What do Roman Abramovich, Jim Ratcliffe and Peter Hargreaves have in common? You might be thinking of trophy assets like super-yachts or football clubs, but all three have been early backers of the hydrogen economy. The gas has been used for decades in industrial processes such as oil refining and ammonia production – to create fertiliser in agriculture, for instance. However, hydrogen does not occur naturally, except in stars; we can’t dig hydrogen out of the ground and burn it like natural gas. So more than 90% of the 70 million tonnes of the world’s current annual hydrogen production comes from burning fossil fuels.
The attraction of hydrogen is that electrolysers can split water molecules into hydrogen and oxygen. The gas can then be stored and converted to power via a fuel cell; the only waste product is water. Think of hydrogen not as an energy source, but as an energy carrier, like electricity. Elon Musk is not a fan, suggesting that it is “the most dumb thing I could possibly imagine for energy storage”, but governments and corporations have identified hydrogen as capable of delivering a shift from burning fossil fuels to renewable energy.
The gas is light and has much lower volumetric energy density than liquefied natural gas (LNG): it takes up a relatively large volume for a given amount of energy stored. It also freezes at a lower temperature, -253 degrees Celsius, compared with -162 for LNG. The upshot is that when producing hydrogen, transporting it, and converting it back to electricity via a fuel cell, the delivered energy can fall below 30% of the initial input, according to the International Energy Agency (IEA). As a result, most hydrogen is produced close to its end use.
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Unlike with software, the investment required in tangible assets, such as storage tanks, refuelling infrastructure, and pipes will be vast. At the start of 2021 there were over 228 announced hydrogen projects with a capital cost of $300bn. In the past 12 months the US has announced $370bn worth of funding for clean energy, of which $9bn which will be for regional hydrogen hubs. There will be no hydrogen businesses founded in a garage in Silicon Valley.
Blue, green, turquoise and pink varieties
Despite being a colourless gas, the source of the hydrogen determines a whole colour spectrum: renewable solar or wind power (green); natural gas (blue and turquoise); grey, black and brown (fossil fuels without carbon capture); and pink (nuclear) all refer to how the gas is produced. Blue hydrogen uses natural gas but stores the greenhouse gases geologically, whereas turquoise hydrogen also requires natural gas, but is a different process with a solid carbon by-product, making it easier to capture. Today roughly 95% of industrial hydrogen production is grey, using techniques such as steam-methane reforming.
Established fossil-fuel companies like Shell, which operates a blue hydrogen project in Alberta, or Spanish utility Iberdrola, which is developing a green hydrogen plant with 100 megawatts (MW) of solar panels, are likely to be a major source of funding. In the UK, Cadent, backed by Australian investment bank Macquarie, plans to trial “hydrogen villages” in Whitby and Redcar, using hydrogen to heat 2,000 residents’ homes. Cadent will convert homes and install hydrogen appliances, then transport hydrogen by pipeline, with a natural-gas pipeline for households that opt out.
There are also competing electrolysers and fuel cells – some electric cars use hydrogen fuel cells. Aim- listed ITM Power makes electrolysers using proton exchange membranes (PEM). A drawback of PEMs is that they require precious metals such as platinum, but competitor AFC Energy has an alkaline fuel cell, using nickel in its electrodes rather than platinum, while Ceres Power Holdings, another hydrogen company, uses solid- oxide technology. Clean Power Hydrogen has developed a membrane-free electrolyser from easily available or recyclable materials.
Historically, the hydrogen sector has traded like a speculative asset such as a cryptocurrency. It recorded impressive returns in the liquidity-driven rally of 2020- 2021, but sold off in 2022, even as investors worried about energy security after Putin’s invasion of Ukraine.
A fund offering diversified access
Ceres, AFC Energy and ITM Power have been on Aim for more than a decade. More recently they have been joined by Atome Energy, Clean Power Hydrogen, Hydrogen Utopia and the investment vehicle HydrogenOne Capital Growth, backed by Ratcliffe.
A month ago, Melrose, the industrial manufacturing business, demerged its automotive, powder metallurgy and hydrogen-storage operations into a separately listed entity, Dowlais. HydrogenOne and Dowlais have a premium listing on the main market of the London Stock Exchange, rather than Aim.
HydrogenOne Capital Growth (LSE: HGEN) is an investment vehicle containing hydrogen-focused assets across the world. It listed in 2021 and since then has invested more than £100m in hydrogen assets, and £18m of cash as of the end of December last year. More than 82% of the fund’s assets are unlisted, while 3% comprise listed companies such as ITM Power and AFC Energy, covered below.
The group has been hit by the broad sell-off and now trades at a discount of about 50% of its December 2022 net asset value (NAV). As a fund, HydrogenOne is the most diversified way of investing in the sector. It may make more sense than concentrated investments in the fuel-cell or electrolyser companies below, where a clear winner has yet to emerge.
AFC Energy (Aim: AFC) is a "flex fuel cell" manufacturer of alkaline fuel cells, which uses nickel in its electrodes. There are competing methods of making hydrogen fuel cells, and AFC's alkaline fuel cells have much cheaper components than the proton exchange membrane (PEM) fuel cells that ITM Power (see below) makes. The downside is that its alkaline technology is less energy-efficient.
Recently AFC announced a successful field trial of its first prototype methanol fuel tower with Acciona, an engineering company listed in Spain. The company reported revenues of £2m in the year to 31 October 2022, and this is forecast by brokers to rise to £11m this year and then jump to £140m two years later, when the company is expected to break even.
Atome Energy (Aim: ATOM) is a green hydrogen company with projects in Paraguay and Iceland. The projects are in such far-flung places because their fuel-cell technology operates more effectively with a continuous power source, so electrolysis using solar and wind power are less suitable. Iceland has an abundance of hydroelectric and geothermal energy, and Paraguay has hydro. Atome doesn't make its own electrolysers, but is buying membrane-free electrolysers from Clean Power Hydrogen, which listed on Aim in early 2022. Powerhouse Energy and Hydrogen Utopia have a similar business model to Atome, except they hope to use waste rather than hydro or geothermal energy to produce hydrogen.
Atome is a spin-out from Aim-listed President Energy, which was involved in largely unsuccessful oil and gas exploration in Argentina. President, which has now changed its name to Molecular Energies, still holds a 25% stake. Peter Levine, Atome's chairman, who made his first fortune investing in Siberian oilfields, holds a further 23% of Atome shares.
FinnCap, Atome's joint broker, believes that the hydrogen company will need to allocate $660m to capital expenditure over the next five years, with a combination of debt and equity. That compares with a current market value of £35m, so management will need to convince investors of the viability of their projects in order to raise large sums.
A play on fuel cells and electrolysers
Ceres Power (Aim: CWR) has been listed since 2004 and makes solid oxide fuel cells and electrolysers. Its fuel-cell commercialisation is more advanced than its electrolyser, but it believes solid-oxide technology's high efficiency gives it an advantage over PEM and alkaline approaches.
Ceres' expertise lies in solid-oxide electrochemistry, but in terms of industrial scale mass-manufacturing it has partnerships with much larger companies. So the group has an asset-light, licensing model partnering with established companies including Weichai in China, Bosch in Germany, and Shell.
Revenues are forecast to more than double to over £50m in 2023, though the firm is still expected to make a loss for the next three years. Having raised £180m in 2021 it still has significant cash, so those forecast losses are manageable. After two decades of losses, investors will at some stage want to see that the promising technology can make a profit.
ITM Power (Aim: ITM) makes proton exchange membrane (PEM) electrolysers for grid balancing, energy storage and hydrogen production at Bessmer Park, Sheffield. ITM had net cash of £318m at the end of October 2022, having raised £250m of equity in 2021. Peter Hargreaves of Hargreaves Lansdown fame is a major shareholder, but ITM also has the backing of industry players such as Linde, one of the world's largest gas suppliers, which has invested £38m, and £30m from Snam, an Italian energy infrastructure company.
In October 2021, ITM and Linde announced the deployment of a 100MW electrolyser at Shell's Rhineland refinery, and they have signed two more 100MW deals with Linde for a site in Lingen, Germany. Sales are forecast to grow to £67m in the year to 30 April 2025, though the company is still expected to be heavily loss-making. However, its most recent set of results in January showed sales halving to £2m in the six months to 31 October 2022.
Following this disappointment Graham Cooley, CEO for 13 years, was replaced by Dennis Schulz, previously of Linde. The move follows several delays, blamed on supply-chain difficulties and rising costs, which have also seen the share price fall by 90% in two years. Even if sales do jump to £67m by April 2025, the market value of £460m reflects considerable optimism over the business model. Some hedge funds have taken a more pessimistic view: ITM Power is one of the most shorted stocks in London.
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