Hydrogen: Powering South Korea’s future

In January 2019, President Moon Jae-in laid out an ambitious roadmap for the country to develop the technology and infrastructure needed for a hydrogen economy (see Fig. 1). The roadmap focuses on three key areas:

• More hydrogen-powered vehicles on the roads.
• More fuel cells (hydrogen batteries) for household and industrial use.
• Build an infrastructure for the distribution, storage and production of hydrogen.

Fig. 1: Roadmap for hydrogen economy by 2040¹

Based on the roadmap, the nation targets to achieve an annual production of 5.26 million tonnes of hydrogen by 2040 (up from 130,000 tonnes in 2018); thereby, halving the average hydrogen cost to KRW 3,000 (USD2.59) per kilogramme². This is one of the most challenging aspects of the initiative, since the storage and production facilities of hydrogen are not yet well developed.

What is the reason for such an ambition? What holds the key to success? Where do we see investment opportunities?

South Korea faces a chronic problem with dirty air. The country is ranked 119 out of 180 for air quality in the 2018 Environmental Performance Index (see Fig. 2). The poor air quality, together with its heavy greenhouse gas (CO2) emissions, is undermining the health of the Korean population.

Fig. 2: Air quality and greenhouse gas emissions in Korea, 2018³

Emissions from cars and trucks are one major source of air pollution; industrial solvents are another⁴.To tackle the issue, South Korea has partnered with the US National Aeronautics and Space Administration (NASA) to accurately locate the sources of air pollution⁵.

In the meantime, however, the South Korean government needs to find an alternative source of energy to help reduce pollutants and greenhouse gas emissions. This is also an integral part to South Korea achieving the targets set at the 2015 Conference of the Parties (COP21), which, together with other countries, aims to keep global warming well below 2ºC.

Besides reducing pollutants and greenhouse gases, the transition to a ‘hydrogen economy’ could create a new domestic market and sustain the growth of the country’s advanced industries.

According to research by McKinsey & Company, a hydrogen industry this large will trigger strong employment demand; just to meet the demand for the domestic market alone, Korea’s hydrogen industry can potentially employ 600,000 people in 2050, largely in the automotive industry.

Domestic revenues across the energy value chain, from hydrogen generation through distribution to end-user applications such as hydrogen vehicles, can reach KRW 70 trillion (USD60.47 billion) per year by 2050, the same research shows (see Fig. 3).

Fig. 3: A hydrogen economy will create new jobs and add revenues for South Korea⁶

Hydrogen is one of the most abundant substances in the universe. It is a clean and safe energy carrier (not an energy source) that can be used directly as a fuel, or converted to heat and electricity in a hydrogen battery called a ‘fuel cell’.

Small fuel cells, such as those installed in the Hyundai Nexo SUV (sports utility vehicle), only take a few minutes to refill and power an electric car, while large fuel cells can provide electricity to buildings in remote areas with no power lines.

Hydrogen-powered cars, for example, correspond to more than a 50% reduction in fuel consumption compared to their gasoline-powered counterparts⁷.

Such low-carbon hydrogen is therefore the key to decarbonising South Korea.

South Korea plans to introduce 2,000 public buses and 820 police vans powered by hydrogen, as well as providing subsidies for hydrogen-powered taxis to reduce further environmental degradation and greenhouse gas emissions, according to President Moon’s plans⁷.

The switch would reduce an estimated 30,000 tonnes of fine dust pollutants – in other words, 10% of the amount currently produced – if 1.8 million hydrogen-powered cars were on the streets by 2030⁸.

Combined with more hydrogen being used for heating systems, industry feedstocks (unprocessed materials) and power systems, the increase in hydrogen usage could help close the remaining gap towards the required greenhouse gas reduction targets by 40% (see Fig. 4).

Fig. 4: Hydrogen can help close the greenhouse gas reduction gap⁹

Despite the positive impacts, however, there are a host of challenges; notably, the high construction costs of fuel cell systems relative to other technologies.

Production scale holds the key to reducing these construction costs.

As Korea’s hydrogen-vehicle production increases and scales up to 100,000 per year – the government’s 2025 target – the cost of a fuelcell system should decrease as much as 77% to around USD3,160¹⁰. In addition, technological advancement should help reduce the usage of platinum in fuel cells, thus further lowering production costs.

In the interim, the government is offering purchase subsidy incentives. A Hyundai Nexo SUV currently priced at USD63,000, for example, can now be purchased at USD32,000 after government subsidy.

In our opinion, if the average sale price drops to about USD30,000 (without subsidy), then it will help push hydrogen-powered cars into the mainstream automotive industry.

South Korea plans to introduce 2,000 public buses and 820 police vans powered by hydrogen, as well as providing subsidies for hydroThe take up of hydrogen vehicles would, however, be dependent on having an established hydrogen mobile infrastructure.

In 2018, South Korea only had 14 hydrogen fuelling stations for 2,000 hydrogen vehicles on the roads. Japan, in contrast, has more than 100 fuelling stations, outnumbering those in both Germany and the United States¹¹.

To catch up, the government has established a special purpose corporation called Hydrogen Energy Network (HyNet) to partner with industrial companies, such as Korea Gas Corporation and Hyundai, to build its hydrogen-fuelling infrastructure (1,200 stations) across the country¹².

to the challenges is the development of up-stream hydrogen technologies. Production and storage technologies for hydrogen, for example, are not yet core competencies, as seen in South Korea’s lagging position in Fig. 5. This contrasts with the country’s commendable performance in hydrogen down-stream technologies, such as fuelcells for heating applications and hydrogen cars.

Fig. 5: Korea’s up-stream hydrogen technologies are not yet well developed¹³

Despite the challenges, South Korea’s key industrial companies, such as the automotive, shipbuilding and petrochemicals companies, are already equipped with world-class technology for hydrogen utilisation, especially in the mobile (e.g. vehicles), stationary (e.g. fuel cells) heating and industrial applications (see Fig. 6).

Fig. 6: Rankings: Industry development of hydrogen applications¹⁴

With a global market share of 50%, South Korea is the first country to succeed in massproducing hydrogen-powered cars¹⁵. In Ulsan, the country’s industrial powerhouse, large-scale petrochemical plants are already capable of producing enough hydrogen to expand the use of hydrogen-powered vehicles.

Given this head start, fuel-cell application leaders who are able to capture both the domestic and export markets’ demand are poised to create sustainable value over time.

For example, the South Korean automotive industry, including original equipment manufacturers (OEM) and fuel-cell suppliers, can generate more than KRW 25 trillion (USD21.6 billion) in annual revenues by 2050¹⁶ as they expand their reach to overseas markets.

Hyundai Motor’s recent joint venture with Swiss-based H2 Energy is exemplary.

From 2019 to 2025, the Korean automaker has promised to deliver 1,600 hydrogen-powered heavy-duty trucks¹⁷; H2 Mobility Switzerland will then lease a large portion of these more energyefficient trucks (see Fig. 7).

Fig. 7: Hydrogen fuel cell trucks are more efficient than battery trucks¹⁸

Hydrogen storage, distribution and production, though currently a developed area, represent significant potential for heavy industrial companies to capture new business opportunities. What they need to do is to move away from the status quo:

• Steel and petrochemical companies. Upgrade their existing facilities to produce more hydrogen for future use.
• Shipbuilders. New business from liquefied natural gas (LNG) carriers and build hydrogenpowered vessels to replace diesel vessels in the future.
• Gasoline companies. Leverage the existing storage and distribution network to tap into the hydrogen fuelling station infrastructure development.

On balance, there is a strong incentive for these industrial players to participate in the hydrogen infrastructure investments, given the potential to generate sustainable earnings.

That said, there must be systematic research and development, together with a clear governmental policy framework and funding mechanisms to incentivise private companies to participate.

State-funded think tank H2Korea was set up to bridge the gap between the government and private sectors on hydrogen technologies. In addition, the Ministry of Trade, Industry and Energy (MOTIE) has earmarked an investment outlay of KRW2.6 trillion (USD2.23 billion)²⁰ for a joint venture with private sector companies to speed up the development of the hydrogen infrastructure.

Such partnerships between government and business are powerful because they increase the amount of funding and result in better vetting of the projects, thereby yielding greater economic benefits.

In view of this, the outlook for Korea’s hydrogen industry and the associated responsible investment opportunities should remain positive.

Only asset managers who can understand the implications of this shifting trend and identify emerging leaders within this space can fully tap into the potential of South Korea’s emerging hydrogen industry.