You might have heard about this “Green” thing. On an unemotional basis, estimates are thrown around regularly that “we” (whether that includes China, India, Brazil, or Russia is a topic for another day) will have to spend $75 trillion dollars by 2050 to achieve, as the headline says, “Carbon Neutrality.” Whether that also includes the Harvard Endowment plan to count the short-selling of carbon producers as an offset to private jet ownership is an issue for another time.
Incorporating my years of experience as a parent of teenagers, in which I was forced to document any number of “likely accurate” statements with source footnotes, which were subsequently mostly ignored anyway (at least to my face), we here at Cove Street have/are spending a fair amount of time understanding technical/financial arguments for any variety of schemes that get floated through SPACs, government press releases, think tanks, investment industry organizations, editorial pages, and said former teenagers. $75 trillion is even bigger than Amazon, so in theory it is worth keeping an eye on it.
Here are some notes cribbed from a seven-hour webinar from the terrific people at RBN Energy on the state of the “Hydrogen” industry, which, although impossible to attribute estimates accurately, is said to occupy $15 trillion of the said $75 trillion. The writer does not have a chemistry degree, and this is 89% accurate.
- There is no demand?
At the present time, there is no mathematical evidence provided by anyone that suggests that anything hydrogen-based has any market incentive to be built, at least without massive government policy and dollar intervention.
- Unsurprisingly, politics have deleterious effects
Political figureheads want something done now, in size, for success in 2050. The reality is that most technological change (and this is a technological change concept) should involve a series of small bets that try, fail, then pivot. The venture capital world is perfect for this and most of its projects and headlines involve these type of small-scale projects and commitments.
Conversely, “government” is clearly the worst protagonist for this process as it wants to make up a date, throw an amount out of money at it, and willingly mow down a few small children to get in front of a camera to preach social virtue. I can’t help but look a few blocks away at the 105 Freeway which was planned for and intended to be a toll road to bring workers from the eastern part of Southern California into El Segundo to support the burgeoning defense industry. Someone forgot to put the Berlin Wall falling down in their spreadsheet and now the road exists to take people from the South bay out to the east. Funny things happen over 30-year planning cycles.
- The financial challenges of creating socially acceptable means of producing hydrogen-based power
Hydrogen-based power for anything—transportation, chemical production (ammonia, for instance, is the big one), and a variety of other industrial and petrochemical use—has been around a long time. It is not a technical challenge to make it; rather, it is a financial challenge to make it in what is today considered to be a politically acceptable way. The production of nearly anything requires energy. Hydrogen production falls into “powered by three general buckets: Blue, Green or Grey.” Grey are legacy plants powered by nasty things like coal and oil. Canceled. Blue is, in theory, the meat on the bone as it takes existing or new gas-powered plants (or converts a Grey) and then massively sequesters the CO2 generated. Green is the same thing as Blue, except the power is generated from renewable sources, the usual suspects being wind, solar, and geothermal.
- The cost of renewable energy
The process of making hydrogen is varied, but “Steam Methane Reforming (SMR),” is by far the biggest share in use. The rest is VC pilot fun. Since “power input” is the major variable, the cost of scale in making hydrogen is highly dependent upon your source. A plant in the Gulf Coast powered by backyard natural gas is low cost. Renewable powered, liquefied natural gas (LNG), or Europe-based plants can be 5x to 10x more expensive.
- Hydrogen production produces a lot of CO2
To make this whole conversation “green” requires geologic sequestration, which, in layman’s terms, means burying the CO2 back in the ground. Let’s just say if you take the amount of hydrogen “desired,” take the CO2 produced by that, then divide it by the amount of CO2 currently sequestered, you get a ginormous number. Translation: sequestration has never been done in scale and, again, there is no infrastructure in place to do it.
- Is it supply-side or demand-side economics?
So here’s the chicken, the egg, and the coup: no one with a financial incentive is ready to spend hundreds of billions of dollars to make any color hydrogen if there are not hundreds of billions of dollars spent to develop the demand for it, and both sides require hundreds of billions of dollars for a transportation and storage system. You first.
“All this can be done, but no one wants to be the tip of the bleeding spear. And let’s face facts: clean energy is simply going to cost a LOT more than what we have today.”
- Guesswork
There is not a lot of great data on costs and pricing, unlike the carbon energy world. There is a lot of guessing.
- Geographical issues in infrastructure development
95% of hydrogen today in the US is made on the Gulf Coast because that is where the supply and demand are. It seems highly likely that is where the bulk of any build will be for infrastructure and regulatory and supply reasons. And thus it falls into the problem of many great energy issues—the source is often very far from the use.
- Transportation and storage issues
Hydrogen is very annoying to transport. It is a smaller molecule than natural gas and thus leaks a lot more and requires essentially an entirely new and more expensive pipeline infrastructure. And who wants to take the odds on building an interstate pipeline from the Gulf Coast to New England? Technical issues aside, it is a financially impossible task to use existing pipeline infrastructure, as blending hydrogen into existing pipelines to get to California “standards” doesn’t work; hydrogen is a much lower price than natural gas and blows the energy content levels out of spec, and who wants to commit to it if regulators can pull the plugin times of high demand? It’s especially concerning since, if you have been paying attention, California has its own disaster on-base power generation.
To have hydrogen be a real power source nationally, you need not just transport assets but storage assets. And hydrogen is annoying to store for the same reasons it is tough to transport. And it can’t be sequestered like natural gas.
- Elon Musk hates hydrogen as a source of power for transportation
What a surprise. This should be the end of the conversation as we should never talk about this again. However, all joking aside, he does correctly state that hydrogen is only 50% as efficient as Lithium-Ion power. He is 94% right on this issue – hydrogen-run cars are not doable.
- “Fresh water will be the new bitcoin”
Hydrogen requires a LOT of water. And somewhat clean water. So, doesn’t this make water a problem? Oh, build a desalination plant…powered by….? And an effective scaled chemical plant really needs to run 24/7-ish. Wind and solar run…not 24/7-ish.
- Most things happening today are still at the venture capital stage
This is $10 to $30mm dollars at work.
- Surprise! California has a plan!
Not content with financing Tesla with renewable credits, it has a variety of plans in place that are encouraging a variety of grossly uneconomic projects financed by green credits. Again, small scale. Genius business model that is being aggressively pursued by smart people.
“Ethanol doesn’t move the needle in the world. Let’s do something material rather than phony and not through generating California regulatory credits or greenwashing your product set.”
- Classic idiocy—making “good” the enemy of “perfect”
Since the math behind Blue is so much better at scale and is so much more doable “now-ish” on a present value basis than “Green,” it is obviously what should be pursued. Naturally, however, that is not the favored path.
- Factoid: The entire global production of wind/solar power today is less than half the amount necessary to “green” even the current footprint of hydrogen production.
So, how do you get from pitchbook to reality and over what time period? And as a simple thermodynamics quiz: how can the cost of hydrogen power be less costly than the power it takes to make hydrogen? Not on a bad day, but any day.
Shareholders, are we really going to allow “climate activists” to make Exxon and the like pursue these types of projects for the theoretical greater good of mankind?
Well, we certainly learned something Tuesday.
