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The fuel of the future

Is the hydrogen economy a hot investment or hot air?
The fuel of the future

Hydrogen has long been hailed as the ‘fuel of the future’. As the most abundant element in the universe – although you’d be hard pressed to find it naturally in its pure form here on Earth – it has the potential for a wide variety of applications, from powering our cars to heating our homes. When used as a fuel by itself, the only by-product is water, offering a seemingly neat solution to our climate change conundrum.

But the ‘hydrogen economy’ has thus far failed to live up to its promise, held back by high production costs and overshadowed by the success of competing technologies such as lithium ion batteries. That said, this year has seen a resurgence of interest in hydrogen’s potential – the economics are starting to look more attractive and government pledges to invest in this space could help the technology achieve economies of scale. As the topic of decarbonisation gathers more attention, it is becoming clearer that electrification alone cannot solve our problems – it’s not a ‘winner takes all’ scenario. There is a sense that hydrogen will contribute to the clean energy future, but whether it plays a starring or background role remains to be seen.  

Growing optimism over its prospects is reflected in the skyrocketing share prices of hydrogen-related stocks, both in the UK and across the pond. Wall Street seems particularly enamoured with the ubiquitous gas as of late – shares in fuel cell maker Plug Power (US:PLUG) have surged from a little over $3 at the start of the year, to $13 now.



Investor enthusiasm in hydrogen is hardly new. Zoom out and you will see that many of the older hydrogen stocks are still well below the highs reached in the early 2000s – a cautionary tale that such excitement can dissipate when tangible progress fails to materialise. With many of these companies still lossmaking, there are fears that we have entered bubble territory. Then again, favourable conditions may mean we have finally reached a tipping point in the hydrogen story. “This is a critical year for hydrogen,” says Dr Fatih Birol, executive director of the International Energy Agency (IEA). “It is enjoying unprecedented momentum and could finally be set on a path to fulfil its longstanding potential as a clean energy solution.”


Hydrogen’s prospects rise as costs fall

While the ability to make hydrogen is all very well and good, mass uptake will depend on its affordability and availability. Green hydrogen is not yet commercially competitive with conventional fuels as electrolysis requires a lot of electricity, the cost of which has previously made this method prohibitively expensive. Meanwhile, less environmentally friendly, fossil-fuel-derived hydrogen has typically been cheaper to produce. But that dynamic looks set to change. As the cost of renewable power comes down, green hydrogen should become more financially viable.



Bloomberg New Energy Finance (BNEF) estimates that green hydrogen could be produced for $0.73-$1.64 per kilogram (kg) by 2050, down from $2.53-$4.56 per kg in 2019. It says this would be competitive with current natural gas prices in countries such as Germany and China on an energy-equivalent basis.

Adding to the favourable outlook, the cost of electrolysers has fallen by 60 per cent over the past decade and is projected to halve between now and 2030. If electrolyser manufacturing can scale up and costs continue to fall, the economics of green hydrogen could improve further.

But if hydrogen is to become a more significant part of the world’s energy mix, this would necessitate massive amounts of additional renewables capacity. BNEF reckons that hydrogen could meet almost a quarter of the world’s energy needs by 2050, requiring close to 700m tonnes of hydrogen. But to produce this amount of green hydrogen, you would need more than 31,000 terawatt hours (TWh) of electricity, which is more power than is currently generated worldwide from all sources.


Gathering political momentum

Hydrogen has had false starts in the past, meaning there is warranted scepticism over whether this will prove to be another cycle of disappointment. But this time around we are seeing an increasingly supportive policy environment as governments look to kill two birds with one stone – reduce carbon emissions and boost future economic growth. The path of offshore wind shows how government backing can make a difference to a fledgling industry, incentivising private investment so that the technology can reach economies of scale.

Countries including Japan, South Korea and Australia, as well as the European Union (EU), have all published hydrogen strategies as part of their plans to reach net zero greenhouse gas emissions. Over in the US, Democratic presidential candidate Joe Biden is promising to ensure that the cost of green hydrogen comes down to that of fossil-fuel-derived hydrogen so that it can be used in power plants – how remains to be seen. Meanwhile, the US Department of Energy is providing a relatively tame $64m of funding for hydrogen projects.

Last month, the EU announced that it aims to have 6 gigawatts (GW) of electrolyser capacity installed by 2024 – less than 1GW is currently in place. It is hoping to increase this to 40GW by 2040 and also to enable a further 40GW of capacity in countries close to the EU so that hydrogen can be imported. The bloc’s exact spending plan has yet to be revealed – it anticipates an investment of anywhere between €180bn and €470bn by 2050. But BNEF’s head of industry and building decarbonisation, Kobad Bhavnagri, recently told Clean Energy Wire that the EU’s commitment could be a game changer – if honoured – throwing the gauntlet down to other countries: “It will scale hydrogen up, drag the costs down, and get a hydrogen economy started.”

Member state Germany unveiled its ‘National Hydrogen Strategy’ back in June, which will see €7bn put towards accelerating the domestic roll-out of hydrogen technologies as well as investing €2bn to foster international partnerships to enable secure access to imports. The country has been particularly enthusiastic about hydrogen’s prospects, believing the gas will form a key part of the energy transition. The Federal Ministry of Education and Research (BMBF) says “green hydrogen has the potential to become the climate-friendly oil of tomorrow”.

While the UK was the first country to legislate for a net-zero carbon emissions target, it has been slow to hop aboard the hydrogen bandwagon. The government is set to invest £139m in the transition from natural gas to ‘clean’ hydrogen power in heavy industry and to scale up CCS. But that level of expenditure is rather less ambitious compared with what we are seeing elsewhere. The chairman of the House of Commons Environmental Audit Committee, Philip Dunne, recently warned that a UK hydrogen strategy is “urgently needed” to prevent us from falling behind. It’s not just about decarbonisation. If hydrogen is to be a fuel of the future, building your own supply could be critical to energy security. The big plan could yet be to come – perhaps something to look out for in the Budget later this year.


Putting the hydrogen to use

Hydrogen extracted from fossil fuels is already a popular feedstock for many industrial processes. But green hydrogen could be a versatile tool in the fight against climate change, helping to decarbonise sectors that produce high levels of emissions. This is particularly true of industries where electrification could prove more challenging, such as shipping and heavy transport. It’s these sectors where hydrogen demand is currently almost completely absent and where energy advisory company DNV GL believes demand will take flight.

These are some of the more prominent areas where hydrogen could make inroads:


Hydrogen's many uses

IndustrialHydrogen derived from natural gas is already used to produce ammonia for fertilisers as well as in oil refining and this could be replaced by its green alternative. Green hydrogen could also be burned to generate the high temperatures needed for steel and cement manufacturing – two big contributors to global carbon emissions.
TransportNasa has been using hydrogen as rocket fuel since the 1950s. But rather than burning hydrogen, electricity can be produced using a device called a fuel cell. Already being used on a small scale to power passenger vehicles and buses, they could also be applied to heavier transport sectors such as lorries, trains, shipping and aviation.
Heating and power Around a fifth of the UK’s carbon emissions come from heating buildings. To begin with, hydrogen could be blended with natural gas in the existing network to bring this down. Anywhere between 5-20 per cent of natural gas can be substituted with hydrogen without modifying the current infrastructure or consumers’ appliances. Anything higher is more challenging as the small size of hydrogen molecules means they can escape through seals and also diffuse into steel pipes and make them more brittle. A full switch to hydrogen would therefore require huge investment to upgrade the gas network and consumers would have to purchase new equipment.
Hydrogen could also be used to fuel gas turbines for electricity generation, providing dispatchable power that can be switched on rapidly to meet demand. In National Grid’s (NG.) latest ‘future energy scenarios’ report, it concluded that hydrogen is necessary for the UK to achieve its net zero ambitions, providing a “very valuable” source of flexibility for the system.
Fuel productionCombined with carbon dioxide collected from CCS, hydrogen could be used as a building block to produce synthetic fuels. It’s not a totally crazy idea. Afterall, oil-derived fuels are simply hydrocarbons – a mixture of hydrogen and carbon.
Energy storageAlongside batteries, hydrogen could provide a much larger-scale solution to the ‘intermittency’ problem of renewables – whereby the amount of electricity generated depends on how strongly the sun is shining or wind is blowing. When there is excess power, this could be used for electrolysis to produce hydrogen, essentially storing the energy as a fuel for when it is needed. National Grid estimates the UK will require at least 15TWh of hydrogen storage by 2050. There are, however, issues of efficiency when converting that hydrogen back into electricity as energy is lost during the process.


For applications where hydrogen isn’t being burned, fuel cells are used to convert the chemical energy of hydrogen into electricity that can be used to power any number of appliances. Fuel cells are basically the reverse of electrolysers. They are not a new technology – Welsh scientist Sir William Robert Grove is credited with coming up with the idea way back in 1842. But modern-day fuel cell developers such as Ceres Power (CWR) are hoping that their more advanced designs will be taken up by the mass market.

Below is a basic fuel cell design:


On the left there is an ‘anode’ and on the right there is a ‘cathode’. Hydrogen feeds into the anode, while oxygen feeds into the cathode.

In between, there is a polymer membrane – called an ‘electrolyte’ – that only allows positively charged things to pass through it.

Hydrogen atoms are neutral overall – they consist of one positively charged ‘proton’ and one negatively charged ‘electron’.

1. As the hydrogen passes through the anode, a platinum ‘catalyst’ that coats the anode splits the protons away from the electrons. As a chemical equation here is what is happening:

H2 --> 2H+ + 2e-

2. The positively charged protons then pass through the electrolyte barrier to the cathode.

3. Meanwhile, the electrons continue on their journey through an electrical circuit, making their way to the cathode separately. The movement of these electrons is an electrical current – essentially the electricity that will go on to power whatever device it is connected to.

4. At the cathode, a platinum catalyst causes the hydrogen protons and electrons to bond with the oxygen to produce water vapour – the only waste product of this process alongside heat. Again, in chemical terms:

4H+ + 4e- + O2 --> 2H2O

By themselves, individual fuel cells produce a small amount of power. But if you put many of them together, you get what is called a ‘fuel cell stack’. According to engineering giant Bosch, 400 fuel cells can deliver approximately 120 kilowatts (kW) of power for a passenger car, equivalent to 163 horsepower. For petrolheads, that’s around the same amount of power as a Fiat 124 Spider.


Planes, trains and automobiles

“The transport sector is ripe for using hydrogen fuel cells,” says Professor Dan Brett, director of UCL’s advanced propulsion laboratory. But for passenger vehicles, lithium ion batteries have leapt ahead of hydrogen, maturing more quickly to be deployed in the mass market. More than a decade ago, it was arguably a coin toss as to which technology would be the successor to the internal combustion engine. But as electric vehicles (EVs) took off – aided by the likes of Tesla (US:TSLA) – hydrogen fuel cells fell by the wayside. According to the IEA, there are around 11,200 hydrogen-powered cars on the road globally, compared with 5.1m EVs.

Just as with EVs, hydrogen cars are facing the old ‘chicken and egg’ barrier to achieving scale – without sufficient fuelling stations, consumers will shy away from buying a hydrogen car and without consumer demand, operators will not invest in hydrogen infrastructure. Breaking this stalemate is likely to require government intervention to support both supply and demand to kickstart the market. As things stand, hydrogen cars are expensive – Hyundai’s (KR:005380) Nexo SUV will set you back almost £70,000.


With EVs having a head start and being cheaper to run over short distances, hydrogen cars are perhaps unlikely to dominate the roads of the future. But the technology could yet have a significant role elsewhere. Batteries aren’t the ultimate solution for everything. Their energy density means that for larger modes of transport – such as ships and planes – and longer distances, the batteries required would be extremely heavy. There are also issues of degradation over time – akin to what happens to your iPhone – as well as the inconvenience of charging. The use of fuel cells would make for a more conventional, speedy refuelling experience.

Public transport has been one area of focus for fuel cell applications. Wrightbus – which is owned by JCB heir Jo Bamford – has announced plans to roll out 3,000 hydrogen buses by 2024, equivalent to just under 10 per cent of the UK’s current bus fleet. Meanwhile, French rail company Alstom (FR:ALO) developed the world’s first hydrogen train, which started running in Germany in 2018. A greener railway network is largely centred around electrification and using energy from renewable sources. But there is still scope for hydrogen-powered trains to replace their diesel counterparts in regions where electrification is less cost-effective. A team from the University of Birmingham, alongside rolling stock provider Porterbrook, is working to bring a UK hydrogen train to market. “If there's a request for a fleet of trains, we think it can be delivered in two to three years,” says Dr Stuart Hillmansen, reader in electrical energy systems at the University of Birmingham. “We're at a stage where the technology is fairly mature. There's still some development work to be done, but it's ready to hit the ‘go’ button and start running around the network.”

Looking to the skies, Airbus (FR:AIR) is looking to develop the world’s first zero-emission commercial aircraft by 2035, while the UK’s ‘Jet Zero’ project aims to make this a reality “within a generation”. Hydrogen could be the key to a replacement for kerosene aviation fuel, although the form it takes is still up for debate.

While hydrogen contains more energy per unit of mass than most fuels, it is less energy dense per unit of volume. That means larger volumes of hydrogen need to be used to match the energy output of other fuels. This can be achieved through bigger storage tanks – which are heavy – or compression and liquefication, which require further energy. Hydrogen can also be converted to denser synthetic fuels or ammonia, which are easier and cheaper to store and transport.

Hydrogen-powered passenger jets would be likely to require a complete redesign rather than modification of existing aircraft. “Even stored as a liquid, hydrogen has several times the volume of kerosene fuel, which today goes into the wings,” says Dr. Andrew Rolt, senior research fellow in low-emission aircraft propulsion technologies at Cranfield University. “So you would need a larger fuselage to accommodate the tanks, and at the very least it would be a major stretch on the existing airframe.” The question is how much the aviation industry will be willing to invest in this space right now as it looks to recover from Covid-19. The deployment of capital by plane and engine makers, and the accompanying supply chain, will depend on whether they envisage sufficient demand from airlines.    

There are potential safety concerns – when thinking about hydrogen, many will recall the 1937 Hindenburg disaster. Sensors can detect leakages, although one advantage of hydrogen is that it rises very quickly and will disperse into the air. But it is highly flammable, burning with incredible speed. It’s also worth pointing out that ammonia is distinct from ammonium nitrate, the compound at the centre of the recent explosion in Beirut. Ultimately, no fuels are without danger and it’s a question of having sufficient safety regulations in place.  


Exploring the options

Assuming you believe the hydrogen economy will indeed materialise, where you put your money could depend on which type of hydrogen you think will prevail – blue or green?

“The blue option is really a stopgap,” says Professor Brett. “If it gets us to a larger deployment of hydrogen, then it's served a purpose, but it's not a long-term solution. The long-term solution is undoubtedly green.” Natural gas has already been touted as a ‘transition’ fuel as we shift ever more to renewables, and it’s the same principle for hydrogen. Analysts at Goldman Sachs see blue hydrogen as “facilitating the near- and medium-term transition until ‘green’ reaches cost parity longer term.”

The natural gas industry is a proponent of hydrogen as it offers a way to stay relevant in a low-carbon future – more so than for oil and coal. It’s little wonder, then, that oil and gas companies are making forays into hydrogen as they look at how to safeguard their futures. Equinor (US:EQNR) is betting on a blue future and leading a project to build a hydrogen plant near Hull that will use natural gas and CCS. “Blue hydrogen is cheaper than green hydrogen, and for green hydrogen to actually work, it is very dependent on overcapacity in renewables," says chief financial officer Christian Bacher. "So our current thinking as of today, perhaps, is that blue hydrogen is somewhat more of an alley to pursue."

Meanwhile, as part of its new net zero strategy, BP (BP) aims to increase its annual investment in low-carbon technologies to $5bn by 2030, an unspecified proportion of which will go towards hydrogen. Focusing on both the blue and green types, the company intends its hydrogen business to have a 10 per cent share of “core markets”, although it is as yet unclear what these may be.

For now, at least, hydrogen remains a very small part of what these companies do. Those looking for more direct exposure might consider pure plays such as Ceres Power, which makes ‘solid oxide fuel cells’ that are compatible with a variety of fuels, including hydrogen. Amid the recent investor appetite for hydrogen, Ceres has seen its shares almost double so far this year. The company’s business model is to adapt its fuel cell technology for customers’ specific needs, license it out and then collect royalties from each end product sold. It’s potentially a very scaleable, asset-light and high-margin operation. But while it has signed joint development and licensing agreements in key markets such as China, Japan and South Korea, only one has reached the commercialisation stage so far and it’s on a relatively small scale. As part of a soft market launch, its proprietary ‘SteelCell’ has been deployed in Japan in a combined heat and power system made by boiler manufacturer Miura.

So, while Ceres continues to fork out on research and development costs, it remains lossmaking, registering a £2.8m operating loss in the six months to 30 June. Broker Berenberg believes the company is facing a £390m operating profit opportunity for its products split across decentralised power, data centres and transport. But based on the current rate of progress, it places the probability of achieving this over a 15-year time period at just 25 per cent.

Berenberg has qualified that the odds will improve should Ceres meet certain milestones with its big partners. For example, Bosch is currently deciding whether to scale up production of their jointly developed fuel cell system. As a sign of confidence, the engineering giant increased its stake in Ceres from 4 per cent to 18 per cent earlier this year, providing a £38m cash injection. To avoid dilution, leading Chinese engine manufacturer Weichai Power (CN:000338) has also bought an additional £11m-worth of shares to maintain its 20 per cent holding. This means Ceres is likely to finish the year ending 30 June 2020 with around £100m of net cash.

The shares are certainly showing momentum right now, but much of that progress is based on sentiment rather than anything tangible. Ceres’ technology and its applications have a lot of promise, which could warrant a speculative punt. But it might be worth waiting for more concrete steps towards commercial success before jumping in.

Another UK-listed fuel cell company that is at an even earlier stage is AFC Energy (AFC). While it is also lossmaking, much like Nikola it has yet to book any revenue in its accounts. AFC makes ‘alkaline fuel cells’, focusing primarily on the stationary, off-the-grid power market to provide a replacement for diesel generators. But it is also looking to move into heavy transport – the new 'HydroX-Cell(S)' fuel cell stack will be introduced from 2022, which the company says is “ideal” for use in shipping and rail.  

AFC is in a small net cash position and with the £32m raised from an oversubscribed share placing, it says it will now be able to ramp up manufacturing of its ‘H-Power’ fuel cell systems to meet “projected customer demand”. So far, the company has struck an agreement to provide the system to the ‘Extreme E’ off-road rally championship next year and will also be providing a 160kW system to Spanish construction group Acciona (ES:ANA) for field testing.

Still, without a track record of concrete sales to provide a measure of performance, it’s a little difficult to get a read on AFC. Theoretically, it stands to do well if the hydrogen economy takes off, so it’s worth keeping an eye on.

At the other end of the spectrum, ITM Power (ITM) is in the business of making electrolysers for green hydrogen production. It is currently constructing the world’s largest ‘polymer electrolyte membrane’ electrolyser for Royal Dutch Shell (RBSB) in Germany. The company’s shares have more than tripled since the beginning of the year, but even before hydrogen fever hit, ITM had attracted investment from a big player – its top shareholder is industrial gas giant Linde (DE:LIN), which paid £38m last year to take a 20 per cent stake. A joint venture between the two companies aims to deliver green hydrogen projects at an industrial scale, harnessing ITM’s electrolysis technology and Linde’s expertise in delivering ready-to-go ‘turnkey’ solutions.

ITM doubled its revenue to £2.4m in the six months to 31 October 2019, but its Ebidta losses widened to £8.3m as income from EU grants tailed off. The company is guiding to a £17.5m loss for the full year to 30 April 2020. It continues to see a net operating cash outflow, although thanks to a £59m fundraising, it is sitting on £41m of net cash.

A record order backlog of £52m indicates demand is increasing and ITM has identified a further £263m-worth of opportunities that it can bid on. But while analysts project that sales will take off this year, costs are also set to increase in tandem, keeping it in a lossmaking position. Brokers have yet to pencil in when ITM might turn a profit.


Mainstream or mania?

Investors seem to be getting high on hydrogen right now and the incredible share price rallies will no doubt lure in more punters. If this is indeed the beginning of the hydrogen economy, then the payoff for investors who get in early is potentially huge. Advisory body the Hydrogen Council estimates that the global hydrogen market could be worth $2.5 trillion by 2050. But many will have been here before with previous hype cycles, faced with risky, speculative investments that are more akin to playing the lottery.

There is a sense that things could be different this time around as the technology is more advanced, costs look set to come down, and governments also weigh in. “I think we've actually hit a sweet spot for the first time in history,” says AFC chief executive Adam Bond. “And that's what's really driving the hydrogen agenda at the moment.” That said, when it comes to hydrogen pure plays, this is not a space for the faint-hearted.

Hydrogen is far from a perfect climate change solution. But while it may not be the be-all and end-all of the clean energy future, it could be a critical piece of the puzzle, filling the gap that other technologies are unable to reach. In that light, the hydrogen economy may finally come to pass.