In today’s Exponential Investor:
- The most ubiquitous yet underutilised energy source
- Hydrogen’s time has come
- Industry growth of… 6,000%
What is a hydrogen stock?
Hydrogen is the most abundant element in the universe.
It’s in the air that we breathe and the water we drink. It’s also found in vast quantities in the sun.
Yet, still, its prevalence in energy systems, and indeed stock markets, is relatively small.
For example, the chemical element accounts for less than 2% of Europe’s total energy consumption.
Given its versatility, this is hugely surprising.
Hydrogen acts as a storer of energy, and can be transported in gas or liquid form. It can be transformed into electricity under a heat-intensive process, helping to power homes. It can even power transport, via battery fuel cells.
Crucially, it doesn’t produce any carbon emissions when burned. However, around 95% of hydrogen is made from non-renewable sources.
This is referred to as grey and blue hydrogen, with the other 5% being made up by green (zero-carbon) hydrogen. As the name suggests, green hydrogen is produced using renewable electricity.
Hydrogen energy adoption’s Achilles’ heel has always been its cost.
In the United States, for example, green hydrogen is three times more expensive to produce than natural gas. This is because the extraction process for hydrogen, called electrolysis, is an intricate process that uses expensive rare-earth metals as a “separator” of hydrogen and oxygen molecules in water.
It’s also extremely flammable, and not very dense. It requires specialist storage to stop it from setting alight and to prevent it from dissipating into the air. However, the energy crisis and green energy transition have left governments with little choice but to explore it.
For example, in September 2022, US President Joe Biden announced that he would be providing $7 billion in funding for up to ten clean hydrogen hubs, as he scrambles to decarbonise the United States’ energy grid by 2035.
Also, the UK government is seeking to invest £4 billion in the hydrogen sector by 2030, with up to 35% of the country’s energy consumption to come from hydrogen sources by 2050.
Theoretically, this should boost innovation, competitiveness and drive down costs.
The hydrogen industry could form the bedrock of energy systems for years to come.
Those companies behind this transition could be on hand to benefit. These include hydrogen producers, storers, and developers of hydrogen energy infrastructure, such as electrolysers and fuel cells.
Who are the big players investing in hydrogen?
Although there are growing tailwinds behind hydrogen at the moment, the industry is still at a nascent stage in terms of commercialisation.
As a result, investor exposure to the hydrogen sector isn’t as broad as it is to other areas of the green energy transition, such as electric vehicles, for example.
Nevertheless, there is still a handful of multi-billion-dollar hydrogen companies that could have solid long-term potential.
- Air Products and Chemicals is the world’s leading hydrogen supplier. It owns and operates more than 100 hydrogen plants worldwide, producing over 7,000 kilograms of hydrogen per day.
- Ballard Power Systems is a leading global provider of fuel cell solutions. Its fuel cells are optimised for buses, trucks, ships, passenger cars and forklifts. This year, it announced a major deal with Swiss industrial giant ABB to develop the fuel cells that power its ships. As well as electrification, this gives an idea of the direction in which the transport sector is heading.
- Bloom Energy provides electrolysers. The company claims its electrolyser can produce clean hydrogen up to 45% more efficiently than competitors. Bloom can also pair its electrolysers with wind and solar energy sources to generate green hydrogen.
Who is leading green hydrogen?
Hydrogen companies are all well and good – but if they aren’t cultivating the use of green hydrogen, they’ll likely succumb to government clean hydrogen targets, which seek to include more green hydrogen and less “dirty” hydrogen.
For example, President Biden aims to produce 50 million tonnes of hydrogen per year by 2050, up from effectively “zero” today. However, due to its high cost, pure-play green hydrogen companies are pretty few and far between.
In the main, it’s the bigger players with the funds and infrastructure that are leading the green hydrogen trend.
These include the companies outlined above, along with other energy powerhouses such as ITM Power and Ceres Power.
One of the few pure-play hydrogen stocks out there right now is Clean Power Hydrogen, a UK-based provider of hydrogen electrolysers.
Currently, one of its electrolysers can produce 450kg of clean hydrogen per day.
What are the risks of investing in green hydrogen?
As suggested, adoption of green hydrogen is limited at present, as it only makes up 5% of total hydrogen generation.
Being the most expensive kind of hydrogen to produce (it’s roughly twice as expensive as blue hydrogen, for example), green hydrogen is the smallest sector in the industry.
As a result, even though it has undoubted potential, investing in green hydrogen comes with uncertainties that you’d associate with a new, unproven industry.
Even the wider hydrogen industry is still at an incredibly early stage, making up a fraction of global energy use. The fact that Europe only gets 2% of its energy from hydrogen shows that there’s huge scope for improvement.
High costs are likely to remain an obstacle for a little while yet, too. It could be several years before economies of scale are finally realised by hydrogen companies, even though governments are pumping billions into the industry.
Typically, a conventional hydrogen fuelling facility can take around 12 months to build.
Both metaphorically and figuratively, hydrogen will most likely be a slow burner.
Are hydrogen stocks a good investment?
In our view, hydrogen stocks are a prudent investment right now. Especially those that cultivate the use of clean hydrogen.
The tailwinds are difficult to ignore, with hydrogen now forming a key part of policymakers’ agendas.
According to Recharge, the clean hydrogen industry is expected to grow a staggering 6,000% between 2021 and 2031, rising from $2.1 billion to $135.7 billion.
In addition, as highlighted in our 26 September 2022 update, the green energy sector has significantly outperformed the wider market this year.
With hydrogen playing a greater role in the wider green energy trend, we believe it could create some serious value for investors both now and in the years to come.
Until next time,
Contributing Editor, Exponential Investor