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The Formula to Net Zero: Decarbonization, Hydrogen, and the Energy Transition

AlphaSense

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July 6, 2022


The idea of Net Zero is now more than a decade old. More than 70 nations — joined by thousands of cities, private enterprises, and other institutions — have pledges in place to reduce their carbon footprint to be at or as close to zero as possible in the near future.

And while progress has been made, today nearly two-thirds of global emissions are still coming from hydrocarbon sources. Attributed mostly to three human activities: power generation, industry, and transport. It’s no surprise that coal, oil, and gas continue to power economies and society at large around the globe.

The question at the heart of the energy transition, then, still remains: how can we continue living as we’re living without consuming hydrocarbon resources?

AlphaSense and HSBC recently partnered to present The Formula to Net Zero: Decarbonization, Hydrogen, and the Energy Transition, where HSBC’s Global Sector Head of Chemicals Research, Sriharsha Pappu, gives us expert insight into the challenge (and what lies ahead).

Quick Takeaways

  • Solar and wind are both clean, modular, and scalable energy solutions but are challenged by intermittent production.
  • Hydrogen is a high-potential alternative, but its carbon footprint won’t reduce until gray and green hydrogen costs reach parity.
  • Nuclear power will need to play a role in the energy transition for Net Zero to be possible.
    Ammonia and PGM markets are expected to tighten as a result of increased hydrogen demand.

The Future is Renewable

Solar and Wind

When we consider renewable energy, two main sources come to mind: solar and wind. They have indeed paved the way for the energy transition thus far and continue to do so, albeit with some challenges still being addressed.

Both are clean, modular, scalable options. Their price barriers are now diminishing as scaled production processes and growing adoption create virtuous cycles and drive lower cost.

Worldwide, the market is diversifying as solar and wind achieve increasingly synchronous global growth. China, which has historically owned supply and demand for both renewables, no longer dominates the market.

All in all: a positive outlook.

That said, inherently intermittent production continues to create hesitation around the idea of exclusively renewable energy around the world — especially as we consider eliminating hydrocarbon sources as a backup. There are also holes in the plan as it relates to forecasting supply, demand, and needed production.

Issues with seasonal peaking or an unanticipated natural disaster could throw off forecasted energy supply immensely. To prevent dangerous ripple effects, storage strategies for solar and wind energy need to improve before they can become exclusive energy sources worldwide.

And of course, there’s the persistent issue of carbon’s critical role across the renewable supply chain, required for raw materials and powering production.

What has emerged is a potential question of balance.

Increased ESG requirements and expectations on both the regulatory and consumer ends have created unprecedented levels of transparency and accountability in the fossil fuel industry. Is there a way, then, to strike balance? Can we leverage responsible fossil fuel production and renewables to achieve the most realistic, cost-effective, and sustainable model possible for worldwide energy consumption?

Of course, outlooks on this vary quite a bit across stakeholder groups and geographies. For now, the Net Zero initiative remains on the forefront as an ultimate goal.

And there is one more renewable option that could be — as Pappu put it — the “swiss army knife solution” to many of the challenges that pervade the energy transition: hydrogen.

The Hydrogen Potential

Given the difficulties in decarbonizing the renewable supply chain, hydrogen is an attractive option to many leaders pushing Net Zero achievement, at least from the standpoint of future potential.

That’s because right now, most hydrogen energy being produced is “gray,” or still derived from fossil fuels. High levels of carbon dioxide are released into the atmosphere during its production, making its impact on Net Zero efforts technically negative. As such, gray hydrogen is seen mostly as a transitional renewable energy option.

The true end goal is green hydrogen. Produced through electrolysis (adding electricity to water to separate hydrogen and oxygen molecules), green hydrogen is truly an end-to-end “clean” renewable energy source.

But right now, it’s also expensive. Cost remains the primary roadblock to its production and adoption as scale. HSBC research predicts it will still take the better part of a decade for gray and green hydrogen costs to reach parity so that green can be the viable option of choice.

Of note, the role of nuclear power in the hydrogen production process has remained a point of debate. Nuclear’s controversial history and public perception have made it a hard sell despite its potentially huge contribution to the Net Zero effort.

But HSBC research adamantly maintains that nuclear must be considered as a contributor to decarbonization efforts around the world. Given its established role and proven effectiveness, ruling it out due to politically-charged viewpoints would be irresponsible.

They state:

“In our view, solving the broader energy-climate equation involves compromises; it will in most cases require a collection of imperfect technology options that provide a working collective solution. We think nuclear warrants consideration to play a meaningful role, partly because its exclusion makes reaching ‘net zero’ emissions all that more challenging.”

This stance is an apt one that can be widely applied across the energy transition landscape. The realities of renewable production requirements must be balanced with decarbonization goals. Leaders of Net Zero initiatives around the world — and the public at large — must also be better informed about what makes a true impact on the effort.

Market Opportunities

Hydrogen presents two interesting market opportunities in ammonia and platinum group metals (PGMs).

The geographic disparity between where hydrogen production is cheapest (like the Middle East, for example, where solar power is ample) and where its demand is highest (Pappu mentions Japan and Korea) is wide. To be transported practically and cost effectively, it needs to be in the form of ammonia, which contains nearly 2X the amount of hydrogen as actual liquefied hydrogen.

According to Pappu:

“It’s a question of [where] the margins sit. Is it manufacturing (which is in the utility model) or technology (which is in electrolysers or maybe a platinum model), or is it in distribution (which is the ammonia model). We think there are opportunities in owning the ammonia part of the chain for returns, and that has potential to dramatically tighten the merchant ammonia market.”

As for PGMs, they play a role in the technology part of the chain — iridium and platinum are electrolysis catalysts. Pappu said he expects a tightening in the PGM market as well as supply for these metals rises.

The Takeaway

Worldwide decarbonization is less a question of possibility and more of plausibility — how will we overcome cost, maintenance, availability and other challenges to achieve Net Zero goals at scale? Further, is total decarbonization the most practical option, or is the responsible use of fossil fuels needed to achieve a more realistic energy scenario?

In short: the exact path to Net Zero is still yet to be determined. What we can be sure of is that every type of organization — public, private, governmental, and the like — will be held increasingly accountable for their part in getting there. And in the meantime, opportunities exist for investors looking in the right places throughout the energy supply chain.

To uncover new opportunities related to the energy transition, it’s essential to stay ahead of emerging trends and the most important happenings across the investment world. In our four-part HSBC series, we cover market-moving trends like urbanization, demographics, and inflation, so you can keep your finger on the pulse. Access the full webinar here: The Formula to Net Zero: Decarbonization, Hydrogen, and the Energy Transition.

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