Hamilton Locke New Energy Expert Insights: The Global Energy Crisis and Hydrogen’s Opportunity – Part II

Expert: Mike Jefferies, Octopus Investments Australia

In this two-part New Energy Expert Insight series, we spoke with Mike Jefferies, Investment Manager with Octopus Investments Australia, to discuss the current state of play in the energy markets six months on from the beginning of the Ukraine crisis.

A long-standing member of the Octopus Investment team, Mike has experience across several areas of renewable energy, contributing to over $1 billion of utility-scale renewable generation equity and debt financing across retail and institutional funds. Octopus is one of the largest owners of renewable energy projects in Australia and Europe, managing some 300 assets for wholesale and institutional investors. In Australia, the firm oversees $1 billion in assets across construction and operational industries.

In Part I, Mike explained how the global energy crisis is impacting the energy markets and project financing in the renewables sector. In this Part II, Mike explains how the energy crisis has the potential to accelerate the transition to net zero, in particular through a burgeoning renewable hydrogen economy.

Part II

We’ve now seen how vulnerable a country’s energy security can be to global events. What in your view does the future hold for the energy transition and can renewables help guarantee energy security?

The energy crisis has really thrown the diversification of the global energy supply into a higher gear. Countries and whole continents, particularly in Europe, are concerned about energy security – ensuring that domestic energy supply is not impacted by international events.

A lack of access to energy supply combined with volatile commodity prices has fed through to both global fuel and energy prices, and I don’t think we will see the energy prices mean revert any time soon.

From the latest government announcements we have seen regarding commitments to targeting additional renewable capacity build-out, it certainly feels like governments see renewables as a way to, in the long term, bring prices back down to earth.

What does this mean for the wider renewables market? The more efficient solar pv, wind and battery technologies become, the more we will see long-term capex prices fall. This will help drive down the cost of supplying energy. This can be seen via various forecasts of levelized cost of energy which are falling. There is a chance we will also see more companies move to manufacturing equipment domestically, in turn reducing the risk around future supply chain constraints. As I touched on previously (read here), the main bottleneck for mass adoption is continued government support. Government holds the key to the acceleration of renewables by enabling infrastructure development and grid build out, utilising skilled labour and by simplifying permit processes for projects.

The ability to produce renewable hydrogen independently of fossil fuels for energy supply makes it an attractive alternative to conventional fuels. For renewable hydrogen, its production is limited to where you can generate renewable electricity. As countries continue to transition their energy mix to renewable resources and technology (ie electrolysers), costs should come down, and the ability to produce renewable hydrogen at scale will follow. This is a potential alternative fuel to liquefied natural gas (LNG) which can hugely contribute to energy security and fuel independence for countries fortunate enough to have the renewable resources to produce renewable hydrogen at scale.

Do you see the same level of adoption playing out in Australia?

Australia has been lagging behind in policy support compared to our European Union and American counterparts. It is one thing to back net-zero targets and commit to carbon neutrality – it is another to actively step in and support the hydrogen industry by creating stable market conditions.

This doesn’t mean just awarding grants to buy electrolysers. Substantive support is about creating the kind of economic environment that makes hydrogen competitive with traditional fossil fuels and allows buyers to ensure the hydrogen they’re buying is of an acceptable standard. Doing so will increase the bankability of hydrogen projects and, in turn, attract the investment capital that is essential to growing the hydrogen industry.

Australia now has a government that seems to believe in renewables, which we are seeing through various commitments and programmes such as the more recent “Rewiring the Nation” announcement, which is great. For hydrogen, seeing policy help stimulate a sustainable market will be a big step forward.

What policies and incentives do you think could work for Australia?

Implementing similar programs to those in Europe and the United States would be a good start. One option could be for the Federal Government to guarantee the creditworthiness of hydrogen companies. This would ensure emerging hydrogen companies possess the financial security to compete with larger international firms in securing the finance required to scale hydrogen projects and to attract international investment. That kind of active government participation in the market would certainly help to level the playing field.

In terms of what these policies should achieve, fostering investor confidence is key. Right now, you’re already starting to see some large names crop up in the Australian hydrogen market – SK Group, FFI, etc. While this is promising, these investors already have huge sums of capital and can invest in hydrogen now. What we’re still not seeing in Australia is the investment from smaller investors – the cost of production and offtake risk are still high, and there is not currently the bankability to make investment worthwhile for a lot of players. Creating confidence in the market will be key for hydrogen projects to become a permanent fixture in our energy mix.

Hydrogen scalability presents a huge opportunity. Not just for those who intend to continue to deploy more traditional renewable technologies like solar pv, wind and batteries to power green hydrogen sites, but also for those wanting to invest more primarily into hydrogen technology itself. We are already seeing those who have a bigger risk appetite looking for exposure to hydrogen development. However, these early stage investments are different from the early 21st century boom in solar and wind. Hydrogen production and storage is more complex – you need a really high level of specialisation both in labour and materials.

As a result, the growth of the industry has been slower than its renewable counterparts – it is being driven more by purposeful action by project developers. While it is a different ballpark to solar and wind, there is tremendous opportunity – particularly for companies like Octopus who focus on bringing specialists in house to engage in a more active style of management with ­­projects on a day-to-day basis. The opportunities are there and have been brought to the fore by recent global events. It’s now up to government and private industry to work together to take advantage of those opportunities.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.