When we talk about energy transition, most people think their investment options are limited to traditional renewable sources such as solar and wind. Anthony Okolie speaks with Mitchell Li, Energy Analyst, TD Asset Management, about why hydrogen represents a big opportunity for renewable energy.
- Absolutely, Tony. So the energy transition is very, very topical today. However, when most people think about investing in energy, they think it's either investing in fossil fuels or investing in renewables, like wind or solar. And today, we want to dismantle that idea and talk about what we at TDAM call transition fuels. And three of these transition fuels that we're focusing on a lot include Liquefied Natural Gas, or LNG, biofuels, and hydrogen. And I think today we're going to double-click into hydrogen.
- OK, so tell us-- what is hydrogen? And how is it cleaner than some of the other fossil fuels?
- So the term hydrogen should really be familiar to a lot of people, because if you remember in your high school chemistry class on the periodic table, you've got hydrogen in the very top left. And that's because hydrogen is the most abundant element on the planet. As a fuel source, hydrogen is very clean. When combusted, the byproduct is water.
Unfortunately, when you think about the emissions process of when you use hydrogen as a fuel source, it's not quite that simple. Because to initiate the process of extracting hydrogen from water, you need an initial fuel source to provide power. And these initial fuel sources can be a lot of things, from natural gas to renewable energy and biofuels, you name it. And this initial fuel source essentially determines how emissions-friendly the hydrogen process can be.
So the three-most discussed fuel sources these days, the industry coins them by color. And gray hydrogen is by using natural gas. That's the most common way to make hydrogen right now. And the next method is blue hydrogen, which uses greenhouse gases captured using carbon capture technologies. And then finally, we have green hydrogen, which uses renewable energy. And from an ESG angle, we definitely prefer blue and green hydrogen projects.
- OK, so that's a great overview. Talk to us about some of the applications for hydrogen.
- Absolutely. So before I answer your question, Tony, I'm going to first take a step back and mention that one of the best ways to reduce carbon emissions in our environment is by looking at the transportation industry. Why? So about half of all the oil that comes out of the ground ends up in transportation.
Now, to move away from fossil fuels in transportation, there are a few key technologies. And two main ones include lithium ion batteries in electric vehicles or hydrogen fuel cells. And at a high level, how lithium ion works is that you are storing power from, say, a wind farm or a solar farm into a lithium battery. And how fuel cells work, a bit differently, is that you're restoring power from hydrogen, which is taken from an initial fuel source. So you've almost introduced another step.
They each have the pros and cons, and where fuel cells have a one up on lithium ion is on charging time and mileage. So fuel cells charge faster and go longer distances. Where fuel cells are inferior is on costs. So cost is a lot more. And to make the economics really work, you need to make sure that you scale up your distances. And one of the best applications of hydrogen in transportation is in long-haul trucks.
- So you talk about some of the challenges with hydrogen. What needs to happen for hydrogen to get over that tipping point?
- Right. So as I just previously mentioned, cost is one of the largest hindrances. So to give a bit of context, green hydrogen projects cost about two to three times more than blue hydrogen, which essentially means green hydrogen needs to come down, costs need to come down, about more than 50%.
When we hit cost parity is really the million dollar question, and we can probably get there within the next decade. It is going to take a lot of work, though. We're going to need a lot of collaboration from the government. We're going to need a lot of collaboration from industry participants, manufacturers, investments in technology. Everyone's going to have to be on board on this. But I think we can get there, and we are moving in the right direction.
- And talk to us about some of the other applications for hydrogen.
- Sure. So as I previously mentioned, long-haul trucks is one of the best applications in transportation. What I didn't mention is that hydrogen adoption is still very, very nascent in the transportation sector. So in the next decade, we can really expect this to ramp up.
Another application that's being discussed is in the grid in terms of power storage. So we all know renewable energy is a great fuel source, but it's intermittent. And we will sometimes need to tap into a backup power supply. And hydrogen could provide that in the future. So two future applications will be in transportation and potentially power storage in the grid.
- And so how does TDAM currently play this hydrogen space?
- So not only is it important for us to invest sustainably, it's just as important we're picking the best of the best companies to invest in. When I'm looking for companies that fit both of these criteria, I'm always repeating to myself, green must be green. Because far too often, we see companies that are rushing into clean energy transition and diluting their returns.
And we want companies that can do both. We want them to take advantage of this opportunity, but also make it really great for their business as well. And we see the industrial gas companies today as a great example of this. So they've announced billions of in hydrogen infrastructure projects. At the same time, their core business is really, really strong. And it's a story we really like on all ends. And that makes them a great fit for a number of our mandates.
- Mitchell, this is a great primer on hydrogen. I know that you have a lot more on this topic. So we'll definitely bring you back next time. Thanks again.
- Thank you.