The Hydrogen Economy

The industrial gas sector is likely to be one of the first to benefit from the move toward a hydrogen (H2) economy. They already have much of the infrastructure, and the largest players are already running pilot clean H2 projects that could come on stream by 2030.

Existing end markets, such as oil refining, chemicals, and later on possibly fertilizers, will likely also be among the early adopters of H2. Net zero commitments imply the full decarbonization of hard-to-abate sectors such as steel, but using hydrogen to do so would be extremely costly. S&P Global Ratings therefore sees steelmakers' credit quality as most at risk since the sector's profitability has been weak for years.

As the global energy transition accelerates, rising interest in clean hydrogen means healthy prospects for companies providing technology to energy and utility industries working to meet green production targets.

However, this is unlikely to have an impact on rated capital goods companies' credit profiles before 2025-2030, when construction of the first batch of large hydrogen projects--currently in the planning stage--could commence.

Companies likely to benefit most from the long-term potential include manufacturers of industrial-scale renewable power generation equipment, and engineering groups offering green energy and electrolysis technology-related solutions and services.

The overall net credit impact on the capital goods sector is likely to be positive. That said, the continuous shift away from fossil fuels over the next two or three decades will eventually force market players with high oil, gas, and coal exposure to reconfigure their business models. Already today, the market for new conventional, centralized power generation equipment is suffering from overcapacity, which is bad news for large gas- and steam-turbine producers.

The steel industry represents almost 10% of total energy-related emissions globally, and more than 20% in some countries, whether starting from iron ore and coke (consumed in blast furnaces) or scrap metal (using EAFs).

A change to EAFs fueled with scrap or direct reduced iron (DRI) from the traditional high-emission blast furnaces is the most obvious way to reduce emissions in steel production.

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The world's top three industrial gas companies each already earn about $2 billion in revenue from hydrogen business annually, but the rising need for cleaner hydrogen could bring substantial growth.

Industrial users producing their own hydrogen, and planning to switch to cleaner sustainable hydrogen, may decide to increase the amount they obtain externally from the current 10% average.

With its next generation of nuclear power plants, Europe is aiming to set new standards and herald a nuclear renaissance. But the economics of new nuclear are challenging and European countries have vastly different views on the technology.

Hydrogen is likely to play an increasing role in electricity storage after 2030 for U.S. and European power utility companies, notably if and when renewables account for the majority of power output. Hydrogen-fueled power generation will remain expensive compared with gas, in S&P Global Ratings view, and is therefore unlikely to play a role in baseload, but its value may lie in providing clean dependable capacity for peak loads.

Keeping gas capacity--even at low load factors--may remain important for supply security and affordability.

Skeptics who said electric vehicles (EV) would never be widely accepted have been proved wrong. With a balanced cocktail of punitive environmental regulation and generous public incentives, authorities have shown it is possible to stimulate strong demand. In Europe alone, EVs already increased to more than 10% of total passenger vehicles sold in 2020, compared to less than 4% just the year before.