In retrospect, the year 2020 was riddled with market dislocation and uncertainty. However, 2020 was also a year of “fast-forwarding” and innovation. Industries, companies, and policies that would have otherwise taken years to become mainstream quickly became the center of economic, industry, and investment attention. One viewpoint that has emerged from 2020 and has started to show signs of potential in early 2021 is the idea of a “hydrogen economy” and a positive correlation toward reversing climate change.
A “hydrogen economy” is the widespread use of hydrogen as a fuel for heat, hydrogen vehicles, seasonal energy storage, and long-distance transport of energy. It is a theory that would limit or phase out fossil fuels (currently 4/5 of the world’s energy supply), reduce carbon dioxide emissions, reduce economic dependence on fossil fuels (along with international providers) and limit greenhouse gases/global warming/climate change.
For clarity, hydrogen is the lightest and most abundant element in the universe with clean-burning gas that contains more energy per unit of weight than fossil fuels. Hydrogen can also be liquified and transported via pipelines, trucks, or ships while providing uses for fertilizers, vehicle fuel, home heating, and electricity (through a process known as electrolysis or the absorption of excess supplies burned in gas turbines to generate electricity). The macro-level idea is that hydrogen could integrate energy-consuming sectors such as building, transport, and industry – a process known as “sector coupling.” However, the most considerable benefit to hydrogen energy is the direct impact on lower CO2 emissions, fewer greenhouse gases, and potential reversal of climate change (all hot policy topics of the 2020 U.S. Presidential Election).
With this said, the most common types of hydrogen used as energy alternatives today (grey and blue hydrogen) still use fossil fuels and emit CO2. “Grey hydrogen” produces methane and releases other greenhouse gases into the atmosphere and “blue hydrogen” captures greenhouse gas (CO2 emission) and stores them underground to prevent adverse impacts on climate change (though not 100% efficient). However, the talk of 2020 focused on “green hydrogen”. “Green hydrogen” does not emit any harmful byproducts as electricity is used to split hydrogen molecules from oxygen (using water as the catalyst) with the combustion by-products only releasing water vapor into the atmosphere. The technological innovation to optimize “green hydrogen” as a renewable energy source is something to watch for in 2021. As politicians coined back in the early 2000s, “though expensive, green energy is the freedom fuel.” Fast-forwarding to today, “green hydrogen” costs continue to drop meeting the cheaper, fossil fuel emitting conventional hydrogen costs. Furthermore, economies of scale have led to hydrogen fuel cells’ costs to decrease approximately 60% over the past decade. Further cost decrease predictions are anticipated in the near future as companies like Deloitte expect hydrogen fuel cell expenses to drop below those of electric batteries and combustion engines (potentially making hydrogen energy rational and realistic).
Contrary to what most people think, this idea is not new. In the early 2000s, hydrogen was a key topic, with then U.S. President George W. Bush saying at his 2003 State of the Union Address that “the first car driven by a child born today could be powered by hydrogen and pollution-free.” He was partially right; however, policy, research, and societal acceptance for this concept, at the time, did not align. However, mainstream acceptance in the later 2010s (continued into the 2020s) accompanied with a new Biden Administration and a Blue sweep of the Senate could provide the synergy between societal acceptance and policy support needed to “fuel” the increasing interest and long-awaited adoption of clean energy alternatives. In essence, it is a perfect storm for alternative energy sources, namely hydrogen, to capture value in 2021. As Morgan Stanley exclaimed, there is an immense portion for clean energy growth due to “very large, multi-decade renewables growth driven by economics, policy support, electrification of other sectors, and green hydrogen.”
These benefits have already seen increasing investor optimism as hydrogen energy companies like PLUG, FCEL, BLNK, and BLDP have all significantly outpaced the S&P 500 in the early weeks of 2021 with an average 2021 YTD return of 62.85% vs. the S&P 500 Index 2021 YTD return of 1.48% (as of 1/13/2021). Additionally, E.V. vehicle companies that reached all-time highs in 2020 have continued their relative outperformance so far in 2021 with companies like TSLA, NIO, and RIDE illustrating an average 2021 YTD return of 25.77% vs. the S&P 500 Index 2021 YTD return of 1.48% (as of 1/13/2021). Furthermore, companies that have pledged for progress towards net-zero CO2 emissions have also provided an avenue to capture alpha. This trend should not be a surprise. State and local governments have already started the push towards sustainability and cleaner alternative energy. For example, the state of California pledged last year that all vehicles would be electrified by 2025. Though a sizeable feat, it illustrates that investment optimism and policy appropriation are beginning to agree.
However, the idea is not a complete win yet. One of the major concerns is a lack of hydrogen infrastructure as hydrogen does not exist in its pure form on earth. Therefore, complex, multistep processes like “green hydrogen” and other technological advancements must be reached by scientists to lead a new era of a scalable “hydrogen economy” and lower greenhouse gas emissions. Thus, significant dollars should be invested, and established coal mining and fossil fuel industries abandoned. According to Bloomberg NEF, approximately an “$11 trillion investment in production and storage worldwide through 2050 and more electricity than the world generates now would be needed to have green hydrogen meet a quarter of the world’s energy needs.” Additionally, according to a report by the Institute for Energy Economics and Financial Analysis, “the current investment and production of hydrogen are not forecast to keep up with demand. Current projects are only expected to generate 3 million tons a year, compared to a global target of 8.7 million tons per year.”
However, others argue that the existing energy infrastructure can be used for “green hydrogen” deployment. The way “green hydrogen” is produced will not likely be used where it is made. Therefore, it must be pressurized and moved through a pipeline or transported by automotives, thus, utilizing existing infrastructure. For instance, grey hydrogen refineries can service their “green hydrogen” counterparts with little need of infrastructure investment. However, the hedged impact on established fossil fuel and coal mining industries remains ambiguous.
Regardless, renewables, nuclear, or energy efficiency alone is not enough to meet the 2050 net zero CO2 emission goals. According to the United Nations, “the production of fossil fuels must decrease by 6% per year to prevent a catastrophic global temperature rise” and meet any of the climate pledges made in the Paris Agreement. Therefore, innovation must be utilized to meet demands.
All in all, the topic of a “hydrogen economy”, hydrogen fuel cells, and the coveted “green hydrogen” process will remain debated subjects throughout 2021 and beyond. However, recent equity outperformance has shown signs of promise. It is likely to continue seeing gains amid attractive mergers & acquisitions activity, new alternative energy investments, the onslaught of clean energy and electrification companies coming to market, accommodative domestic administration, policy implementation, international accord, and the growing mainstream social acceptance of the notion. With the light at the end of the uncertainty tunnel starting to emerge, we see clean energy alternatives through the haze. This subsector should continue to remain on investor’s watchlist based on the potential immense growth opportunity within this space.