REPLACING natural gas with “green hydrogen” is often touted as a way to solve “stranded asset” risk for fossil fuel assets such as gas pipelines.
The International Energy Agency believes hydrogen has the “potential to play a key role in a clean, secure and affordable energy future“.
As part of a renewable energy transition, some natural gas pipeline and storage infrastructure could be repurposed for hydrogen. The clean fuel could even be blended into natural gas.
But is it really a solution for investors worried about holding “stranded” fossil fuel assets that no longer have an economic use due to redundant technology or high costs?
There is no clear-cut answer right now — and advances are required to make hydrogen technology economical, says Murray Ackman, a credit ESG analyst in Pendal’s Income and Fixed Interest team.
“Stranded asset risk is very tangible for fixed income investors when you’re looking at a seven- or 10-year bond,” says Ackman.
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“You have to take a view on what may or may not happen during that time frame.
“Credit ratings, access to financing, cost of funding, demand for the products, regulation — those are the kind of ESG risks that we’re looking at.”
Some risks are clear cut: “Coal is something that needs to be phased out very quickly, so if you’re coal or coal-adjacent like a train company that hauls coal from the mines, there is a clear stranded-asset risk in the short term.
“The cost of funding might become higher and there could be a chance of default or ratings downgrades.”
But the risks to natural gas assets — and the potential for hydrogen to be a solution — are more difficult to pin down.
Part of the problem is conflating potential industrial and domestic uses for hydrogen.
“There are some very clear uses for hydrogen as a replacement for natural gas in industrial processes like producing fertiliser, powering heavy vehicles and aircraft or making steel,” says Ackman.
“And there’s this moon shot that it will be a one-for-one replacement for natural gas,” says Ackman.
In that scenario, parts of the natural gas pipeline and storage infrastructure can be repurposed for hydrogen, protecting their value well into the future and saving them from becoming stranded assets.
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“This is what industry is betting big on. It’s tricky because the economics don’t stack up yet — but then that was true for solar panels for a long time too.”
For households, the benefits of hydrogen are less clear cut.
Hydrogen can be blended into the natural gas but above about 10 or 20 per cent it can damage some existing pipes.
“And if you go any higher 20 per cent, you need to change household appliances anyway — if you’re changing your stove to something that can accept hydrogen, why not just change to electricity?”
The weighing of these different views is an important part of the investment process, says Ackman.
“It’s very much a question mark whether it is the solution. In our investable universe, we’ve got some gas distribution networks.
“The question is ‘why are you talking about how good hydrogen is?’
“Is it because you really believe it? Or is it because it’s an existential threat and without it you have a potentially stranded asset in the future?”
Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.
Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team’s awards include Lonsec’s Active Fixed Income Fund of the Year (2022) and Zenith’s Australian Fixed Interest Manager of the Year (2020).
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