Chris Stebbings, Director, LGB & CO
With one of the most turbulent years on record almost behind us, the Climate Crisis nevertheless remains at the top of the global political agenda. One key enabler for a carbon neutral future is the transition to a green hydrogen-based economy, and at least 20 countries – collectively representing around 70% of global GDP – are proposing hydrogen strategies or roadmaps as key elements of their decarbonisation plans. For example, the UK government recently unveiled a plan to make green hydrogen a cornerstone of its “green industrial revolution”, while the EU’s three-phase hydrogen roadmap announced earlier this summer envisages up to €500bn being invested in this transition by 2050, potentially employing up to one million people. The incoming US administration is also expected to reverse the current administration’s policies to invest significantly in clean energy infrastructure over the next four years.
Key companies at forefront of green hydrogen transition
Clearly, there is global momentum towards green hydrogen investment. With the key technology underpinning the transition being the hydrogen fuel cell that silently generates electricity from hydrogen, fuel cell makers such as AFC Energy, Ceres Power and ITM Power are some of the listed companies at the forefront of this transition. Yet while fuel-cells are often considered a green technology, almost all of the hydrogen produced globally is currently done so through techniques based on fossil-fuels. Therefore, the widespread deployment of electrolysers (that generate hydrogen from water) running off surplus renewable power is needed to ensure enough green hydrogen in the future, and electrolyser manufacturers such as ITM Power, which is soon to finish construction of the world’s largest electrolyser factory in Sheffield, stand to be central players. Ceres Power has also announced that it can reverse its fuel cell process to create an electrolyser to produce green hydrogen from renewable electricity.
Sky-high valuations…or not? Is the transitioning of global energy creating a super cycle?
Indeed, many pure-play hydrogen companies that are set to gain from growth in hydrogen demand have seen their shares rocket over the past year on the back of government pledges such as the EU’s roadmap. Over the past year, ITM Power is up c.370%, Plug Power is up c.700% and French electrolyser developer McPhy is up an amazing c.820%. At the same time, major industrial companies such as Cummins and Bosch who have realised that they need to embrace fuel cell technology if they want to prosper are expanding into hydrogen and taking stakes in relevant companies. US-based Cummins made its first move into the renewable energy sector last year when it acquired fuel cell and electrolyser technology manufacturer Hydrogenics. In the same year took a minority investment in Loop Energy, a fuel cell electric range extender provider, and signed a memorandum of understanding with Hyundai Motor Company to collaborate on hydrogen fuel cell technology.
Ceres Power has also attracted big names such as Bosch as a partner and 18% shareholder alongside Waichei which owns 20%. Large, global businesses are shifting their focus to a cleaner, greener source of energy but this has only just begun. ITM Power has attracted an investment from Linde/BOC as well as Italy’s biggest gas grid company Snam. The list of partnerships with hydrogen economy companies is expanding at a rapid pace and we expect this to continue through to deployment.
Reasons for caution? Or is there more gas in the tank?
Investors have witnessed a number of short-lived hype cycles surrounding hydrogen technology in the past, with the most recent being in the tech bubble of the late 1990s. Then, interest in hydrogen companies took off after major automakers started to invest in fuel-cell technology. This powered Ballard’s share price to a record high of C$165.05 and a market cap of $20b in September 2000, before plunging below C$15 two years later after consumer demand failed to materialise.
Today, many of the companies set to benefit directly or indirectly from increased hydrogen demand are still at an early stage of revenue development and few are consistently profitable. Many will also require significant additional funding from the big industrial companies already mentioned, which from an investor point of view will dilute existing shareholder holdings.
Applications across a range of sectors, even in near term
Nevertheless, a number of niche applications mean there are still opportunities for savvy investors that are aware of market dynamics. This is because while cheap renewable power combined with battery storage looks set to address sections of the transport and power sectors, important gaps remain in various sectors that hydrogen is well suited to fill. ‘Hard to reach’ sectors such as steelmaking, residential and commercial heating, long-distance road freight, shipping and aviation, have no obvious, low-cost, convenient alternatives to fossil fuels, and collectively account for approximately 34% of global energy consumption. Hydrogen’s high energy to mass ratio and low losses during storage and transportation make it an ideal fit across these sectors. Before the widespread availability of green hydrogen, there is also scope for fuels cells to be used in off-grid generation, distributed generation, and back-up power. One specific vertical where fuel cells could provide the solution is EV charging as highlighted by AFC Energy’s recent partnership with ABB. Ammonia (NH3) provides the source of hydrogen for AFC’s fuel cell which is readily available and therefore means that deployment for EV charging is available now.
Outlook – no longer a crystal ball
There have been a number of false starts for fuel cell stocks over the last 40 years and yet the concerns have been based around a number of issues including; hydrogen, efficiency of the fuel cell, costs of the fuel cell, the incumbent oil majors allowing this transference from hydrocarbons to green energy to happen and finally government support. The hydrogen issues centre around; the safety of hydrogen, the availability of pure enough hydrogen and the lack of a hydrogen infrastructure, yet these concerns are being answered. The fuel cell’s efficiency has evolved dramatically over the last decade and costs are falling materially (as much as 90%) as partnerships like Ceres/Bosch move into the mass production phase. The incumbent oil majors have been decimated by governments around the world announcing lower and lower carbon emission targets on shorter and shorter time frames which ultimately forces them to be investors in hydrogen economy companies.
So, despite this uncertainty, there seems to be a steady shift towards green hydrogen being a major part of the energy mix. Recently published forecasts from the EU, the Hydrogen Council and Bloomberg New Energy Finance suggest hydrogen could grow from 2% now to 13–24% by 2050. Many listed companies are bound to be winners along the way and, with the same economies that embraced batteries now embracing fuel cells as the next major technology they need, plenty of opportunities remain for investors, even with valuations being where they are today.