The Merrill Perspectives Podcast
The Promising Power of Green Hydrogen
With
Candace Browning
Head of BofA Global Research
Chris Hyzy,
Chief Investment Officer,
Merrill and Bank of America Private Bank
And Joon-Ho Lee
Director for Equity Research, BofA Global Research
Candace Browning: It’s incredible to think about but just one element makes up 90% of all the atoms in the entire visible universe. This same element has the potential to become a virtually unlimited source of fuel and with no greenhouse trapping gas emissions, such as carbon, as a byproduct.
We’re talking about hydrogen. And for decades, scientists and engineers have sought ways to convert hydrogen into a cost effective and pollution free energy source, but harnessing its full potential proved to be problematic. That is until now.
So, what’s different today for hydrogen? Could it really be the answer to the world’s rapidly growing energy needs?
[THEME MUSIC]
Hello and welcome to this edition of the Merrill Perspectives podcast. I’m Candace Browning, Head of BofA Global Research. In today’s show we’re exploring the future of hydrogen power. We’ll look at what makes it so unique in its potential to completely revolutionize the energy industry. We’ll explore the ways it could become a part of our daily lives and we’ll touch on the promise it holds to help solve the planet’s climate crisis.
Joining me for this conversation are Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Chris Hyzy: Hi, Candace.
Candace Browning: And Joon-Ho Lee, a Director in Equity Research and Asia-Pacific Coordinator of Electric Vehicle Battery Research for BofA Global Research.
Joon-Ho Lee: Hi, Candace. Good to be with you.
Candace Browning: So Joon-Ho, I’d like to start with you. You and several other analysts on our research team have published what I think is a truly groundbreaking report on hydrogen or more specifically, “green” hydrogen and why it could be the answer to the world’s energy needs.
So Joon-Ho, what is that makes hydrogen so unique as a fuel source? And then how exactly does it get converted into energy? I don’t really understand that. I think it involves something called an electrolyzer?
Joon-Ho Lee: That’s right, Candace. Let’s step back and talk about what makes hydrogen unique. It is a virtually unlimited green source of energy. But just because hydrogen is all around us, doesn’t mean that it’s free or easy to harvest. What’s changing is that we are reaching a pivotal moment when economics and technology are making it feasible for us to efficiently harness this energy and environmental awareness is making governments interested to do so.
So, coming back to your question about how hydrogen is converted to energy, hydrogen provides 4% of our global energy today but most of this is not green. Instead, it’s “brown” or “gray” hydrogen extracted using fossil fuels such as coal or natural gas. To tackle climate change, we need “green” hydrogen, which is hydrogen extracted using renewable energy through the process of water electrolysis. In electrolysis, water is split into hydrogen and oxygen using electricity generated from renewable power, like solar or wind power. That process emits no heat trapping greenhouse gases and is proving more cost effective now than in the past.
Candace Browning: So Joon-Ho, why is it becoming more cost effective? What’s changed?
Joon-Ho Lee: Because of technology developed the electrolyzer, it used to be too expensive but it’s now much cheaper than before.
Candace Browning: Okay. So Joon-Ho, just how large a market do you think hydrogen could ultimately represent?
Joon-Ho Lee: We estimate around $11 trillion in infrastructure investment opportunities should arise over the next 30 years.
Candace Browning: Wow. So, Chris, I’d like to bring you in here. I mean, obviously the idea of a hydrogen economy could have a huge effect on other big trends we’re following like smart cities and the smart grid. Where do you see hydrogen having the biggest knock-on effects and what do you think it might take to build out the infrastructure for a hydrogen-based economy?
Chris Hyzy: So, there’s a number of different ways to take a look at hydrogen, its usage, its infrastructure today and in the years ahead. The first thing is, smart cities and the smart grid. Now we all know that number one, that we have seen through the pandemic and even before the pandemic, there’s been an acceleration of many new themes, one of which is e-everything. We like to say e-everything crosses across not just gaming and e-learning, but certainly eventually it’ll be the production of public transportation, it’ll be the production of the use of a new grid and again, the build out of smart cities. As that happens, the need for broadband is going to rise exponentially even more than it is today. And then we estimate then in the next five to 10 years electricity consumption is going to follow on this in an exponential way. So, the need for smart everything, especially infrastructure, is at the top of the list of a build out.
The climate and the environment, green initiatives are at the top of the list of almost every government and that’s obviously going to rise and it’s starting in Europe, in Japan, in South Korea, ultimately in the United States in a more assertive way. And last but not least, consumption. The efficiency of consumption is going to rise in our opinion and a consistency of power. If you’re going to need more broadband, if you’re going to need an expansion of the grid, you’re going to need a consistent grid and that’s where you get a more effective distribution and that’s where hydrogen sits at the heart of as well.
Candace Browning: Okay, well let’s dig down into one of the areas that you focused on Chris, which is transportation. And Joon-Ho, I’d like to particularly look at cars. So, I understand that hydrogen fuel cells could revolutionize the passenger vehicle market. Can you tell us, you know, what’s happening there? Could hydrogen fuel cell powered cars eventually overtake battery powered electric vehicles?
Joon-Ho Lee: That’s a great question, Candace. The key reasons why hydrogen fuel cell vehicles are becoming interesting now are they offer three major functional advantages over battery electric vehicles: longer driving range and faster charging time and environmental benefits. In terms of longer driving ranges, hydrogen fuel cells and the density is higher than that of current state of the art lithium ion battery. This allows fuel cell EVs to travel up to 650 km on a single charge while battery EVs can only travel around 400 km on a single charge now.
Second, faster charging time. Fuel cell EVs can be easily and fully refueled in just three to five minutes, much like refilling cars with gas or diesel at the gas station. In contrast, charging battery EVs may take an hour to more than four hours.
Perhaps most importantly, on the environmental front, heavy duty trucks roughly constitute 3% of total global autos on the road but they account for about 25% of the total on-road carbon dioxide emissions. If we can replace traditional or battery vehicles with hydrogen fuel cell EVs that emits no tail pipe emissions, the impact will be tremendous.
Candace Browning: So Joon-Ho, this all sounds almost too good to be true. Are there any safety concerns or risks associated with hydrogen fuel cell technology and how are those risks being mitigated?
Joon-Ho Lee: There is a public concern of safety in using a highly flammable gas, which is hydrogen. So, there’s lots of efforts being made by chemical companies to produce those material like carbon fiber to protect the storage tank to prevent any safety and exploding issues.
Candace Browning: So, Chris, I want to come back to you and talk a little bit about the challenges of climate change. And we know that the sheer costs associated with it are just enormous and obviously growing day by day. But what do you think it could potentially mean for the global economy if we could finally turn the corner on climate change? And could that be an incentive for industry and governments to commit lots of investment dollars to hydrogen technologies?
Chris Hyzy: Yes, Candace. The first opportunity is we need to change this equation from a climate change / climate destruction issue to a climate solution issue. Once you do that, that’s how you bring in the private side of the equation, that’s how you bring in and widen out the investment opportunity set, and that’s how you ultimately increase the available investment dollars within the hydrogen technological development equation and the hydrogen economy. So we think that’s number one. We
need to change this issue from a climate change / climate destruction issue, which is very real, to what are the climate solutions out there to combat the problem? And hydrogen squarely sits at the top of that list.
As you do that, the need and the use and the demand for renewables goes up. So it’s not just hydrogen, it’s the areas around it. And then as investment dollars go up in those areas, you get the benefits of it in the broader society through obviously the lower production of greenhouse gas emissions, etc.
Governments are spending enormous amounts of money on combating issues that climate change itself creates, whether it is what’s happening out in the western part of the United States - floods, fires, destruction of arable land, etc. All of this is where the governments have to spend dollars to clean up, if you will, what climate change produces. And if we could change that equation and take those dollars to reinvest in climate solutions, that absolutely changes the game.
Candace Browning: And Joon-Ho, Chris has just talked about the fact that it’s going to take collaboration and partnership among a number of stakeholders including industry, governments, investors, to make the hydrogen economy a reality. So, what do you think needs to happen to bring all these stakeholders together? And what are the potential roadblocks?
Joon-Ho Lee: Sure, there are still potential issues for further widespread adoption of green hydrogen. Chief of which is cost, given hydrogen costs seven times more expensive than fossil fuel now. In this regard, we believe that public policy will continue to play a key role. Support measures may include carbon tax or cross border carbon adjustments. Several national and cross region policy initiatives are being launched to stimulate both supply side
expansion of the green hydrogen economy and identify new application that can use the fuel, including the new European Green Deal announced in July this year. It aims to reach 100% carbon free economy between now and 2050, which we think is a game changer that could create an enormous source of future demand.
Most of the action plan in this green deal are focusing on installation and the use of electrolysis to produce green hydrogen in Europe. This is certainly giving companies and all stakeholders the incentive to commit capital and R&D to bring costs down and develop new infrastructure that could serve hydrogen-based systems.
Candace Browning: So, Chris, you’ve talked a lot about private-public partnerships as one way to help energize these kinds of new initiatives and technologies. Is there a role for those kinds of private-public partnerships with green hydrogen?
Chris Hyzy: Yeah. Candace, that’s an excellent way to kind of describe this whole equation, energize these sorts of new initiatives in technology.
Now, what if we looked at hydrogen and renewables and sustainability in a different way in the next decade? What if we looked at private-public partnerships to create a whole new infrastructure where perhaps hydrogen is one element, no pun intended, that actually sat at the core of all this where you create an infrastructure redevelopment bill whether it’s global, European Union, the UK, the United States or Asia or a combined basis, where you commit to a full-fledged new infrastructure. This is where demand, supply and production, that triangle, all converge.
So as costs come down to produce hydrogen for use, whether it’s retail or institutional usage in transportation, in industrials, whatever it may be,
that’s where demand as we know it today actually continues to rise. And if that happens as costs go down, what’s where the public-private partnership equation really produces an ROI, return on investment, that is much higher than previous private-public partnerships.
Candace Browning: So Chris, let’s follow up on that and talk about how investors could get involved in this theme. I mean hydrogen is clearly going to take many years to play out but it could be a theme worth considering, especially for listeners who are interested in sustainable investment opportunities. So where do you see hydrogen fitting into that sustainable investment landscape?
Chris Hyzy: Candace, I think first, the drawback here is that investors want to immediately begin to invest in the beneficiaries of a change to normal day life or the production of energy for how energy was produced before and then that change potentially to a hydrogen-based renewable. The problem with that is the investible opportunity set is very narrow. The beneficiaries are years and years out.
So, you have to look at the blockers. And the blockers are the areas that are currently producing the current energy sources and how do you change that equation to more renewable. We’re already seeing it in renewable energy—solar, wind, fuel cell technology, those areas. So you start with renewables that are already in place. That’s an opportunity set that should widen out.
Then you start to think about what’s the next use as that cost curve comes down and that demand goes up. That’s transportation through the use of fuel cell technology, so that should also expand in our opinion. And then finally, as you get later into a much longer decade in usage and build out
of infrastructure, you have to look at who the ultimate beneficiaries are and that clearly, clearly is the industrial use as well.
So, it’s renewables, the expansion thereof. Secondarily it’s the transportation benefits. Third, it is the infrastructure for the use by industry and ultimately, an entire new power grid system. Those are the areas that investors should be looking towards in the years ahead.
Candace Browning: Thanks for that, Chris. So Joon-Ho and Chris, I think this has been a truly fascinating conversation. And I just would like to end with some of your thoughts on what we’ve been discussing and how could it shape the future in five or 10 or more years. And could that future include achieving a netzero emissions global economy in our lifetimes? So Joon-Ho, let’s start with you.
Joon-Ho Lee: Sure. Although we’re currently forecasting hydrogen to account for about a quarter of the global energy consumption by 2050 from 4% now, the process may well develop faster than this on the back of continued tech breakthrough and strong government initiatives.
While we expect hydrogen use to reduce carbon emission by one third by
2050, remember this is only one part of the clean energy evolution. Solar and wind also continue to see exponential cost reduction. A net-zero emission global economy can certainly be realized in our lifetimes if we are all behind this change.
Candace Browning: Chris?
Chris Hyzy: Yeah. Following on what Joon-Ho said, I think we'll always start and go back to asset allocation and portfolio construction and portfolio strategy in
general. The key to that over one’s lifetime is diversification. We use that same equation as it relates to the production of energy, the use of energy. One fuel source is not going to drive the next five decades or so. We’re going to need it all as renewables continue to be built out. So, this is squarely something that the government public-private partnership is going to have to rally around and that net-zero emissions goal is the objective.
So, diversification’s important, objectives are obviously important and if we focus on those goals over the next three decades or so, getting close to that 2050 net-zero emissions objective becomes clearer in focus, in my opinion.
Candace Browning: Well, that’s a great and very optimistic note to end on. So Joon-Ho and Chris, thank you both so much for your insights into this incredibly interesting topic. It’s one that we could easily be talking about and studying for years or even decades to come.
And thank you all for listening to this edition to the Merrill Perspectives podcast. My co-hosts have been Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank and Joon-Ho Lee, Director in Equity Research for BofA Global Research. I’m Candace Browning, Head of BofA Global Research.
To learn more about our latest insights on the markets, please visit ml.com and you can sign up for Merrill Perspectives wherever you get your podcasts.
Thanks again for listening.
This podcast was published on November 10, 2020.
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