Blue hydrogen projects will leave companies vulnerable to “any acceleration in the global decarbonisation agenda” — and will ultimately be a “long-term credit negative”, according to a new report from ratings agency Moody’s.
Blue hydrogen — produced from natural gas with carbon capture and storage — is also only a “moderate at best” tool for reducing carbon emissions, which adds to the investment risks, says the paper.
“Low-carbon blue hydrogen, which uses carbon capture, could contribute to [the] global carbon transition, but it won’t reduce hydrocarbon reliance,” it explains. “For example, carbon capture technologies could propagate the continued use of fossil fuels. Moreover, investment costs for carbon capture in carbon-intensive sectors are high relative to alternatives like renewables and [non-blue] hydrogen.
“In addition, CO2 transport and storage safety is not guaranteed and the overall effectiveness of carbon capture techniques in reducing CO2 emissions is moderate at best.”
It will take many years for carbon capture “to begin to have a notable impact on emissions”, the report adds.
“Continued reliance on hydrocarbons will leave issuers [ie, companies issuing shares or bonds] in carbon-intensive industries vulnerable to volatility in fossil fuel demand and prices, as well as the long-term economic and financial risks associated with an accelerated global decarbonisation agenda — a long-term credit negative.”
Credit ratings from agencies such as Moody’s largely determine companies’ cost of borrowing, so the worse the rating, the higher the interest rates — which can increase the costs of doing business and therefore reduce profits.
For obvious reasons, those investing in blue hydrogen tend to be companies that are currently heavily involved in fossil fuels.
What about green hydrogen?
The Moody’s report — entitled Green hydrogen may help carbon transition, but implementation risks are high — was only a little more positive about renewable H2.
“Green hydrogen can help achieve net-zero carbon economies given its potential as clean fuel for power generation and as a decarbonisation tool for carbon-intensive sectors, where electrification is not a viable alternative,” it says.
“However, substantial hurdles will constrain the development and commercialisation of green hydrogen at scale over the medium term.
“Lack of available renewable energy and hydrogen, low technological readiness and high production, distribution and storage costs are likely to severely limit large-scale production and commercialisation of green hydrogen, especially without the guarantee of continued government support.”
The paper goes on to say that companies involved in the generation, distribution and use of green hydrogen will be more resilient to energy transition risks over the long term.
“However, the long-term nature of net-zero plans engenders significant implementation risks,” it adds. “This could potentially push back green hydrogen projects’ target dates, which would mute the positive credit impact they might have on issuers’ credit profiles.”
It also warns that the required regulatory frameworks are not yet in place, adding to the potential risks.
“The current absence of stable, transparent, long-term regulatory frameworks for hydrogen projects makes investment in green hydrogen production more precarious. It is unclear how supportive future regulation will be for issuers involved in the wider hydrogen value chain. New regulations could significantly impact these companies’ cost structures,” the report explains.
“As the environmental and social standards for what constitutes a green and blue hydrogen project are still evolving, some projects may fall short of the standards required to generate a strong pricing premium over non-green alternatives.”