Canadian Energy Podcast Series Episode 4 | Investments in Hydrogen

Lorne: Hello. I'm Lorne Rollheiser, a partner with Gowling WLG in the Calgary office. Today we're having a discussion about hydrogen and we have a guest, who's a principal with HydrogenOne based in the UK, and his name is JJ Traynor. We're looking forward to having a discussion with him in regards to all things hydrogen and related to hydrogen investment. With me is Stephen Bowman from our UK office. Stephen, can you just briefly introduce yourself?

Stephen: Hi guys. Stephen Bowman from the Corporate Energy team at Gowling WLG in the UK. I spent a lot of time investing in hydrogen and energy.

Lorne: Welcome, JJ.

Lorne: Great. Thanks. So, JJ Traynor. Very nice to meet everybody and thanks for the opportunity. I'm one of the two founders of HydrogenOne Capital. The other founder is a gentleman called Richard Hulf. He's busy on the other side of this office deploying the funds that we've managed to raise. Both Richard and I have technical backgrounds. Richard is a chartered engineer, and had a career in the power sector, with Exxon. I'm a professional geologist. I have a degree and a PhD in geology and spent early career with DP doing exploration projects. Richard and I moved from that kind of technical background into the financial markets. Richard is a professional fund manager with a company called Artemis, and myself, with Deutsche Bank on the investment banking and sale side and I spent 11 years with Shell, most recently including a lot of work actually in Canada. So it's good to speak to the team today. HydrogenOne was set up in 2020. So we're just coming up on the second anniversary party. The first year of those 2 years was preparation and working very closely with Stephen and his colleagues to do that. After about a year of preparation we launched the fund as an IPO on the London Stock Exchange, and raised 107 million pounds in that IPO, with a cornerstone investor Eneus Energy, and I'm not sure everybody would be familiar Eneus. Eneus is one of the world's largest chemicals companies and has a particular interest in clean hydrogen as a major user of hydrogen in the chemicals processes. So Eneus came in as a cornerstone on the fund. The proposition, we talk rather grandly about democratizing private hydrogen, so if you were to purchase a share in HydrogenOne, and I'm not for a second promoting the company on this call, but if you were to do that then what that share gets you is access to private equity in hydrogen and related technologies, in a positive market that's otherwise rather difficult to get access to unless you happen to be extremely wealthy. So we're democratizing private hydrogen with a listing on the London Stock Exchange. This is very much an ESG mandate. So we're very much in the clean fuel space, and we set for ourselves very high standards in terms of exclusions from the investment proposition, and we require our own vested companies to behave in a very good way on the ESG side. That's who we are.

Lorne: Thanks for that introduction. That's very helpful. Hydrogen, sitting here in Alberta, has been produced for an extended period of time. It's not new but its utilization, and the expansion of its utilization, it feels new in that it's rapidly kind of ramping up. It seems to be the, sort of as you mentioned the ESG in clean tech parameters, it seems to be that one item that's really gaining traction. More so than maybe other renewables have in the past. I'm wondering how you are seeing the landscape, in respect of somebody who's making hydrogen investments, about the opportunities that are out there. If you kind of describe a little bit about the parameters that you seek in respect of looking for hydrogen investments and sort of their general availability and applicability. Whether that be size, geography, scalability, whatever the parameters are that you guys think about, I think people would be interested to know.

JJ: That's great. There's quite a lot in your question. Let me give you a bit of background as to why hydrogen and what's driving the hydrogen economy here. There are really three big really substantial factors that are pushing this sector. These we think are structural changes and they're kind of unstoppable so there's the energy transition and the role of clean hydrogen in replacing dirty hydrogen in industrial processes, and I'll … that again in a moment, but it's the clean up of today's industrial gas sector and of course using hydrogen to replace fossil fuels in things like transport and power generation and heating over time. So energy transition and net zero commitments that many countries made around the world. That's a grandiose 2050 piece. In the here and now the problems of air quality in big city environments. This is really around diesel in heavy transport and coal and diesel and power generation. We think hydrogen with fuel cell has a really big role to play in the clean up of heavy transport, particularly. Then the third one, which was always there but we all kind of forgot about it, is energy security. In this rather changed world now with the Russian invasion of Ukraine, certainly over in Europe, the big emphasis is how to get off fossil fuels that have been shipped from Russia and how to do that as quickly as possible. So there's major moves, in terms of government policy, to accelerate renewable energy in the energy mix and domestic energy in the energy mix. Clean hydrogen, of course, has a really big role to play in all of that. So it's energy transition, air quality and energy security all pushing very, very strongly on the hydrogen economy. Which then of course … the question, where do you get it from? Where does hydrogen come from? What's investable for the fund?

      The hydrogen industry today is actually pretty big. It generates global revenues of about $170 billion dollars. It's hydrogen that's sometimes called grey hydrogen, manufactured by splitting fossil fuels, obviously with a big emission of greenhouse gases as a result. That hydrogen gets used in oil refining, in steel manufacturing, large scale chemicals processes. There's a significant demand call from heavy industry to replace that grey hydrogen with something else. So this is clean industry piece. Lorne, where you're sitting, you are about 150 kilometers, 100 miles, from the Scotford Oil Refinery? At a guess.

Lorne: Yes.

JJ: Which for everyone on the call will know this, but that's the big oil refinery that processes oil from the oil sands, from the Athabasca oil sands. Scotford is actually the world's first blue hydrogen facility. So about 30 miles from Scotford there's a carbon capture and storage project, that's called Quest, that was funded by the Alberta Government in the mid-2000s. Quest sequesters CO 2 from the Scotford refinery as part of hydrogen manufacturing steps. So the refinery splits fossil fuels. Makes hydrogen and makes greenhouse gases which have been captured in that Quest CCS plant. Then the hydrogen is then used in the Scotford refinery to make diesel. That's what's called a blue hydrogen facility. So what you're doing there is taking today's kind of grey polluting hydrogen manufacturing but actually capturing and storing the CO 2 and making a clean form of hydrogen. There are many projects like that on the table around the world today on the back of that breakthrough at Scotford. So that's blue. The one that tends to capture the headlines is green hydrogen, which uses electricity from wind or solar or hydroelectric, and then runs that electricity through an electrolyser which is a bit like your car battery, anode and cathode, but the anodes and cathodes are the other way around. That electricity through the electrolyser with some science produces O2 and hydrogen, both of which are cleaner, both of which can be sold. So most of the growth that we're seeing in the clean hydrogen sector is in that green space. There's a variance on that, and it's called turquoise hydrogen, and we can go into that in more detail if there's any interest to follow up. That's a bit the macro for hydrogen and what's driving it and then where it comes from. Lorne, that's a bit of a stream of consciousness, so let me peddle to the air and see if there's any follow up questions.

Lorne: I think you've done a really good job of describing what the path of travel is and sort of the desirability of moving from grey to blue to green, in respect of the hydrogen stream. I think that's a very helpful parameter to set up for listeners. I think the thing to talk about in that move along the chain, or the stream, is the thing that's in mind is about transferability of skill sets and capabilities. Certainly worldwide there are many professionals from the traditional fossil fuel world, you and I included, who are moving from fossil fuels to more sustainable fuels and I'm wondering about how you and your colleagues have found the transition, because I think there's a lot of people that are in a similar situation, as is society, which is transitioning from a fossil fuel base which is, I think, it's going to take time but it's certainly going to take a lot of investment and how you found that transition. How you found the transferability of the skill set from your previous engagements to what you do now.

JJ: Well, thanks for the question. I mean the way we look at the hydrogen system is we look at it as in any other system. So there are facilities that make the stuff. There's the supply projects that manufacture the hydrogen and then there's some sort of storage element to that. So salt caverns, pipelines, tanks, which would be familiar ground to people in the fossil fuel distribution system, which overtime is going to be pipelines. So asbestos grade pipelines and then in the near term is trucks using gas cylinders. Then there's the applications of the hydrogen, which is usually using fuel cell in power plants, in trucks and trains and airplanes and so on. So some of that is quite new for people with the fossil fuels background but actually a lot of it is pretty familiar ground. The commercial concepts that are in there, and Stephen may want to come in on this, but the commercial concepts are actually very similar to the natural gas industry. So gas sales agreements, off-take agreements, bank guarantees, all that good stuff. The projects that drive the supply of hydrogen, these are SPVs of the sort that you would see in the natural gas industry, or the wind and solar industry. So there's kind of new stuff for fossil fuel professionals but there's a lot of familiar ground. The returns profiles are very different. So if there's any economists on the line, if you're thinking about building an oil sands mine in Athabasca, say goodbye to $20 billion dollars and 5 years of your life that you never get back. The final bill is probably going to be $40 billion before you finish. So hydrogen projects are not like that. They have a construction time of sort 6 to 18 months and $150 to $200 million dollars gets you a lot in the hydrogen sector. What you don't have is subsurface risk. So you don't need to worry about reserves, audits and appraisal wells, and … and all that good stuff. You're really thinking about the weather to drive your wind and solar and obviously the costs of your supply chains. So some bits of this is easy and some bits are obviously pretty new. The bit where us grey haired fossil fuel guys are never going to make much progress is in the high tech bits. So the details of what makes or breaks a fuel cell or what makes a successful electrolyser. That is a very specialist electric chemical area and there's a whole different PhD that you need to do to become an expert in that.

Stephen: I mean, JJ, what you said about the transferability. So some of the projects have the same underlying components of other projects, sort of gas, of renewables. From my perspective, and this is what I find fascinating about the hydrogen factor, is the multi-factor of big projects. So if a green hydrogen, not only producing hydrogen to secure your renewable supply, so that you have a mix of renewable supply as well as grid …, whereas the hydrogen going is the off-taker. There's also a lot of … with the production of hydrogen, particularly in industrial site. So for example, JJ, I think one of your portfolio companies announced they'd reached record efficient in electronics to create that by working with a fuel manufacture. The fund prior just they manufactured electrolysers and these are also high temperature electrical efficiency. In the worry of making both professions to use the heat by-product from … manufacturing … the action is thought the high temperature of the electrolysis kind of achieved to a high efficiency. So there's a lot of, in a high industrial …, you're not forced to apply energy or integrate your hydrogen solution with the needs and having the in-take and the off-take align and follow the structure. That's where a really interesting point of thought. So we're looking at it from more angles is probably the underlying legal framework creates from this whole mix than we're used to.

Lorne: I think we've all kind of got similar experiences in that regard. I think of things like your description, JJ, of the technical expertise and specialty associated with that. I think of our IP and patent lawyers, when you have PhDs on staff, I think they are somewhat agnostic to, well they might disagree in that some are going to be more life sciences focused, some are going to be more download technology focused. There are going to be specialties amongst them but I think they're in a similar situation as I would be with respect to things like gas sales, off-take agreements, mid-stream transportation, those operating style agreements and the issues that come up, Stephen, and focused on the financing side, applying financing that's taken place in other realms to this realm isn't a stretch, and I think that's the thing that you've kind of described this, which is the transfer of focus from fossil fuel experts to sort of the further push into renewable green clean tech is something that's quite natural. It's simply another path that people may walk but it's not dissimilar from the path they've previously walked. So I think that it helps overall in thinking about aspects of the transition that are going to be rocky and volatile, this is an area, that is to say bringing expertise to the area, isn't one that I'm as concerned about as just sort of the overall adoption. There's just the time and expense it takes to re-do grids and re-do energy systems. Kind of leading into that a little bit, maybe JJ I'll kick it back to you, about challenges and opportunities, supports from stakeholders and just to sort segue into that a little further, recently here in Canada our Federal budget announced support for things such as carbon capture and storage that you've described earlier. Here in Alberta there's a significant support for the hydrogen business as well as carbon capture. So we're getting governmental support and I wonder kind of what you're seeing from where you sit, in respect of both the obstacles but the support to overcome those obstacles.

JJ: It's a great question. The demand call that we're seeing in the hydrogen sector today is supply of clean hydrogen and it's the supply chains to make the hydrogen. So it's electrolyser. It's storage. It's fuel cell. The sites to obviously make the stuff. The off-take is industry. It's chemical plants. It's fertilizer plants. It's oil refineries. There's an absolute imperative on those heavy industries to take this clean hydrogen and make it work to reduce the greenhouse gas emissions from those facilities. It's not to say that hydrogen is going to fix all of these problems but many of these refining petrol-chemical sites and steel plants won't be viable with the carbon penalties that are coming in, unless they can really move on this theme. Green steel would be a great example of that, which also can use a lot of hydrogen. We think that industrial pull is really moving this sector out to 2030. Perhaps against a big of a backdrop of media coverage of cars and trucks and trains and things that are using hydrogen. We see that as very much a chapter too, once the industry has addressed that heavy base load. Now governments, I think they were running at 39 countries around the world now, that have hydrogen policies. Clean hydrogen policy as part of their net zero commitments. Of course, Canada would be in that 39. Typically those policies set the target for how many gigawatts, gigawatts is the metric that's used in measurements, how many gigawatts of clean hydrogen they would be in 2030 and 2050. What's often a little bit further behind that headline is grant support, funding support, to get these projects off the ground. Then the legal and then get a regulatory frameworks to get the projects moving. Around the world, it's not very scientifically, but we would see Japan, South Korea, Denmark, Germany, California actually, as the more advanced in terms of target setting and then the policy formation that's required to make those targets happen. Then other countries obviously catching up pretty quickly. But what we're also seeing is big business kind of getting on with it anyway because of this imperative to clean up the existing greenhouse gas emissions. In terms of what we're investing in, to turn it the other way, most of our capital employeds, actually all of our capital employeds so far has gone supply chain OEMs. So electrolyser and fuel cell businesses and transport businesses. Those guys are very busy growing their market share and growing their product lines into this very dynamic market.

Lorne: I appreciate that. In regards to next steps, I'm obviously curious as we all are, like I say I think there's a lot of enthusiasm. Certainly governments are coming out with support. I think it's a thing that industry is moving towards, and I guess a thing I would make note of  here in this time and place as well, is that established industry, focusing on fossil fuels, pricing has changed drastically since the Russian/Ukraine conflict that's undergoing, that is changing things from sort of a scramble mode from the 2014 dip in prices where there wasn't as much capital flowing around and people were having, I think, more difficulty sort of understanding what they're going to do in the new environment, with respect to their company and how to reinvest. Now there's more choices and I'm curious about your views on next steps and where we go. I think governments are putting  a lot of money into this. I think traditional energy companies have more money available, should they wish to go this direction, and it just seems that the time is right. I'm kind of curious, maybe your wrap up comments, on where we're headed.

JJ: On the macro, I mean obviously the Russian invasion of Ukraine, made a very, very tough situation. I'm personally not convinced that the policy response of energy is fully bottomed out here. Certainly in Europe, governments, I mean asleep at the wheel is kind of a strong statement, but energy was kind of on the list of things to do but it wasn't very high on the list. Now it's high and Richard and I feel that we're seeing government ministers kind of learning the brief and not putting things down that are necessarily particularly doable in any race to make short timeframes. I think we all on this call know how long it takes to grow an oil and gas field or an nuclear power plant or maybe for any renewable energy business. We don't think we've seen the full outcome on the energy system for what's happened in Ukraine. In terms of the hydrogen sector, it's a very hard thing to say but it's all very positive, and the geophysical situation, sorry to say it in this way, but it has actually been very supportive for this sector. As you say, oil prices and carbon prices and natural gas prices, they've all kind of doubled or trebled in the last year, which makes relatively expensive clean hydrogen suddenly seem less expensive. So the economics have improved for us, as have the imperative of domestic energy supply and diversification energy supply and growth in renewables. So we are busier than ever. What's next for HydrogenOne,  actually need to have a call with Stephen straight after this one, because we've got a few deals that we're juggling and he's very busy on a couple of those. Like our plan is, we have 60 million pounds of undeployed capital, which is kind of harmful for our fund, so we've made a commitment to our investors to get that deployed, sensibly, but quickly. Then our business model is to show that current record back to the market, raise more funds and then deploy more capital. We expect to be moving away from private companies. We've done a lot of private company investment in the last year. We expect that to be alongside the supply projects in the next year. So where it's been all private companies, we think it's going to be much more of a blend of companies and projects going forward, as the industry grows.

Lorne: Stephen, before you get instructions from JJ to pick your pen back up, are there any closing thoughts you've got for our discussion today, and generally energy investment, that you're seeing?

Stephen: Yeah. There's clearly a huge amount of activity in the hydrogen sector. We've seen it before from when … … storage and now there is more … in hydrogen, particularly in the UK and across Europe as well. I think right on trend of the topic, Lorne, and that there'll be a lot more in this space.

Lorne: Thank you both very much for taking the time. Appreciate sharing what you're seeing very much on the frontlines of the activity that's taking place and I know this has been very valuable for me and I'm sure our viewers really appreciate your contributions. Thanks again.

JJ: Excellent. Thanks very much for the opportunity.

Stephen: Thank you.