As the efforts to battle climate change intensify, scientists are getting excited about hydrogen’s potential as a wonder fuel again. We explain why this is important to investors.
What’s the history?
The potential of hydrogen, the most plentiful chemical element in the universe, to provide cheap and clean energy has long been known. Back in 1875, for example, the French writer Jules Verne envisioned a world where “water will one day be employed as fuel, that hydrogen and oxygen which constitute it, used singly or together, will furnish an inexhaustible source of heat and light, of an intensity of which coal is not capable”.1
Previous waves of enthusiasm for hydrogen have broken on the challenges of producing and storing it in a cost-effective way. However, recent developments, both technological and political, suggest the cost of producing an environmentally friendly form of hydrogen could fall significantly over the next 30 years. Storage and distribution problems are also likely to be overcome.
Society and investors could benefit in various ways if hydrogen’s role changes from being simply an industrial chemical to a major form of energy. Opportunities could include investments in renewable energy producers, European industrial gas suppliers, and areas of transport that are hard to electrify, as well as a variety of associated technologies.
What about the future?
Hydrogen is the simplest and most abundant element on earth and has clear advantages over other sources of power. Critically, it can provide sustainable, clean energy. As Tony Roskilly, professor of energy systems at Durham University and lead on Network-H2, the hydrogen-fuelled transportation research network, points out, hydrogen does not release any carbon dioxide (CO2) into the atmosphere when it is converted into electricity.
The drive to tackle the climate crisis is spurring investment to overcome the challenges in producing and storing hydrogen
Challenges in producing and storing hydrogen have, so far, limited its use. However, the drive to tackle the climate crisis is spurring investment in technologies that could overcome these problems. In particular, increasing numbers of governments are committing to stringent environmental targets, including reducing net CO2 emissions to zero to limit temperature rises.
For example, in 2019, the UK became the major economy to pass a net-zero emissions law, committing the country to reach that target by 2050.
According to Nigel Brandon, professor at Imperial College London and the electrochemical engineer leading the UK’s hydrogen and fuel-cell research hub, H2FC SUPERGEN, this means that “everyone knows there is nowhere to hide”. The prospects for hydrogen have been boosted “because it is potentially the most cost-effective way of abating carbon emissions in areas that are difficult to address, like heavy industry”.
Meanwhile, there have been encouraging advances in the efficiency and durability of fuel cells, which use the chemical energy of hydrogen to produce electricity. Other developments, like the fall in the cost of power generated by renewables, are also improving hydrogen’s prospects.
The most environmentally friendly way of producing hydrogen uses renewable power
That’s because, while there are various methods of producing hydrogen, the most environmentally friendly, which do not generate carbon emissions, split water into its components, hydrogen and oxygen, using renewable power. Energy consultants are even asking what will happen in the future when so much renewable power is being produced that the cost of energy falls to almost nil. That scenario is some way off, but it is worth contemplating for those who are keenly awaiting cheaper “green” hydrogen.
“We only produce a very small amount of hydrogen in this way now; it is less than five per cent overall and not cost-effective at the moment,” says Rick Stathers, senior environmental, social and governance (ESG) analyst and climate lead at Aviva Investors.
However, he believes that “green hydrogen could reach cost parity with hydrogen produced from other methods by around 2030 and could be the cheapest form by 2050”.2 He adds that costs could fall even faster.
Why should investors care?
If hydrogen’s role changes from being one chemical in the industrial mix to an energy source and store, the investment implications could be game-changing. Stathers says investors can gain exposure to the hydrogen theme through a combination of renewable energy companies and suppliers of fuel cells and electrolyser. (The latter is used in the production of hydrogen from renewable energy.)
Investors can gain exposure through a combination of renewable energy companies and suppliers of fuel cells and electrolyser
European industrial gas producers are expecting meaningful revenues from the production of “blue” hydrogen, in which CO2 is captured or utilised, within about five years.
In transport, the greatest potential is thought to be in areas that are hard to electrify, including long-distance freight, trains and shipping.
Another potential investment route is through the companies that will allow hydrogen to be integrated into the wider energy system.
Three points to remember
- Political and technological developments to tackle climate change have reignited interest in using hydrogen to supply power.
- These developments mean hydrogen could develop into a clean, cost-efficient, easily stored and widely available form of energy over the next 30 years.
- A variety of sectors and companies could benefit from hydrogen in the coming year, making this a potentially important investment theme.