Hydrogen investments

Revolution or Evolution?

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On a macro-level, and our readers know we love the macro, any investment right now is subject to the current interest rate zeitgeist. This means that growth investments are under short-term pressure as interest rates rise. That being said, rates go down as well as up, and in the case of hydrogen, there may be significant government support and largess to help support market investment.

The subject of this note is hydrogen investment, and along with some of the basics, we will examine it through the lens of London’s first listed specialist hydrogen investment fund, Hydrogen One Capital Growth (HGEN).

Data courtesy of Sentieo.

Contents?

• Industry Background?
• Hydrogen technologies?
• Hydrogen Capital
• Portfolio companies?
• Risks and opportunities?
• Conclusion?

Industry Background

Ancieo members will have heard hydrogen being quoted as one of the potential solutions for the climate crisis. That's fair enough because as it currently stands it is one of the stronger contenders for a net zero future. Hydrogen holds potential in many industries, including transport, and energy generation, amongst many others. But where hydrogen differs from fossil fuels in many respects, there is one fundamental difference that matters more than any other. Hydrogen is an energy?carrier, not an energy?source.?

This may seem a rather opaque statement. But at an industrial scale, hydrogen must be?made,?which presents both obstacles and opportunities in its future. This may at first seem counter-intuitive. After all, hydrogen is the most common element in the universe, accounting for about 75% of normal matter. On Earth however, hydrogen naturally bonds with other elements to make common compounds like water and needs energy to separate it from those elements into its pure form.

Whatever energy production method is used, hydrogen must be produced. You can’t just pluck it from the hydrogen tree. This is a key point and any potential investor in hydrogen technologies has to ask themselves, where is the hydrogen coming from? How clean is that production? How efficient is the energy transfer during the hydrogen production and importantly how much does it cost?

Hydrogen technologies?

Once those questions have been asked, its time to look at the end use of the hydrogen product.

Hydrogen technologies revolve around two specific applications. In one pathway, hydrogen is burnt to provide energy like fossil fuels, and in the other, it provides electrical energy via a fuel cell. If you have to produce something, you need energy to make it. And the source of that energy is key to making the whole hydrogen universe work.

If the energy source to make hydrogen is dirty, then the whole endeavour is pointless.?

Making hydrogen using electricity derived from coal or oil-powered power stations (without complete carbon sequestration) is utterly counterproductive.

The colours of hydrogen?

Despite being a naturally occurring element, hydrogen doesn't exist in a simple and readily accessible way. You can’t mine or drill for it. It must be separated from other elements. As time and technologies have moved on, different methods have evolved. Each method has a different environmental impact, and each method has a different colour label to illustrate that impact.

Let’s start with the worst of them:?black hydrogen.?

Black hydrogen is the bogeyman of the hydrogen industry. Hydrogen is produced by gasifying coal or throwing steam at methane. This produces hydrogen and a?lot?of carbon. For the green transition, it is useless.

There may however be a possible solution:?blue hydrogen.?

Blue hydrogen uses the same carbon-intensive methods as black. The difference is that the carbon is captured and stored, and potentially utilised. The aim being to make the process net carbon zero.

This is where things get interesting. Carbon capture and sequestration have enormous potential application. If the technology works, and at the moment that's a big if, then it could be possible to scale it and apply it to fossil fuel use. That’s a game-changer.

The ideal form of hydrogen and its holy grail is?green hydrogen.?Green hydrogen is, unsurprisingly, produced from non-greenhouse gas-emitting sources. So perhaps from electricity produced by wind and solar. The stoppers for green hydrogen are the same as those associated with wind and solar. These are the questions on scaling up, supply consistency, and energy storage.

There are also some more esoteric hydrogen colours, including yellow and turquoise. For more on them, see below:

https://www.h2bulletin.com/knowledge/hydrogen-colours-codes/

Hydrogen Capital?

Technology without investment is just an idea. In order to make a real difference in the energy transition, hydrogen technologies will need capital, and lots of it. So it makes sense to tap the liquid public markets available in exchanges such as the London Stock Exchange (LSE). So there is sense of inevitability that Hydrogen Capital came to be listed in the LSE.

HGEN describes its investment thesis as:

"HydrogenOne’s investment objective is to deliver an attractive level of capital growth by investing, directly or indirectly, in a diversified portfolio of hydrogen and complementary hydrogen focused assets whilst contributing to climate change mitigation by integrating core ESG principles into its decision making and ownership process."

Portfolio Companies?

HGEN has divided its portfolio investment into primary areas of interest in both private and public companies. Those companies work mainly in the following areas:

• Fuel Cells- Bramble Energy (low cost production of fuel cells using printed circuit board technology). Cranfield Aerospace (fuel cells for aircraft).
• Electrolysers- Elcogen AS (fuel cell and electrolyser production). Sunfire GmbH (industrial scale electrolysers).
• Distribution and Storage-NanoSUN Limited (hydrogen distribution and mobile refuelling) Strohm Holding B.V. (Hydrogen pipeline production).
• Hydrogen production-HH2E AG (green hydrogen) Gen2 Energy AS (Norwegian green hydrogen production).

There are several other companies within the HGEN portfolio but these serve as good examples of the overall investment thesis.

Risks and Opportunities?

The hydrogen industry has established at least two meaningful decades of development in its quest to replace fossil fuels. This is important because it places the technologies in an evolutionary phase rather than a revolutionary context. This places their potential development trajectories in less of a “growth” stock context and closer to an industrial sector. That doesn’t mean that investors can be complacent. Proper examinations are required of the technology and development companies. Due diligence is key, the last year has proven that self-evident truth with a resounding force.

Evolutionary technologies and investments are, by their nature, lower risk than those that use completely novel solutions. Fuel cells have been in operational use, perhaps most prominently, since the Apollo space program, with improvements in efficiency and weights well established. Their further development should hold opportunities for investors up until it appears they are approaching the inevitable barriers of diminishing returns.

It’s unlikely (but not impossible) that so-called green swans will be easily found. By that, we mean an unforeseen technological development or invention that utterly changes the carbon-free route via the hydrogen pathway.

Sometimes though, that's not what it's about. As we’ve discovered over the years, a small incremental improvement can foster a fundamental change. One of the significant obstacles to hydrogen adoption is the amount of energy and cost spent on its production. That’s not unusual. In the fossil fuel industry, as a comparator, oil and gas became increasingly expensive to source, with deep water rigs and fracking technologies requiring substantial capital. Indeed, the fracking revolution in the United States was largely financed under the easy money conditions of quantitative easing and low interest rates.

Intelligent investment in the hydrogen industry could allow for incremental improvements and breakthroughs that allow its widespread use in more applications than are presently envisaged.

Conclusion

Hydrogen has captured the imagination of innovators, policy makers and investors. For some hydrogen appears to have the same characteristics as hard pressed technological growth companies. This is a mistake, the reality is more nuanced. Careful research and due diligence will help identify those companies and projects that follow time honoured principles often learnt from traditional energy companies. Those evolutionary principles, combined with new insights particular to the hydrogen question, should enable successful investments and a contribution to a net zero carbon economy.