Strategic Insights | Should you get high on the hydrogen hype?

Strategic Insights | Should you get high on the hydrogen hype?

Published April 18, 2021

There’s loads of the stuff

As the most abundant chemical substance in the universe (accounting for roughly 75% of its entire mass), hydrogen might seem like the Holy Grail of energy. Think back to your chemistry lessons at school: you can produce it simply by passing an electrical current through water, splitting it into hydrogen and oxygen (electrolysis). And if that electricity comes from renewable sources (like solar or wind), then the whole process is basically emissions-free. Even better, when hydrogen is burned or passed through a fuel cell, the only by-product is water. What’s not to like?

Cometh the hour, cometh… one of the cleanest energy solutions available

Forget Hindenburg: it looks as though hydrogen could finally be going somewhere – after decades of misadventures, false starts and disappointments. Indeed, it looks as though it’s currently in something of a sweet spot. Production costs are falling, technological improvements are coming thick and fast and the EU, the UK, the US and China are all behind a global push toward sustainability with a raft of binding carbon neutrality commitments. All of these factors are converging, meaning that the time just might finally be right for the universe’s most abundant commodity to take centre stage.

An US$11 trillion market

According to many commentators, a widespread backing of hydrogen could transform our lives for the better and generate trillions of dollars for the world economy. It could also play an essential role in tackling climate change.
Investment Quorum’s Chief Investment Officer Peter Lowman believes that we are reaching a watershed moment, and that green hydrogen could finally meet our energy needs, fuel cars, heat people’s homes and be used in industries as an economically viable alternative to fossil fuels.
“Together with renewable electricity generated by other means – such as hydroelectric, photovoltaic and wind – green hydrogen produced by splitting water gives us a serious shot at achieving carbon neutrality by 2050”, he says.
Given the stakes involved, the economic revenue potential is significant. Because green hydrogen is being tipped as something that could cut emissions by a third, it could provide up to US$11 trillion worth of infrastructure investment opportunities over the next 30 years or so. On its own, this would generate annual revenues of US$2.5 trillion. This figure even increases to US$4 trillion when you include income generated by associated hydrogen products – such as hydrogen fuel cell vehicles.

Hydrogen stocks

“Hydrogen has been very popular with investors for some time now, and a number of stocks have performed extremely well”, says Peter Lowman. Indeed, confidence in hydrogen is growing, and a number of hydrogen focused ETFs have started taking advantage of the trend. “The likes of L&G (with its Clean Water ETF) and Schroders (with its Energy Transition fund) already have some exposure to hydrogen, so clearly this is a theme that has legs – from a number of perspectives. And Investment Quorum has exposure through these funds, as well as – at a tiny level – through a number of others”.
Many of the stocks out there have fallen back slightly from their recent highs. But many analysts see this pullback as a buying opportunity for interested investors.

Some major companies are in on the game

A number of companies are emerging as leaders in the hydrogen sector. One such company is 26-year-old Plug Power Inc. which develops hydrogen fuel cell systems. Another is Clean Power Capital with its innovative modular hydrogen fuelling station solution. And then there is Doosan Fuel Cells, which is currently developing a solid oxide fuel cell system to provide the heavy shipping industry with cleaner power. When you look at the interest in these companies and the sheer transformative power they have, it’s no wonder that the hydrogen market has been valued at US$11 trillion.

Who’s putting the brakes on?

So, where’s the snag? Why hasn’t this wonder fuel taken off? Investment analyst Nick Harrington agrees that the wider commitment to net zero is a fantastic opportunity for investors interested in cleantech. “Sure, there are practical issues relating to storage and transportation, but the number one hurdle is currently cost”, he says. “Electrolysis is energy intensive, meaning that ‘green’ hydrogen is not yet commercially competitive with fossil fuels.
The UK is not alone in pledging to invest in hydrogen as part of its post-pandemic and net-zero emissions initiatives. Governments all around the world are committing to making the ecological transition a priority as they all strive to meet the goals set by the Paris accords and make net-zero a reality. This is also helping to boost the popularity of hydrogen stocks and ETFs. Meanwhile, the EU is making strides with its Hydrogen Strategy.
Then, of course, there is thematic investing, which is growing in popularity because it gives investors an easy way to access a number of stocks in one sector.

The future or a bubble fit to burst?

The…ahem… explosion of interest in hydrogen has led to some rather punchy valuations. Plug Power Inc. has been a day trader’s dream over the past 12 months or so: its share price rocketed from around US$4 in June 2020 to US$75 in January of this year, before crashing back down to around US$34. And Clean Power Capital – which is rolling out its PowerTap on-site hydrogen production technology across the US and plans to install over 500 stations in the next five years – has also seen its share price soar.
It is certainly true that a number of multinational energy management companies, rolling stock manufacturers and transport providers are throwing their weight behind hydrogen (Alstom, Keolis and ENGIE, to name but a few). But as a fossil fuel alternative, it has a history of false dawns and the spectacular share price collapse of US zero-emission vehicle concept designer Nikola should serve as a lesson.
“When it comes to hydrogen, you really need to be careful”, cautions Pete Lowman. “It’s a question of timing. It may be flavour of the month today, but we need to make absolutely sure we are not paying top dollar to get into it. You really need to have your long-term hat on”. Investing in hydrogen does indeed remain highly speculative and it is unclear how significant hydrogen will ultimately be to the global energy picture. Although we may see the odd hydrogen-powered car on the roads in the next year or two, we may be able to pick up a dockless hydrogen fuel cell e-bike, it is questionable whether hydrogen really will take off as a means of powering mobility solutions. But it could emerge as a highly viable solution in areas where electrification is less appropriate – such as steel and cement making and shipping.

Less risky ways to play the hydrogen theme

At Investment Quorum, our investment analysts agree that – given the uncertainty associated with the gas – there are less risky ways of exploring the theme. These could include funds made up of companies that don’t arrive huge revenue from hydrogen technologies at the moment, but which see hydrogen as a significant component of their longer-term growth and spending. Many such funds are already benefiting from the overall higher demand for clean power.