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Financing of hydrogen, low-carbon fuel pipelines faces hurdles in ESG era

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Essential Energy Insights - October 2021


Financing of hydrogen, low-carbon fuel pipelines faces hurdles in ESG era

Pipeline operators seeking to build or adapt infrastructure to carry hydrogen and other low-carbon fuels may face challenges accessing capital, forcing them to think creatively and anticipate environmental, social and governance concerns, according to a panel convened by Columbia University's Center on Global Energy Policy, or CGEP.

The panelists at the Oct. 4 event broadly saw the potential for the existing natural gas pipeline system to mitigate the substantial costs of achieving net-zero emissions. However, the idea of repurposing infrastructure built for the hydrocarbon-based economy has faced opposition over concerns about locking in future fossil fuel use, said Jason Bordoff, CGEP founding director and co-founding dean of the Columbia Climate School.

Earning investors' confidence

The challenge of transitioning to a net-zero world essentially entails reverse engineering more than 100 years of energy investment within 30 years, according to Maria Elena Drew, director of research for responsible investing at T. Rowe Price. That will require "a huge amount of financing" at a time when many investors are wary of allocating capital to fossil fuel companies.

In order to attract energy transition financing, fossil fuel companies are "going to need to prove to the investment community that they're genuinely committed and able to deliver on a net-zero pathway," Drew said. "I think as we think about utilizing some of that [existing] infrastructure, we'll have to think about how accepting investors are of that process."

To gain confidence that gas assets are operating properly, investors need companies to report emissions data diligently, get the data externally assured or audited, and report numbers that are comparable across the industry, Drew added.

Modifying gas pipelines and midstream infrastructure to carry biofuels and low-carbon hydrogen is one area that has generated concern among climate activists, Bordoff noted. While many energy system researchers believe low-carbon hydrogen will complement renewable electric power, environmentalists often argue that hydrogen will prolong fossil fuel use.

Avoiding stranded cost

Energy Futures Initiative, or EFI, is studying incentives to construct carbon pipelines capable of carrying hydrogen, according to Melanie Kenderdine, a principal at EFI, a climate solutions think tank.

The pipelines will be necessary to transport carbon captured from natural gas-based hydrogen production, known as blue hydrogen. By making those lines hydrogen-capable, infrastructure investors can avoid stranded costs and prepare for a hydrogen economy dominated by green hydrogen produced from renewable electric power, Kenderdine said.

While many pipeline operators aim to utilize their assets to carry hydrogen, they should also consider existing rights of way as valuable assets, particularly as it becomes more difficult to site energy infrastructure, panelists said.

"If you have a right of way that you can put an extra hydrogen or CO2 pipeline through, then that's a significant asset," said Maarten Wetselaar, director of integrated gas, renewables and energy solutions at Royal Dutch Shell PLC. "Because otherwise, you're never going to build the pipeline in big cities and in densely populated parts of the world."