The energy transition is not all about established forms of renewable energy generation. Hydrogen might not be competitive yet, but it will play a key role in a low-carbon economy, Mirova says.
The energy transition to renewable and sustainable energy generation will require more than just solar panels and wind turbines. Hydrogen is often cited as another key pillar to a sustainable economy.
Hydrogen is produced through electrolysis, where an electrical current is applied to electrodes, breaking down water molecules into oxygen and hydrogen. But most of that electricity used in hydrogen production today is generated with fossil fuels, predominantly gas, causing significant amounts of carbon dioxide emissions.
To make hydrogen a part of the energy transition story, the production needs to be powered by renewable sources. This so-called “green hydrogen” can hopefully then be used for a wide range of applications, including heating, transportation and metal production.
The European Union has ambitious targets for hydrogen production. Although hydrogen accounted for less than 2 per cent of Europe’s energy consumption in 2022, while 96 per cent of this was produced with natural gas, the EU is aiming to produce 10 million tonnes of green hydrogen and import 10 million tonnes by 2030.
Australia also has plans to become a major global player by 2030, in part driven by the vision of Dr Alan Finkel, Australia’s former Chief Scientist, and has set out its game plan in Australia’s National Hydrogen Strategy.
The strategy details a number of pilot projects that have been started in the various states and territories. For example, it describes a project in which the Australian Capital Territory’s government has partnered with Neoen, Hyundai and ActewAGL to establish hydrogen refuelling infrastructure and the integration of 20 hydrogen fuel cell vehicles into the ACT government’s fleet.
[Hydrogen] is the only way to decarbonise heavy transportation and this is the only way to decarbonise industry
But there are also many sceptics who doubt hydrogen will make a substantial contribution to the energy transition as few projects run at any significant scale and can’t currently compete on price with other renewable energy sources. Also, the main application of hydrogen today is in the production of chemicals and fertilisers, while its application to heating or transportation is still at a very early stage.
Yet, Raphaël Lance, Head of Energy Transition Funds at Mirova, an affiliate asset management firm of Natixis Investment Managers dedicated to sustainable investing, is positive on the role of hydrogen in the energy transition.
“We are strong believers that it will be an important feature of energy transition. This is the only way to decarbonise heavy transportation and this is the only way to decarbonise industry,” Lance says in an interview with [i3] Insights.
“We are at the beginning of the story. Green hydrogen is not yet completely competitive, but it is similar to where solar was 20 years ago.
“There are systems that are now being put in place by governments to help launch this economy, whether they are subsidies or feed-in tariffs. And so at Mirova, we’ve always been a bit of a pioneer in the sense that we have been willing to support those new technologies if we believe that they will be an important pillar of the energy transition.”
In the current vintage of its energy transition fund, Lance will invest in hydrogen projects, but these projects will be capped at 10 per cent of the fund. Yet, this percentage is an increase on previous fund vintages, when hydrogen investments were capped at five per cent. The bulk of the fund, however, will be invested in established renewable assets.
“The first investment we ever made in hydrogen was in a taxi company in Paris, called Hype, that was developing a fleet of hydrogen taxis. We did a secured loan, secured by the taxi licences and the cars,” Lance says.
“It was an asset-based transaction, not equities based, so we did not have to rely on whether hydrogen would be the main form of taxis in the future.”
Lance and his teams are also starting to explore opportunities in electro fuels or e-fuels for short.
E-fuels are a class of synthetic fuels that are manufactured using captured carbon dioxide or carbon monoxide and green hydrogen. They can replace existing fuels, including methanol and diesel.
So far, Mirova has made a small investment in this space, in September this year, involving the provision of financing to e-fuel company Elyse Energy for the development of the company’s e-methanol and sustainable aviation fuels projects in France and Spain.
“We believe that e-fuel is going to be an interesting feature of green hydrogen. For the shipping and aircraft industry, in particular in Europe, there is regulation in place now to blend traditional fuel with green fuel. That can be either e-fuel or biofuel. We don’t invest in biofuel, but we do believe in e-fuels,” Lance says.
Changes in Financing
Lance can invest through a number of structures in the energy transition, including directly into assets. But more recently he has found taking equity stakes in renewable energy development firms is an attractive opportunity that has only been made possible by a changing financing landscape.
The rise of interest rates in recent years has made the cost of borrowing significantly more expensive and this has changed the way development firms are financing their projects.
Previously, developers of energy transition project companies and assets would rely on debt to fund their projects, which they could service through long-term, secure cash flows generated by the project. This meant they had little reason to sell equity stakes in their businesses to external parties.
But as interest rates climbed and financing became more expensive, there was a greater need to attract external parties to provide capital.
“The projects were almost financed by the services they were providing to the project companies, including the development premium and construction services. That was almost paying for their equity and so you had a lot of companies that were very equity light and they did not need to have sub-party investing into their corporate structure,” Lance says.
“That has changed because the equity need is much bigger. So if they want to keep assets, they can always sell [part of the] assets, but if they want to keep [all of the] assets, then the only way for them to do it is to open their capital [structure]. And so we have seen a lot of developers going to the market, trying to raise capital.”
Mirova has now allocated about 30 per cent of the fund to private equity stakes in renewable energy development firms, rather than the project assets itself. This strategy should allow Mirova to target higher returns than otherwise might be expected.
Lance prefers to partner with mid-market and smaller-sized companies to help them go to the next stage of growth and become independent power producers.
“We are very selective in the type of deals we want to do. What we want to do is mostly primary capital, so we really want to inject capital into the companies that is then used to put new assets on the ground,” he says.
Mezzanine debt is used in less than 15 per cent of investments and is usually only applied to companies that do not want investors to share their capital structure or when Mirova invests in newer technologies.
“That’s how we did storage at the beginning and that’s how we have started to do our first investments in hydrogen,” Lance says.
Emission Intensity
Investing in the energy transition can sometimes feel at odds with the objective to achieve net-zero emissions by 2050. Many of the companies that operate in the renewable energy space, such as manufacturers of wind turbines, are industrial companies with high emission profiles.
Yet, the products they are building will certainly help in reducing emissions in the broader economy.
How to reconcile the two?
Lance says this is where scope four emissions come into play. Looking at these emissions shows how a wind turbine manufacturer helps the transition away from fossil fuels as avoided emissions are counted under this category.
“It’s true that if you only look at scope one or even scope two, but not at scope three or four, these companies look emissions intensive,” he says.
“For instance, insulation material is quite energy intensive to be manufactured, but then it provides you with insulation for 20 years in your house.
“The difficulty is that there is no common methodology to measure carbon footprint.”
We are developing a methodology to measure avoided emissions, which is scope four. And if you look at it from this angle, then there is no doubt that the wind turbine manufacturers are actually providing a positive contribution when it comes to CO2 emissions, in the sense that they are improving the system overall
Scope four emissions in particular are hard to measure as there is still little consensus on how to calculate them and so Mirova is working in partnership with universities, financial institutions, LPs and GPs on a global database of avoided emissions factors and associated company-level avoided emissions, which aims to enable those players better assessment of companies’ true contribution to the global net-zero objective.
“We are developing a methodology to measure avoided emissions, which is scope four. And if you look at it from this angle, then there is no doubt that the wind turbine manufacturers are actually providing a positive contribution when it comes to CO2 emissions, in the sense that they are improving the system overall,” Lance says.
Mirova has made its efforts in developing a methodology to calculate scope four emissions open source so others can contribute and develop a common standard.
“We are inviting as many stakeholders as possible to participate in this common effort so that we have one common way of measuring avoided emissions,” Lance says.
This article is sponsored by Natixis Investment Managers. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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