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Investing in the Future of Canada: Hydrogen

August 30, 2022
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Hydrogen can play a key role in achieving net zero emissions by 2050, and Canada is positioned to become a global hydrogen leader. Our Fundamental Equity and Responsible Investment experts dive into the “rainbow” of hydrogen, its opportunities and challenges and how BMO Global Asset Management (GAM) is investing in its future.

Key takeaways:

  • Hydrogen can play a key role in the global race to net zero by tackling hard-to-abate emissions in energy, transportation, buildings and industrial sectors. We dive into the history of hydrogen, the “rainbow” of production methods, and future challenges and opportunities.
  • With Canada positioning itself as a global leader in hydrogen, we highlight which sectors stand to benefit most from hydrogen developments and share examples of Canadian companies leading the charge.
  • As an investment manager, we see the hydrogen economy as an opportunity to advance the energy transition and support the adaptation of existing energy producers on the path to net zero.

Did you know Canada is one of the top 10 producers of hydrogen in the world?5 That’s one reason hydrogen will play a definitive role as the country advances toward its net-zero targets. If played right, Canada could derive up to 30% of its energy needs from hydrogen and replace up to 50% of its current natural gas use. In the process, the country could produce more than $50B in direct revenue while creating approximately 350,000 jobs and abating up to 190 megatons (Mt) of CO2 equivalent emissions each year0.

In practice, this means that your daily commute could include riding a hydrogen bus that emits water instead of CO2, and your natural gas furnace could run partly on hydrogen, reducing your household emissions. It means hydrogen replacing fossil fuels for industrial uses such as steel and cement production. It means filling the gaps on the power grid when renewables like solar and wind have periods of low output.

As an investment manager, we see the hydrogen economy as an opportunity to advance the energy transition and support the adaptation of existing energy producers on the path to net zero.

Here, we explore hydrogen and its role in the path to net zero, the energy transition and the merits of hydrogen as an investment opportunity.

  • Why hydrogen and what is it?
  • What is it used for?
  • How it can help high-emitting sectors reduce emissions?
  • What are the challenges in adopting hydrogen as a clean energy?
  • What companies are innovating hydrogen solutions in Canada?
  • How does BMO GAM include hydrogen in its investment considerations?

Why hydrogen?

The climate crisis demands an energy transition— a switch to low- or zero-emission technologies, and fossil-fuel based activities that incorporate emissions reduction technologies such as carbon capture and storage. The energy sector, which is responsible for roughly 75% of global emissions each year1, must invest heavily in low- and zero-emission technologies to make this transition. Hydrogen is a dynamic clean energy source that can take a strong role in this transition, particularly when considering dual imperatives of electrification and transportation.

What is hydrogen?

People have used hydrogen since the 1800s—it’s uses have varied widely, such as to create ammonia and power space missions2. The world currently uses a considerable amount of hydrogen today (mostly high-emission grey hydrogen). Global hydrogen production emits about 830 Mt of CO2 per year3. By comparison, Canada’s overall emissions of CO2 in 2020 was 672 Mt4.

Hydrogen is the lightest and most abundant element on the periodic table. It’s a flexible energy carrier that can be stored as a compressed gas or a superchilled liquid, or in physical storage media such as graphene or carbon nanotubes. It can be burned like natural gas to generate heat or used in a fuel cell to generate electricity.

Given that it is a light molecule, it is too reactive to be found in its pure form in our environment (except underground), and thus must first be refined. There exists a myriad of different ways to extract hydrogen. Examples include biologically through fermentation of organic materials such as biomass, electrolysis by running water through an electrolyser, or through thermal processing using natural gas, known as steam methane reforming (SMR).

The hydrogen industry uses color labels to categorize the different ways hydrogen is extracted and the resulting emissions. For example, Green Hydrogen creates zero emissions and Brown/Black Hydrogen creates the highest level of emissions. These standard labels are also able to support evaluation of the emissions impact hydrogen-related investments may have.

Carbon rainbow infographic

What is the future of hydrogen?

Hydrogen has an important role to play in a net zero world, 5 particularly in hard to abate sectors like road transportation, agriculture, industry, aviation, shipping and heating. According to the International Energy Agency (IEA), the world will need to produce six times more hydrogen in 2050 than it did in 2020, with low-carbon hydrogen rising from a 10% share of production to more than 98%. About two-fifths of low-carbon hydrogen will be derived from fossil fuels (blue hydrogen), with the remainder coming from electrolysis (green, yellow and pink)6. Scaling production will require investments in low- or zero-emission hydrogen. Hydrogen infrastructure will also need significant investment, given the current lack of pipelines and tankers capable of moving large amounts of hydrogen or ammonia (which is made up of roughly 18% hydrogen).

Sectors that stand to benefit the most from scaling low- or zero-emission hydrogen include:

  • Power. Hydrogen can produce power in ways that efficiently abate emissions. Natural gas-fired power plants could be retrofitted to co-fire with hydrogen, and remote areas of the world that require power, such as mines and isolated communities, could rely on hydrogen as a source of power when solar, wind or other renewables are not viable. Fuel cells can be used to convert hydrogen to electricity, producing only water as a by-product. Hydrogen also offers a reliable way to store power produced by renewables operating on unpredictable schedules, such as wind turbines.
  • Road Transportation. Hydrogen can be stored at pumps, just like fuel, and then used to fill tanks in vehicles. Fuel cells are then used to separate the hydrogen’s positive and negative electrons, creating electricity in the process. Hydrogen-powered Fuel Cell Electric Vehicles (FCEVs) have the potential to offer a viable alternative to traditional Electric Vehicles (EVs), most prominently in heavy duty trucks that need more long-haul power than batteries may be able to provide.
  • Industrials. Industrials will likely produce the largest demand for hydrogen by 2050. Industrials supply raw materials used in finished goods. Creating these raw materials usually requires high amounts of heat, consuming a considerable amount of energy and burning fossil fuels in the process. The most common uses of hydrogen today, in both mixed and pure forms, are oil refining, ammonia production, methanol production and steel production7. Replacing grey hydrogen with zero- or low- emission hydrogen will help these industries cut emissions. For a net zero world, emissions abatement in industry will require large-scale retrofitting of plants, including switching burners, furnaces and boilers to hydrogen-fired or co-fired. The same concept applies to residential and commercial real estate, where heat pumps can be converted to fire on hydrogen. Industries that depend on natural gas can reduce emissions by using gas blended with hydrogen in gas networks.

What is happening in Canada?

Canada is in a unique position to become one of the top three hydrogen producing countries by 20500. The country is already known for its leading hydrogen and fuel cell technology companies. As the nation’s hydrogen strategy unfolds, new opportunities will arise for the Canadian private sector. Here are some interesting examples of companies operating in Canada that produce hydrogen or are investing in hydrogen solutions:

  • Air Products (APD) – Industrial Gases. APD, an American-domiciled business with hydrogen production operations in Western Canada, is one of the largest current producers of hydrogen and is developing a more than $10 billion pipeline of green and blue hydrogen projects.
  • Brookfield Renewable (BEP) – Independent Renewable Power Producer. BEP is investing in green hydrogen production for energy storage in order to provide electricity 24/7.
  • Enbridge (ENB) – Pipeline. ENB is investing billions in the hydrogen value chain and testing blends of up to 15% hydrogen in its existing natural gas feed to help lower emissions. ENB is also looking at options to export hydrogen and ammonia from its Ingleside terminal in the U.S. Gulf Coast.
  • Northland Power (NPI) – Independent Power Producer. NPI has announced that it intends to invest in green hydrogen so the company has the ability to provide electricity 24/7.
  • Brookfield Infrastructure (BIP) – Infrastructure. BIP is looking to invest in a hydrogen export facility at an Australian-regulated terminal.
  • TC Energy (TRP) – Pipeline. TRP is developing green and blue hydrogen hubs in partnerships throughout North America. Its investments are in the billions, with the potential to grow.

Risks and challenges

Although the future of hydrogen is promising, global implementation will need to overcome complexities in the supply chain, manage the introduction of new safety standards and gain social acceptance. Perhaps the most prominent headwinds will be cost and transportation. Low emission hydrogen is currently expensive to produce, and logistics of transporting hydrogen through pipelines is challenging as existing infrastructure can not be utilized without significant retrofitting. Using hydrogen in existing consumer appliances to burn can also be a challenge as it burns very quickly as compared to natural gas and can be explosive.
  • Costs. Fossil fuel-based hydrogen can be produced more cheaply than low- or zero-emission hydrogen, given the abundance of inexpensive coal and natural gas in certain regions. According to the European Commission, green hydrogen prices per kg are typically 2-3x more expensive than grey hydrogen8. The market dynamics for green hydrogen will depend on how quickly the world electrifies and will vary based on the location. Renewables will play a significant role in the transition to a net zero world, and alongside the ramp up in renewable infrastructure will come the opportunity to divert large amounts of clean energy towards green hydrogen production. The rise of low-emission hydrogen such as blue hydrogen may enable a thriving global hydrogen market to form as renewable electricity becomes more abundant and more competitive with fossil fuel-powered electricity.
  • Transportation. Getting hydrogen from production sites to customers presents its own challenges. As the hydrogen market grows, transportation will need to be low-cost and must not disrupt existing infrastructure for commodities such as natural gas. Hydrogen to be transported overseas is typically converted to ammonia first, introducing losses of efficiency. Although some pipelines have started blending up to 15% hydrogen in the natural gas feed, it is hard to convert existing pipelines to distribute hydrogen. One economical method to distribute hydrogen is to transport natural gas to end markets using existing pipelines, and then to convert it to blue hydrogen. The transportation sector will be able to repurpose existing fuel stations to store and sell hydrogen to consumers, but it will need to make significant investments to build out hydrogen station networks for light and heavy transport FCEVs. Finally, while it is possible to export hydrogen via ship, it may require a process of conversion from hydrogen to ammonia and then back to hydrogen, resulting in less weight but introducing some inefficiencies due to energy loss.

Investing in the future of hydrogen

BMO Global Asset Management is a signatory to the Net Zero Asset Manager’s Initiative9 and aims to reach net zero emissions in all assets under management by 2050. Our investments include companies that are developing technologies intended to reduce their carbon emissions, create low-carbon fuel alternatives, reduce their impact and increase their contribution to mitigating climate change.

We believe that companies investing in solutions today will be the future leaders of the energy transition. We work with companies that are investing in technologies that will help resolve the challenges facing hydrogen, including renewable independent power producers, midstream and pipeline companies, industrial gas companies and traditional energy companies. Large emitters today must be part of the solution, and we believe hydrogen is an opportunity for many of them to become clean energy suppliers in the future.

BMO Funds that feature investments in Canadian hydrogen leaders and innovators:

Sources

Disclaimer

The viewpoints expressed by the Authors represent their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
Commissions, management fees and expenses (if applicable) may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus of the relevant mutual fund or ETF before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in BMO Mutual Funds or BMO ETFs, please see the specific risks set out in the prospectus of the relevant mutual fund or ETF . BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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