An original article by Longrun Capital
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<aside> đź’ˇ Hydrogen is increasingly recognized as a crucial component in the transition to a sustainable, low-carbon economy. Its ability to serve as both a fuel and an energy carrier makes it versatile across various sectors, like in steel production where it can significantly reduce carbon emissions. Hydrogen can be produced in environmentally friendly ways, notably green hydrogen via electrolysis using renewable energy. However, scaling up to meet global energy demands by 2050, which includes a massive increase in hydrogen production, will require substantial investments estimated at $320 billion by 2030.
Despite its potential, challenges such as cost, hydrogen embrittlement in metals, and the need for large-scale infrastructure development persist. As the hydrogen economy is accelerating and attracting investment from corporates, banks and pension funds, also private capital such as PE and VC are flooding into the sector. VC hydrogen deal count has more than tripled since 2014 with quadrupled PE count (True, 2023). Venture capital firms can play a pivotal role in this transition by funding and guiding startups focused on innovative hydrogen technologies, potentially transforming industries like steel production to be more sustainable and less carbon intensive.
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The shift towards a more sustainable and low-carbon economy is prompting a re-evaluation of energy sources and production techniques across various industries. Hydrogen, with its high energy content and clean-burning properties, emerges as a pivotal player in this transition.
Hydrogen is not just a fuel but a versatile energy carrier, which can be produced from various sources and used across different sectors. It offers significant potential to contribute to environmental sustainability, energy security, and economic prosperity. It is poised to meet 18% of the world's final energy demand by 2050, up from less than 1% today. This transformative shift necessitates the production of 530 million metric tons (Mt) of hydrogen annually, a substantial increase from the current 70 million Mt. While the potential impact on decarbonization across sectors is substantial, significant investments, estimated at up to $320 billion by 2030, are imperative to scale up the hydrogen economy (Hydrogen Council and McKinsey & Co, 2023). The most appealing attribute of hydrogen is its ability to facilitate the integration of renewable energy sources into the economy, providing a storage solution for intermittent wind and solar power, and enabling long-distance energy transfer.
The methods of hydrogen production are classified based on their carbon footprint:
Despite the potential, the cost and availability of green hydrogen are currently limited by the high capital expenditure on electrolysers and the need for substantial renewable energy supplies.
Green hydrogen production, conversion and end uses across the energy system. Image from IRENA, 2020, used under CC license BY 4.0.
So where does a VC firm find its place in Hydrogen’s evolution? We believe they have a role to play in the hydrogen economy, primarily by driving innovation and commercialization of emerging technologies. Investors can provide not only capital but also strategic guidance to startups focused on developing new hydrogen-related technologies, such as advanced electrolyzers, efficient storage systems, and novel applications in industrial processes. VC investors can act as catalysts for innovation, by daring to take on technology risk through early-stage investments and accelerating the path to commercial viability and scalability. The sector is further fueled by government and corporate commitments in Europe, Asia and North America to build hydrogen infrastructure, such as the newly announced European Hydrogen Bank that will invest €3 billion into hydrogen infrastructure.
Let us have a look at one of the end-uses for hydrogen, the steel industry, where there is a high demand for reducing emissions and finding ways to produce green steel. GreenIron is among the Swedish companies to use hydrogen in their process. So what are the challenges with hydrogen in steel production?