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In bid to boost hydrogen rollout, utilities move into industrial value chain

SNL Image

A compressor station operated by gas utility Snam in Italy. Companies like Snam are betting on hydrogen as a future-proof alternative to natural gas.
Source: Snam SpA

As utilities build out their burgeoning hydrogen businesses, some have made a rare foray outside their traditional expertise, investing directly in the technology and equipment being used to produce the fuel.

Although the move by European power companies is unusual, it is not without precedent: Iberdrola SA until recently held a minority stake in wind-turbine maker Siemens Gamesa Renewable Energy SA. The Spanish utility first put money in Gamesa, which later merged with Siemens AG's wind business, in 1990 — a time when the wind market was still in its infancy.

Now Iberdrola is following its own playbook to drive ahead the nascent market for large-scale electrolysis, which presents a potentially vast opportunity for utilities to use and sell their electricity.

In late 2020, the company announced a new joint venture with technology provider Ingeteam SA, dubbed Iberlyzer, that aims to become Spain's first integrator of electrolyzer projects, including those already being developed by Iberdrola in the country.

"What we want is for Iberlyzer to fulfill the market need ... in the same way as Gamesa did in the early days of the wind industry," Diego Díaz Pilas, head of new ventures and technology prospects at Iberdrola, told analysts in December last year. The goal for Iberdrola is not to become a manufacturer, but rather boost the industrialization of the hydrogen business, he said.

Snam SpA, the Italian gas pipeline operator, has moved even more aggressively into the hydrogen supply chain. The company has bought minority stakes in both ITM Power PLC, one of the largest electrolyzer makers, and Industrie De Nora SpA, which mainly produces electrodes for those units and also owns part of an installation company involved in several hydrogen projects.

An accelerating push by governments to develop hydrogen production has already led a slew of other power companies to launch projects, beef up their internal teams and jointly plot how to drive down the cost of the fuel.

Getting things off the ground

In their bid to secure access to hydrogen technology, other power producers have also strengthened ties with manufacturers even when they have stopped short of investing in them directly — at least so far.

Aside from its Iberlyzer venture, Iberdrola is also working closely with Nel ASA, a Norwegian competitor to ITM, to jointly develop hydrogen plants. And German power producer Uniper SE has signed a similar agreement with Siemens Gas and Power, now Siemens Energy AG, to look at using Uniper's existing gas turbines and gas storage facilities for hydrogen. Siemens' sprawling energy business also makes electrolyzers.

Elchin Mammadov, a utilities analyst at Bloomberg Intelligence, said the utilities have a strong interest in spurring quicker deployment of the technology. If infrastructure for using hydrogen in heating, transport and industrial plants gets built, producing the fuel could require vast amounts of gas and electricity, the companies' core commodities.

"They want to get things quickly off the ground," Mammadov said.

SNL ImageA Siemens electrolyzer at a research facility in Austria.
Source: Siemens AG

Snam's CEO, Marco Alverà, also emphasized the point of putting money into equipment production when he presented the acquisition of De Nora in November 2020.

"We want to retain the exposure to the technology at a time when we see really the bottleneck being on the manufacturing side and on the technology side," he said.

Mammadov said he expects more utilities to take stakes in hydrogen equipment makers, either directly or through their venture capital arms. But he said the strategy is unlikely to become mainstream and most utilities will probably look to off-load the investments again once the market is well established.

Iberdrola slowly built up a stake in Gamesa until it owned almost 20% of the company at the time of its merger with Siemens in 2016. After the wind supply chain came of age, there may have been little incentive to keep the stake, and Iberdrola cashed out in 2020. The same might conceivably happen in hydrogen.

"It's not their core business. They just want to have an outlet for their wind and solar farms," Mammadov said. "I don't see utilities, in five years' or 10 years' time, still having these stakes."

Competition from oil, industrials

In their newfound enthusiasm for the technology, utilities could get some competition from oil and gas companies, which already use and produce hydrogen from natural gas at their refineries and are also doubling down on greener technologies as part of an investor-driven push to decarbonize.

According to a survey of 600 executives conducted by Capgemini Research Institute in 2020, 55% of utilities and 63% of energy companies said they are investing in green hydrogen.

The rush for the fuel has also led to some consolidation in the manufacturing sector. Mitsubishi Heavy Industries Ltd. invested in Norwegian electrolyzer maker HydrogenPro AS when it went public in November 2020. And earlier this month, German electrolyzer producer SunFire GmbH took over IHT Industrie Haute Technology SA, a Swiss hydrogen component maker.

For Snam, getting access to different hydrogen technologies through ITM and De Nora will be "a key differentiator" in getting access to new projects, according to Alverà particularly in the early phase of the market, where each major project is a custom order.

But he hinted that the investments could also be quite profitable in their own right — particularly Snam's 33% stake in De Nora, for which it paid €400 million. The company plans to make the stake the anchor asset of a new investment platform in similar technologies that drive ahead the energy transition.

"Given the recent policy announcements, we expect over 40 GW of [hydrogen] capacity in Europe alone by 2030, which implies sales of €20 billion to €40 billion for electrolyzer companies in the next decade," Alvera said.