Imagine a future where your kettle, your washing machine, your plug-in car and “the whole lot of them will get their juice cleanly and without guilt from the breezes that blow around these islands”, as Boris Johnson invited his audience to do at the virtual Conservative party conference earlier this year. Imagine Britain as the Saudi Arabia of wind. Imagine wind power propelling this country to “commercial greatness” again, just as it once puffed the sails of Drake and Raleigh and Nelson. Imagine a future, post-Covid-19, when investment in new energy technologies has boosted the economy, created tens of thousands of new jobs, and helped the UK to meet its target of net-zero carbon emissions by 2050. It’s easy if you try, no doubt. But though you may call the PM a dreamer, he’s not the only one. Europe and China have committed to similarly bold plans, as have Saudi Arabia, Japan and Korea; the US seems likely to too, now that Joe Biden is on his way to the White House. Investors have been placing their bets: the S&P Global Clean-Energy Index has climbed by over 70% since the start of this year.
From vision to reality
Johnson was expected to announce further steps in his green revolution as MoneyWeek went to press, including bringing forward the ban on new cars powered by fossil fuels. But the wind blowing around these islands, not to mention the hot air issuing forth from Conservative podiums, will not be enough on its own to keep the lights on. As The Times points out, progress has already been made towards the goal of decarbonising electricity networks. But to make further progress towards the government’s legal commitment to net zero by 2050 will require additionally decarbonising heavy industry, transport and heating. Electricity, however, no matter how cleanly produced, is not up to the job of smelting iron or lifting jumbo jets.
That means hydrogen will have to play some role in Johnson’s plans. Its potential as a clean fuel has long been recognised – it is the most abundant element in the universe and the only waste product produced when it is used as fuel is water – and it is indeed already in use in a number of pilot projects around Britain. It fuels buses in London and Aberdeen, and ferries in Orkney. Trials of hydrogen-powered trains have begun, and the Tees Valley is set to host the UK’s first hydrogen transport hub. Earlier this year the world’s first hydrogen plane took to the skies over Britain – a first step towards commercial flights by 2023, it is hoped. ArcelorMittal Europe aims to produce its first “green steel” using hydrogen technologies this year.
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The obstacles that remain before hydrogen’s full potential could be realised – and the hoped-for “hydrogen economy” replaces our current one running on fossil fuels – remain considerable, however. Hydrogen, although abundant, is not found just lying around in pure form. Most of the hydrogen produced in Britain is manufactured by burning fossil fuels. It is possible to produce “green” hydrogen instead, by electrolysing water using renewable energy, but costs remain prohibitive. Still, as The Times notes, it’s “probably right” that Johnson “not lose sight of the long-term prize” here. Renewable energy costs have tumbled over the past decade; the cost of green hydrogen is likely to do so too. And other countries, including Germany, China, Japan and the US are investing in the technology. Goldman Sachs estimates that green hydrogen could be a $10trn global market by 2050, driving investments in renewables, electrolysers, pipelines and storage.
The challenge, as Dieter Helm, a professor at Oxford University, points out in the Financial Times, is of turning the grand vision into a reality. “The energy scene is littered with the debris of grand visions and bold initiatives,” he says. The PM has, for now, merely added to it. If the rhetoric is to be transformed into something of substance, action is urgently required. The UK’s coal industry is now “effectively closed and the nuclear fleet is ageing”. The long-promised energy white paper “must be delivered and decisions taken. Otherwise, the lights might go out and the carbon targets be missed”.
Hydrogen might well be one of the key planks on which to build a proper energy policy “after two decades of dither and uncertainty”, and Johnson is “good at willing the ends, if only vaguely”, says Helm. But Johnson must also will the means: ensuring appropriate infrastructure is in place and providing an appropriate regulatory and institutional infrastructure, for example. Doing all this and more would be a “great legacy for the prime minister” – assuming he will act “and pay for it too”. As an FT editorial points out, Germany has already set out a recovery plan with an estimated €40bn of detailed green measures. France has pledged almost a third of its €100bn recovery fund to green investments, including hydrogen. All this is a “far cry from what the British government has announced so far”.
How to invest
Still, the speculation and the government subsidies already announced have made hydrogen the “energy buzzword of the moment” among investors, as George Hay of Breakingviews puts it. That is reflected in the “toppy valuations” of the main players in the industry, and “investors might be forgiven for avoiding hydrogen altogether, especially as a similar burst of sector enthusiasm two decades ago proved short-lived”. This time around, an enthusiasm for environmental, social and governance (ESG) investing is also inflating valuations as fund managers snap up anything that appears to be “on the right side of the energy transition. That could keep share prices elevated even if the returns that justify the hype remain a long way off”.
Indeed, all of the stocks suggested by MoneyWeek last time we covered the sector earlier this year – Ceres Power (Aim: CWR), ITM Power (Aim: ITM), McPhy Energy (Paris: MCPHY) and Siemens (Frankfurt: SIE) – have soared since, rising fivefold in the case of McPhy. It would be tempting to ride the momentum, but be aware that, at least in the case of the purer plays, you will be making risky bets on companies that have yet to make profits and on the likelihood of further progress over the next 20 or 30 years in the highly uncertain energy revolution already outlined.
But there’s a way to get some exposure and hedge your bets at the same time. Hydrogen can only live up to the hype if it is able to ride the coat-tails of the more general transition to a lower-carbon future. To stand a chance of doing that, the hydrogen produced will have to be “green”. That means that the growth of a hydrogen economy depends on growth and development in renewable energy. “The… investment opportunity for green hydrogen is really, actually, in more renewable energy,” as BNP Paribas analyst Mark Lewis told CNBC. To meet the EU’s goal of producing as much as ten million tonnes of renewable hydrogen by 2030, for example, about €400bn of investment will be required, reckons Lewis. “Fully half of that is for dedicated new renewable energy capacity. So this is only going to increase the growth opportunity that was already there around renewables.” The real opportunity, then, says Lewis, is in the capital goods companies that build the electrolysers (an example is Siemens, which MoneyWeek suggested as an option earlier this year) and renewable energy projects more generally. You can play the latter theme via two clean-energy exchange-traded funds – the iShares Global Clean Energy (Xetra: INRG) and the Lyxor New Energy (Xetra: NRJ) ETFs.
Among investment trusts, Renewables Infrastructure Group (LSE: TRIG) was popular with MoneyWeek readers when we asked in our 1,000th issue what you would invest £1,000 in until 2030. Edward Sheldon of Motley Fool likes it too: the FTSE 250-listed trust is “one of the best UK renewable energy investment trusts” out there, he reckons. It owns a broad portfolio of wind and solar farms in the UK and Europe and aims to provide investors with regular dividends. It has a trailing yield of about 5%.
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