Hydrogen presents a once in a generation value-creation opportunity.

In an overall very challenging market environment, the hydrogen industry is globally making large steps forward to being deployed at scale. Hydrogen investor, Co-Founder, Managing Partner of FiveT Hydrogen AG, David Crnjac, about challenges and opportunities in clean-H2 investing.

An interview by Natalia Westhaeuser, September 2022.

Let’s start with a personal question: why did you join the cause of hydrogen?

I follow my fathers’ footsteps who has been reducing pollutants from industrial plants for 50+ years by designing and installing filter technologies. Becoming a father myself in parallel to co-founding FiveT Hydrogen deepened my strong conviction to make fighting climate change my top priority. In that context, to me, hydrogen is the missing piece of the puzzle to complete the energy transition.

What makes a strong case for investments into sustainable hydrogen and what are the hurdles?

We have a strong global consensus to decarbonize, and hydrogen is addressing the short comings of electrification: it can be stored, transported, and can decarbonize heavy transport, heating, industrial or chemical processes. While the technology is ready to be deployed and the H2 economics have improved a lot, it’s mostly the coordinated effort of companies and public authorities in many countries to push for establishing a H2 economy as well as the strong attraction on top talent that gives me confidence into the future of clean hydrogen.

… and the hurdles?

We see a fossil world that is striving to change but has to deal with conflicting needs and habits. Beyond that, the H2 industry is still a nascent industry facing the chicken and egg challenge of demand and supply and the need of a new infrastructure. At FiveT Hydrogen we believe this transformation will materialize and that cleanhydrogen, aiming to account for 20% of the worlds’ final energy demand, presents a once in a generation valuecreation opportunity.

How do you see the H2 market today?

It is a fascinating time, which is particularly attractive for investors. A raging inflation and rising interest rates are putting a lot of pressure on valuations due to applied Discounted Cash Flow valuation methodologies. As not profitable today, and fully dependent on valuing future cash flows, a rising interest rate has been significantly reducing the valuations of hydrogen companies over the past 12-18 months. A very technical effect, while the fundamentals of the hydrogen industry are unchanged. They have even improved as new policies like the US Inflation Reduction Act have been introduced. Furthermore, the despicable Russian war against Ukraine has moved clean-H2 of being a topic to fight climate change to a topic of national security – at least that’s true for Europe. All in all, it’s a compelling entry point for investors to generate both: a strong financial performance and a positive impact.

What do you as an investor pay attention to when investing in H2 projects and companies?

It varies depending on the asset class and the investment strategy. Like every investor we look at the market segment attractiveness, business model, technical maturity, risks, etc. It has been critical to us from the start to apply the highest ESG standards to our assets. We always aim to meet the Article 9 requirements of the European directive for sustainable finance. Beyond that, it’s safe to say that in any case the management team is critical. And, it’s usually a great sign if the CEO managed to gather a leadership team that is at least as smart – if not smarter – than the CEO. A team that has established trust among each other. And a team that has the capability to tell a story and sell the product they are passionate about.

In general, there is a lot of funding available, what makes FiveT Hydrogen unique?

Most importantly – we are a clean-H2 pure play investor. Everything we do is focused on hydrogen only. We have the deep hydrogen expertise of an industrial investor combined with the performance focused approach of a financial investor. We are working towards creating a fund family of different investment strategies offering an end-to-end value proposition to our investments. For our first investment initiative – a clean-H2 infrastructure fund – we established a joint venture with Ardian which is a leading European investment and asset manager. A set up combining the best of the hydrogen world with the best of the financial world. We were fortunate and managed to gather large parts of the global hydrogen ecosystem as industrial investors, putting us right at the center of it to play the role of a catalyst. And finally, we built an excellent operating partner network of hydrogen experts, knowledgeable and experienced in a complementary set of hydrogen domains.

Regulatory Frameconditions – Always a Blessing?

• Renewable hydrogen is at the center of regulatory efforts

• The exponential market growth driven by the Fitfor55 and RePowerEU targets and policies needs significant investments and these need investment certainty.

• The regulatory framework needed to support this has to be completed and implemented pragmatically: Stimulating demand, providing infrastructure, helping to build integrated supply chains (raw materials & components).

• If investment certainty is given, most industrial companies are willing to invest in the sustainable value chain and the renewable hydrogen. We support you in this process!

To strengthen security of supply and independence from Russian raw material imports, the European Commission has published the REPowerEU plan in response to the global energy crisis in connection with the Ukraine war. The measures it contains build on the “Fit for 55” package of measures published in July 2021. They maintain the goal of reducing greenhouse gas emissions by 55% by 2030 and achieving CO2 neutrality by 2050. At the same time, they provide for increased expansion of renewables (45% instead of 40% target by 2030) and acceleration of hydrogen market ramp-up. See Excursus I on The key hydrogen related measures identified in the REPowerEU plan.

Renewable hydrogen will be the key to replacing natural gas, coal, and oil in hard-to-abate industrial and transportation sectors.

REPowerEU sets a goal of producing 10 million tons of renewable hydrogen domestically and importing 10 million tons of renewable hydrogen by 2030.
The exponential market growth driven by the Fitfor55 and RePowerEU targets and policies needs significant investments and these need investment certainty.
The regulatory framework needed to support this has to be completed and implemented pragmatically:

1) Stimulating demand
CCfDs, for example, are a good instrument. And the subsidies adopted in the USA for a hydrogen ramp-up (minimum price for green hydrogen of about 3 USD/kg) are exactly the right means to stimulate the market.
We need similar pragmatic determinations for a ramp-up in DE/EU, and thus the recognition of green hydrogen/derivatives in the sustainability requirements of all industrial sectors. See Excursus II on the Delegated Act of the European Commission on Article 27 of the Renewable Energies Directive (RED II).
Furthermore, we see the need for accurate emission calculations in the hydrogen value chain instead of the regional and often proprietary color label (green) certificates. This opens the possibility for new markets, e.g. by backward optimization of the required basic materials based on emission values. This would increase the competitiveness of new products and thus the willingness of buyers of sustainable hydrogen and its derivatives to pay higher prices. A demand boost and scaling in the production of sustainable hydrogen would then be the result.

2) Provision of infrastructure
To produce 10 million tons of renewable hydrogen in 2030, 500TWh of renewable electricity will be needed. The approval procedures for renewable energy projects should be simplified and shortened

3) Support in building integrated supply chains (raw materials & components).
Global electrolysis plant production capacity is limited (see also our story “Green hydrogen – The oil of the new millennium on the rise”). OEMs report challenges related to building integrated supply chains and availability of components and raw materials at the required scale.
Even as electrolyzer OEMs in Europe strive to advance research to reduce raw materials in electrolyzers and implement appropriate recycling systems, partnerships with countries that export the critical raw materials must continue to be supported.
If investment certainty is given, most industrial companies are willing to invest in the sustainable value chain and the renewable hydrogen.
Together with our partners in science and industry, we advocate the creation of such regulatory frameworks that enable investment certainty.

Excursus I:

The key hydrogen related measures identified in the REPowerEU plan are:

1. Aligning the sub-targets for renewable fuels of non-biogenic origin (RFNBOs) under the Renewable Energy Directive for Industry and Transport with the REPowerEU target (75% for industry and 5% for transport).
2. Increasing Horizon Europe’s investment for the Hydrogen Joint Undertaking (EUR 200 million) to double the number of so-called Hydrogen Valleys.
3. Publication of two delegated acts on the definition and production of renewable hydrogen to ensure that it contributes to net decarbonization (see Excursus II)
4. Completion of the evaluation of the first IPCEI (Important Projects of Common European Interest) projects on hydrogen by the summer.
5. Establishment of a dedicated working group for joint purchasing of renewable hydrogen under the EU Energy Platform for Voluntary Joint Procurement of Gas, LNG and Hydrogen.
6. Development of cross-border hydrogen infrastructure and establishment of three new hydrogen import corridors and strategic partnerships in the Mediterranean, North Sea and Ukraine to facilitate imports.
7. Introduction of so-called Contracts for Difference (CfDs) to support scaling of hydrogen and transition to new processes in hydrogen production and industrial sectors.
8. Implementation of a special REPowerEU innovation funding for

(1) Electrification and hydrogen applications in industry,

(2) Production of clean technologies (including electrolyzers and fuel cells),

(3) Pilot projects to test and optimize highly innovative solutions.

Excursus II:

on the Delegated Act of the European Commission on Article 27 of the Renewable Energies Directive (RED II):
On May 20, 2022, the European Commission published the draft delegated act on Article 27 of the Renewable Energy Directive (RED II) on electricity purchase criteria for electrolysers. On the one hand, this creates the urgently needed regulatory certainty for the development of a green hydrogen economy.
On the other hand, the highest requirements for the production of green hydrogen and its derivatives contained therein prevent rapid industrial scaling. These requirements for the production of green hydrogen are e.g.

• Additionality: exclusive use of electricity from newly built and unsubsidized wind and solar plants (after a transition period until the end of 2026). Given the project approval and realization time for new wind and solar plants, the production of large quantities of green hydrogen would not be possible before 2030
• Temporal correlation: Electrolysers may only produce hydrogen if electricity is also generated almost simultaneously from the new wind power and solar plants. This temporal correlation means that electrolysers are not operated during longer calms and thus age more quickly/ lose efficiency. As a result, production becomes more expensive and continuous supply to customers is not possible.

We support dena’s positions and proposals for more “flexibility in the market ramp-up phase and clearer provisions to transfer the criteria to potential exporting countries” to achieve rapid industrial scaling, which is urgently needed to reduce the production costs of green hydrogen, see Publikationsdetailansicht – Deutsche Energie-Agentur (dena)

Holistic Project Evaluation for a Targeted Direction of Investments.

• The development of the hydrogen economy has no alternative and is currently generating strong momentum and, as a result, enormous hype on the market.

• It requires strong political commitment, private investments and a “doer mentality” to bring the projects to commercial viability through the targeted direction of capital.

• The realization of the first industrial scale projects involves significant risks and challenges. Without transparency and systematics, there is no money and no realization!

• A holistic and systemic project evaluation reduces investment risks and accelerates investment decisions.

The development of the hydrogen economy has no alternative and is currently generating strong momentum and, as a result, enormous hype on the market.

By 2030, the global electrolysis capacity is expected to increase to 290 GW to meet the demands of green H2 (32.6 Mt = 25% of 130.4 Mt total production), according to McKinsey Hydrogen Insights.

According to the Global Hydrogen Council it is pursuing 680 projects with an estimated value of $240 billion in the year of 2022, a dramatic increase compared to the projects from six months ago, which were worth about $160 billion.

It requires strong political commitment, private investments and a “doer mentality” to turn projects into reality through the targeted direction of capital, as only few projects are currently economically viable.

The “bankability” of the projects starts with the offtake. The willingness of the “offtakers” to enter into long-term contracts (usually 12 to 15 years) with a price premium is currently hardly present. This is because the (first of its kind) FOIK risks of the first industrially scaled projects are not insignificant:

1. The economic viability of the projects depends to a large extent on the electricity prices and the expected lifetime as well as the time-dependent efficiency (note: degradation) of the electrolysers.
2. The electrolysis technology is not yet technically mature and has not been sufficiently tested in long-term operation. Often the technology suppliers hesitate to offer binding performance guarantees, e.g. for the availability and functional life span of the plants or their efficiency. Especially with rising electricity prices, there is a high long-term risk!
3. Thus, reducing the OPEX and increasing the functional life span (efficiency) of the electrolysers through an innovative operation optimization and a holistic service strategy is crucial for the profitability of the projects.
4. Furthermore, there are serious supply chain risks for all market participants. The global production capacity of electrolysis plants is limited. Based on producers’ investment plans, IRENA (IRENA 2022, Geopolitics of the Energy Transition: The Hydrogen Factor) estimates it will reach 16 GW in 2024. In addition, the production capacity of critical materials for the electrolyzers is limited and the production of those often takes place in countries with fragile political stability.
5. The mostly cross-value chain projects require systemic thinking as well as strategic partnerships in analysis/preparation and later in implementation.
6. It’s all about the people! Hydrogen and PtX projects require diverse skills, especially in engineering and project management, which are hard to find on the market nowadays.
7. Hydrogen value chains are international, complex and characterized by country-specific regulations & certificates of origin. Currently, private sector approaches as well as the use of regional color labels make a harmonized certification and global trade difficult.

All players in the market have the a-priori problem of assessing which projects or investments have the potential to become profitable or to secure the highest returns with minimal risks. Without transparency and systematics there is no money and no realization, to put it in the words of Warren Buffet: “Don’t invest in something you don’t understand!”

Thus, there is a growing need for competent advice on and technical-economic analyses of (green) hydrogen projects. We offer a holistic and systemic project assessment that reduces investment risks and accelerates investment decisions.

If you want to know more about it, contact us!

Green hydrogen – the oil of the new millennium on the rise

• Green hydrogen is at the heart of the energy transition: without it, complete decarbonization of society is not possible.

• Hydrogen production is not new, but only in recent years with cheaper prices for green electricity in some parts of the world is the production of green hydrogen becoming increasingly economical.

• The anticipated market size and growth are gigantic in all areas of the hydrogen economy (technology, production, transport, storage, applications) – the sky is the limit. But what of it all is realistic and when does the market set in?

• The implementation of the announced projects depends critically on the regulatory environment – demand stimulation, infrastructure provision and technology scaling in order to reduce costs.

Green hydrogen is on everyone’s lips and is at the center of the energy transition: without it, complete decarbonization of society is not possible, since only a maximum of 50% of the final energy demand can be met by electrification with renewable energies. Aviation, shipping, heavy transport, some industries such as steel, cement and chemicals, and high-temperature processes present particular barriers to direct electrification with renewables. Hydrogen opens up the possibility of “coupling” renewable energy sources, essentially wind power and photovoltaics, with the industrial and mobility sectors (the so-called “sector coupling”), thus also compensating for their volatility through long-term storage in large quantities and thus making an important contribution to security of supply.

The industrial synthesis of hydrogen and oxygen by electrolysis was invented as early as 1888. Well-known manufacturers, such as Siemens AG, entered the development of water electrolysis plants almost two decades ago with the so-called PEM (Proton Exchange Membrane) technology, which uses a solid polymer electrolyte as a proton exchange membrane. However, it is only in recent years, with green power prices well below 2 to 3ct/kWh in some parts of the world, that green hydrogen production is becoming increasingly economical.

There is no alternative to the development of the hydrogen economy, and it is currently generating strong momentum, even enormous hype in the market. The anticipated market size and growth are gigantic in all areas of the hydrogen economy (technology, production, transport, storage, applications) – the sky is the limit.

But what of it all is realistic? When does the market set in?

The implementation of the announced projects depends crucially on the regulatory framework.

1) Stimulating demand:

The market must be stimulated. It stands and falls with the offtake. The willingness of the offtakers to enter long-term contracts (usually 12-15 years) with a price premium is currently almost non-existent. This is also not surprising given the FOIK (first of its kind) risks.

Regulatory framework conditions must be set accordingly. CCfDs, for example, are a good instrument. And the subsidies adopted in the USA for a hydrogen ramp-up (minimum price for green hydrogen of about 3 USD/kg) are exactly the right means to stimulate the market. We need similar pragmatic determinations for a ramp-up in DE/EU, and thus the recognition of green hydrogen/derivatives in the sustainability requirements of all industrial sectors.

2) Provision of infrastructure

Enormous efforts will also have to be made to expand the infrastructure in order to enable the market ramp-up of the hydrogen economy. The power requirements of electrolysis plants in Germany alone will ramp up to values between 50 and 90 GW by 2050. This will also require significant expansion of green power production and grid infrastructure (gas and electricity). For comparison: In 2021, the installed capacity of all wind energy and PV plants in Germany was approx. 123 GW.

3) Technology scaling to reduce costs

Boosted by market demand, investments in large-scale production of hydrogen have increased. For example, the power class of Siemens Energy’s portfolio scales by a factor of 10 every 4 – 5 years, having started with a 0.1MW electrolysis plant in 2011 to plants of about 1MW in 2015, about 10MW in 2018, and 100MW starting around 2023.

Nevertheless, the global production capacity of electrolysis plants is still very limited and needs to be further expanded. IRENA (IRENA 2022, Geopolitics of the Energy Transition: The Hydrogen Factor) estimates this at 16 GW in 2024 based on the producers’ investment plans.

There is still a need to invest a lot in R&D, e.g. to reduce the precious metal loadings of the electrolyzers or to develop alternative catalysts. This is because the current global production volume of iridium (about 6-8 tons per year) would be sufficient for about 10-12 GW of PEM electrolyzer power at current power densities and loadings (about 650 to 700 kg of iridium per one GW of power). To enable scaling up to GW classes, the specific iridium consumption should be reduced to about 50 kg/GWel. (Source: Reimund Neugebauer ed., Water Technologies, 2022, p. 227 et seq.).

Generally speaking, it will take significant political will, private investments, and a “doer mentality” to both support current technologies as they advance as well as drive important innovations forward.

Nevertheless – we have good examples where we have succeeded in such a transition. One example is the introduction and scaling of wind energy in Germany since the 1990s. And then, accompanying this, the development of photovoltaics – in the period between 2010 and 2021 alone, module costs have decreased by 90%.

The Stone Age did not end because there were no more stones. The oil age will not end because there is no more oil! With green electrons (electricity) and green molecules (based on hydrogen), alternatives are available that enable a successful implementation of the energy transition. There is no “plan(et) B” – we have to act! Fast!!

We are happy to be your partner for this!