Hydrogen: A Key Piece of the Energy Transition Puzzle for Forward-Looking Investors

New to Hydrogen?

Hydrogen is emerging as a promising clean energy source. As the most abundant chemical element, comprising 75% of the universe's mass, hydrogen has vast potential if harnessed properly.

On Earth, hydrogen is scarce as a gas, making up less than one part per million in the atmosphere. However, it can be produced from resources like natural gas, nuclear power, biogas, and renewables like solar and wind. The challenge is scaling up hydrogen gas production to replace existing fossil fuels.

Hydrogen does not release carbon dioxide when burned, unlike natural gas which contributes to climate change. With 85% of UK homes and 40% of electricity relying on gas, and 47% of US households using natural gas, hydrogen could displace a huge market.

There are two key terms: "blue" and "green" hydrogen production. Blue hydrogen uses natural gas as a feedstock, requiring carbon capture and storage. Green hydrogen is produced via electrolysis powered by renewable electricity, with no carbon byproduct.

While hydrogen fuel cell vehicles are growing in countries like China and Japan, the bulk of the opportunity is in hydrogen production and infrastructure at scale. Producing hydrogen cheaply and adapting existing pipelines are critical to displacing natural gas.

For investors, hydrogen represents a massive market potential as a key piece of the clean energy transition away from fossil fuels. But technological and infrastructure hurdles must be overcome to realise hydrogen's full promise.

Companies taking advantage of the growing hydrogen trend:

• Energy and utility companies are investing in building hydrogen production facilities and infrastructure. They are starting to retrofit existing natural gas pipelines and storage facilities to transport and store hydrogen. Leaders in this area include Air Products, Linde, Air Liquide, and Shell.
• Automakers are developing hydrogen fuel cell vehicles, fuelling stations, and components. Toyota, Hyundai, and Honda already have fuel cell models on the market. Nikola Motor is focused entirely on hydrogen trucks. Plug Power is a leader in fuel cell systems.
• Industrial gas companies like Air Products and Linde can boost their hydrogen production capabilities to supply the market. They have the expertise and infrastructure to produce hydrogen at scale.
• Engineering firms like KBR are designing and building hydrogen production plants, storage facilities, and pipelines. Fluor and Bechtel also have related capabilities.
• Mining companies are increasing the production of metals like platinum that are used in fuel cells and electrolyzers. Examples are Anglo American and Glencore.
• Renewable energy companies use excess capacity to produce green hydrogen via electrolysis. NextEra Energy, Orsted, and Iberdrola are well positioned.
• Oil & gas majors like BP, Shell, and TotalEnergies are leveraging their scale and infrastructure to ramp up hydrogen efforts.

The key for public companies is to gain first-mover advantage and establish a leadership position in the rapidly expanding hydrogen ecosystem.

What should investors be looking for?

Here are some key things investors should look for when evaluating public companies in the hydrogen space:

• Track record in hydrogen - Companies with experience producing, handling, or working with hydrogen at scale. This demonstrates technical expertise and capabilities.
• Clear hydrogen strategy - A well-defined roadmap focused on hydrogen, including production, infrastructure, end markets, etc. Ambitious near and long-term hydrogen targets.
• Production capabilities - For industrial gas companies, the capacity to produce blue and green hydrogen via methane reforming, electrolysis, etc.
• Infrastructure access - Pipelines, storage facilities, and transportation assets that can be repurposed for hydrogen.
• Partnerships - Collaboration with other companies across the hydrogen value chain. This spreads risk and leverages synergies.
• Innovative technology - Proprietary technologies that improve production, lower costs, enhance storage, etc. Companies actively filing patents in hydrogen tech.
• Financial strength - The balance sheet to fund large capital projects required for hydrogen infrastructure buildout.
• End market visibility - Exposure to end-use cases such as transportation, industry, heating, etc. where hydrogen adoption is imminent.
• Management execution - Track record of management success and follow-through on strategic initiatives. Hydrogen experience is a plus.

The most attractive hydrogen stocks will demonstrate several of these attributes to investors. Companies unable to pivot convincingly towards hydrogen may see valuations suffer.

Challenges

Hydrogen does have an important near-term role to play in the energy transition, despite some challenges:

• Decarbonising transportation - Hydrogen fuel cell vehicles are already on the market and being adopted, especially for commercial vehicles and heavy transport like trains, ships, and trucks where batteries aren't feasible. This can reduce emissions in the near term.
• Industry processes - Hydrogen can replace fossil fuel use in steel, chemical, and fertiliser production. It may be the only way to decarbonise high-heat industrial processes soon.
• Heating - Blending hydrogen into existing natural gas networks will lower emissions from building heating. Trials are underway in Europe. Full conversion to hydrogen heating is a longer-term goal.
• Electricity storage - Hydrogen provides a way to store renewable electricity to account for intermittency. This will be key for stabilising grid power as renewables grow.
• Export potential - Countries like Saudi Arabia and Australia see the potential to produce low-cost blue and green hydrogen for export as fuel and feedstock.

However, widespread adoption faces challenges like high costs compared to fossil fuels currently, the need for new infrastructure, technology improvements required, and lack of policy support.

Conclusion

While the hydrogen economy may take decades to fully mature, it will likely see increasing utilisation in the near term to complement batteries, biofuels, and other solutions for cutting emissions across transportation, industry, and power generation. Investors should monitor companies that can contribute to this early adoption phase.