The planet is warming and over the coming decades the global economy will be reshaped by our efforts to limit and mitigate its effects. Amid these threats lie opportunities for investors who can spot them. Waverton’s John Buckland explains.
All our energy comes from the sun. Some 350 million years ago, its rays nurtured woodlands that grew, matured and died, laying down the carbon-rich material that eventually powered the industrial revolution.
Freeing the energy in that stored sunlight has got us into trouble, releasing greenhouse gases and cranking up the heat in our atmosphere and oceans. To counter this trend, we must switch to energy sources that will release less carbon and last for as long as the sun burns.
Enough sunlight bathes the earth in an hour to satisfy global energy needs for a year. Winds whipping over the planet’s surface carry sufficient energy to fulfil global consumption seven times over. This is all the energy we need. The challenge is getting it into usable forms and to where it is required.
Wind and solar energy have three major drawbacks. One is that they can be harnessed only to supply electricity, which today represents just 20% of global final energy consumption. The other is that they are variable, available only when the sun shines and the wind blows. Finally, the energy they contain must be converted into another form for transportation (in the jargon, they are not dispatchable).
But there is a solution that can harness renewable electricity. It is a carbon-free fuel that suffers none of these disadvantages: hydrogen.
Hydrogen’s advantages are many: it contains a lot of energy (pound for pound, three times that of gasoline and more than 100 times Li-Ion batteries); unlike conventional fuels it is not poisonous; the right kind of hydrogen is carbon free; and, unlike the lakes and rivers that power the world’s hydroelectric plants, it can be transported.
Exploiting hydrogen means overcoming some tough challenges, ranging from the physical to the economic. The chief physical problem is hydrogen’s low density compared to other gases. One kilo takes up nearly 15 times as much space as a kilo of air, for example, so it must be compressed at very high pressures and/or very low temperatures for efficient storage and transportation, requiring heavy and expensive containers. A typical hydrogen tank weighs twice as much as the gas it contains. Hydrogen gas is also the smallest known natural molecule, which means it can sneak through the tiniest fissures in tanks or pipelines, making loss through leakage a particular challenge. The physics means the industry relies on specialist skills and expensive materials and equipment.
Figure 1. Hydrogen Infrastructure and Usage
Source: Siemens Energy, Waverton
This is where the economic challenges come in. Hydrogen is designated by a variety of colours depending on its environmental footprint: grey (the most common form today, created from natural gas or methane in a process that generates CO2); black or brown (created from coal or lignite and generating more CO2 than grey); blue (grey, black or brown hydrogen but with most of the resultant CO2 captured and sequestered); and green (generated by electrolysis using electricity from renewable sources, and carbon free). Blue and, particularly, green hydrogen are the promising environmental fuels of the future, but they are more costly to produce than polluting brown or grey.
Until the cost can be brought down to comparable levels (or the costs of more polluting varieties raised through carbon pricing) industry is reluctant to embrace them, although there is increasing pressure to do so to meet CO2 targets. The Hydrogen Council, an industry group, forecasts that this will happen within the next decade, while some participants suggest blue hydrogen can be produced competitively now.
Hydrogen also faces a social challenge. As with nuclear power, spectacular public disasters have tarnished public views of hydrogen as an energy source, but out of the public gaze hydrogen has been playing an important role in the production of electronics and the desulphurisation of gasoline and diesel. It was not long ago that “town gas”, which contains 50% hydrogen, was used to light our streets and to heat our homes. As we write, there are projects underway in the UK to use hydrogen for these purposes again, blending it with natural gas. Countering popular reticence will take careful education and public relations. Hydrogen is indeed highly flammable (that’s the point), but it also disperses rapidly when released into air and, because of its low density, tends to rise quickly out of harm’s way. Demonstrations have shown that a fuel fire in a hydrogen-powered vehicle can burn out completely with little damage to the vehicle, in contrast to the conflagration of a gasoline fire.If these challenges can be overcome, and there is every reason to be optimistic, there is a bright future for green hydrogen as a renewable, clean source of energy.If these challenges can be overcome, and there is every reason to be optimistic, there is a bright future for green hydrogen as a renewable, clean source of energy. The Hydrogen Council expects hydrogen to represent around 20% of the energy mix by 2050, with production increasing from around 80mt per annum now to some 600mt. At US$2/kg this would generate revenue of US$1.2trn. Adding equipment sales could turn hydrogen into a US$2.5tn pa industry. One market analyst breaks it down thus:
- Hydrogen gas sales US$1,400bn
- Fuel cells for transport US$360bn
- Fuel cells for stationary power US$203bn
- Electrolysers US$215bn
Add to this billions in sales of equipment for industrial uses and investment in infrastructure expansion such as pipelines and storage, and the size of the opportunity begins to take shape. Necessity is the mother of invention, and now she is giving birth to the next industrial revolution. Hydrogen promises to play a big part. The IEA in its recent report, ‘Net Zero by 2050′, forecasts that “every month from 2030 onwards, ten heavy industrial plants equipped with CCUS , three new hydrogen-based industrial plants built, and 2 GW of electrolyser capacity added at industrial sites.”
Key to hydrogen’s role is achieving scale in the supply of the less polluting green and blue varieties of hydrogen fuel, a task that is already in train thanks to government policy and financial support. The EU and some Asian countries are leading the way. There has been a proliferation of new hydrogen projects here, and momentum is gathering: in July 2021 the Hydrogen Council listed 359 projects, backed by investment of US$500bn. The UK has issued its own first ever Hydrogen Strategy and is aiming to reach 5GW of low carbon hydrogen production capacity by 2030. It estimates the sector could be worth nearly a billion pounds by then, generating 9,000 high-quality jobs.
Old hands may be familiar with the mantra that hydrogen will be our salvation. Previous waves of hydrogen enthusiasm—during the 70s oil shock, in the 90s as climate change concern went mainstream, and in the 2000s with the ‘peak oil’ conjecture—all petered out. But this time really looks different. The need to decarbonise is urgent and widely accepted. Infrastructure is already in place, with over 4,000 km of hydrogen pipelines already in place in the US and Europe and some 300 km in the rest of the world. Fuel cell technology is being adopted in trucks, trains, aircraft and ships (in 2023 Norway will launch the world’s biggest fuel-cell driven cruise ship, offering carbon-free tours of the fjords). There are few more dangerous words in investing than ‘this time it’s different’, but the evidence is stacking up decisively in hydrogen’s favour.
In the meantime, hydrogen can play a central role in tackling the toughest CO2 abatement challenges. Replacing grey hydrogen initially with blue (using carbon capture and storage – CCS) and later with green hydrogen will offer a lifeline to the oil & gas and chemical industries and will encourage wider acceptance of hydrogen as a fuel and feedstock. It will also help in pushing technological advancement and building the required scale in hydrogen production.
Renewables and electricity networks will be important in supporting green hydrogen production and adoption. Global capacity of renewable electricity generation could reach 34 TW by 2050 (from 3TW currently). Approximately 80% of the cost of green hydrogen is determined by the costs of renewable electricity, but developing green hydrogen production capacity can, in turn, support demand for power, underpinning demand in the sector.
The hydrogen story offers many opportunities for investors with different time horizons and risk appetites. To identify them we must trace the sequence of steps needed to build the supply infrastructure and the potential products that will use green hydrogen:
- What is going to happen first and fastest?
- Which areas will be the largest and longest lived?
- Which segments have the most favourable competitive environments?
- Is it better to go for pure plays, or companies where the hydrogen business is currently small but provides future options?
- Is the hydrogen business adding net positive incremental growth, or offsetting an existing business in decline or facing obsolescence?
Figure 2. Hydrogen / Energy Transition Universe – Valuation Matrix
Source: Factset, Waverton.
Using these criteria Waverton has identified a group of around 100 companies that hold promise. We are already invested in some of these, and others may prove of interest over time. The list is not definitive: companies will be added as their circumstances change or will fall off as consolidation eliminates the losers.
Figure 2 gives an idea of how Waverton is tracking potential winners.
The chart gives an idea of the number and diversity of companies delivering the hydrogen economy, including in: renewable electricity generation; infrastructure, plant and equipment; distribution networks; and supply of end user products. The chart shows how the list spans a wide range of profitability and valuation metrics and the extent of change expected over the next three years.
Things will change. Some pure play hydrogen companies will grow rapidly and become highly profitable, with commensurate valuations and returns for shareholders. Small hydrogen related operations embedded in larger companies could be equally transformative for their parent.
The red points on the chart highlight some stocks that are already on the Waverton global and regional recommended stock lists or are owned in the Waverton equity fund portfolios. Thus, while we continue to identify and assess the best long-term hydrogen opportunities, Waverton clients already have some exposure to hydrogen and the energy transition.
Waverton is one of Wren Sterling’s investment manager partners.The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed. Derivative instruments can be utilised for the management of investment risk and some of these products may be unsuitable for investors. Different instruments involve different levels of exposure to risk.