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The Hydrogen Economy: Green H2 Offers Energy And Process Technology Majors A Long-Term Growth Opportunity

(Editor's Note: This article is part of a series following "How Hydrogen Can Fuel The Energy Transition," published Nov. 19, 2020.)

Over the past decade, the transformation of energy infrastructure to increase the share of renewables assets supported rapid development of the wind energy industry. S&P Global Ratings views the rising importance of "green" hydrogen as a continuation of this trend. Although starting from a niche position, green hydrogen--produced through electrolysis and fueled by green electricity--is a natural choice as a renewable energy source. It enables the conversion of surplus clean electricity into hydrogen, which can be stored, transformed back into electricity, or used in industrial processes.

We expect the main beneficiaries of planned hydrogen production capacity and infrastructure buildup will be wind power original equipment manufacturers, as well as engineering groups providing chemical process and energy technologies. These companies supply electrolyzers, process automation, plant engineering, and maintenance services.

The overall net credit impact on the capital goods sector is likely to be positive. That said, the continuous shift away from fossil fuels over the next two or three decades will eventually force market players with high oil, gas, and coal exposure to reconfigure their business models. Already today, the market for new conventional, centralized power generation equipment is suffering from overcapacity, which is bad news for large gas- and steam-turbine producers.

Green Hydrogen Production To Increase More Than 25% By 2030

According to industry sources, 73 million tons of hydrogen are produced annually, and this number is forecast to be about 20 million tons higher by 2030. Only about 1% of hydrogen is currently generated from green energy sources. The bulk is grey hydrogen, which comes from using carbon-intensive processes that emit as much as 830 million tons of carbon dioxide (CO2) per year, more than all CO2 emissions from the global shipping industry.

Given the high environmental cost of producing grey hydrogen, the petroleum refining and fertilizer industries are increasingly seeking cleaner (low emission) sources of hydrogen. New applications will provide another growth path for green hydrogen. These will include fuel cells for heavy transport vehicles and, in the longer term, applications to store energy to be blended with gas and used to generate dispatchable power.

A Healthy Power-To-X Project Pipeline Underlies Long-Term Potential

Power-to-X (P2X) describes methods for converting electrical energy into other forms (such as liquid or gas) through electrolysis and further synthesis. According to Bloomberg New Energy Finance, planned global hydrogen projects total more than $90 billion. What's more, the Institute of Energy Economics and Financial Analysis estimates the green hydrogen electrolyzer project pipeline at $75 billion, with Australia, Europe, and the Gulf region leading the development.

Although we expect only some of these projects will be realized, we see significant potential for technology providers in the green hydrogen market over the next one or two decades. This is because we anticipate public policy decisions and technological advancement will reduce production costs, thereby fueling investment in P2X projects across the globe through 2050.

In P2X projects, water is split into oxygen and hydrogen using electricity, in a 100% CO2 emission-free process. That way, surplus electric power can be converted into other forms of storable energy, for example to be used as feedstock in chemical processes, as a synthetic fuel, or even reconverted into electricity (see chart 1). In the production of green hydrogen, the surplus electricity comes from renewable energy sources, which currently means industrial-scale wind, solar, or hydroelectric generation.

Chart 1


Global technology company Siemens Energy (BBB/Stable/--) estimates that replacing fossil-based hydrogen with green hydrogen would require 820 gigawatts (GW) of new wind power generation capacity, 26% more than currently available through the installed base. For this reason, Siemens Energy has recently joined forces with Siemens Gamesa Renewable Energy, S.A. (BBB/Stable/--), a leading manufacturer of wind turbines, to invest €120 million over five years to develop a fully integrated, offshore wind-to-hydrogen solution (splitting desalinated sea water directly on site) to produce green hydrogen.

Three Pathways To Green Hydrogen Competitiveness

The competitiveness of green hydrogen compared with grey hydrogen depends on cost reduction and scaling of production technology. But CO2 pricing also plays a decisive role. The higher the CO2 price for grey hydrogen, the faster green hydrogen becomes a more lucrative option. Siemens Energy estimates that a large wind power and electrolyzer facility costing $16 per megawatt hour to produce electricity and 6,000 operating hours per year would result in a green hydrogen cost of $1.5 per kilogram (/kg), making it cheaper than grey hydrogen.

Closing the cost gap isn't achievable yet. However, we think a steep decline in green hydrogen costs is possible by 2030 through three channels: (1) the levelized cost of energy (LCOE) for renewable power (estimated to account for 50%-60% of the total cost), (2) capital investment costs of electrolysis plants (30%-40% of total costs), and (3) capacity factors.

Based on a sensitivity analysis of Platts Analytics and McKinsey, we estimate that:

  • A drop in electrolyzer capital expenditure by $250 per kilowatt (/kw) would reduce the cost of hydrogen by $0.3/kg-$0.4/kg. We anticipate substantial cost declines for electrolysis plants to $400/kw-$500/kw from more than $1,000/kw today, since industrial scale plants capable of producing over 100 megawatts (MW) are being contemplated, compared with the typical 2MW-3MW currently.
  • An increase in capacity utilization factors to 50% from 40% would reduce the cost of hydrogen by $0.2/kg-$0.3/kg. Electrolysis plants may not be economical when relying solely on periods of surplus renewable generation, but raising electrolysis capacity factors to 90% from 50% could cut hydrogen costs by $1/kg (see chart 2).

Chart 2


The Credit Impact For Capital Goods And Engineering Companies Is Far Off

We expect mounting hydrogen demand to present a long-term opportunity for companies providing equipment and services to the energy, utility, base chemicals, and industrial gas sectors. Green hydrogen projects will increasingly require renewable energy production equipment, energy transport, conversion and storage infrastructure, and related engineering services. However, we do not see a meaningful revenue contribution from planned projects materializing before 2025-2030, when some are scheduled to go on stream or commence construction.

The sector will likely see a greater impact from 2030 as a result of increasing technological maturity, cost competitiveness, and public support to achieve set climate goals. The significant growth potential from green hydrogen will not materialize in the short term. It will take several years for cost reductions to be realized (through various hydrogen pilot projects). Only then can we more confidently factor them into our long-term growth projections.

At the same time, we recognize that capital goods players with capabilities in the field of renewables have an advantage over providers with high oil, gas, and coal exposure, which may see their end markets stagnate in the long term; the latter will therefore be under increasing pressure to diversify.

Editor: Bernadette Stroeder. Digital Content Producer: Tom Lowenstein.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Tuomas E Ekholm, CFA, Frankfurt + 49 693 399 9123;
Secondary Contacts:Karl Nietvelt, Paris + 33 14 420 6751;
Massimo Schiavo, Paris + 33 14 420 6718;

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