2019-11-06 - Bernstein - European Utilities Renewables - Hydrogen A Vision For Deep Decarbonisation and Opportunities For The Power Sector

6 November 2019
6 November 2019
European Utilities & Renewables

Hydrogen: A vision for deep decarbonisation and opportunities
for the power sector
Meike Becker The topic of Hydrogen and its role in the deep decarbonisation of an economy is gaining
+44-207-170-5008 momentum, as the theme of Climate Change continues to grab headlines and policy makers
meike.becker@bernstein.com
are increasing ambitions towards a net zero emission society by 2050. In this note we explore
Dale Tan the potential of hydrogen and discuss implications for the European utility sector.
+44-207-170-0592
Dale.Tan@bernstein.com
We believe that hydrogen has a role in a carbon free economy and that with mounting focus
on net zero carbon emissions by 2050, European governments are increasingly looking at
Pujarini Ghosh hydrogen as an option to achieve low carbon emissions in more difficult-to-decarbonize
+44-207-170-0566 sectors and applications such as heavy goods transport, industry, peak power generation or
pujarini.ghosh@bernstein.com
building heating.
Deepa Venkateswaran, ACA We assume that technology and cost are not prohibitive factors, considering potential for low
+44-207-959-4915
cost hydrogen production from renewables, promising pilot and test cases in Europe and
deepa@bernstein.com
assuming technology and cost progress across the hydrogen value chain when the industry
Arjun Menon, ACA, CFA scales up.
+44-207-170-0522
arjun.menon@bernstein.com We think that the share of hydrogen in a zero-carbon economy will be determined by policy
choices and the technology's competitiveness relative to other options, mainly electricity (for
example BEV, utility scale batteries or electric heat pumps). The hydrogen council and
McKinsey model an 8% share of hydrogen in energy demand in a business as usual scenario
increasing to more than 20% of energy demand in the ambitious case.
Investment implications for our European utility coverage:
Hydrogen supports faster and further deployment of renewables (i) as one option for short-
term flexibility in the system, (ii) as a low emission seasonal storage vector to address winter
peak demand in colder climates and (iii) via the production of hydrogen from renewables on-
or off-grid. Companies that could benefit include Enel (rated Outperform), Iberdrola (rated
Outperform), EDP (rated Outperform), Orsted (Market-Perform), SSE (Outperform) and RWE
(Outperform).
Gas network operators face risks and opportunities in the transition to zero carbon
economies. Gas demand would be reduced in a zero-carbon economy. While this has no
immediate effect on remuneration (which is not volume linked) and regulators might
address potentially stranded gas assets via faster regulatory depreciation, it raises
questions about investments, shrinking asset bases and the overall role of a gas network
operator in 2050. Hydrogen poses an opportunity, assuming that it is being transported via
pipelines or that gas network operators enter other parts of the hydrogen value chain.
Companies exposed include Engie (rated Outperform), Snam (rated Market-Perform),
Italgas (rated Market-Perform) and National Grid (Outperform).
Registration link for our upcoming conference: The Future of Hydrogen: A 2050 Vision for
Hydrogen & Deep Decarbonization on Monday 11th November, 8:30am – 1:00pm.
Analyst Page Bernstein Events Industry Page
See Disclosure Appendix of this report for important disclosures and analyst certifications www.bernsteinresearch.com
Meike Becker +44-207-170-5008 meike.becker@bernstein.com 6 November 2019
INVESTMENT IMPLICATIONS
We believe that hydrogen has a role in a carbon free economy and that with mounting focus on net zero carbon emissions by
2050, European governments are increasingly looking at hydrogen as a viable option to achieve zero or low carbon emissions in
more difficult to decarbonize sectors such as heavy goods transport, industry, peak power generation or building heating (see
Exhibit 1).
EXHIBIT 1: Moving to 'Net Zero' means addressing the last mile

Global Energy Consumption, 2016 vs 2050 (ReMap adjusted)
100% 110,000 TWh/yr 97,500 TWh/yr 97,500 TWh/yr

Dist. Heat & Other
Modern bio.
Electricity
Hydrogen
Traditional bio.
Natural gas
Coal
+ Abatement Oil
2016 2050 2050 net zero
Source: IRENA and hydrogen council estimates, Bernstein analysis
We assume that technology and cost are not prohibitive factors, considering potential for low cost hydrogen production from
renewables (see Exhibit 2), promising pilots and test cases and assuming technology and cost progress across the hydrogen
value chain when the industry scales up.
EXHIBIT 2: Green hydrogen will become economic as a result of falling electrolyser and electricity prices
Levelized Cost of Hydrogen (USD/kg H2)
7.0
5.8
6.0
5.0
Gas w/ CCS
4.0
($11/mmbtu,
3.0 $60/ton CO2)
2.1
1.7
2.0 Gas w/ CCS
1.0 0.7 ($3/mmbtu,
$20/ton CO2)
0.0
Today Future Today Future
LCOE of $56/MWh LCOE of $23/MWh LCOE of $30/MWh LCOE of $11/MWh

Electrolyser costs Electrolyser costs Electrolyser costs Electrolyser costs
$830/kW $200/kW $200/kW $60/kW
Load Factor 34% Load Factor 45% Load Factor 48% Load Factor 63%
Average Best
Source: IRENA, Bernstein analysis and estimates
EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 2

We think that the share of hydrogen in a zero-carbon economy will be determined by policy choices and the technology's
competitiveness relative to other options, mainly electricity (for example BEV, utility scale batteries or electric heat pumps). The
hydrogen council and McKinsey model an 8% share of hydrogen in energy demand in a business as usual scenario increasing to
more than 20% of energy demand in the ambitious case (see Exhibit 3).
EXHIBIT 3: Annual hydrogen demand could reach 24% of final energy demand by 2050
Hydrogen: 24% of EU energy demand by 2050

3000 30%
24%
25%Power generation,
2500
buffering
20%
Transportation
2000
15%
Heating and power for
8%
1500 6% 10%buildings
4% Industry energy
2% 5%
1000
New industry feedstock
0%
500 Existing industry feedstock
-5%
0 -10%H2 % final energy demand

Business as Ambitious Business as Ambitious
Usual Usual
2015 2030 2050
Source: Hydrogen Council, Hydrogen Europe, Fuel Cells and Hydrogen 2 Joint Undertaking, Bernstein analysis
Investment implications for our European utility coverage:

Hydrogen supports faster and further deployment of renewables (i) as one option for short-term flexibility in the system, (ii) as a
low emission seasonal storage vector to address winter peak demand in colder climates and (iii) via the production of hydrogen
from renewables on- or off-grid. Companies that could benefit include Enel (rated Outperform), Iberdrola (rated Outperform),
EDP (rated Outperform), Orsted (Market-perform), SSE (Outperform) and RWE (Outperform).
Gas network operators face risks and opportunities in the transition to zero carbon economies. Gas demand would be reducing in
a zero-carbon economy. While this has no immediate effect on remuneration (which is not volume linked) and regulators might
address potentially stranded gas assets via faster regulatory depreciation, it raises questions about investments, shrinking asset
bases and the overall role of a gas network operator in 2050. Hydrogen poses an opportunity, assuming that it is being
transported via pipelines or that gas network operators enter other parts of the hydrogen value chain. Companies exposed
include Engie (rated Outperform), Snam (rated Market-Perform), Italgas (rated Market-Perform) and National Grid (Outperform).

DETAILS
The topic of Hydrogen and its role in the deep decarbonisation of an economy is gaining momentum, as the theme of Climate
Change continues to grab headlines and policymakers are increasing their ambitions towards a net zero emission society by
2050. In this note we explore the potential of hydrogen and discuss implication for the utility sector.
HYDROGEN WHY NOW
MOVING TO 'NET ZERO' MEANS ADDRESSING THE LAST MILE, INLCUDING HYDROGEN AND CARBON
ABATEMENT
Governments are increasing ambitions to reduce carbon emissions to net zero by 2050: The IPCC's 2018 report highlighted CO2
emission pathways that are consistent with 1.5°C and 2.0°C global warming scenarios and we show two examples in Exhibit 4.
It is important to note that 'net zero by 2050'-pathways usually imply a 'net negative' balance thereafter. In 2019, several
governments have committed to 'Net Zero' emissions by 2050. For example, UK, France, the state of New York lately enacted
climate change legislations to further reduce their GHG emission targets to net zero emissions by 2050.
EXHIBIT 4: Limiting global warming to "well below 2°C" requires carbon neutrality by 2050 or earlier
Global CO2 and methane emission reductions

(Gt CO2-eq)
40
Renewables
30
Electrification/ Other
20
Efficiency
10
(Green) gas/hydrogen
-
Carbon capture
-10
-20
2020
2030
2060
2070
2100
2010
2040
2050
2080
2090
Historic Early reduction Overshoot Today's path
Source: IEA new policy scenario estimates, IPCC estimates, Bernstein analysis
Moving to 'Net Zero' means addressing the last mile: In 2019, Governments in Europe have moved goalposts forward to faster
and deeper carbon emission reduction pathways and while policy makers could afford to focus on renewables, electrification
and efficiency with pledges of carbon emission reductions of 70-80%, aiming for 'net zero' brings into focus hydrogen and
carbon abatement (see Exhibit 5).

EXHIBIT 5: Moving to 'Net Zero' means addressing the last mile
Global Energy Consumption, 2016 vs 2050 (ReMap adjusted)
100% 110,000 TWh/yr 97,500 TWh/yr 97,500 TWh/yr

Dist. Heat & Other
Modern bio.
Electricity
Hydrogen
Traditional bio.
Natural gas
Coal
+ Abatement Oil
2016 2050 2050 net zero
Source: Irena, Bernstein analysis
HYDROGEN IS GAINING ATTENTION ON POLICY AGENDAS

In the early to mid-2000s, European policy-makers initiated policies for the decarbonisation of the power sector paving the way
for renewables via subsidies and targets and encouraging the move away from coal and other thermal technologies via carbon
prices and higher environmental charges.
Over the last 5-10 years, European policy makers have intensified the focus on electrification (e.g., electric vehicles) and
efficiency (e.g., building renovation standards).
We have yet to see widespread policy support for technologies such as hydrogen or carbon capture in Europe, but we see an
increased level of attention recently (see Exhibit 6).

EXHIBIT 6: We have yet to see widespread policy support for technologies such as hydrogen or carbon capture in
Europe, but we see an increased level of attention
Timeline
2000 2018
Green Carbon capture

gas/hydrogen
Efficiency/
demand shift
‘Well below 2°C
Electrification assumes net zero
Use green gas or
Lever by 2050 and net
Renewables hydrogen for
Reduce energy negative thereafter
industry processes
demand and - carbon capture
Electrify or transport
increase energy and reforestation
transport, segments that are
Replace thermal efficiency in needed.
industry and uneconomic or
power generation buildings, engines inefficient to
buildings via
with renewables and electric electrify.
electric vehicles
, heat pumps, equipment.
etc.
Technology,
scale and
policy Established Developing Developing Emerging Emerging
support
Source: Bernstein analysis
We look at Northern Netherlands, the UK and Portugal as three policy examples for hydrogen in Europe (see Exhibit 7):
Northern Netherlands is at the forefront of a hydrogen economy actively investing EUR2.8bn until 2030 and considering
hydrogen to have a vital role in a green economy. Projects in the hydrogen valley include
 2 blue hydrogen production facilities, 8 electrolyser projects (one up to 1GW over time) and 2 hydrogen wind turbines.
 2 pipeline projects and 2 storage projects
 14 end use projects including heat & power, hydrogen-electric buses, conversion of burners and furnaces, applications in
new residential buildings, refuelling stations and a fuel cell component factory.
Germany increasing R&D budgets for green hydrogen after the Climate Package:
 Ministry of education adds €300m to the €480m already pledged for green hydrogen as Germany seeks to become the
global leader
 Federal Minister of Education and Research Anja Karliczek said: “We will increase the intensity of our research into green
hydrogen, that is, hydrogen produced by the sun and wind.”
 The government will reveal its hydrogen strategy by the end of the year with a view to "create the conditions enabling
businesses to further develop its industrial potential", according to Federal Economic Affairs and Energy Minister Peter
Altmaier.

EXHIBIT 7: Northern Netherlands is at the forefront and Germany commits R&D budgets
Northern Netherlands – Hydrogen Valley, Feb

Germany – increasing R&D budgets, Oct 2019
2019
 “The Northern Netherlands is actively building  “Ministry of education adds €300m to the
on the green industry of the future. Hydrogen €480m already pledged for green hydrogen as
has a vital role to play.” Germany seeks to become the global leader
 EUR2.8bn of investments until 2030.  Federal Minister of Education and Research
 Production projects including 2 blue hydrogen, Anja Karliczek said: “We will increase the
intensity of our research into green
8 electrolysers up to 1 GW and 2 hydrogen
wind turbine projects. hydrogen, that is, hydrogen produced by
the sun and wind.”
 Infrastructure projects including 2 pipeline
 The government will reveal its hydrogen
projects, 2 storage projects
strategy by the end of the year with a view to
 14 use projects including, heat & power, "create the conditions enabling businesses to
hydrogen-electric buses, conversion of further develop its industrial potential",
burners and furnaces, new residential according to Federal Economic Affairs and
buildings, refueling stations. Energy Minister Peter Altmaier.
Source: New Energy Coalition, Bernstein analysis
The UK is studying hydrogen. The Committee on Climate Change (CCC) published a study on the role of hydrogen in the
decarbonisation of the UK in 2018, while prior to 2018 hydrogen was not considered. The study concluded:
 “A combination of energy efficiency and electrification […] can take the UK a great deal of the way […] But it […] is not
enough.”
 Producing hydrogen in low-carbon ways and using it to meet challenging demands (e.g. for heat in industrial processes, for
heating buildings on colder winter days and for heavy transport) is likely to be an important part of the next stage of the
UK’s energy transition.”
Portugal 's 2019 roadmap for carbon neutrality by 2050 includes hydrogen in the transport sector. Compared to the Netherlands
and the UK, Portugal is less reliant on gas in building heating, less exposed to winter peak energy demands and less exposed to
carbon intensive industries, which explains the focus on transport for hydrogen.
Portugal plans to achieve carbon neutrality by 2050 via the near full-decarbonisation of transport, buildings, energy, waste and
agriculture with emissions remaining in the industry segment (see Exhibit 8).

EXHIBIT 8: Portugal 's 2019 roadmap for carbon neutrality by 2050
Portugal Sectoral GHG Emissions (Mt CO2 equivalent)

100
80
Abatement
60
Agriculture
Transport
40
Residential
Industry
20 Energy
Waste
0
-20
2005 2020 2030 2040 2050
Source: Republic of Portugal, Bernstein analysis
Portugal's 2050 vision includes hydrogen in transport, along efficiency gains and electrification (see Exhibit 10).
EXHIBIT 9: Portugal's 2050 vision includes hydrogen in transport, along efficiency gains and electrification
Energy Consumption in Transport Sector (PJ)
250 234 236
Hydrogen
187
200 Electricity
Biofuels
150
117 Kerosene
14 89 Gas
100
21 LPG
50 Petrol
Diesel
0
2015 2020 2030 2040 2050
With high shares of hydro and pumped hydro in the electricity generation mix, Portugal has a no need for hydrogen storage to
address peak demands and the country can achieve zero carbon electricity generation by adding solar, wind, biomass and
batteries to the system while phasing out Coal by 2030 and Gas by 2050 (see Exhibit 10).

EXHIBIT 10: With hydro in the mix and adding batteries, Portugal can afford to fully phase out coal and gas in
electricity generation
Portugal generation capacity (GW)

60
Batteries
50
Solar
40
Wind
30 Hydro
Hydro pump
20
Biomass
10 Gas
Coal
0
2015 2016 2017 2018 2019E 2020E 2030E 2040E 2050E
Portugal's industry is not skewed to difficult-to-abate sectors such as steel or chemicals (see Exhibit 11) and Portugal's
decarbonisation strategy for industry does not include hydrogen. For building heating, Portugal already today has a high share
of electricity and bases carbon emission reduction on thermal solar, further electrification and efficiency gains without hydrogen
(discussed in more detail in a later section).
EXHIBIT 11: Portugal's industry is not skewed to difficult-to-abate sectors such as steel, chemicals or cement
Industry GHG Emissions (Mt CO2 equivalent)
20 18
Solvents
18
16 Electronics and
14 13 12 Pharmaceuticals
Mineral Industry
12
10 9 Food, drinks and others
8
8
5 Pulp and Paper
6
4 Chemical
2
Iron and Steel
0
2005 2015 2020 2030 2040 2050

GREEN HYDROGEN PRODUCTION WILL BENEFIT FROM CHEAP BEST-IN-CLASS RENEWABLES COST
Average global renewables cost has already reduced dramatically, and solar PV and onshore wind cost have crossed over with
thermal generation in 2017/18 and are at present the lowest cost generation technology in many countries (new versus new).
Furthermore, we expect further significant reductions across both technologies (see Exhibit 12, Exhibit 13).
In 2018 alone, the average costs of solar PV or onshore wind projects fell by 14%. Within a decade we will be at a point where
new solar and wind is cheaper than continuing to run existing gas and coal units in many countries.
EXHIBIT 12: Renewables growth is being fuelled by… EXHIBIT 13: …consistent cost reductions
347 Solar PV LCOE (USD/MWh) Onshore wind LCOE (USD/MWh)

-20% CAGR
80 -5% CAGR
60
-5% CAGR 55 -3% CAGR
13
1 8
6 2 0 1
1 2 33 2 37
3 5
28
20
Inverter
2010A
2018A
2030E
2050E
Load
BoS
Module
Life
O&M
BoP
Life
2010A
2018A
2030E
2050E
Other
Load
Turbine
O&M
Source: IRENA, Bernstein estimates and analysis Source: IRENA, Bernstein estimates and analysis
Today, in favourable conditions, solar PV and onshore wind projects have already reached cost of 20-30 USD/MWh. For
example, recent renewables auctions in Portugal have revealed auction prices of 20 EUR/MWh. In Spain, we believe, LCOE for
solar and wind are at 30-35 EUR/MWh and for upcoming renewables auctions in Italy, we expect price points at similar levels.
EXHIBIT 14: The best onshore wind projects are 60% EXHIBIT 15: …and the best Solar PV projects are up to
cheaper… 70% cheaper than the average.
Onshore wind LCOE ($/KWh) Solar PV LCOE ($/KWh)

0.20 0.20
0.18 0.18
0.16 0.16
0.14 0.14
0.12 0.12
0.10 0.10
0.08 0.08
0.06 0.06
0.04 0.04
0.02 0.02
0.00 0.00
2010A
2012A
2014A
2016A
2018A
2020E
2022E
2024E
2026E
2028E
2030E
2032E
2034E
2036E
2038E
2040E
2042E
2044E
2046E
2048E
2050E
2014A
2010A
2012A
2016A
2018A
2020E
2022E
2024E
2026E
2028E
2030E
2032E
2034E
2036E
2038E
2040E
2042E
2044E
2046E
2048E
2050E
Average Onshore Best Onshore Average Solar PV Best Solar PV
Source: IRENA, Bernstein analysis and estimates Source: IRENA, Bernstein analysis and estimates

In Exhibit 16, we show average and best in class cost examples for hydrogen production today and in future: For best-in-class
today, we combine renewables at prices of 30 $/MWh with electrolyser cost of 200 $/KW reported by some Chinese
manufacturers. We conclude that best-in-class green hydrogen could compete with gas w/CCS today and as cost reduce green
hydrogen on average is on a good path to be cost competitive.
EXHIBIT 16: Green hydrogen will become economic as a result of falling electrolyser and electricity prices
Levelized Cost of Hydrogen (USD/kg H2)

7.0
5.8
6.0
5.0
Gas w/ CCS
4.0
($11/mmbtu,
3.0 $60/ton CO2)
2.1
1.7
2.0 Gas w/ CCS
1.0 0.7 ($3/mmbtu,
$20/ton CO2)
0.0
Today Future Today Future
LCOE of $56/MWh LCOE of $23/MWh LCOE of $30/MWh LCOE of $11/MWh

Electrolyser costs Electrolyser costs Electrolyser costs Electrolyser costs
$830/kW $200/kW $200/kW $60/kW
Load Factor 34% Load Factor 45% Load Factor 48% Load Factor 63%
Average Best
Source: IRENA, Bernstein analysis and estimates

HYDROGEN FRAMEWORK AND SCENARIOS
FRAMEWORK
Exhibit 17 summarizes all aspects of hydrogen in the energy transition, starting with the production of hydrogen from
renewables or fossil fuels with carbon abatement, extending to the role of hydrogen in power generation and transport options
and closing with diverse end uses in transport, industry, feedstock and building heating.
EXHIBIT 17: Hydrogen will play a critical role across all segments of the power value chain
Energy Energy Diverse End

Sources System Uses
4. Decarbonize
transport
5. Decarbonize
industrial energy
use
2. Distribute
energy across
1. Produce sectors and regions
hydrogen from 6. Serve as
renewable energy feedstock using
or fossil fuels plus 3. Provide storage captured carbon
abatement and flexibility to
increase system
resilience 7. Help
decarbonize
building heating
Source: Hydrogen Council, McKinsey, Bernstein analysis
1. Hydrogen can be produced via Renewables or Fossil Fuels plus CCS

Hydrogen can be produced through reforming fossil fuels, or from water via electrolysis. Today, the vast majority (~75%) of
hydrogen is extracted from natural gas using steam methane reformers. Due to its dominance in China, coal is used to produce a
further ~23%. This dependence on fossil fuels results in significant greenhouse gas emissions, amounting of ~830MtCO 2 per
year according to the IEA.
Less than 0.1% of hydrogen production comes from electrolysis today. This has historically been because of high electricity and
electrolyser costs. Recently, there has been increasing interest in the technology as renewables and electrolyser cost continue
to fall.
2. Distribute Energy Across Sectors

Hydrogen could be used to distribute energy between countries and regions. Regions with abundant renewable resources
enjoy significant cost advantages in electricity generation; for instance, analysis from the Hydrogen Council shows that Australia
can generate solar power which is 55% cheaper than Japan as a result of higher irradiation and load factors. Hydrogen could be
the energy carrier which will allow countries to export this cost advantage. Despite energy losses of between 20% to 30% upon
liquefaction, sea delivery of hydrogen or derivatives such as ammonia from Australia to Japan could be cost efficient relative to
local production.

3. Improving System Resilience

Production levels of renewables varies based on seasonal and climatic conditions. European winter solar generation is 60%
lower than in the summer, while winter electricity demand is ~40% higher than in the summer, McKinsey estimates.
Hydrogen could step in as the best long-term storage technology which could balance electricity power demand and supply
across both weeks and seasons. Hydrogen is very well suited to storing large quantities of power and could be stored in
underground caverns at a large scale with low costs of around $1 per 3MWh (Hydrogen Council estimates), significantly less
than other electricity storage technologies.
Studies by multiple organizations including the Fraunhofer Institute for Solar Energy Systems, BMW, RWTH Aachen, and Sterner
and Stadler conclude that an exponential increase in demand for storage solutions occurs as variable energy sources reach a
share of between 60% to 70% of the energy system. As an example, a 10% increase in renewable energy in Germany from
80% to 90% would imply that additional 15% of electricity will have to be stored as hydrogen.
Countries keep strategic reserves of fossil fuels in order to ensure national energy security and protect from geopolitical risk
and supply shocks. On a global level, the energy system has an average of 50 days of final demand within its reserve capacity,
the Hydrogen Council estimates. The transition to renewables could reduce the risk of geopolitical-driven supply shocks, but
reserves will still be necessary in order to guard against other shocks which could threaten domestic generation (such as natural
disasters). As hydrogen use becomes commonplace, it might form an increasing proportion of global strategic reserves.
4. Decarbonize Transport
Transportation generates more than 20% of all industry-wide CO2 emissions and is today almost entirely reliant on fossil fuels.
Furthermore, the transportation sector will likely grow over the next few decades as vehicle penetration increases in emerging
economies according to the IEA. As a result, under the IEA reference scenario CO2 emissions from the transportation sector
increase 35% by 2050. On the other hand, in order to keep temperature increases to two degrees Celsius it will be necessary
for transportation emissions to be reduced by 40% until 2050 according to the IEA.
We view hydrogen-powered fuel cell electric vehicles (FCEV) to be a complementary technology to battery-powered electric
vehicles (BEV): At 60% well to wheel efficiency, BEVs are close to twice as energy efficient as internal combustion engines
which have a well to wheel efficiency of 30%. However, batteries suffer from the lowest energy density per unit weight (0.6
MJ/kg). Hydrogen has close to four times higher energy density (2.3MJ/kg) but FCEVs have lower well to wheel efficiencies of
30%. As a result, BEVs will likely be utilized for shorter-range and lighter passenger vehicles while FCEVs will be used in heavier
and longer-ranged vehicles.
5. Decarbonize Industrial Energy Use

Decarbonizing and electrifying industry is more challenging due to technical reasons and where electrification may be
impractical hydrogen could play a crucial role. Many industrial processes require the generation of high heat in combustion-
based heaters that are impractical to electrify. For example, in the case of iron production, the coke used not only melts the iron
but is also an essential part of the chemical reaction which transforms the ore into iron. Therefore, while electrifying the entire
furnace might be costly and impractical, it could be possible to enhance the heat of the furnace through low-carbon fuels such
as hydrogen.
6. Serve as Feedstock
Today annually, 55m tons of hydrogen are utilized as a feedstock, all of which is produced using fossil fuels. 55% of global
hydrogen production is used in ammonia production (largely for fertilizers), 25% in oil refineries, and 10% is used to synthesize
methanol.
Green hydrogen produced through renewables could displace hydrogen created using fossil fuels and hydrogen could replace
fossil fuels as a feedstock.
7. Decarbonize Building Heating

Achieving the two degrees Celsius scenarios will require CO2 emissions from buildings to reduce. Hydrogen can play an
important role in decarbonizing building heating needs. We note that this is particularly the case in countries which have cold
winters and high heating needs such as the UK and Germany. These countries tend to already have large natural gas
infrastructures which hydrogen can piggyback on and would therefore be cost competitive with other approaches such as
electrifying heat pumps. Hydrogen can be blended into existing gas networks without major adaptations to appliances at low

shares and it could be possible to increase the blend of hydrogen beyond these limits: UK and Australia utilized high hydrogen
content natural gas of 30%-60% up to the 1970s, and countries such as Singapore and Hawaii continue to use high hydrogen
blends. Hydrogen could also be converted to methane which would be fully compatible with the existing gas network.
SCENARIOS: A ROADMAP FOR EUROPE

Exhibit 18 outlines scenarios for hydrogen growth put forward by McKinsey and the Hydrogen Council – an ambitious scenario
and a business as usual scenario.
EXHIBIT 18: Annual hydrogen demand could reach 24% of final energy demand by 2050
Hydrogen: 24% of EU energy demand by 2050

3000 30%
24%
25%Power generation,
2500
buffering
20%
Transportation
2000
15%
Heating and power for
8%
1500 6% 10%buildings
4% Industry energy
2% 5%
1000
New industry feedstock
0%
500 Existing industry feedstock
-5%
0 -10%H2 % final energy demand

Business as Ambitious Business as Ambitious
Usual Usual
2015 2030 2050
Source: McKinsey, Hydrogen Council, Hydrogen Europe, Fuel Cells and Hydrogen 2 Joint Undertaking, Bernstein analysis
Under the ambitious scenario, policymakers, industry and investors invest in hydrogen technologies resulting in a step-up of
hydrogen capabilities across the value chain. Under this scenario, hydrogen penetration increases by 12x, from 2% of total
energy demand in 2015 to 24% by 2050.
 Transportation: Hydrogen could power a European fleet of 45mn passenger cars and 8.5m LCVs, buses and trucks with a
total energy demand of 675TWh. Hydrogen-powered vehicles are already available, and rapidly reach mass market
acceptability by 2025. Penetration will be higher in larger vehicles with longer range requirements, such as taxis (55%),
non-electrified trains (50%) and large cars (30%). Hydrogen could reach 3,700 large refueling stations by 2030 and
FCEVs will enjoy full mobility across Europe. Hydrogen could also decarbonize freight ships and aviation should
government policies mandate it.
 Building Heating: Hydrogen will initially be ramped up via blending with natural gas to 7% in volume by 2030. Over 2030-
2040, some cities could switch to grids running on pure hydrogen. The creation of new infrastructure could result in market
acceptability by 2040. By 2050, hydrogen could provide 18% of energy used for heating European households, replacing
up to 44% of natural-gas-sourced building heat. Leading countries could have converted 80% of their gas networks to run
on pure hydrogen. Building heating will consume 465TWh of hydrogen.
 Industrial Heat: Hydrogen will substitute for fossil fuels, leading to market acceptability within high-grade heat by 2030 and
consuming 8TWh in energy. By 2040-2045, hydrogen will likely achieve market acceptability in low to medium-grade heat
applications. By 2050, 240TWh of hydrogen could be the fuel used in 20% of high-grade heat, 8% of medium-grade heat
and 5% of low-grade heat processes.

 Industry Feedstock: 325TWh of hydrogen is already used as a feedstock for refining, producing chemicals such as
ammonia and methanol, and metal processing. This hydrogen is generally produced from fossil fuels. By 2030, 30% of
production could be decarbonized through carbon capture systems or from using by-products of other processes. By
2050, 100% of hydrogen production could be decarbonized. Hydrogen use will also be increasingly used as a feedstock in
new process: Iron production via DRI is expected to grow from 1% in 2025 to 20% by 2050. Captured carbon will also be
combined with hydrogen to produce 30% of methanol, olefins and BTX.
Under the business as usual scenario, regulatory support for hydrogen does not emerge and companies only gradually invest in
hydrogen R&D, resulting in significantly slower adoption. By 2050, hydrogen will only reach a penetration of 8% of total final
energy demand.
 Transportation: Adoption rates will be significantly lower at less than 1% for small cars, 2% for taxis and 5% for buses.
Hydrogen would not play a significant role in decarbonizing transportation and FCEVs will remain a niche technology.
 Building Heating: Hydrogen blending plateaus at 7%, resulting in a final hydrogen demand of about 190TWh.
 Industrial Heat: Hydrogen will be of minor importance, reaching a penetration in high grade heat of just 7% by 2050 and
only 50TWh in annual demand. Hydrogen will have negligible demand in low and medium grade heat.
 Industry Feedstock: There will not be any significant uptake of hydrogen in industrial processes.
PROVIDE ZERO CARBON STORAGE AND FLEXIBILITY TO ENSURE SYSTEM RESILIENCE
HYDROGEN IS UNIQUELY POSITIONED TO REPLACE GAS' ROLE OF SEASONAL STORAGE

Electricity's strength is that it can be produced cost competitively at zero carbon emissions, electricity's weakness is its inability
to be stored and today gas fulfils the role of electricity system back-up driven (partly) by its ability to be stored. The combined
gas storage capacity of Belgium, Denmark, France, Germany, the Netherlands, Sweden, Switzerland and the Czech Republic of
1,200TWh is sufficient to cover average EU gas demand for more than three months. This is vastly larger than total electricity
storage of 1.5TWh, which is only enough to meet average electricity demand for fewer than 10 hours (Exhibit 19).
EXHIBIT 19: Existing gas storage is vastly larger than electricity storage
Gas
Storage
1,200 TWh
Electricity
Storage
1.5 TWh
Source: Hydrogen Europe, Bernstein analysis

Hydrogen is not the only storage technology and for time horizons of up to a week, for example, competes with batteries or
pumped hydro. However, hydrogen is unique in its ability to be stored in large volumes across seasons (Exhibit 20).
EXHIBIT 20: Hydrogen is a superior store of energy versus all other electrical storage technologies
Source: Hydrogen Europe, Bernstein analysis
Hydrogen is uniquely positioned to adapt power generation to seasonal variations in power demand. During summer months,
excess renewables production could be converted and stored as hydrogen. Hydrogen could be used during winter months
when cold snaps drive in peak energy demand at a time of low renewables resources.
Current studies believe that over-building renewables to serve winter peak demand is not cost efficient (Exhibit 21). Beyond a
renewables share of 60%-70%, additional renewables capacity is no longer efficient to build without a storage solution, and the
energy system will require other net-zero technologies (e.g. biogas peaking plants). However, with seasonal storage a higher
renewables share is possible. In fact, a literature review conducted by the Hydrogen Council of 23 studies suggests that the
need for hydrogen storage will increase exponentially as generation from variable renewable systems increases. IRENA believes
that seasonal storage will be a growth market from 2030E onwards and that hydrogen could play a central role.

EXHIBIT 21: The need for hydrogen storage will increase exponentially with variable renewable energy share
Hydrogen Demand (% of electricity production)

Hydrogen Demand (% electricity output)
30
25
20
The need for hydrogen
storage increases
15 exponentially with variable
renewable energy share
10
0
20 30 40 50 60 70 80 90 100 110 120
Variable Renewable Energy (% of electricity demand)
Source: Fraunhofer Institute for Solar Energy Systems ISE, 2017; BMW; RWT Aachen; Sterner and Stadler (2014), McKinsey, Bernstein analysis
HYDROGEN-POWERED TURBINES COULD BE USED IN THE WINTER FOR 'DUNKELFLAUTE'

Elia, Belgium's transmission operator, notes: "the most dimensioning moments for adequacy [in an electricity system] are cold
periods during winter (increase in consumption due to heating). Cold spells are usually accompanied by low wind generation,
which leads to the so called 'Dunkelflaute': no wind and little sun (it's winter). During those periods, that can last from a few days to
one or two weeks, thermal generation is the only technology than can ensure adequacy".
Exhibit 22 shows Elia's model for a week in Winter 2040E. Thermal generation will be necessary to cover peak demand and
hydrogen could be one option to decarbonise this thermal generation.
1 Wind and efficient gas or hydrogen generation exported: During the first part of the week, there is enough renewable generation
in Belgium to cover the load but not enough abroad. The efficient gas/hydrogen fleet in Belgium is exporting energy abroad to
cover the demand of its neighbours.
2 National RES generation complemented by efficient gas/hydrogen generation: The following days of the week, a lower wind
production is observed which leads to a need for thermal generation in Belgium. In this case there is enough generation from
efficient gas/hydrogen units to cover almost the entire Belgian demand. In other cases, there is not enough to cover it with
national generation and more energy is imported from abroad.
3 Enough with national RES generation and flexibility options: The wind blows again during the weekend in Belgium and abroad.
Gas/hydrogen-fired generation is not dispatched given the excess of renewable generation. Saturday experienced both a high
wind and PV production. The excess generation was stored in the batteries/pumped-storage/EVs to be used the next week. The
rest is exported. During some hours, an excess of generation is simultaneously happening in more than one country, which leads to
curtailment of energy. The generated energy is lost as it could not be stored, shifted or exchanged. Such moments will increase in
the future with the increase of variable RES production.

EXHIBIT 22: CCGT will be necessary as a backup in the winter – Belgium 2040 a week in Winter
Source: ELIA
In January 2019, Japan and members of EUTurbines (an association representing the EU gas and steam turbine sector)
committed to providing gas turbines which will be able to run on a 20% hydrogen mix by 2020, and on 100% hydrogen by
2030.
Key turbine manufacturers including Mitsubishi Hitachi Power Systems (MHPS), GE Power, Siemens Energy, and Ansaldo
Energia are also redoubling efforts (Exhibit 23):
EXHIBIT 23: Manufacturers are shifting hydrogen technology development into high-gear
Progress on Hydrogen Turbines
Experimental prototypes show 100% hydrogen is possible. Already offers fuel-flexible advanced
Ansaldo Energia
gas turbines.
Currently offers combustion systems for aero-derivative and heavy-duty turbines which are able
to operate with increased hydrogen levels (of approximately 50%). Has several existing high-
General Electric
hydrogen projects such as Desan refinery which has used a 70% hydrogen mix for the past two
decades.
Siemens Targeting to unveil a 25MW - 50MW pure hydrogen technology within two years
Pilot project to convert Vattenfall's 1.3GW Magnum CCGT plant in the Netherlands to hydrogen
Mitsubishi-Hitachi
by 2023
Source: Company reports, PowerMag, Bernstein analysis
Based on studies in the UK, the cost of using hydrogen instead of gas in CCGT plants, mainly linked to assumptions on the cost
of fuel, are higher but not prohibitively so (see Exhibit 24).

EXHIBIT 24: Based on studies in the UK, the cost of using hydrogen instead of gas, mainly linked to assumptions
on the cost of fuel, are higher but not prohibitively so
Projected operating costs of gas plants in 2040 (£/MWh)

120
100
Additional carbon price
80 required
Current carbon costs
60
Variable Operating
40 Costs
Fuel Costs
20
0
Natural Gas Hydrogen Natural Gas Hydrogen
CCGT OCGT/Reciprocating Engine
Source: HMT, BEIS, Bernstein analysis
HYDROGEN CAN ALSO PROVIDE SHORT TERM FLEXIBILITY

Hydrogen can also provide short-term flexibility but would be competing with batteries or existing pump hydro.
Exhibit 25 shows Elia's model output for a typical week in Spring, Summer or Autumn in 2040E, when the country will run at
close to 100% renewables. Excess generation will be stored.
1 Flexibility options During the first three days of the week, renewables combined with must run generation (biomass, hydro run of
river and CHP) is enough to ensure adequacy of the system. No gas/hydrogen-fired generation (other than biomass and CHP) was
started up for market economic reasons as there is enough with renewables and flexibility options in all neighbouring countries.
The effect on DSM and storage can be clearly identified where the reservoirs are filled during the day and emptied during and
after sunset. Demand is shifted from the evening to the day when there is excess generation.
2 National RES generation complemented with RES imports. The second part of the week experiences a drop in wind generation in
Belgium but there is still enough renewable generation abroad to be imported into Belgium. The drop is therefore complemented
with additional imports.
3 Excess of national RES generation exported and stored During the weekend, the wind blows again in Belgium. Given lower
demand during those days due to economic activity, the excess of renewable generation in the country is exported. Some energy
is also stored in batteries, pumped-storage reservoirs, and electric vehicles to be used the following week. Hydrogen can also
provide short-term flexibility but would be competing with the other technologies.

EXHIBIT 25: Hydrogen can provide flexibility and avoid curtailment – Belgium 2040 a week in Summer
Source: Elia

END USE BUILDINGS

In terms of end use of hydrogen, we look at building heating specifically because governments and regulators might be looking
at building heating and gas networks jointly, particularly when it comes to gas distribution networks. For instance, blending
certain shares of hydrogen in the current gas network is being discussed as a way to scale up and increase the share of
hydrogen in building heating.
Hydrogen studies assume a role for hydrogen in building heating (see Exhibit 26) to various degrees, but hydrogen competes
with other technologies, mainly electric heat pumps and different countries might choose different pathways.
EXHIBIT 26: Building heating
Source: SystemIQ analysis, Energy Transitions Commission analysis, Bernstein analysis
Arguments for a purely electric solutions based on heat pumps and thermal solar lend themselves to countries less exposed to
cold winters and with a higher share of modern energy efficient buildings or ambitious strategies for district networks and
improvements to energy efficiency in buildings and refurbishments (see Exhibit 27).
Portugal is an example of a country that is aiming for a purely electric solution to building heating. This is embedded in the
country's zero carbon by 2050 energy plan that only envisions hydrogen in the transport sector and neither in power generation
nor industry. Portugal is not exposed to cold winter spells as much as other European countries and electricity today already
accounts for more than 50% of building heating/cooling. Portugal's decarbonisation strategy for building heating and cooling is
based on energy efficiency, further electrification and thermal solar (see Exhibit 28).

EXHIBIT 27: Arguments for electricity versus hydrogen in building heating
Electricity Hydrogen
Cost Costs
Cost of heat pumps will continue to More cost-efficient in older homes which
come down are difficult to insulate and already have
access to gas networks.
Building renovations
Renovated/upgraded and more energy Storage & Buffer
efficient buildings complement heat Especially in colder climates, provides an
pumps energy storage solution which can be
used as a buffer during cold snaps with
peak heating demand and low generation.
Implementation
Overall requires less refurbishment than
electricity as utilizes the existing gas
network. Boilers will have to be replaced.
EXHIBIT 28: Portugal's decarbonisation strategy for building heating and cooling is based on energy efficiency,
further electrification and thermal solar
Services Sector Energy Consumption (PJ)

250
202
188 193
200 178
156 Heat
150 Solar
Petroleum Products
100 Biomass
Natural Gas
50
Electricity
0
2015
2020
2030
2040
2050

Arguments in favour of the use of hydrogen in building heating point to cold winters with higher heating demand, old building
stock, where heat pumps would not be a sufficient solution in the winter and easier implementation (top down regulatory
approach, less refurbishment in houses/flats and ability to use current gas distribution grids for hydrogen, see Exhibit 29)
EXHIBIT 29: Hydrogen as an option for heating in older less energy efficient buildings
Buildings Emissions by Age of Building (%)
10-25 years
26-44 years 20%
30%
0-9 years
75% 5%
from Old Buildings
>44 years
45%
Source: Europa Fuel Cells and Hydrogen Joint Undertaking, Bernstein analysis
Considerations in the UK: After concluding that hydrogen, electricity or hybrid systems have similar cost (see Exhibit 30), the
UK's Committee for Climate Change (CCC) favours the hybrid solution citing flexibility and easier adoption by consumers.
EXHIBIT 30: UK studies find similar costs for hydrogen, electricity or hybrid systems
Annualized System Costs for Alternative Heat Decarbonization

Pathways (£bn/year)
140 Carbon costs at £22/tCO2
120
Carbon Storage
100
Gas boilers (Capex)
80
Heat pumps (Capex)
60
Energy Storage
40
Fuel burn (Opex)
20
Gas Networks (Capex)
0
0Mt
0Mt
0Mt
0Mt
30Mt
10Mt
30Mt
10Mt
30Mt
10Mt
30Mt
10Mt
Electricity Networks (Capex)

Hydrogen Production (Capex)
Hydrogen for Electrification of Hybrid Heat Hydrogen +
Electricity Capacity
Heating Heating Pumps Hybrid Heat
Pumps
Source: Imperial College, Bernstein analysis

The hybrid approach for part of the building stock would be embedded in a wider decarbonisation strategy for building heating
that includes heat pumps for new energy efficient buildings, district networks and energy efficiency improvements in existing
buildings (see Exhibit 31).
EXHIBIT 31: The UK's wider strategy for building heating decarbonisation includes efficiency, heat pumps for new
buildings and district networks
Low-regret solutions to building heating

Size of blocks reflects approximate scale of emissions reduction
New Build New-build energy efficiency and low-carbon heat
Existing buildings off Heat pumps in off-gas properties,

the gas grid with a supplementary role for biomass boilers
Low-carbon heat networks
Biomethane to gas grid
Energy efficiency
Existing buildings on
improvements in existing
the gas grid
buildings
Low-carbon heat solution needed for on-gas properties not on
heat networks
Source: Climate Change Committee, Bernstein analysis
The CCC believes that "heating buildings is one of the areas where the challenges in achieving deep emissions reductions by
2050 is greatest".
 In the CCC's view, arguments against a full hydrogen pathway include the production of large volumes of hydrogen
necessary from natural gas with CCS which could lock the UK into a path with insufficient emission reductions by 2050.
 Arguments against a full electrification relate to questions regarding how widely heat pumps could be deployed and how to
meet peak electricity demand on cold winter days.
 The hybrid solution would moderate challenges around meeting winter peak demand while lowering the reliance on bulk
hydrogen production (possibly from gas with CCS).

DISTRIBUTE ACROSS REGIONS AND SECTORS - ARE WE GOING TO BE USING PIPES?

Today, hydrogen is largely produced for consumption on-site (85%). 15% of hydrogen is transported via pipelines and trucks,
largely as a liquid or compressed gas (Exhibit 32).
EXHIBIT 32: Hydrogen supply chains are in a nascent state today, with 85% produced on-site
Hydrogen Supply Chains Today (kg H 2 )
Pipelines &
Trucks
15%
Produced on-
site
85%
Source: IEA, Bernstein analysis
With commercialization of hydrogen, new transmission and distribution alternatives would have to emerge. Hydrogen could be
transported via trucks, ships or pipelines and it could also be converted into other forms such as liquid hydrogen, ammonia or
LOHC mainly for the purpose of transport. End use is focused on hydrogen gas (and to some extend ammonia, Exhibit 33).
Liquid Hydrogen: Hydrogen could be cooled and liquified prior to transport increasing its density. However, this would require
the hydrogen to be cooled to below 253°C and result in energy consumption equivalent to between 25% and 35% of the initial
amount of hydrogen (this is much more than LNG which uses 10% of the initial amount).
Ammonia: Hydrogen could also be converted into Ammonia. This process consumes between 7% and 18% of the initial
quantity, an energy loss that is doubled if converting back to hydrogen is required. However, Ammonia is 1.7x denser than liquid
hydrogen and liquifies at a much higher temperature of -33°C, significantly reducing transport costs. Ammonia also has a well-
established international transmission and distribution network.
LOHC: A liquid-organic hydrogen carrier involves loading a "carrier" molecule with hydrogen. After transport, the hydrogen is
separated from the carrier molecule. LOHCs are similar to oil products and are much cheaper to transport and do not require
cooling. However, the conversion and reconversion process consume 35% - 40% of the energy content of the hydrogen.
Furthermore, the carrier molecules are expensive and require shipping back to their place of origin after delivery.

EXHIBIT 33: Transmission, distribution and storage in the hydrogen value chain in the future
Distribution & Collection Transmission End-Use
Hydrogen Gas Hydrogen Gas Hydrogen Gas
Industry
Pipeline
Liquid Hydrogen Liquid Hydrogen Liquid Hydrogen
Ship
Ammonia Ammonia Ammonia
LOHC LOHC LOHC
Hydrogen Gas Hydrogen Gas Hydrogen Gas
Buildings
Truck
Truck
Liquid Hydrogen Liquid Hydrogen Liquid Hydrogen
Ammonia Ammonia Ammonia
LOHC LOHC LOHC
Hydrogen Gas Hydrogen Gas
Transport
Pipeline
Liquid Hydrogen Liquid Hydrogen
Ammonia Ammonia
LOHC LOHC
Hydrogen Gas
Generation
Conversion, Reconversion and Storage
Power
Liquid Hydrogen
Ammonia
LOHC
PIPELINES ARE COSST COMPETITIVE OPTIONS TO TRANSPORT HYDROGEN
Electricity versus hydrogen/gas pipe

Gas networks can transport much larger quantities of energy for the same cost and distance of the electricity equivalent. As an
example, we compare the BritNed high voltage submarine power cable against the BBL Natural Gas Connector. The Britned
cable transports 8TWh over 260km and cost €600m to construct. On the other hand, the BBL pipeline cost €500m and can
transport 120TWh annually over 230km, see Exhibit 34.

EXHIBIT 34: Gas networks can transport much larger quantities of energy for the same cost and distance of the
electricity equivalent
Distance (km) Construction costs (EURm) Volume (TWh/year)
300 800 300
700
250 250
600
200 200
500
150 400 150
300
100 100
200
50 50
100
0 0 0
BritNed NEMO BBL IUK BritNed NEMO BBL IUK BritNed NEMO BBL IUK
(Cable) (Cable) (Pipeline) (Pipeline) (Cable) (Cable) (Pipeline) (Pipeline) (Cable) (Cable) (Pipeline) (Pipeline)
Hydrogen Transmission: Pipes vs Ships

The IEA estimates that a new-build pipeline would cost USD1/kgH2 to transport gaseous hydrogen across 1,500km. As the
distance increases, the cost of transporting hydrogen via pipeline increases faster than that of ships because more
compressors stations will be needed along the length of the pipe (Exhibit 35). Below 1000km, pipelines remain the cheapest
form of transport (new versus new). Above 1000km, converting hydrogen to LOHC becomes more cost efficient. At 2000km, all
shipping options become cheaper than pipelines.
EXHIBIT 35: Pipelines are the transmission technology of choice for all distances below ~1000km
Cost of Hydrogen Storage and Transmission (USD/kgH2)

2.00
1.50
1.00
0.50
Below ~1000km, new pipes are
cheaper
0.00
0km 1000km 2000km 3000km
Hydrogen (Pipe) Hydrogen (Ship) Ammonia (Pipe) + Conversion
LOHC (Ship) + Conversion Ammonia (Ship) + Conversion

Therefore, pipelines could have a significant role to play in transporting hydrogen within Europe, especially across land-locked
routes which would require a ship to undergo a long detour, see Exhibit 36.
EXHIBIT 36: Pipelines would likely be the most cost-efficient for hydrogen transmission within Europe
1000km Radius
Source: Google Maps, Bernstein analysis
Hydrogen Distribution: Pipes vs Trucks

Currently, most of the hydrogen gas is distributed via trucks for distances less than 300km. However, we believe that this could
change in the future and note that pipes have cost advantages over trucks. As a simplified heuristic, the larger the quantities
transported, the more advantageous pipes become. This is partly driven by size restrictions: A single-trailer truck could
theoretically transport up to 1,100kg of hydrogen, but in practice this maximum will not be achieved because of regulations
regarding a vehicle's maximum weight, height, length, width and the pressure of the hydrogen tank.
For large quantities of 500 tons per day, pipes are vastly more efficient than trucks for all distances (Exhibit 37). However, even
for a small pipe of 100 tons per day, the pipe remains more cost efficient than trucks for distances below 120km.
EXHIBIT 37: Below 120km, even the small 100tpd pipe is cheaper than any truck
Hydrogen Distribution Costs (USD/Kg H 2 )

1.5
1.0
Below ~120km, even the

small pipe is cheaper than
0.5 any truck
0.0
0km 100km 200km 300km 400km 500km
Pipe (500tpd) Truck (Liquid H2)
Truck (Ammonia) + Reconversion Pipe (100tpd)
Truck (LOHC) + Reconversion Truck (Gas H2)

Pipelines benefit from an existing network

We further note that the cost estimates we have presented have been based on the use of new-build pipes (Exhibit 38). The
pipeline option could be even cheaper because there is already an existing and extensive gas distribution and transmission
network which could be repurposed to transport hydrogen.
EXHIBIT 38: Europe has an existing and extensive gas transmission network
Source: ENTSO-G
As hydrogen is a smaller molecule than natural gas, iron pipes will have to be converted for example to plastic in order to avoid
embrittlement and leakage. Some countries have already begun this process: the UK's Climate Change Committee expects the
country's gas distribution network to be suitable for transporting hydrogen at all pressure tiers once the Iron Mains
Replacement Program is completed in the early 2030s.

Compared with a 100% electrification scenario, the savings could be significant. Studies have shown that Germany could save
€12bn annually should it continue to use its gas networks1 (as opposed to a full electrification scenario where gas is used solely
for seasonal storage).
HYDROGEN CAN ALREADY BE BLENDED INTO THE GAS NETWORKS TODAY

Blending hydrogen with natural gas could be an important low-regret option to step-up the use of hydrogen in the energy mix
prior to a wider-reaching conversion to 100% hydrogen. Assuming 3% of the world's annual LNG demand of 3900 bcm is
replaced with hydrogen, this would increase hydrogen demand by 12MtH2 and require an additional 100GW of electrolyser
capacity.
Such a transition is very much technically feasible: Many gas heating and cooking appliances in Europe are already certified for
use with up to 23% hydrogen, and many components of the natural gas network are already able to tolerate 20%-30%
hydrogen blends or more (Exhibit 39). The H21 Leeds City Gate project in the UK demonstrates that 100% hydrogen is feasible
for delivery via the gas distribution network for industrial purposes and residential heating, with an estimated conversion cost
(without any regulatory help) of £0.014 per kWh H2 for the initial conversion in year one. The UK is also replacing its iron
distribution pipes with polyethylene pipes which can handle up to 100% hydrogen. The Ameland demonstration project in the
Netherlands found that blending up to 30% hydrogen did not pose any safety hazards or operational difficulties for household
devices.
EXHIBIT 39: Many portions of the natural gas network have high tolerance to hydrogen today
Tolerance of Natural Gas Network to Hydrogen (%)
CNG Tanks
Gas Turbines
End Use
Engines
Cooking
Boilers
Underground Storage
Transmission &
distribution
Compressors
Transmission
Gas meters
Distribution
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Tolerance Allowable under certain circumstances
We note that similar conversions have been done in the past. Until the 1970s, the UK used "town" gas in its natural gas
networks, which had high hydrogen contents of between 30%-60%. Countries such as Singapore and Hawaii continue to rely
on high hydrogen blends today.
It will be necessary to increase the tolerance of the existing parts of the natural gas value chain which are unable to function
with high hydrogen blends, or the system could be constrained by the lowest tolerance sectors. The largest constraints are
likely to be in the industrial sector, where many processes have not been assessed in detail for their ability to function with high
hydrogen blends. In the power sector, existing gas turbines can tolerate less than 5% hydrogen.
1 FNB Gas Study, Hydrogen Europe

Furthermore, existing national regulation specify differing levels of maximum hydrogen content: Some countries such as Finland
specify 1%, while other such as Austria, Spain, and France specify between 4%-6% (Exhibit 40). Germany allows a hydrogen
mix of up to 10% subject to the condition that CNG filling stations are not connected to the network. These differing standards
will have to be harmonized in order to facilitate cross-border trade. The European Commission is currently examining standards
and the role of hydrogen in gas networks.
EXHIBIT 40: Countries have non-uniform regulation on hydrogen blending
Current Limits on Hydrogen Blending (%)
Netherlands
Finland
Lithuania
Switzerland
Austria
Spain
France
Germany
0% 2% 4% 6% 8% 10% 12%
Tolerance Allowable under Certain Circumstances

IMPLICATIONS FOR THE UTILITY SECTOR

Exhibit 41 summarizes the main implications for the utility sector, which in our view pertain to renewables and gas network
operators.
EXHIBIT 41: Hydrogen implications for the utility sector pertain to renewables and gas network operators
Thermal Networks Networks

Wind/Solar Hydro Retail
Generation Electricity Gas
Renewables ××
Electrification
Efficiency/
demand shift
Green gas /
hydrogen
Carbon capture --
Trends  Capacity  In Europe,  Coal and nuclear  Investments  Gas  Energy efficiency
growth benefitting closures priced in needed in networks services grow
 Costs from carbon  Pressure on electricity to have a role strongly
reduction price; long- marginal pricing integrate in 2050  With distributed
term margin in 2030ies renewables  Some generation and
 Adequate uncertainty and to digitize
margins  Gas as insurance uncertainty EV’s, customer
 Contracted becomes more
 Exceed abroad  Carbon capture important
expectations no support
Hydrogen supports faster and further deployment of renewables (i) as one option for short-term flexibility in the system, (ii) as a
long-term storage vector to bridge seasonal demands and (iii) via the production of hydrogen from renewables on- or off-grid.
Companies in our European coverage that have renewables businesses that could benefit include Enel (rated Outperform),
Iberdrola (rated Outperform), EDP (rated Outperform), Orsted (Market-Perform), SSE (Outperform) and RWE (Outperform).
Gas network operators face risks and opportunities in the transition to zero carbon economies. Gas demand would be reducing in
a zero-carbon economy. While this has no immediate effect on remuneration (which is not volume linked) and regulators might
address potentially stranded gas assets via faster regulatory depreciation, it raises questions about investments, shrinking asset
bases and the overall role of a gas network operator in 2050. Hydrogen poses an opportunity, assuming that it is being
transported via pipelines or that gas network operators enter other parts of the hydrogen value chain.
 We believe that the future of gas distribution networks is linked to plans for building heating decarbonisation in a specific
country.
 Gas transmission network operators (including storage) could benefit from long distance transport of hydrogen for use in
power winter peak generation, building heating, industry and transport. Determining factors in our view include (i) country
specific and European policy views, (ii) the overall level of hydrogen use in an economy (iii) and the geographical spread of
hydrogen demand. In a low hydrogen deployment scenario (similar to the 'business as usual'- scenario in Exhibit 18), we
could envision hydrogen production locally close to industrial demand centres or transport via trucks and ships.
 We note that in the three examples that we reference in this note – Netherlands, UK and Portugal – considerations for the
use of hydrogen in an economy are anecdotally positively correlated with the role of gas today in the economy and the
density of gas networks in the country.

 Beyond the discussion regarding the future of the gas network, gas network operators could enter other parts of the
hydrogen value chain, such as deploying hydrogen refuelling infrastructure.
Companies in our Southern European coverage that face the risk of lower gas demand in a zero-carbon economy while being
exposed to the opportunities associated with the uptake of hydrogen include Engie (rated Outperform), Snam (rated Market-
Perform), Italgas (rated Market-Perform) and National Grid (Outperform).

DISCLOSURE APPENDIX
TICKER TABLE
4 Nov 2019 TTM EPS Adjusted P/E Adjusted
Closing Target Rel.
Ticker Rating Price Price Perf. 2018A 2019E 2020E 2018A 2019E 2020E
SRG.IM M EUR 4.65 4.90 15.8% EUR 0.29 0.33 0.33 16.26 14.18 14.02
ENGI.FP O EUR 14.89 15.00 16.6% EUR 0.98 1.07 1.16 15.15 13.87 12.83
IG.IM M EUR 5.84 6.00 15.3% EUR 0.39 0.41 0.44 15.07 14.27 13.40
ENEL.IM O EUR 6.97 7.50 46.6% EUR 0.40 0.47 0.52 17.28 14.87 13.33
IBE.SM O EUR 9.14 10.00 33.6% EUR 0.47 0.55 0.59 19.39 16.60 15.61
EDP.PL O EUR 3.71 4.00 9.3% EUR 0.14 0.21 0.24 26.03 17.32 15.50
SSE.LN O GBp 1,281.50 1,325.00 1.1% GBp 74.04 93.12 107.33 17.31 13.76 11.94
RWE.GR O EUR 27.51 29.00 41.3% EUR 0.54 1.21 1.97 50.49 22.69 13.95
NG/.LN O GBp 897.00 1,000.00 (2.7)% GBp 59.01 59.15 61.79 15.20 15.17 14.52
ORSTED.DC M DKK 584.20 595.00 24.4% DKK 42.40 14.88 18.18 13.78 39.26 32.14
MSDLE15 1,651.54 107.04 107.39 117.68 15.43 15.38 14.03
O - Outperform, M - Market-Perform, U - Underperform, N – Not Rated
SSE.LN,NG/.LN base year is 2019;. ORSTED.DC eps type is EPS Reported;. ORSTED.DC valuation type is P/E Reported;.
VALUATION METHODOLOGY
Our main valuation approach is a sum of the parts DCF methodology. We complement the DCF SOTP methodology with an
EV/EBITDA multiple approach by segment where applicable, (e.g., Engie) and a premium to RAB view for networks.
RISKS
European Utilities & Renewables

There are certain risks that are common to all companies in our coverage:
 Regulation: All companies in our coverage are at risk of regulatory impacts. A country's general attitude and policy
toward the energy & utilities industry (e.g., Renewables, regulated return for networks, energy taxes, etc.) will have
significant influence toward the future earnings stream of companies operating in this space.
 Adverse credit conditions limiting access to credit
 Prevailing macro-economic conditions: In each of the territories our coverage companies operate in, the demand for
electricity and gas is correlated to the prevailing economic conditions. Thus, any unexpected deterioration or
improvement in the macroeconomic conditions in these countries will impact the growth assumptions applied to those
operations. Changes in commodity prices – Power, Gas, Coal, Carbon will also impact the profitability of our coverage
with merchant power generation/ upstream/ midstream activities

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12-Month Rating History as of 11/04/2019

Ticker Rating Changes
EDP.PL O (RC) 09/04/19 M (IC) 05/01/19
ENEL.IM O (IC) 11/15/17
ENGI.FP O (IC) 10/15/18
IBE.SM O (RC) 09/10/18
IG.IM M (IC) 05/01/19
NG/.LN O (RC) 06/14/19 M (RC) 09/07/16
ORSTED.DC M (RC) 09/03/19 O (RC) 09/06/17
RWE.GR O (RC) 01/09/18
SRG.IM M (IC) 05/01/19 O (RC) 01/13/16
SSE.LN O (RC) 01/09/19 M (RC) 09/07/16
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
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6 November 2019

European Utilities & Renewables

Analyst Page Bernstein Events Industry Page

EXHIBIT 1: Moving to 'Net Zero' means addressing the last mile

100% 110,000 TWh/yr 97,500 TWh/yr 97,500 TWh/yr

2016 2050 2050 net zero

Source: IRENA and hydrogen council estimates, Bernstein analysis

LCOE of $56/MWh LCOE of $23/MWh LCOE of $30/MWh LCOE of $11/MWh

Source: IRENA, Bernstein analysis and estimates

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 2

Hydrogen: 24% of EU energy demand by 2050

0 -10%H2 % final energy demand

Investment implications for our European utility coverage:

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 3

HYDROGEN WHY NOW

Global CO2 and methane emission reductions

Historic Early reduction Overshoot Today's path

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 4

EXHIBIT 5: Moving to 'Net Zero' means addressing the last mile

Global Energy Consumption, 2016 vs 2050 (ReMap adjusted)

100% 110,000 TWh/yr 97,500 TWh/yr 97,500 TWh/yr

2016 2050 2050 net zero

Source: Irena, Bernstein analysis

HYDROGEN IS GAINING ATTENTION ON POLICY AGENDAS

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 5

Green Carbon capture

Source: Bernstein analysis

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 6

Northern Netherlands – Hydrogen Valley, Feb

Source: New Energy Coalition, Bernstein analysis

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 7

EXHIBIT 8: Portugal 's 2019 roadmap for carbon neutrality by 2050

Portugal Sectoral GHG Emissions (Mt CO2 equivalent)

Source: Republic of Portugal, Bernstein analysis

Energy Consumption in Transport Sector (PJ)

250 234 236

Source: Republic of Portugal, Bernstein analysis

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 8

Portugal generation capacity (GW)

Source: Republic of Portugal, Bernstein analysis

Industry GHG Emissions (Mt CO2 equivalent)

Source: Republic of Portugal, Bernstein analysis

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 9

347 Solar PV LCOE (USD/MWh) Onshore wind LCOE (USD/MWh)

Onshore wind LCOE ($/KWh) Solar PV LCOE ($/KWh)

Average Onshore Best Onshore Average Solar PV Best Solar PV

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 10

Levelized Cost of Hydrogen (USD/kg H2)

LCOE of $56/MWh LCOE of $23/MWh LCOE of $30/MWh LCOE of $11/MWh

Source: IRENA, Bernstein analysis and estimates

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 11

HYDROGEN FRAMEWORK AND SCENARIOS

Energy Energy Diverse End

Source: Hydrogen Council, McKinsey, Bernstein analysis

1. Hydrogen can be produced via Renewables or Fossil Fuels plus CCS

2. Distribute Energy Across Sectors

EUROPEAN UTILITIES & RENEWABLES BERNSTEIN 12

3. Improving System Resilience