Global Energy Ventures — Emission-free green hydrogen and H2 transport

GEV is focused on the delivery of integrated compressed gas solutions for the production and transportation of energy within regional markets. Although its primary focus until now has been on compressed natural gas (CNG), large-scale compressed hydrogen solutions are likely to become the dominant focus of the group. To this end, GEV is currently developing a compressed hydrogen vessel, which is expected to begin operations in 2026. This is expected to be followed by the introduction of a fleet of more efficient 2,000t vessels to transport green hydrogen from northern and western Australia, to regional markets in the South-East Asia, specifically Japan and Korea, where the opportunity is huge, driven by net zero commitments. There are also numerous opportunities within the EU, within economic range.

The success of GEV fundamentally depends on the availability and price of green hydrogen in Australia, and the market price in South-East Asia, which we believe are currently c US$4/kg and US$9/kg respectively, although we believe the market is opaque and currently going through a price discovery phase. In the long term, the prices of new energy forms fall, and we have reflected this in our deflationary modelling.

In The hydrogen economy: Decarbonising the final 20%, we highlight the exciting opportunities offered by the compressed hydrogen market and some of the major challenges that it faces: green hydrogen is likely to require policy support, particularly in the near term, to stimulate end-demand and to bridge the cost gap with more traditional energy sources such as natural gas. Key policy tools are likely to include subsidies, deployment targets, carbon taxes and co-ordinated infrastructure development.

Our modelling suggests potentially attractive internal rates of return (IRRs) from a range of scenarios. We have modelled a deflationary hydrogen gas (H2) price scenario and a flat pricing scenario for a fleet of six 430t H2 vessels and a fleet of five, more efficient, 2,000t H2 vessels. The smaller, 430t vessel fleet implies transporting 50,000t of H2 pa in 116 voyages of 2,000 nautical miles (nm), a round trip of 4,000nm. The IRR comes in at 9.7% in the deflationary scenario, rising to 14.2% in the flat pricing scenario.

The larger 2,000t vessel fleet implies transporting 200,000t of H2 pa over the same distance, but in 100 voyages. The IRRs in the two respective scenarios come in at 13.8% and 18.7%. This, we believe, highlights the benefits of scale of the larger, more efficient vessels.

We estimate that the smaller fleet in a deflationary scenario, that is the lowest IRR scenario, would have a diluted net present value (NPV) of 18c per share (at 6% WACC).

GEV is attempting to build a long-term business based on projections of the future availability, demand and the price of green H2. There are of course multiple elements that influence the outcome of the plan. These include:

Shipping H2 in a compressed form is one of three potential transportation alternatives, liquid hydrogen and ammonia being the others. Each one has its strengths and weaknesses, but GEV has been able to demonstrate that its compressed hydrogen model is the most efficient up to a range of c 4,500nm as evidenced in its March 2021 scoping study.

GEV was set up in 2016 to develop and commercialise integrated compressed shipping solutions for energy (gas) transportation between regional markets. The business aims to design, build, own and operate integrated transport projects for either natural gas or hydrogen. GEV has clearly defined ideas and relationships, and a robust route to revenue and cash flows that fits very neatly with the global drive to a net-zero carbon emission future for energy production, transportation and usage. There are hurdles to overcome on this journey and GEV has the answers to some of the major issues that stand in the way of achieving this goal. We believe GEV has the management in place and access to the right technology to make a success of its future.

GEV’s current primary activity is focused on developing integrated CNG marine transport solutions. This has taken the form of devising the company’s construction-ready ‘CNG Optimum’ ship. This vessel utilises a patented hexagonal, close-packed, high-strength pipe system that stretches the entire length of the cargo hold. This CNG transportation solution could have applications in situations where reinjection of natural gas into the seabed is too expensive or is not feasible, or in situations where no pipeline to shore is available. CNG is well understood as a transport solution, is safe and produces lower emissions than transporting gas in a liquified (LNG) form.

In addition, as the world aims to transition to net zero-carbon fuels, GEV is developing the world’s first large-scale Compressed Hydrogen Ship (C-H2 Ship) design, which should support the transportation of ‘green’ (zero-emission) hydrogen, which could be used to decarbonise hard-to-reach heavy greenhouse gas-emitting industries. The vessel would have twin, 1,000 tonne capacity tanks in the hold that will be pressurised to 250 bar. The vessel will ultimately be powered by a fuel cell that will create energy from green hydrogen stored in the ship’s hold, implying zero emission fuel for transportation. Therefore, the C-H2 Ship has ‘green cargo’, and the cargo itself offers zero-emission fuel for transportation. With the exception of the vessel construction, this solution could have zero carbon emissions and could be a vital differentiator for GEV as it helps corporates towards decarbonisation targets.

The ‘CNG Optimum’ solution could have applications off the coast of the United States, Mexico and Brazil for example. The C-H2 Ship is expected to have applications in northern and western Australia, exporting green hydrogen to South-East Asia, and in off-shore applications in Europe. We have attached zero valuation to the CNG Optimum solution as this project may ultimately be shelved in favour of the C-H2 Ship solution. However, it does lend credibility to the C-H2 Ship project.

With the anticipated investment, Australia is likely to become a net exporter of green (emission-free) hydrogen given the number and size of projects either under construction or planned versus the domestic demand level, with the first export volumes available from 2025. The largest of these projects is the Asian Renewable Energy Hub, which is planned to have 1,600 wind turbines and a 78 sq km array of solar panels producing 26,000MW of green renewable energy. Therefore, there will be significant volumes of green hydrogen available for export to regional markets, potentially carried in GEV’s zero-emission C-H2 Ship. It is also anticipated that the vessel design will have applications for off-shore energy and hydrogen production in Europe’s off-grid, off-shore windfarm industry.

In addition to the C-H2 Ship, GEV is also planning to develop its own renewable hydrogen production facilities in order for it to be able to provide a fully integrated supply chain. GEV is looking to construct a pilot project with 10,000–20,000tpa capacity. It is currently in discussions with technical partners to supply electrolysers, including Siemens and Nel. Once the hydrogen is produced, it will need to be compressed before loading. Siemens and others are already providing compressors suitable for hydrogen at the volumes and pressures required.

The potential markets for the excess hydrogen are likely to be South Korea, Japan and Singapore, which are within, or on the cusp, of the economic range of the C-H2 Ship being designed. Currently, GEV has no agreements in place for offtake for export, but it does have a relationship with Iwatani Corporation and others that may lead to agreements. Iwatani is Japan’s only liquid hydrogen producer and distributor with an annual production capacity of 120m m3 across six plants supplying 70% of the country’s current hydrogen demand.

GEV’s C-H2 Ship can also be utilised in offshore applications where a wind farm and an H2 production facility are located ‘off-grid’. This could easily be the case in Europe and especially in the North Sea where there is a significant build-out of offshore wind farms. The EU is also funding (€2bn, terms of reference to be announced after the summer) schemes to accelerate engineering studies of potentially viable offshore hydrogen production and GEV is looking at tapping into these schemes via a partnership with engineering firms already active in the space.

GEV is in discussion with a number of major engineering partners to advance the supply into key markets. Such relationships could be a beachhead into the EU as well. In Europe, it is envisaged that 430t vessels would be more suitable than the 2,000t capacity vessel for a number of reasons, including shorter distances to market and the lower cost of smaller vessels.

In essence, the offshore model is very similar to the onshore model. The principal difference is that the C-H2 vessel is loaded via a submerged turret loading (STL) system in mid ocean, similar to those used in offshore loading of high-pressure oil and gas applications, rather than piped directly from the production facility at a port. Once loaded, the vessel would sail to the unloading terminal in the same way as is anticipated in the onshore model. These production facilities are likely to be closer to the shore (customer) than in Asia-Pacific, so a smaller fleet is likely. In some situations, there may be competition from existing pipelines, which would need to be considered.

The key to success for GEV will ultimately be the difference between the purchase price of green hydrogen and the price that it can sell it at, minus shipping costs. The Hydrogen Council estimates that the current average global production cost of green hydrogen is c US$5.3/kg, and expects it to fall to US$2.3/kg by 2030.

Declining costs and prices are a double-edged sword. Falling production costs imply a greater market opportunity for green hydrogen in general, but, more significantly, the lower absolute spread between supply and demand prices will also have an impact. Based on the Hydrogen Council estimates, in 2030 the spread between Australian H2 production and domestic Japanese production could be less than US$1/kg (the spread between the landed price and domestic cost of c $1.5/kg), potentially undermining GEV’s business case. There could be mitigating measures introduced such as carbon tax subsidies that would have the effect of reducing the purchase price of hydrogen and widening the spread to an acceptable magnitude. That said, Japan has recognised that it will require imports of 3mt of green hydrogen by 2030 and 20mt by 2050 given they will not have the available resources for renewable hydrogen production at scale. This important issue is discussed in more detail in our report Finding the sea of green.

Currently, the green hydrogen market in South-East Asia is very opaque with few, if any, participants making prices privately, and none publicly. It is, in effect, a new market where participants are at the price discovery stage. It would appear that c US$9/kg is the current price in Japan based on pilot production facilities, but there are no publicly quoted figures. Given the current lack of visibility and the early stage of market development, in our deflationary valuation scenario (see page 13), we start at the US$9/kg pricing level and assume price erosion over the forecast period to c US$4/kg by 2050. This 3% pa deflation is also reflected in the purchase price. We note that this is a preliminary scenario, and the future pricing and supply/demand situation will significantly depend on the overall energy market development.

GEV believes that the future of clean, zero-emission energy production lies in ‘green’ hydrogen, and that the location of energy production (Australia) will not always be close to consumption (South-East Asia) due to net zero commitments, particularly in Japan and South Korea. It has addressed this technical issue with the development of a compressed hydrogen shipping solution (the C-H2 Ship), which it expects to build and commercialise over the next four to five years, using its patented C-H2 Ship design. The feasibility and economics of this model were recently confirmed in the findings of GEV’s scoping study. We believe this method of hydrogen transportation is not only cost-effective versus selected alternative methods but has by far the lowest carbon footprint. Credibility for this project can be evidenced by the progress made by GEV in developing its CNG vessel.

GEV has a CNG vessel that has already been designed and approved for construction by the American Bureau of Shipping (ABS) and GEV has signed a letter of intent with shipyard CIMC Raffles for its construction. This previous process is clear evidence that GEV has the expertise and experience to bring the C-H2 project to fruition. However, it is unclear whether this project will ever be developed as GEV is likely to want to focus on the emission-free C-H2 vessel instead.

The CNG vessel, called CNG Optimum, is 190m long and has the capacity to carry 200mmscf at a pressure of 3,600psi, or 248 bar. The CNG Optimum has a patented, pressurised pipe storage system, and is capable of being loaded via a STL system implying it is suitable for offshore, as well as onshore, loading.

The vessel is designed to be powered by gas from the cargo as this is expected to be three to four times more efficient in terms of green house gas (GHG) emissions than for an LNG vessel because the liquefaction process, in particular, is so energy intensive.

GEV’s C-H2 Ship is designed to carry 2,000 tonnes of ambient temperature hydrogen in two large 20 metre diameter tanks at an operating pressure of 3,600 psi, or 250 bar (see Exhibit 3). The hold tanks will be fabricated in layers with an inner liner to prevent the tiny hydrogen molecules entering the steel and weakening it. This weakening process is called ‘embrittlement’. The inner tank layer will be stainless steel, and the outer six layers of the tanks will be made of high-strength alloy steel to meet stress and fatigue requirements. The multi-layer design is a key safety feature as any crack that was to appear on the inner tank would not naturally proceed through the adjacent layer.

It is expected that the vessel will be powered by a Ballard fuel cell (described on page 10), which would run from hydrogen piped from the cargo hold. This implies a ‘zero-carbon’ shipping solution.

There have been several key milestones to date; in December 2020, GEV filed a US patent application for various parts of the design relating to the storage and transportation of hydrogen on the vessel. The inventor of the specialist design work is GEV Canada’s Chief Technical Officer John Fitzpatrick. Detailed filing is likely within 12 months with a positive outcome expected, as GEV has already been granted two patents relating to its CNG Optimum vessel.

In January 2021 GEV signed a memorandum of understanding (MoU) with Ballard Power Systems to design and develop a hydrogen fuel cell to power the vessel using hydrogen from the cargo tanks, and in June it signed an MoU with Wärtsilä for its propulsion system.

The design and construction of the vessel is progressing, and certain approvals have already been achieved such as the AIP from the ABS received in March 2021. This approval confirms that there are no unresolvable or unmitigable risks that would prevent the successful development of the 2,000t C-H2 Ship.

The company is now in a position to commence discussions with suitable shipyards that should lead to external confirmation of the capital cost of the vessel and the schedule of construction. Ultimately, GEV is hoping to develop a five 2,000t vessel fleet, but will look to design a pilot vessel with 430 tonnes of capacity over the next 18 months. The pilot C-H2 ship should be operation around the end of 2025 or early 2026.

To initiate the project there are three key physical elements that need to be put in place: (1) an emission-free power system, (2) a C-H2 propulsion system and (3) the C-H2 ship itself. GEV has already signed MOUs with Ballard Power Systems and Wärtsilä to develop a fuel cell solution for power and the propulsion systems respectively. Furthermore, it has signed a letter of intent with CIMC Raffles for the design, development and production of a CNG ship (CNG Optimum, discussed earlier). This establishes credibility for the construction on the C-H2 Ship.

GEV’s ground-breaking C-H2 Ship is expected to be powered by a fuel cell system (FC System) designed by Ballard Power Systems after the two companies signed an MoU on 3 February to design and develop a hydrogen fuel cell system.

The FC System will be powered by compressed green hydrogen drawn directly from the storage/cargo tanks thus providing a truly zero-emission marine transport system. Ballard will design the FC System utilising its FC Wave Technology and will assist GEV with the integration of the FC System into the design of the C-H2 Ship.

It is expected that both companies will work to complete the design, and procure all necessary approvals and full costings over the next 12–18 months.

The C-H2 Ship with 2,000t capacity will require approximately 26MW of power. The smaller 430t pilot vessel will require c 10MW. Ballard’s FCwave Marine Module technology is already proven in a number of applications, and there are now four train projects and five ships in development that will use the technology. Pressure for the shipping industry to migrate to zero-emission transport is growing and has been given a push, for example, by the Norwegian government’s requirement that cruise ships and ferries operating in its heritage fjords need to be emission-free by 2026.

Ballard Power is working with a number of partners to develop these technologies. The partners include ABB (cruise ships), Kongsberg Maritime and CMAL (ferries), Norled and Westcon (ferries), ABB and LMG Marine (barge push boats), and BEHULA and TU Berlin (ELEKTRA push boats). Some of these projects are due to go into testing or operation as early as 2022.

The FCwave fuel cell module is tested and certified for marine environments. Each individual power unit generates 200kW, which can be ‘banked’ together to scale-up output to multiple megawatts to satisfy more power-hungry applications like coastal vessels and ferries. Ballard is developing the FCwave technology to produce a 1,000–1,500kW (1–1.5MW) module more suited to large applications like the C-H2 Ship.

The objectives of GEV’s MoU with Wärtsilä are: (1) to review the various low emission propulsion solutions, including use of alternative fuels for the C-H2 vessel; (2) to advance GEV’s AIP application with the ABS for the 430t C-H2 Ship; and (3) to demonstrate the availability and outlook for efficient, low-emission propulsion systems for the C-H2 Ships, including the integration of fuel cell applications to be provided by Ballard.

GEV’s green hydrogen production and supply chain is emission free and less complicated than the alternatives of using liquified hydrogen (LH2) or ammonia. The renewable energy source and hydrogen production could be either onshore or offshore, making the supply chain model very flexible. The compression to 250 bars, and loading, is to be carried out simultaneously onto the CH2 Ship, negating the need for expensive quayside storage. In the GEV model, there will always be a vessel moored on the quayside.

The hydrogen is stored on board in its gaseous form and transported at ambient temperature. The vessel is powered by electric drive engines and onboard fuels cells utilising hydrogen from the ship’s own cargo. This is a closed system that does not result in any boil-off of cargo (in the case of LH2), or emissions other than water vapour. ‘Boil off’ is where liquified gas warms up and evaporates.

When the vessel arrives at its destination, the C-H2 ship unloads pure gaseous hydrogen to a customer for fuel cell applications. The unload is unassisted due to the high pressure in the hold.

GEV believes a net-zero emission supply chain should be the ‘holy grail’ of its green hydrogen cargo, and zero-emission marine transportation. Therefore, GEV undertook a scoping study to assess the cost competitiveness and technical feasibility of its 2,000t C-H2 Ship using 100% green hydrogen. GEV’s detailed scoping study looked closely at the cost efficiency of the three main supply chain alternatives: compressed hydrogen (C-H2), LH2 and ammonia (NH3), comparing its 2,000t C-H2 Ship against other comparable vessels. The conclusion was that the C-H2 supply chain was the most cost efficient for the transportation of 200,000tpa of hydrogen over distances of 2,000nm and 4,000nm.

The key assumptions in the study were:

The charts below describe the relative levelised cost of hydrogen (LCOH) of the three supply chains over 2,000nm and 4,000nm (Exhibit 7).

The key conclusions were:

GEV’s detailed scoping study also looked into the energy efficiency of the three main supply chains: C-H2, LH2 and NH3. The conclusion was that the C-H2 ship supply chain was the most energy efficient principally because it involved fewer and far less complicated processes than either the LH2 chain, or the NH3 chain.

The study estimated that for a supply chain of between 2,000nm and 4,000nm, the C-H2 chain delivered 75–85% of the initial energy, while LH2 delivered 60–65% and NH3 delivered less than half (47–50%).

The principal energy loss for C-H2 was in the shipping, so the longer the distance to the destination, the more of the hydrogen cargo was used; see Exhibits 8 and 9 below. Very little energy was expensed elsewhere in the whole energy production, transportation and usage process.

With LH2, the main energy loss was the liquefaction process where the gas has to be chilled and kept below -253°C to avoid or minimise losses of ‘boil-off’. Other problems also exist. The liquefaction process only exists in small-scale plants and therefore does not exist in suitable scale at any locations where it would be required physically. Furthermore, the shipping technology to transport high volumes of LH2 is a new technology developed by NASA and, again, only exists in small scale.

The most readily available and well-understood supply chain is that of NH3. However, this process has its own limitations. For example, the initial compression and synthesis process is highly energy consumptive, and the shipping and storage at -33°C also potentially requires energy and produces CO2 emissions. Finally, if the hydrogen is to be used for fuel cell applications, the ammonia will need cracking and purifying, which is very energy intensive and currently only exists at micro-scale.

The C-H2 Ship solution is virtually emission free, whereas the other two transportation methods are far more energy hungry and could therefore produce far greater GHG emissions, especially where a certified green grid is not available for processes that require a base load power supply.

GEV’s management team is crucial to the success of the company. We believe GEV has the required experience to make it a success. For example, the non-executive chairman, Maurice Brand, has been active at senior levels in international energy companies for over 30 years. Martin Carolan, the newly promoted CEO, has a financial market background that was preceded by roles at large corporates on behalf of international consultants.

In addition, Garry Triglavcanin, who is the chief development officer, has more than 25 years’ experience of the commercial, technical and legal aspects of project developments and delivery in the international energy industry; and the chief technical officer is John Fitzpatrick, the inventor of the specialist design work for the C-H2 vessel.

They are supported by non-executive director Andrew Pickering, who has spent his entire career in shipping and logistics. Specifically, he was CEO of a company that developed a small-scale fleet of LNG vessels and an LNG terminal. His experience is extremely relevant to GEV.

We see a number of risks to the long-term success or failure of GEV, mainly because of the early stage of GEV’s development, but also the embryonic stage of ‘green’ hydrogen production in Australia, and the potential demand for hydrogen in end-markets. Furthermore, the high level of upfront investment required is a further, and fundamental, risk. We see the principal risks as follows:

Despite the long list of risks above, there are numerous mitigating issues to consider that would reduce the risk of failure.

For example, the C-H2 Ship is really a standard handy-max vessel. The two principal differences being the C-H2 hold tanks and the FC/propulsion system. Both of these can be tested on dry land and at an appropriate scale to improve design in the early stages and to minimise the risk of failure.

Hydrogen is rapidly becoming a key renewable energy in the fight for decarbonisation. Therefore, we believe hydrogen production, and demand, are likely to attract more, not less capital, accelerating the demand for product and its transportation.

The biggest risk we see for GEV is that of H2 pricing. But here too we believe that GEV is likely to sign long-term purchase and supply contracts with common reference points/prices that would reduce its risks.

There are several key drivers that weigh very heavily on the financial viability of the project, including the size of vessel, distance to market and, most importantly, the cost and price of the hydrogen bought and sold. Our modelling concludes that a fleet of small (430t) vessels could generate an IRR of over 14% in a flat pricing scenario, falling to an acceptable c 10% in a deflationary H2 price environment of 3% pa (see Exhibit 11). The economics improve dramatically with scale. Our 2,000t fleet model suggests IRRs move up to c 19% and c 14% in the flat pricing/deflationary scenarios, driving considerably higher profits from the enlarged capital base. In our valuation we modelled the smaller 430t vessels, in a deflationary environment.

Anecdotal evidence suggests green hydrogen can be purchased from producers for c US$3–4/kg and that the selling price is c US$9/kg currently as discussed earlier. We have adopted $4/kg and $9/kg as a starting point in our modelling, though pricing could prove to be more advantageous than these figures as the market matures and production prices in particular fall. Therefore, we have also modelled two scenarios for each fleet: one with flat pricing assumptions and a second scenario that assumes parallel price deflation of 3% pa on both the purchase and selling prices of hydrogen. This scenario implies that the purchase cost of hydrogen falls from $4/kg to $1.93/kg by 2050, and that the selling price falls from $9/kg to $4.33/kg at the same point in time, consistent with long-term market forecasts.

We believe that the six vessel, 430t fleet is therefore able to prove the concept of shipping compressed hydrogen and will be able to generate profits and positive cash flows even in a deflationary environment. However, given the demonstrably higher IRRs available on the larger-scale vessels, it is likely that GEV would want to leverage on this scale advantage sooner rather than later.

The cost and price assumptions for hydrogen are crucial to the economics of the models. As stated above, for each of the two fleets, we have modelled two scenarios: the first with flat pricing based on the hydrogen price assumptions above; and a second that assumes parallel price deflation of 3% pa over the life of the project. Many industry experts expect the cost and price of hydrogen to fall as production reaches scale, but there are also likely to be long-term supply contracts involved that would give investors in new hydrogen production plant the confidence to invest in the first place. These contracts could potentially hold purchase prices higher for longer and would potentially be matched by long-term selling price contracts that would protect GEV from unnecessary pricing risks.

Our models for the 430t fleet involve shipping 50,000t of compressed hydrogen per annum. In this scenario we assume the full cost of initially running the vessel on marine fuel oil (MFO) rather than utilising the hydrogen cargo. There are two reasons for this. Firstly, GEV is keen to prove the concept of transporting compressed hydrogen with the vessel design, and secondly, by using MFO, it can deliver a higher volume of hydrogen per voyage as it will not have utilised part of the cargo to power the vessel. The 430t vessel will be designed such that the traditional engine can be replaced with a fuel cell at a later date.

Our 3% pa deflationary model gives revenue of US$450m and a profit of US$153.9m in year one, 2026. This implies a margin of 34.2% which declines c 100bp pa as we have assumed 3% cost inflation in operating expenditure and fuel. Based on our discussions with management, we have assumed the fleet of six vessels costs about $900m and are depreciated on a straight-line basis over 30 years. It produces an IRR of 9.7%.

There are clearly some potentially large sensitivities to these assumptions. In the table below, we have described the potential operating profit in 2026 given a range of hydrogen purchase and selling prices. It shows for example a profit of US$153.9m with a purchase cost of US$4/kg and selling price of US$9/kg. Profits would fall to US$103.9m if the purchase price fell to US$2/kg, and the selling price dropped to $6/kg.

Our flat price scenario contains the same assumptions bar pricing. Profits decline more slowly because the selling price is much higher than the purchase price, and the IRR in this scenario rises materially from 9.7% to 14.2%, a level that is clearly more attractive, thus making the case for compressed hydrogen more compelling.

Our model for the 2,000t fleet involves shipping 200,000t of compressed hydrogen pa. In this scenario we assume the vessel is powered by a fuel cell that is fed from the hydrogen in the hold such that c 166,000t of the original 200,000t of hydrogen are delivered at the destination. We also assume the first voyage is four years after the first 430t vessel voyage, in 2030, by which time the concept should be proven, and many key lessons are likely to have been learned by GEV, and the shipyards building compressed hydrogen vessels in particular.

This 3% pa deflationary price model gives a revenue of US$1,325.9m and a profit of US$471.9m in year one. This implies a margin of 35.6% which declines slowly as we have assumed 3% pa cost inflation in operating expenditure only. Based on company guidance, we have assumed the fleet of five vessels costs US$2,400m and are depreciated on a straight-line basis over 30 years. It produces an IRR of 13.8%.

There are clearly some potentially large sensitivities to these assumptions, similar to the smaller vessel fleet. In the table below we have described the potential operating profit in 2030 given a range of hydrogen purchase and selling prices. We forecast a profit of US$471.9m, with a purchase cost of $3.54/kg and selling price of $7.97/kg. Profits would fall to US$452.7m if the purchase price fell to $2/kg, and the selling price dropped to $6/kg.

Our flat price scenario contains the same assumptions bar pricing. Profits decline slightly more slowly because the selling price is much higher than the purchase price, and the IRR in this scenario increases from 13.8% to 18.7%, a level somewhat more attractive than any of the other scenarios due to better pricing and the benefits of scale of the larger vessels.

As described above, we have modelled two scenarios for each of the 430t and 2,000t vessel fleets, one that assumes a deflationary pricing environment, and one that assumes flat pricing. Using the NPV of the smaller fleet in a deflationary environment and assuming some additional cash requirements to reach deployment, we value GEV at A$0.18/share, implying more than 150% upside. Our flat pricing model implies significantly greater upside. The 2,000t fleet model shows materially more uplift potential, highlighting the benefits of the larger-scale vessels.

In arriving at a valuation for GEV, we started with the estimated net cash as at 30 June 2021 of A$6.5m and added A$119.0m, being an estimate of 10% of the total funding requirement, raised at the current share price, to take GEV to the point of beginning operations and to pay for the vessels. This gives a total cash value of A$125.5m. We then added the NPV of the 430t fleet (six vessels) of US$199.6m/A$259.5m, which gives a total value of A$385.0m. In our NPV model we used a weighted average cost of capital of 6%, which reflects a cost of debt of 4% and a cost of equity at 25%, 90%/10% weighted. A 4% cost of debt may seem low, but Australian government bonds currently yield c 2%, and we also think that ‘green’ finance initiatives may be happy to accept such a return. That said, the potential funding structure and the possible share of equity in the overall funding package remain to be seen.

In this scenario, we have assumed that 1.7bn new shares are issued, which dilutes the existing shareholders by a factor of nearly five. However, despite the dilution, we estimate that the shares would have a value of A$0.18, which implies 156% upside.

In a flat pricing scenario, the value rises considerably, to A$0.51/share, because both revenue and profits are higher. In reality, it could be possible that GEV may negotiate long-term contracts with hydrogen producers and customers that may in effect be a combination of the two scenarios modelled; that is, the first 10 years may be a flat pricing scenario, followed by some trajectory of price deflation/open market pricing for the last 20 years.

Of course, achieving any of this will require significant amounts of capital, which GEV does not have. In our deflationary scenario, we estimate GEV would need to raise A$1,190m, which would be 10% equity (A$119.0m), and the balance (A$1,071.0m) being debt. This is likely to be extremely challenging considering the current market capitalisation of GEV is only A$27m.

In reality, the funding model is likely to follow GEV’s CNG funding structure. This is likely to involve placing the C-H2 project in an SPV, which in turn would raise both debt and equity. The pool of relevant capital could be deep given the interest in hydrogen from ESG investors and from infrastructure and pension funds. Government funding is also a potential source.

In our summary valuation scenario table above, we have assumed that GEV will require equity fund raises totalling c A$20m (ie A$5m pa) in order to fund the project through to 2026. We estimate that GEV ended the 2020/21 year to June with net cash of c A$6.5m following a A$6.3m equity raise in February.