Amid ongoing debate about reducing emissions as part of the energy transition, there is growing excitement about hydrogen’s potential as an ultra-low carbon fuel of the future.
We definitely see a role for hydrogen in some aspects of transport, as well as in potentially decarbonising heat and as a storage medium for electricity. Our Sustainable Investment team has been looking at hydrogen for many years and the relatively recent resurgence in Hydrogen 2.0 appears to have a number of benefits over Hydrogen 1.0, which peaked with fuel cells before withdrawing to the sidelines a decade or more ago.
How this will pan out, however, and the best ways to invest in this theme are still uncertain and we anticipate it will be some time before the economics are right for mass adoption.
The beauty of hydrogen is that when burned, the main by-product is water; the critical factor from an emissions standpoint, however, is how that hydrogen is produced. At present, virtually all hydrogen comes from using natural gas as a feedstock (grey hydrogen). Blue hydrogen is when this process captures and stores most of the resulting carbon emissions; green hydrogen, meanwhile, is made by electrolysing water (using electricity from ultra-low carbon sources such as wind and solar). Within this, it is key where the water for electrolysis comes from and technologies that enable the use of sea water are interesting and will be needed in areas of scarcity.
From an environmental and investment perspective, we are only interested in green hydrogen. Blue is a good idea and it is easy to see why the incumbents like it but we have yet to see carbon capture and storage technology to make this economically viable. Using grey hydrogen as a future fuel also makes no sense as, by our calculations, the carbon emissions in producing it are worse than simply burning natural gas.
In terms of application, hydrogen is being used in transport, particularly replacing batteries in warehouses for forklift trucks and similar machines. We see further potential for green hydrogen as fuel stock in logistics (trucks, trains and marine) but these newer applications are unlikely to be scalable and economic before 2025 to 2030.
Green hydrogen is also being used in pilot applications, particularly industrial processes such as chemicals and refining in Europe. This is proving an excellent learning ground and has the capacity to drive up the scale of this industry and bring down costs within it. This also includes green hydrogen production facilities using primarily wind-powered electricity.
In heating homes, we think replacing natural gas with hydrogen will take time before grids are capable of carrying high proportions of the latter (many in Europe are being upgraded to plastic piping) and we are still some way from green hydrogen being cheap enough to make that switch economically viable. There are trials under way to add hydrogen to the grid to around 30% levels (the remainder being natural gas), which has the potential to reduce emissions. Our view is that electrically-driven heat pumps will gain traction as we move towards 2030 to 2035 before we eventually see this green hydrogen gas network scaling up, likely to be in the late 2030s or early 2040s.
Looking at investment opportunities, there are listed companies where hydrogen makes up the vast majority of their business, such as Plug Power and Ballard Power in the US. We also have ITM Power in the UK, which makes electrolysers and builds systems for clients (including storage and balance of plant), while Aker Clean Hydrogen recently listed in Norway.
It is tough, however, to predict the profitability of these companies as they scale up and, given how rapidly this space is evolving, visibility of returns is difficult to assess. Coupled with the fact that hydrogen has quickly captured the market’s imagination, this means many of the positive prospects these companies face are largely reflected in valuations. While we are not saying they are overvalued, we have low conviction in seeing much upside from current levels and so do not invest in any of these stocks currently.
That said, we continue to watch these companies and think the next 12 to 24 months will be a fascinating time to see how this area evolves. This should provide better visibility for the future and conviction in finding investable companies accelerating the shift towards economic green hydrogen and benefitting from potentially huge future demand.
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