Why everyone’s talking about hydrogen
Almost any stock with a decent hydrogen angle performed well in 2020. So, what is all the excitement about, and are these stocks in a bubble?
What is all the excitement about?
Renewable energy can and will decarbonise power generation. Renewable energy and batteries can and will decarbonise the automotive sector. But these technologies will not be as viable for aviation, shipping, commercial vehicles, steel or fertiliser manufacturing. In all of these vital industries it looks as though hydrogen will be needed, or at least that hydrogen will be one of the most viable solutions, for decarbonisation.
How much hydrogen will we need?
Hydrogen is already used in a few large scale industrial processes, such as oil refining ammonia and nitrogen fertiliser production. However, if hydrogen fulfils its potential in these new end markets of heating, industrial, transportation and energy storage, the production and consumption of hydrogen volumes would need to expand 7-10x from current levels.
What are the respective costs of different production methods?
Today, renewable hydrogen is a lot more expensive than fossil fuel hydrogen. However, this is expected to change, and by 2030 renewable hydrogen should cross over and become the cheapest method of production, at which point there is really no need to persist with alternative production methods. The situation is very similar to where electric vehicles (EVs) and renewable energy itself were 5-10 years ago.
While very cheap gas with carbon capture and storage might still be slightly cheaper than solar produced hydrogen in 2030, the difference will be fairly small. There are also others who forecast renewable hydrogen costs to fall faster.
How big could the market for green hydrogen be?
The costs of renewable derived hydrogen are going to fall dramatically, driven by economies of scale and the ever falling costs of renewables, and this makes it quite likely that green hydrogen will overwhelm fossil-derived hydrogen in 10 years' time. Given that green hydrogen is only 1% of the hydrogen market today, the potential is huge. In a blue sky scenario, taking 100% share of a market that will be 8x larger means that green hydrogen production would be 800x larger than it is today in 2050!
What will be the investment consequences of this transition?
There will be opportunities for energy companies and industrial engineering companies to build and operate all the new green hydrogen facilities. There will also need to be hundreds of gigawatts of new renewable energy capacity to supply electricity to the electrolysers, and these new renewable energy volumes are not yet built into market forecasts for the wind and solar industry suppliers.
However, perhaps the simplest business and investment opportunity will be the growth that comes to the companies that can capture the equipment market for all the new electrolysers that will be deployed. The fact that there are only a handful of leading electrolyser players today makes this a very interesting industry, as while there could be some new entrants, the technology is not simple and the established players are rapidly forming alliances and customer relationships with developers and energy groups. This will give them economies of scale and help them drive down costs.
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