- As governments throw their weight behind hydrogen, shares in Aim-traded ITM Power and Ceres Power are soaring
- While this momentum is impressive, investing in hydrogen is still highly speculative
The idea that we should replace hydrocarbons with hydrogen is not new, but it has been enjoying a renaissance over the past year or so. As countries get serious about tackling climate change, hydrogen is being billed as the missing piece to the decarbonisation puzzle.
On the face of it, hydrogen seems like the holy grail of energy. It’s easy to make as you simply pass an electrical current through water to split it into hydrogen and oxygen – a technique known as electrolysis. If the electricity comes from renewable sources, then this process is essentially emissions-free. When the hydrogen is burned or passed through a fuel cell, the only by-product is water. It also offers a solution to the intermittency of wind and solar power as it can be used as an energy store.
So, why hasn’t this wonder fuel taken off? There are practical issues relating to storage and transportation, but the number one hurdle is cost. Electrolysis is energy intensive, meaning that ‘green’ hydrogen is not yet commercially competitive with fossil fuels. As the cost of renewable energy comes down and installed capacity increases, hydrogen could become more financially viable.
This should be aided by an increasingly supportive policy environment as governments around the world promise to invest in hydrogen as part of their post-pandemic and net-zero emissions initiatives. The UK government has announced plans to invest up to £500m in hydrogen initiatives, aiming for five gigawatts (GW) of low carbon hydrogen production by 2030. It is hoping to attract £4bn of private sector investment as well. Meanwhile, the European Commission’s Hydrogen Strategy is targeting 40GW of electrolyser capacity by 2030 and the bloc could spend as much as €470bn (£425m) on hydrogen production by 2050.
Aiming high
With governments throwing their weight behind hydrogen, investor excitement has been kicked into overdrive. There has been incredible momentum among hydrogen-related stocks over the past year or so and the Aim market is the place to go for potential hydrogen plays in the UK. ITM Power (ITM) recently completed the construction of its ‘Gigafactory’ in Sheffield and it is aiming to ramp up production of its ‘proton exchange member’ (PEM) electrolysers to 1 gigawatt (GW) per year. Once the facility reaches 60 per cent capacity, ITM has plans to build another Gigafactory as well.
The additional capacity should enable it to supply any hydrogen projects that arise from the partnerships with two of its shareholders – industrial gases giant Linde (DE:LIN), which bought into ITM in 2019 and which has a 17 per cent stake, and Italian energy group Snam (IT:SRG), which made a £30m equity investment in October last year.
Hydrogen companies have established a pattern of teaming up with deep-pocketed big names who can help scale up their technology and bring it closer to commercialisation. Engineering giant Bosch (US:BOSCHLTD) owns an 18 per cent stake in Ceres Power (CWR) and last month the company announced that it will develop 200 megawatts (MW) of fuel cell production capacity across Germany by 2024, incorporating Ceres’s ‘solid oxide fuel cell’ stacks. Ceres anticipates this will generate around £23m in licensing fees between 2021 and 2023.
Unlike ITM, Ceres is focused on licensing out its valuable intellectual property rather than manufacturing, likening its approach to chip designer Arm. This asset-light business model has enabled high gross margins of over 70 per cent, although when it comes to the bottom line, the company remains in the red.
A new dawn or another bubble?
The explosion of interest in hydrogen has led to some rather punchy valuations. ITM’s shares have been rocketing up since mid-2019, rising from around 35p to 523p now and translating to a market cap of close to £3bn. That’s quite astonishing when you consider that ITM is loss-making and analysts predict it will only swing to a profit in 2023 with an EPS of merely 0.04p. Meanwhile, fuel cell maker AFC Energy (AFC) has a market cap of over £500m, but it didn’t actually book any revenue from product sales in 2019 or the first half of its 2020 financial year.
Hydrogen has a history of false dawns and the spectacular share price collapse of electric truck start-up Nikola (US:NKLA) should serve as a cautionary tale. “At one point, they were a $40bn company and yet they don't even have a truck,” says Lucas White, portfolio manager for GMO Asset Management’s resources and climate change strategies. “They don't even have a prototype for a truck, they have an idea for a prototype for a truck.”
Investing in hydrogen remains highly speculative and it is unclear how significant hydrogen will ultimately be to the global energy picture. While Toyota (JP:7203) recently launched its second-generation hydrogen-powered car, it is questionable whether hydrogen will really take off in the passenger vehicle market given batteries’ head start. But hydrogen could shine in areas where electrification is less appropriate such as steel and cement making and shipping.
Given the uncertainty, there are less risky ways of playing the hydrogen theme. Johnson Matthey's (JMAT) pivot towards hydrogen holds long-term potential, while renewable energy stocks such as Ørsted (DK:ORSTED) and wind turbine supplier Vestas (DK:VWS) will benefit from the overall higher demand for clean power.
