these decarbonization efforts, government targets, and subsidies have led to a number of really high profile and ambitious project announcements in the [green hydrogen] sector," Irwin said. "But even if those are backed by solid forecasting and predictable revenue streams ... the market itself is still a bit of an unknown quantity. Where is the green hydrogen going to be consumed? How's it going to get there? And what is pricing even going to look like? These are still being worked out."

Yet, hydrogen does have one advantage over the more mature clean tech sectors like solar, wind, and battery storage—China has not yet captured green hydrogen's supply chain.

"With the new incentives in the US and EU, western markets won't be playing catch-up to attain self-sufficiency and could conceivably occupy an important space in the green hydrogen supply chain that China does in the solar and battery supply chains," Irwin said.

Furthermore, green hydrogen produced in certain areas of the US is projected to be more competitive than that produced in mainland China owing to the tax credits the IRA created, which supply up to $3/kg of clean hydrogen produced.

The US Gulf Coast currently produces the most competitive green hydrogen in North America, according to Platts, a part of S&P Global Commodity Insights. As of Feb. 15, green hydrogen produced by PEM electrolysis was assessed at $2.55/kg (including capex), while that produced using alkaline electrolysis was assessed at $1.75/kg.