Hydrogen Optimized: Commercializing Electrolysis for Large-Scale Green Hydrogen Applications

Roger Mortimer

The European Union has laid out, as part of its Hydrogen Strategy for economy-wide decarbonization, plans to install 40 gigawatts of renewable hydrogen electrolyzers and produce as much as 10 million metric tons of renewable hydrogen by 2030. To preview VerdeXchange’s second VX Green Hydrogen Discussion Forum on December 10th, VX News interviewed Roger Mortimer, Director of Corporate Strategy for Ontario-based Hydrogen Optimized. Mortimer shares his investor perspective on how the company is commercializing electrolyzer technology for large-scale green hydrogen applications.

Elaborate on Hydrogen Optimized’s corporate mission and marketplace niche.

The founders at Hydrogen Optimized come from a long-standing hydrogen leaders in their family with a deep history in electrolysis. The grandfather of the company’s CEO, Andrew Stuart, started in the water electrolysis business in 1913 by selling industrial electrolytic equipment into situations where the avoided cost was very high. So, he traces his direct involvement in electrolysis back three generations.

Hydrogen Optimized is a newly created entity to commercialize electrolysis technology that builds on three generations of knowledge and applies insights to address the particular needs of large-scale applications that are emerging in green hydrogen. In particular, the Hydrogen Optimized technology focuses on scalability, on low-cost manufacture, and on direct linkage to a variable input, like a windmill that stops or a solar panel that goes dark. Hydrogen Optimized is a subsidiary of a private Canadian company, and a related hydrogen technology business that is 15 years old and profitable.

Address what factors are driving growing interest in the market for Green Hydrogen.

As your as your readers are aware, there has been a tremendous groundswell in interest in the concept of green hydrogen that has emerged in the last two years.

There are really four drivers. The first is action by government and government regulation. You have more than 75 countries around the world that have signed net-zero emissions targets, typically for 2050, but for some countries, as soon as 2030. More than 20 of those countries have explicit hydrogen programs inside of their GHG reduction targets. There is a broad belief that it's not possible to get to net-zero greenhouse gas emissions without integrating some form of hydrogen strategy. So, there's a top-down government involvement that is resulting in quotas, incentives, and in broad awareness across many geographies, and a number of countries are aspiring to leadership in this area.

The second driver is that the technology costs associated with hydrogen production that would enable this to occur have fallen dramatically, particularly the cost of generating renewable power. About half of all renewable power generation today comes on at a levelized generation cost that is competitive with a newly built fossil fuel plant—a gas-fired generating plant. And in fact, about 40 percent of new renewable generating capacity is cheaper than the cost of actually running an existing coal-fired plant. So, the fact that renewable generating costs have fallen so dramatically has enabled the possibility for using low-cost renewable power to charge a water electrolyzer and generate green hydrogen.

The third factor is that companies are under huge pressure from investors around what are referred to as ESG factors: environmental, social, and governance factors. As investor interest grows, and money flows increase in this area—and I think there's strong evidence that this will be the most important factor in corporate valuation over the next decade—companies are feeling more and more pressure to adopt progressive ESG policies and capital allocation strategies. I think what's going to happen in every industry is a bifurcation between companies that are pro-ESG and companies that are not. With the combination of falling technology costs and shareholder pressure, companies are discovering that they can integrate new technologies like renewable power, without it coming at a significant cost to their profitability, and they're rewarded by their investors for doing that.

 The final driver would be this idea that we've been in a low growth, slowing global growth world for a long time; we're at the end of a very long economic expansion. The world's quite indebted, and growth is hard to find. Many investment universes are pretty fully mature, and there's an awful lot of capital looking for new places to be deployed. This concept of green hydrogen, which is really as significant as a redefinition of the industrial and utility networks in the world, involves the opportunity to deploy huge amounts of capital. Goldman Sachs estimates that the investable universe in the global utility industry that is advanced by the green hydrogen idea is €10 trillion over the next 30 years. So, this would make this one of the one of the largest potential investment themes of the coming decades and that catches the attention of corporations.

Please elaborate on Hydrogen Optimized’s electrolyzer technology - on water electrolysis and the scalable industrial uses of its architecture.

The way I would describe an electrolyzer is that an electrolyzer and a fuel cell are the opposite of each other. A fuel cell is an engine that converts hydrogen to create electricity and water. An electrolyzer is a machine that you charge with electricity, add water, and it creates hydrogen; it's an electro-chemical production process. This has been a viable means of generating hydrogen always.

The vast majority of the hydrogen in the world today is produced using natural gas through steam methane reformation. But there has been a niche business of producing hydrogen through electrolysis by industrial customers where the economics favored it— where the avoided cost was very high and you could buy this electrochemical machine and, with cheap electricity, you could produce hydrogen that way.

What's happening now really is demand for zero-emission hydrogen, and the cost of producing the electricity through renewables has fallen dramatically. So now we're looking at scaling an industry dramatically.

Is Hydrogen Optimized exclusively focused on industrial clients? And, if so, what are the applications possible given the scalability of the technology’s architecture.

It’s still a relatively small universe, but we think of electrolyzer suppliers falling into three groups. There is a group of companies who supply what I would describe as small units, kilowatt-scale units. Those might be used in a medical research application or a small, highly specialized industrial application. Then, there is a class of producers who make technology that is larger, up to the 10 to 20 megawatt range. Those are used in industrial applications. One example, Thyssen Krupp, is involved in the chlorine industry.

But what's interesting is that what is emerging is a new class and scale of applications that are significantly larger than the technology architecture that exists in the industry today. These very large utility applications, merchant applications, and large industrial applications are systems that are 100 megawatts or larger. There are systems that are proposed that are well into the gigawatts. The conventional technology approach cannot get there without replication; it simply ends up being a modular approach.

 What is different about the Hydrogen Optimized technology architecture is that it has a fundamental scalability to it enables it to be to deliver on the needs of a 100-megawatt system without replicating the entire unit multiple times. This gives it a fundamental cost advantage. What we believe as a company, is that for these very large applications, total cost of ownership is going to be the most important decision variable for the project sponsor. And so, our focus has been on scalability and then on low-cost manufacture and reliability. And so, we are at the table in these conversations on large technology.

Could you share who are the target sectors/customers interested in this technology?

We are early in our customer discovery process. We announced only at the end of September, an MOU with ABB, one of the world's largest power electronics customers. We are going to market, together, a large-scale hydrogen electrolysis system. Subsequent to that announcement, we have engaged or begun to engage customers globally.

Our focus has been on utility companies— electric utilities, gas utilities, large project sponsors—and industrial companies in areas that would be large users and potential candidates for large systems. We track project activity in the industry globally, and there are more than 100 projects proposed right now. And to us, it looks like there are, at least, 30 to 35 that are very large for which our technology would be in the conversation for. So, we have approached those parties first and have a series of ongoing dialogues.

Re: the aforementioned opportunities, what are Hydrogen Optimized’s competitive advantages?

Our technology offers a combination of low total ownership cost, which is low capital cost on a dollar per kilo-watt of capital, low operating cost in that the technology is extremely robust.  The design team understands how to design electrolysers to last 50 years.

An industrial user requires something different than a commercial user. If you were building an electrolysis unit to sit on the forecourt of a vehicle fueling station, it would have to be packaged like a consumer product and have an attractive form factor and be small.  Everything would be designed from the perspective of how to make it as compact and attractive as possible. But if you were designing something for a large industrial user that might be sitting in the Atacama desert or the Australian outback, they are much more concerned about reliability, about the integrity of the product, and ultimately about the total cost of operating the product. And so, the systems that we design are really designed with the needs of an industrial customer in mind.

Roger, you mentioned in elaborating on Hydrogen Optimized, ESG – a global standard for sustainable investment. Elaborate on how ESG is being use by global rating agencies and investors and Hydrogen Optimized’s value proposition.  

Certainly one aspect is that the proliferation of ESG sentiment and the pressure on corporations to adopt ESG practices is causing corporate executives and capital allocators to be more mindful of the potential benefits of taking steps that are viewed favorably by those measures.

The relevance is that, as ESG money flows increase and become a larger percentage of the total, they're exerting more influence on companies. There is there is an increasing class of companies that recognize how taking these actions, and telling your shareholders about these actions, can be good for corporate valuations. If you consider that, for a large company to implement a hydrogen pilot project that might not be perfectly as economic as it would be at full-scale in 10 years, the materiality of the cost of that project is often not particularly significant relative to the investor reception they get for taking that step.

The companies that are identified as the leaders and the early adopters of ESG trade at higher valuations and are better received by investors. So, what you're seeing in the legacy oil and gas industry is the valuation of those companies is falling because investors are questioning what the terminal value—the future value—of these companies is going to be. If an investor views a company as not having a future, it doesn't place a high valuation on it. And if an investor views a company as having a very bright future, it places a very high valuation.

Recently NextEra, a Florida-based company that owns Florida Power & Light surpassed Exxon Mobil as the most valuable energy company in the United States. And NextEra is seen as a very green, renewable-based utility, and Exxon Mobil is seen as a legacy oil and gas company. And those two companies provide a pretty, pretty interesting counterpoint for investors to consider in that context.

Roger, your answer above clearly implies an investor’s background;  if so, has your career history led to your current leadership role with Hydrogen Optimized?

My background is as a professional investor, but I have had a tremendous interest in this area for a long time. In fact, I worked with our CEO, Andrew Stewart, 25 years ago doing advisory work for companies in the power sector and was exposed to hydrogen, battery storage, and fuel cells in the mid ‘90s. I’ve shared his belief that one day this would all be mainstream. The CEO of the company obviously has great technology skills and a great technology team, and my value to him is in helping bring an understanding of how corporations think about some of these things and build those bridges.

Two more questions. First, with Hydrogen Optimized headquartered outside of Toronto, Canada, where are the company’s target markets?

From the perspective of electrolysis, and broad receptivity to the idea of green hydrogen, I would say the two geographic areas that have the highest level of engagement and the greatest desire to be early movers are Western continental Europe and Australia. Continental Europe is motivated as a large energy user with very aggressive carbon reduction targets and Australia sees itself as a future exporter of green hydrogen. One is going to be the customer and one is going to be the supplier, but both of those regions are highly engaged.

In the United States, there has been less engagement in ESG among US executives than there is in Europe and the hydrogen thesis is not as broadly defined. The pushback often is that the low price of natural gas makes competing with natural gas more difficult in the United States. But we have seen NextEra, who is a bellwether US utility, step into this marketplace. I think we're undoubtedly going to see others. Certainly, in industry conversations we've had on multiple continents there's a high level of awareness of this activity by utility companies globally and whether they have formalized, specific teams to implement pilot projects, they're certainly doing the work.

Lastly, does the Provincial Government of Ontario or Canada’s Federal Government have regulations that incentivize the hydrogen industry?

In Canada, not as yet. Canada has not yet released its hydrogen policy that is forthcoming. So, there's a high degree of awareness and interest and engagement, but the policy is not yet released. What you see in Western Europe, where the European Commission has a very robust hydrogen policy, is an overlap between climate and economic development objectives. 

Particularly in the wake of COVID where there is a need for stimulus and broad-based catalysts for investment, governments are aligning their environmental objectives with their economic development objectives, and green hydrogen is getting support. I would say that governments generally see the area of green hydrogen, of building new generating assets, building electrolysis assets, as clean tech job creation; they see it as part of the knowledge economy and the types of industries that represent future growth and job creation that governments generally embrace.

“There is a broad belief that it's not possible to get to net-zero greenhouse gas emissions without integrating some form of hydrogen strategy.”
“A fuel cell is an engine that converts hydrogen to create electricity and water. An electrolyzer is a machine that you charge with electricity, add water, and it creates hydrogen; it's an electro-chemical production process.”
“What is different about the Hydrogen Optimized technology architecture is that it has a fundamental scalability to it that enables it to deliver on the needs of a 100-megawatt system without replicating the entire unit multiple times.”