This article was first published in MoneyWeek magazine issue no 988 on 27 February 2020. To make sure you don't miss out in future, and get to read all our articles as soon as they're published, sign up to MoneyWeek here and get your first six issues free.
Hydrogen is the fuel of the future – and always will be. That’s the industry joke and, as Homer Simpson would say, it’s funny because it’s true. Or at least it has rung true for a long time. General Motors built a car powered by hydrogen in 1966, as Fatih Birol of the International Energy Agency (IEA) points out. It ended up in a museum. At semi-regular intervals since then, hydrogen has been touted as the answer to humanity’s energy needs. After all, it is the most abundant element in the universe and, when burned, releases only energy and water. It can be stored and transported in liquid or gaseous form, is energy dense, and is not subject to intermittent supply. All of these qualities put it ahead not just of fossil fuels, but of renewable alternatives too – at least in potential.
Until now the momentum in renewable energy has been with other sources such as the wind and sun, but converting these into electricity cannot possibly meet all of our energy needs, no matter how cheap or widely used they become. Electricity is unlikely ever to be suitable for running heavy lorries or airliners, for example, nor could it meet all our heating needs or replace fossil fuels in energy-intensive industries such as those involved in the production of iron, steel and cement.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
And as hydrogen is not found in pure form on earth and so must be produced, it is not as clean or green as it might at first glance appear. Demand for hydrogen – coming mostly from its traditional uses in the manufacture of ammonia and in the oil-refining and steel industries – has climbed steadily, rising threefold since the mid-1970s and today that demand is mostly met by hydrogen produced from natural gas. The manufacturing process itself consumes energy, today mostly coming from fossil fuels. Production of hydrogen is responsible for around 830 million tonnes of carbon dioxide per year, equivalent to the emissions of the UK and Indonesia combined.
The rise of “green” hydrogen
The rise and ever-declining costs of wind and solar have given hydrogen a new lift, however – if hydrogen were instead produced by electrolysing water using electricity from renewable sources (so called “green hydrogen”), then we would have at our disposal an abundant source of genuinely green energy. Less than 0.1% of global dedicated hydrogen production today comes from water electrolysis, but the Hydrogen Council, an industry body, thinks that by 2050 green hydrogen could provide almost a fifth of total power consumed globally and thereby avoid six billion tonnes of greenhouse-gas emissions per year – roughly the equivalent of those emitted by the US annually.
This has obvious attractions for governments and companies looking to reduce their carbon footprints, and helps explain why the shares in some producers of hydrogen and manufacturers of fuel cells – which convert the chemical energy in a fuel such as hydrogen into electricity – have soared to their highest levels in decades. The companies enjoying the attention are themselves often small and loss-making, and it may be years before they see any profit (see box on page 26). But the bullish excitement of investors is explained by the prospect for soaring future demand as societies transition from fossil fuels to cleaner alternatives. Hydrogen could clearly play a role in that – but how big a role is the question.
Here comes the cold water
Before we get too carried away, we should bear in mind that hydrogen has been “hailed as a pollution-free substitute” before, as Jonathan Ford points out in the Financial Times. And there’s a reason why hydrogen today accounts for just 4% of final energy use: it’s costly to manufacture and bulky, making it cumbersome and expensive to handle.
At present prices, green hydrogen comes in at $6/kg. Transform that into the energy equivalent of hydrocarbons and it equates to a “recession-inducing” oil price of $270 a barrel. Even if you factor in likely future efficiencies and price falls, you still only get to $45 oil in the long term before distribution costs. Such considerations make hydrogen “relatively uneconomic over anything but short distances”. If it were to become the basis of a new “hydrogen economy”, as some predict, the problem then is who would fund the cost of investment in infrastructure in advance of demand.
There is a reason the industry is “looking hungrily at governments for another wave of support, with taxpayer subsidies acting as a midwife to the new hydrogen economy”. Ford thinks there is a better way – setting an appropriate price for carbon, imposing “carbon border adjustments” to prevent the export of energy-intensive industry, and restricting government subsidies to assistance at the margin, supporting research and development, say, rather than trying to predict and bet on the technologies of the future.
That argument makes a lot of sense, but it may be wiser to bet on what is actually going to happen rather than on what we think should happen. Providing bungs to job-creating industries in a hot new sector and being seen to be doing something radical about climate change would seem to be an easier sell politically for governments striving to meet their climate commitments than higher taxes and tariffs and hand-waving in the direction of the free market.
The former seems to be the way the wind is blowing. Hydrogen is “currently enjoying unprecedented political and business momentum, with the number of policies and projects around the world expanding rapidly”, concludes a report from the IEA last year. Over the past few years, global spending on hydrogen energy research and development by national governments has risen. China, for example, is aiming to get one million fuel-cell vehicles on its roads by 2029 and by 2023 it will have invested more than $17bn in the broader hydrogen sector. Japan is promoting the global adoption of hydrogen and working towards a goal of being predominantly powered by the fuel by 2050. And the UK has also been subsidising the industry in a bid to meet its aim to reduce greenhouse-gas emissions to net-zero by 2050.
Earlier this month the first low-carbon hydrogen energy production plants in the UK were granted £70m in government funding, reports the BBC. Facilities at Stanlow Oil Refinery in Ellesmere Port, Cheshire, and St Fergus Gas Terminal in Aberdeenshire, will produce hydrogen for manufacturing industries. St Helens’ glassmakers Pilkington and Unilever in Port Sunlight are experimenting with using hydrogen to cut carbon emissions.
And the North West Hydrogen Alliance is seeking to promote the region as a pioneer in the industry, with operator Cadent Gas distributing hydrogen through a pipeline network. The firm already supplies a 20% hydrogen and natural gas blend to heat 100 homes and 30 faculty buildings at Keele University in Staffordshire. Rolling that 20% blend out across the country could in itself save about six million tonnes of carbon-dioxide emissions, the equivalent of taking 2.5 million cars off the road, says The Guardian. Alstom and Eversholt Rail have also announced a plan to launch a hydrogen-powered train by 2022.
This time it’s different
There have, of course, as we have noted, been false starts for hydrogen in the past, but there are good reasons for thinking that this time could be different, as the IEA report points out. There is a widespread political determination to be seen to be green. The global energy sector is in a state of flux as a result and governments and companies are looking for ways to meet their climate goals. The recent successes of solar, wind, batteries and electric vehicles show that change is possible, and could be repeated for hydrogen. Support is already coming from governments, as we have seen, and companies, from renewable electricity suppliers to car makers and major engineering firms, are investing.
At present, there are headwinds. Hydrogen production remains costly. But the falling cost of renewable energy and the development of new technologies, if they reach sufficient scale, could be transformative. The Hydrogen Council claims that the cost of producing hydrogen could be halved by 2030, making it affordable for 22 different applications, including trains and heavy-duty transport such as lorries and long-distance coaches. Once costs come down after 2030, demand would take off over the next couple of decades, reckons Bloomberg New Energy Finance, to reach as much as 275 million tonnes of renewable hydrogen by 2050.
The challenge is not technical, but one of collective action. The development of hydrogen infrastructure is proceeding slowly and holding back widespread adoption, according to the IEA. National, regional and city governments could guide future expectations by setting clear long-term goals, stimulating demand, supporting research and development, making conducive policies and eliminating unnecessary barriers to progress. And there is an obvious place to begin – many of the firms that might benefit from the rise of the hydrogen economy cluster at major industrial ports, so there is an opportunity there to build combined infrastructure. Such ports could be turned into hubs for lower-cost, lower-carbon hydrogen.
What we’re still waiting for is a game-changing moment. If heavy industry were to switch to hydrogen, for example, that would create a dependable customer, one able to keep up demand and drive production, according to some industry experts. That could be a powerful driver in the transition towards a hydrogen economy.
When it comes to the other potential drivers of demand – cars, heating, domestic electricity production – then at the moment, there’s a kind of chicken and egg problem, as Daniel Oberhaus points out in Wired. Car manufacturers, for example, are already developing hydrogen fuel cells, so that when the hydrogen economy finally arrives, they’ll be ready to take advantage of it. Yet for now, no one wants to buy a hydrogen-powered car because there isn’t a ready supply of hydrogen fuel. Here, then, is a task for Amazon boss Jeff Bezos’s new $10bn climate fund: “end the stalemate by pledging to rapidly scale up sustainable hydrogen production, finally giving the hydrogen fuel-cell industry the supply it needs”.
Governments will have to lead the way
Get Bezos to chip in? Well, why not, but the challenge is greater than that. Exploiting the potential of hydrogen requires large-scale projects, backed by public-policy decisions, says Nick Butler of the King’s College Policy Institute in the Financial Times.
At present, there are many small-scale developments, but “none sufficient to cut unit costs enough or to resolve the technical challenges involved in using hydrogen in specific markets such as home heating”. Governments in key geographies will need to put in place supporting policies, agree the bosses of the Hydrogen Council on the World Economic Forum blog, and investment support of around $70bn will be needed from various sources over the next decade in order to scale up so that hydrogen can achieve cost-competitiveness.
hat’s a sizeable figure, and is more than the total value of Bezos’s new fund, but it accounts for less than 5% of annual global spending on energy – subsidies provided to renewables in Germany totalled roughly $30bn in 2019 alone. And Germany might be about to forge ahead and lead the way. A draft report from Germany’s Ministry for Economic Affairs suggests that the country may be about to throw its weight behind hydrogen to “secure its global position in hydrogen technologies”, reports Bloomberg. “Germany wants to raise production of the element using electrolysis to as much as five gigawatts from less than one gigawatt at present in order to have a fifth of hydrogen consumption via renewable resources by 2030.”
Four ways to play the rise of hydrogen
UK-based Ceres Power (Aim: CWR) is a maker of fuel cells made from ordinary steel – as opposed to more expensive materials such as platinum – that burn natural gas to generate low-carbon electricity. The technology also works with hydrogen and other biofuels, and enables residential and commercial properties, and charging points for electric vehicles, to generate their own power.
The company is investing in new plant and technology to meet rising demand and is probably a good four years away from making any profit, but sales are growing fast and losses narrowing. For the full year to June, revenues were up 142% to £15.3m, the fourth year running that Ceres has more than doubled turnover. Ceres licenses its technology to commercial partners including Chinese engine maker Weichai Power, America’s Cummins and car makers Nissan and Honda. Germany’s Bosch recently increased its stake in the company to 18%, investing £38m. The shares have been on a tear recently, more than doubling in the past six months, but if the company can live up to the comparisons that some are making with technology giant ARM, that could be justified. Orders at the end of June totalled £28.4m, with a pipeline worth a further £50m.
ITM Power (Aim: ITM) is also based in Britain and manufactures electrolysers, which use electricity to split water into hydrogen and oxygen. Losses have grown recently despite rising revenues – in the six months to 31 October, ITM notched up pre-tax losses of £9.8m, up from £5.3m in the same period the year before – but the firm believes its new joint venture with Irish chemicals firm Linde will be transformative, allowing ITM to focus on its own developments and reduce its exposure to the kind of challenges that led to the losses. ITM was recently awarded £7.5m in funding from the UK Department for Business, Energy & Industrial Strategy for the second phase of its Gigastack renewable hydrogen joint venture, which will generate hydrogen using offshore wind as a power source, with the aim of demonstrating the feasibility of producing low-cost, zero-carbon hydrogen on an industrial scale. If that happens, ITM is well placed to benefit, but its shares have also been on an upward streak of late, trebling over the past six months.
McPhy Energy (Paris: MCPHY) is headquartered in France and is a specialist in hydrogen production and distribution equipment. It is to equip the first large-scale, zero-carbon hydrogen project in Europe, a project initiated by Nouryon and Gasunie, two leading industrial groups, that will be installed in Delfzijl in the Netherland. McPhy’s “Augmented McLyzer” technology will convert green electricity into 3,000 tonnes of clean hydrogen per year. This will be used to produce biomethanol and will contribute to reducing carbon emissions by up to 27,000 tonnes per year, according to the company. McPhy recently reported strong revenue growth of 43% to €11.4m in 2019 and it has raised €7m from investors to pursue its development strategy. It has yet to make a profit though and, again, its shares have near doubled in six months.
A less risky and speculative way to play the trend might be to buy the bigger engineering groups whose fortunes are not entirely tied to the rise of the hydrogen economy, but which might profit from it should it take off at a later date. Siemens (Frankfurt: SIE), for example, is a world leader in the manufacture of hydrolysis equipment for the large-scale production of hydrogen. The multinational conglomerate is Europe’s largest industrial manufacturing company and it is well run, with a strong balance sheet. The shares trade on a forward price/earnings ratio of 14.2 and a near-4% dividend yield is on offer, a payout that is well covered by earnings. The firm sells into markets that face strong headwinds, but, as The Motley Fool points out, it looks likely to weather these and the stock looks “good value for income seekers”. A hydrogen-based lift would be a nice bonus.
Stuart graduated from the University of Leeds with an honours degree in biochemistry and molecular biology, and from Bath Spa University College with a postgraduate diploma in creative writing.
He started his career in journalism working on newspapers and magazines for the medical profession before joining MoneyWeek shortly after its first issue appeared in November 2000. He has worked for the magazine ever since, and is now the comment editor.
He has long had an interest in political economy and philosophy and writes occasional think pieces on this theme for the magazine, as well as a weekly round up of the best blogs in finance.
His work has appeared in The Lancet and The Idler and in numerous other small-press and online publications.
King Charles banknotes to enter circulation in June
New banknotes featuring the King will enter circulation on 5 June – here’s what they will look like and what you need to know about your old notes.
By Katie Williams Published
Metro Bank to slash 5.22% savings rate for current customers- what’s the next best alternative?
Metro Bank is set to cut the rate on its best buy instant access saver for existing customers. Is there an alternative on the market and should you switch now?
By Vaishali Varu Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in
Tips Tech-focused funds are continuing to attract private investors and Scottish Mortgage falls back into favour - we look at the top fund, trusts and stocks investors are pumping their money into in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published