“Hydrogen” is the word on everyone’s lips, as the most abundant of all the elements is tapped as the clean energy source of the future.

With a global market worth more than US$100 billion ($135 billion), hydrogen is widely used as an industrial chemical – mainly within the petroleum industry, and for the production of ammonia, most of which is used for fertiliser, but it has a wide range of other uses. Industrial hydrogen is mostly produced from natural gas, which generates significant carbon emissions – that kind is known as “grey” hydrogen. A cleaner version is “blue” hydrogen, for which the carbon emissions are captured and stored, or reused. The cleanest kind is “green” hydrogen, which is produced from electrolysis of water, powered by renewable energy sources, without producing carbon emissions in the first place. That is the kind of hydrogen that is being talked-about as the clean energy source of the future.

It is something of a paradox that hydrogen is the most abundant of all the elements, but it has to be created, using processes that require a lot of energy. Hydrogen gas can be used as an energy store and fuel, but at present, arguably, it is a very difficult product to compress, handle and transport; it has a very wide flammability range, and worse, because its molecule is so small, it is very difficult to prevent leakage.

It must be stressed, these are very much “live” debates – others say hydrogen is quite similar to natural gas from a handling and safety perspective.

To produce hydrogen, water is put through electrolysis – that is, using an electric current to break water, H2O, into its component elements of hydrogen and oxygen, both in gas form. If this electric current is produced by a renewable source (for example, solar PV or a wind turbine), the clean hydrogen produced is known as “green” hydrogen. The oxygen is benign waste.

It is certainly possible, relatively quickly, to produce green hydrogen in this way. If you use a dedicated renewable power system and don’t use any additional power from the grid, yes, you’re producing hydrogen with nearly zero emissions (apart from that which resulted from smelting, building, transporting and installing all of the required equipment).

Even if you are using wind or solar to power the electrolysis, it is still a hugely expensive and very energy-intensive process. Then, compression and storage of the hydrogen will not be a trivial cost, either.

On a small scale, local plants may use electrolysis of water to make hydrogen gas an energy store and fuel. The potential problems start to arise upon expanding the scale of production, storage and transport.

At the moment, no-one has any real clue about the costs of green hydrogen. But as in all things involved with renewable energy, the conditional tense gets a big workout – hydrogen “could” do anything, right down to powering our industrial society.

If a few relatively large problems are ironed-out – but that’s not to say they will not be.

There are two ASX-listed companies at the forefront of the hydrogen push.

1. Fortescue Metals Group (FMG, $21.26)
Market capitalisation: $65.4 billion
Three-year total return: +86.1% a year
FY22 forecast yield: 8.8% fully franked, grossed-up 12.6%
Analysts’ consensus valuation: $23.07 (Thomson Reuters), $23.24 (FN Arena)

Iron ore giant Fortescue Metals Group has told its shareholders that the company will also become a hydrogen and steel superpower, unveiling plans to build a steel-making industry in Australia, making “green” steel – zero-carbon steel, using zero carbon-dioxide-emissions energy – as well as becoming one of the world’s largest clean-energy companies. Fortescue has formed a new arm, Fortescue Future Industries (FFI), which will take oversight of these plans.

Fortescue says it will make green steel by replacing coke (made from steelmaking coal) as a reducing agent in the blast furnace with “green” hydrogen, which is made by electrolysing water into its component elements of hydrogen and oxygen, both in gas form, using renewable energy.

Fortescue plans to start building Australia’s first green-steel pilot plant this year, with a commercial plant in the Pilbara, powered entirely by green electricity from wind and solar, in the next few years.

Whether “green” steel really has a commercial future, certainly in the near future, will depend very much on significantly reducing the cost of generating the hydrogen. At this stage, the cost is simply too high to allow green steel to compete with traditional blast-furnace steel-making. Also, the major markets are far away: Australia is of course an expert shipper of LNG, but it should not be simply assumed that it can do the same with hydrogen, which is a very different kettle of fish.

Fortescue says it will invest at least $400 million into renewable energy technologies such as wind, solar and green hydrogen, as it ramps up its push to be one of the world’s biggest clean energy companies. The company says hydrogen is the ultimate focus of FFI, but it will need to invest in wind and solar will be necessary to manufacture it in a clean way, and it also wants to run its mines solely on renewable energy.

Fortescue CEO Elizabeth Gaines said last month that the company would put aside 10% of net profit into renewable projects through FFI – that means $400 million to invest from the half-year just gone, but will also include whatever profit the company generates in the June half. However, any capital allocated to a project will be assessed within Fortescue’s “disciplined capital allocation framework.”

FMG shareholders can take comfort from the fact that the company is massively profitable at current iron ore prices, and will still be profitable even with a significant drop in prices. Last month Fortescue reported a net profit of $US4.1 billion for the December half-year, after sales rose by 44% to $US9.3 billion. Shareholders will receive a fully franked interim dividend of $1.47 per share, up 93% on the interim payout a year ago.

Fortescue’s day job – iron ore – is still pumping out the cash.

2. Hazer Group (HZR, $1.32)
Market capitalisation: $193 million
Three-year total return: +45.7% a year
FY22 forecast yield: no dividend expected
Analysts’ consensus valuation: no analyst coverage

Perth-based Hazer Group is the only pure-play exposure to green hydrogen on the ASX – only not through electrolysis. Hazer, which was founded in 2010 to commercialise technology developed at the University of Western Australia, and listed on the ASX in December 2015, committed in July to build a commercial demonstration plant (CDP) to prove that its Hazer process works. The process uses iron ore as a catalyst to produce hydrogen and graphite – rather than carbon dioxide – from methane. The process decomposes methane into hydrogen molecules and solid graphitic carbon.

Hazer’s CDP will be built at Perth’s Woodman Point wastewater treatment facility. The feedstock will be biogas produced from sewage waste, which will be converted into green hydrogen. Woodman Point already has bio-digestor facilities on site, which allow for methane gas to be produced and captured from the sewage waste received at the plant, and will serve as a ready-made supply of green biogas for the Hazer hydrogen project. The project will use about two million standard cubic metres of biogas that is currently being flared-off, for environmental mitigation.

The plant will produce 100 tonnes a year of hydrogen at fuel-cell grade, meaning it will be capable of use as a low-emission transport fuel, in heavy-duty applications such as passenger vehicles, buses, trucks, rubbish collection vehicles and long-haul road transport – or for power generation, or as a “cleaner” source, in terms of carbon-dioxide emissions, for industrial applications.

The project will also produce about 370 tonnes a year of high-quality synthetic graphite, which could be used for energy storage and other large global graphite applications – the CDP will provide the first larger-scale example of Hazer graphite available to market. Hazer says its graphite is highly crystalline and has excellent comparison to high-end commercial forms of graphite used in lithium-ion batteries – but with less environmental impact, as Hazer does not need to excavate mass areas of land like natural graphite extraction and does not need to use harsh chemicals like petroleum coke, which is used to create current synthetic graphite.

The $17 million plant will also feature a stationary hydrogen fuel cell power-generation system, allowing Hazer to use some of the hydrogen it produces to generate its own renewable power, thereby offsetting power purchased from utility providers and reducing operating costs. The installation of the hydrogen fuel cell will be one of the first larger-scale installations in Australia and the company says it will demonstrate the technology’s ability to be integrated with the Australian grid.

Hazer is targeting commissioning in October 2021, with the CDP intended to operate for up to three years or until the end of 2023.

Other players

There are several highly speculative smaller companies with plans at varying stages to enter the hydrogen market.

3. Leigh Creek Energy (LCK)

The South Australia-based Leigh Creek Energy is focusing on “grey” hydrogen, made through in-situ gasification (ISG) of the old Leigh Creek coalfield, with urea (for fertiliser) produced on-site. The company says the Leigh Creek Energy Project (LCEP) is a $2.6 billion project.

4. Hexagon Energy Materials (HXG)

The former rare earths-gold explorer acquired the Pedirka hydrogen project in the Northern Territory in 2020 – the project will use an underground thermal coal resource and a surface gasification plant to produce “blue” hydrogen from coal for export and domestic markets with zero carbon emissions. The carbon dioxide given off by the coal will be captured as the process separates the hydrogen, and sequestered back into the ground.

5. Pure Hydrogen Corporation Limited (PH2)

The newly merged (this week) entity Pure Hydrogen Corporation, created from the merger of Real Energy and the former Strata-X Energy, will hold gas assets in the Surat and Cooper basins, and is also planning a renewable-energy powered electrolysis operation at Port Anthony in Victoria to produce hydrogen for export, manufacturing input and powering of hydrogen fuel-cell vehicles. The company is also proposing a hydrogen plant at Miles in Central Queensland, which could access both coal seam gas (CSG) and gas from the company’s own gas fields.