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3 stocks to play the exciting hydrogen theme
Hydrogen has had more than one false start over the last decade, but the combination of government climate targets, bans on diesel vehicles and a fall both in the underlying cost of production and the cost of green energy to produce it has seen a sharp spike in demand in the last three years.
Without hydrogen, governments around the world simply can’t meet their 2050 carbon-reduction targets. In the next decade we will see hydrogen homes, hydrogen trucks and maybe even hydrogen airplanes.
Bloomberg Intelligence estimates investments in hydrogen projects are set to surge ‘like a hockey stick’ to almost $40 billion per year. In this article we pick three ways to tap into this growth.
THE HYDROGEN ECONOMY
For the UK to reach its target of zero carbon emissions by 2050, using hydrogen to generate electricity and as a replacement for other fossil fuels is the second-highest priority after electrification, according to the Government’s climate change committee.
As well as power generation and industrial uses, we will see hydrogen being used in our homes and possibly on our daily commute thanks to new technology and the availability of renewable power to produce it.
Speaking at a seminar at the Institute of Mechanical Engineers in March, David Joffe, head of carbon budgets at the UK’s Climate Change Committee, said that in terms of the UK’s power generation needs, renewable sources such as wind, solar and tidal should be able to ‘decarbonise’ most of the electricity supply network by 2050.
Much of this green energy will come from the 40GW of offshore wind projects the Government has proposed, but for the balance of supply there are plans to convert existing natural gas-fired plants to burn hydrogen, while new plants will have to be able to burn hydrogen from the start.
There are more than 100 gas turbines around the world burning hydrogen, but only in small quantities. In order to meaningfully reduce CO2 emissions, power stations need to burn a higher proportion of hydrogen than natural gas, but the technological challenges in doing so are huge and for now a one-third hydrogen mix is the most that is achievable.
In terms of industrial use, the applications are vast and there are already hydrogen clusters around the UK, the most advanced being Hynet North West which brings together clean energy, hydrogen production, industrial users and CO2 storage.
While battery-electric technology is likely to dominate in passenger vehicles, for public service vehicles, heavy goods vehicles, trains and even planes, hydrogen is a genuine alternative to fossil fuels and a more practical solution than electrification.
Hydrogen buses are already in use in dozens of towns and cities around the world, including in the UK. Hydrogen is either produced on site, brought in by pipeline or in pressurised tanks for refuelling.
For the heavy goods haulage industry, which operates on thin margins, hydrogen rather than electrification is almost certainly the answer to decarbonisation. With more low-emission zones and rules requiring drastic cuts in CO2 by 2030, the European freight transport industry is investing heavily in hydrogen fuel cell technology.
While most train lines in the UK can be electrified, for rural lines using smaller trains hydrogen is a viable alternative. Again, supplies could be produced on site or brought in using tanks.
However, the most exciting application could be in air travel. Airbus is already working on three different ‘ZEROe’ design concepts using hydrogen – a turbofan, a turbojet and a blended-wing aircraft – which it hopes to have ready by 2035.
HYDROGEN IN THE HOME
To replace the amount of natural gas used for heating our homes with electricity to meet climate goals, the UK would need three to four times its current renewable energy capacity, which simply isn’t feasible. Also, the existing electricity supply network is already at full capacity and needs a massive upgrade.
Most of us probably don’t realise but our domestic boilers can already use a mix of 20% hydrogen without needing any modification. That could mean a huge reduction in CO2 considering 85% of UK homes use gas for heating and half of all carbon emissions come from heating homes and commercial buildings.
Moreover, the gas supply network has been upgraded over the past 20 years, mostly with plastic pipes which are ideal for transporting hydrogen instead of natural gas, and smart meters work with hydrogen.
The Hy4Heat programme in Gateshead is showcasing two homes of the future fuelled entirely by hydrogen including boilers, hobs and fires, all with zero carbon emissions.
Energy Minister Anne Trevelyan said: ‘To tackle climate change we need to find alternatives to fossil fuels. While these new houses in Gateshead will look like any other, they will showcase how low-carbon hydrogen can transform the way we power our homes and offer a glimpse of what the future holds as we build back greener.’
THREE WAYS TO PLAY THE HYDROGEN THEME
ITM Power (ITM:AIM)
Buy at 480p. Market cap £2.75 billion
At this point we need to hold up our hand and admit that when we last looked at ITM Power (ITM:AIM) we described it as ‘priced for perfection’. That was in August when the shares were trading at 260p, 45% below where they are today.
Granted, the firm still has barely any revenues – £4.4 million in the six months to October, of which £4.2m were government grants – let alone profits (it made a six-month operating loss of £12 million), but it has enormous future potential and is seen as the ‘gold standard’ supplier of hydrogen electrolysers.
It has a backlog of £124 million of orders and a pipeline of £284 million. It has partnered with Linde, Orsted, Siemens Gamesa and Snam, all leaders in the field of renewable energy, and Royal Dutch Shell (RDSB) has asked it to increase its electrolysis plant in the Rhineland by 100MW. We feel so much has changed in the hydrogen space and with ITM itself, thanks to various big deals, that the stock is now worth buying.
L&G Hydrogen Economy ETF (HTWG)
Buy at 650p. Market cap £156 million
L&G describes its ETF as a ‘precision tool’ providing investors with exposure to the long-term investment opportunity offered by the transition to a low-carbon, hydrogen economy.
The ETF invests in companies across the whole value chain, meaning electrolyser manufacturers (such as ITM Power), hydrogen producers, fuel-cell manufacturers, component suppliers, energy storage and utilities.
Don’t be troubled by the share price declining since the ETF launched in February. We think this is due to market rotation away from growth themes towards value stocks rather than any negative fundamental view on the ETF or hydrogen as an investment theme, making this a good time to pick up shares.
Buy at $265. Market cap $138 million
With annual sales of $27 billion, US-listed Linde is one of three firms which dominate the global market for industrial gases, along with Air Products and Air Liquide. Some readers may remember it acquired BOC back in 2004.
The company serves a variety of end markets including chemicals, refining, food and beverages, electronics, healthcare, manufacturing and primary metals. It is also the biggest producer of hydrogen for clean fuels with the largest liquid hydrogen capacity and distribution system in the world.
The company was selected by the European Commission to join the Clean Hydrogen Alliance and is playing an integral role in Europe’s hydrogen strategy. Given the firm’s credentials, the shares crop up in most ethical and sustainable funds.
Disclaimer: The author owns shares in the L&G Hydrogen Economy ETF