The Many, Many Ways To Profit From The Fuel Of The Future

The Many, Many Ways To Profit From The Fuel Of The Future
Reda Farran, CFA

over 2 years ago5 mins

  • Investors are excited about hydrogen, which has transport and industrial applications and could be used to store fuel.

  • There are all sorts of companies you could invest in to get exposure to the hydrogen boom, from hydrogen producers to electric utilities.

  • Or you could invest in a hydrogen ETF and put yourself in a position to profit from them all – if the fledgling industry can keep its costs down, of course.

Investors are excited about hydrogen, which has transport and industrial applications and could be used to store fuel.

There are all sorts of companies you could invest in to get exposure to the hydrogen boom, from hydrogen producers to electric utilities.

Or you could invest in a hydrogen ETF and put yourself in a position to profit from them all – if the fledgling industry can keep its costs down, of course.

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Hydrogen is being hyped as the clean energy source of tomorrow, with the industry expected to quadruple in size by 2050. And it’s easy to see why: there are so many potential applications for the humble gas, and I thought I’d look into how you could invest in each one of them.

Why is hydrogen set to boom?

Hydrogen can itself be used to generate electricity in two different ways: it can be cleanly burned in power plants built to run on natural gas, and it can be converted directly into electricity using fuel cells that chemically react the gas with oxygen – where the only waste product is water so pure you can drink it.

Those cells can be used to power an electric motor, meaning hydrogen could be a clean fuel source for vehicles on land, sea, and in the air. Hydrogen’s higher storage density offers advantages in terms of both weight and range over the batteries currently used in passenger electric vehicles (EVs), and you can refuel a hydrogen-powered car much quicker too.

In fact, hydrogen tanks could be a key form of energy storage in a world increasingly dependent on inconsistent wind and solar power. Extra electricity generation from these renewable sources can be used for electrolysis: that is, splitting water molecules (H2O) into hydrogen and oxygen atoms using electricity to produce pure hydrogen with no harmful by-products. The hydrogen produced can then be stored up and drawn on to produce electricity of its own when the sun isn’t shining. And unlike conventional batteries, hydrogen can be stored for months without losing much power.

How hydrogen can be used for energy storage. Source: Ballard Power Systems
How hydrogen can be used for energy storage. Source: Ballard Power Systems

Hydrogen also has industrial applications. Manufacturing steel, cement, and chemicals typically involves fossil fuels either as a means to create extreme temperatures, a raw material input, or a catalyst for chemical reactions. In fact, industry accounts for a fifth of the world's carbon emissions. But hydrogen could burn far more cleanly, stand in for carbon in certain reactions, and potentially be sourced emissions free.

What’s the opportunity here?

Investors have unsurprisingly begun to cotton on to hydrogen’s game-changing potential, with the mooted US infrastructure plan promising to make much of the above a less-expensive reality. But there’s still time to get in on the ground floor, and there’s a buffet of ways to do just that.

Hydrogen producers

Three of the biggest industrial gases companies are Air Products & Chemicals, Air Liquide, and Linde. The drawback is that the bulk of their current hydrogen production comes from carbon-emitting sources, though all of them are trying to transition toward cleaner production methods. New Fortress Energy, meanwhile, recently launched a business line selling green hydrogen to the power, industrial, and transport sectors, but it’s also heavily involved in natural gas.

Electrolyzer and fuel cell manufacturers

ITM Power, Nel, and Cummins all manufacture electrolyzers, while the latter also makes hydrogen fuel cells. It’s joined by the likes of Bloom Energy, Ballard Power Systems, Plug Power, Ceres Power, Powercell, and, believe it or not, by tire-maker Michelin, which is trying to reduce its reliance on rubber by betting on the growing demand for hydrogen-powered vehicles.

Hydrogen-powered vehicles

Sales of hydrogen vehicles are small, but they’re on the rise as the likes of Toyota, Daimler, and BMW invest in related projects. And last week, Hyundai – the third-biggest carmaker in the world – announced that it wants hydrogen fuel cell versions of all its models by 2028, with the goal of making prices competitive with EVs by 2030. That could help break the current paradox where carmakers won’t produce hydrogen-fueled vehicles until drivers drive them, drivers won’t buy them until refueling stations are easily accessible, and refueling station companies won’t build them until customers drive hydrogen-fueled vehicles….

Pipeline companies

With fewer fossil fuels to transport, pipeline companies might be forced to repurpose their existing infrastructure to transport hydrogen instead. There aren’t many firms doing this now, but you may want to watch this space: some of the largest pipeline operators are Enbridge, Kinder Morgan, TC Energy, and Williams Companies.

Electric utility companies

NextEra Energy, for instance, has about 50 potential green hydrogen projects coming up, while German utility Uniper has joined forces with energy giant Shell to accelerate the development of the hydrogen economy in Europe.

Alternatively, you could invest in all of the above via the recently launched Global X Hydrogen ETF, which invests in companies that “stand to benefit from the advancement of the global hydrogen industry.” That includes companies that produce hydrogen, firms that integrate it into energy systems, as well as those manufacturing hydrogen fuel cells and electrolyzers. That could be a wise move, for my money: there’s a lot of potential across the entire hydrogen market, which Morgan Stanley reckons has the opportunity to quadruple in size by 2050:

Forecasted size of the global hydrogen market. Source: Morgan Stanley, Financial Times
Forecasted size of the global hydrogen market. Source: Morgan Stanley, Financial Times

But I’ll finish with a word of caution: hydrogen is still, for now, a high-cost form of energy. Costs are falling, and according to Bloomberg New Energy Finance, “green hydrogen” – hydrogen produced via electrolysis using renewable electricity – is expected to be cheaper than “blue hydrogen” – hydrogen produced via fossil fuels where the resulting carbon emissions are captured and stored – in most countries by 2030. That’ll go a long way toward making the use of hydrogen commercially viable across a variety of applications.

Green hydrogen will outcompete blue hydrogen everywhere by 2030. Source: Bloomberg New Energy Finance
Green hydrogen will outcompete blue hydrogen everywhere by 2030. Source: Bloomberg New Energy Finance

But the big challenge in the next few years will be to reduce the expense of electrolysis, as well as the cost of using hydrogen to generate electricity. The technology is exciting, then, but it still has some way to go to become fully commercial.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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