Hydrogen and a Net Zero Future

Vic Pascucci
Managing Partner

By Vic Pascucci III and Nate Johnson

Recently, clean hydrogen startup Monolith announced that it has received conditional approval for a $1B loan from the U.S. DOE Loan Programs Office (LPO). This funding will be used to scale its Olive Creek facility in Hallam, Nebraska, which uses methane pyrolysis to convert natural gas into gaseous hydrogen and solid carbon, also known as carbon black. Hydrogen is one of the key elements of the gas networks’ ESG imperatives. Under the rigorous due diligence process of the LPO, no conditional commitments have been extended to non-nuclear projects since 2016, which illustrates that Monolith's announcement is a big deal. It's a vote of confidence in making clean, cost-competitive hydrogen a reality in this decade.  Hydrogen can and will be a source of clean, reliable, safe and cost-effective energy that can be transported using the existing trillion-dollar natural gas infrastructure. 

Hydrogen’s properties make it a strong candidate for augmenting and potentially replacing existing fossil fuels in various use cases. It exists in abundance on Earth in water, hydrocarbons, and other compounds. As a diatomic gas (H2) it’s an energy-dense, storable fuel which does not emit any pollutants or greenhouse gasses when consumed. The challenge is that the primary method of hydrogen production today, steam methane reforming, is carbon-intensive, and clean production methods, such as electrolysis, are currently economically unattractive. 

 

Source: IEA Future of Hydrogen (2019)

Producing clean hydrogen has far-reaching decarbonization potential. Most hydrogen today is used in industrial applications, including production of ammonia, methanol, steel, and other petroleum products. Substituting clean hydrogen in solely existing applications would yield emission reductions of up to 830 MtCO2 annually (or 2% of worldwide GHG emissions), but there is also opportunity to reduce carbon intensity and even displace fossil fuels with hydrogen in other applications: 

  • Industry: In hard-to-decarbonize sectors, such as steel, cement, and chemicals, hydrogen combustion can supply high grade heat
  • Transport: Hydrogen can power fuel cell vehicles, particularly in heavy-duty applications, such as trucking, shipping, and aviation, where routes are predictable and hydrogen's fuel density is advantageous relative to batteries
  • Buildings: Leveraging existing natural gas infrastructure, hydrogen can be delivered as a fuel source for heat (using hydrogen-powered boilers / furnaces or absorption heat pumps) or electricity (using fuel cells)
  • Energy storage: For long-duration energy storage in a future-state energy grid dominated by intermittent renewable resources, clean hydrogen can be generated, stored, and then converted back to electricity when needed

In the IEA's Net Zero Scenario (NZE), which provides a projection of achieving global NZE by 2050, hydrogen demand is expected to more than double from 2020 to 2030, driven by expanding applications.

Source: IEA Hydrogen report (2021)

Achieving this amount of growth in clean hydrogen supply and demand is an amazing opportunity for the entrepreneurial ecosystem. Challenging barriers lie ahead, including sufficient renewable generation capacity to power electrolysis, infrastructure for safe and efficient  transportation and storage of hydrogen, and equipment for hydrogen consumption (e.g., fuel cell vehicles, refueling stations, hydrogen combustion systems, compatible gas heat pumps and turbines).  These are the challenges where great entrepreneurs thrive, succeed, and completely disrupt the status-quo. To support entrepreneurs in overcoming these challenges, funding needs to be robust at all stages of the capital stack, with both public and private capital fueling technology innovation and deployment at scale. There is momentum from 2021 in both areas. 

In the public sector, Monolith's loan is only one of several clean hydrogen support efforts underway. The Bipartisan Infrastructure bill, signed in November 2021, contains more than $9B in federal funding for electrolysis R&D and buildout of hydrogen hubs, which would contain infrastructure for production, transportation, storage, and consumption of hydrogen in close proximity. These funds were highlighted this past week as part of the Biden administration’s industrial decarbonization initiative. The Build Back Better Act, which was passed by the House in November contains a $3/kg production tax credit for clean hydrogen production. Although its fate in the Senate remains uncertain, if it passes with this provision intact, it would be a huge growth driver for the clean hydrogen industry. The DOE also kicked off its Hydrogen Shot initiative in June 2021, which aims to reduce the cost of clean hydrogen to $1/kg in 1 decade, via $400M in annual funding for demonstration projects and hosting of hydrogen summits.

In the private sector, cleantech venture capital firms have used an influx of capital to back hydrogen startups, including large deals for hydrogen fuel infrastructure developer FirstElement Fuel ($105M), hydrogen transport and storage provider for aviation Universal Hydrogen ($62M), hydrogen aviation powertrain manufacturer ZeroAvia ($37M), green hydrogen developer Electric Hydrogen ($24M) and turquoise hydrogen (thermal pyrolysis) developer Ekona Power ($65M) Our own portfolio company Cemvita Factory raised their series A to decarbonize heavy industries and is doing so in partnership with Oxy for Bioethylene.  Cemvita is also creating a new version of hydrogen which will soon be known as “Gold Hydrogen”; stay tuned for more announcements on that front! Venture capital funding plays a critical role in complementing public programs by driving commercialization of innovation and promising technologies. Both these sources of funding will need to continue to grow in coming years to build the hydrogen economy. 

Hydrogen presents an incredible opportunity for entrepreneurs to develop game-changing, climate-positive companies that redefine multiple industries. At Energy Capital Ventures, we see it as our responsibility to play a critical role in the advancement of hydrogen innovation to support the ESG Imperatives of the natural gas industry and the decarbonization goals of the planet.