Who gets a bigger piece of the pie?

Aglobal climate push to decarbonise industries most in need of environmental remediation could turn hydrogen from a cottage sector into a behemoth with the help of government subsidies that attract investment to meet net-zero emissions targets.

This revolution may provide a US$2.5 trillion investment opportunity between now and 2050 for utilities, equipment makers, and other businesses seeking to curb emission intensity. According to BloombergNEF (BNEF) annual demand growth for hydrogen could reach 7% per year, and hit 7% of global energy use by the middle of the decade. This article will take a look at which companies are best placed to benefit from this rapid growth.

Hydrogen investment to boom amid huge potential in climate fight

Hydrogen is necessary for the world’s largest carbon emitters – the US, China, and Europe – to achieve their net-zero climate targets by 2050 - 2060, as the molecule can aid hard-to-abate industries to decarbonise. Investment opportunities are plenty, though subsidies are essential for the initial scale-up and to achieve cost reductions, since hydrogen production is very expensive.

As a storage mechanism, hydrogen has several advantages over lithium-ion batteries, namely greater energy density. This is important, considering the need for long-term seasonal storage of intermittent renewable power and easy transportation to places where the energy is needed from sites with ample green resources. Hydrogen can also utilise most existing natural gas infrastructure, though modifications would be needed to handle large amounts.

Hydrogen investments look set to skyrocket

Despite several false starts in the past decades, Bloomberg Intelligence (BI) believes that investments in hydrogen are set to surge. Between 2018 and 2020, investments averaged approximately US$1.5 billion/yr, according to BloombergNEF. This will likely increase to US$38 billion/yr between 2019 - 2040 and US$181 billion/yr from 2041 - 2070, according to International Energy Agency (IEA) projections.

Elchin Mammadov, Senior Industry Analyst in the UK, Bloomberg

Intelligence, explores which companies could benefit from the incoming hydrogen revolution.

Figure 1. Global cumulative investments in hydrogen (US$ billion).

Europe leads the way but others set to catch up

Figure 2. Anticipated grey hydrogen share decrease, 2019 - 2070.

The majority of that amount will initially go toward investments in ramping up the production of hydrogen, while future spending on distribution may only account for between 12% and 16% through to 2070. Looking ahead, hydrogen will have a better chance of broader uptake compared to past attempts thanks largely to governmentbacked green stimulus policies. The EU (as well as many of its member states), South Korea, and Japan have already developed hydrogen strategies, and the UK is set to follow later this year.

The EU green hydrogen package envisages a cumulative €150 billion (US$183 billion) investment by 2030 deploying at least 6 GW of electrolyser capacity to produce up to 1 million t of renewable hydrogen by 2024, and 40 GW of electrolyser capacity to make up to 10 million t by 2030.

Early movers to gain edge as growth begins

Companies across many industries are making early bets on hydrogen to gain a competitive edge before the market matures.

Among energy, chemical, and metallurgic companies, Shell, Ørsted, Engie, Neste, Linde, and SSAB are making more progress in expanding hydrogen activities than Gazprom. Within the industrials group, Alstom has a head start over CAF and Siemens. Equipment suppliers such as Plug Power, ITM Power, and Faurecia should also benefit from the hydrogen boom. Globally, Europe is leading the way on the number of announced hydrogen projects – with 126 out of 228 – as a result of pro-climate policies in place across the continent, including net-zero emissions targets adopted by governments and companies. This is followed by Asia (46), Oceania (24), and North America (19).

However, BI expects other less-densely populated regions with better solar and wind resources, as well as access to seaports, to catch up over time as the technology matures and the cost of production and transport decline. Saudi Arabia and North Africa, for example, have a high potential to be hydrogen suppliers for Europe. Similarly, Australia could start exporting hydrogen to Japan and South Korea, while Latin American countries such as Chile could supply the US.

Hydrogen boom reliant on subsidies

While the future for hydrogen is bright, governments will need to develop new policies and regulation. At least initially they will need to offer subsidies – such as Contracts for Difference, high carbon prices or low taxes – and faster deployment of low-cost renewable energy, in order to address the chicken-and-egg problem facing hydrogen producers, infrastructure operators, and potential consumers. To encourage regulated utilities to invest in hydrogen networks, authorities will have to allow grid operators to include hydrogen-related works in their rate base.

Subsidies have been used to great effect across Europe to scale-up offshore wind and turn it into an established power generation technology. As costs keep falling due to economies of scale and increased knowledge, the industry should become less reliant on subsidies. The potential hydrogen revolution will require a similar approach to get it off the ground.

Hydrogen surge would be from a low base with uncertainty over future prices

The next five years’ expected surge in global hydrogen investment will be from a very small base. Key drivers will likely be supportive government policies, decarbonisation efforts by companies themselves and, over time, the declining cost of the technology amid economies of scale and the learning curve. Wind and solar generation and electrified transport look set to continue to dominate green investments over the course of the remainder of the decade, but the share of hydrogen and carbon capture and storage (CCS) could increase by the mid-2020s from the 2018 - 2020 level of approximately 0.4% each.

Yet, uncertainty on future carbon prices, government subsidies, economies of scale, and the learning curve means there is a huge variation in forecasts for hydrogen investment and consumption growth. Wood Mackenzie estimates

that a cumulative US$1 trillion of capital investments will be needed by 2050, while the IEA’s projections imply approximately US$2.5 trillion during that period. Similarly, there is also a wide variation in projections for hydrogen demand in 2050, with BloombergNEF being significantly more bullish with approximately 1.4 Gtpy in its maximum demand scenario and 0.7 Gtpy in its strong policy scenario opposed to 0.2 Gtpy projected by Wood Mackenzie and 0.3 Gtpy by the IEA.

Transport may eclipse industry, while heating may remain niche

Industrial processes, including oil refining, account for nearly all of hydrogen consumed today, but this may decline to approximately one-quarter by 2050. By contrast, the proportion of hydrogen used by the transportation sector could rise by as much as 43% in the next 30 years, according to one of BNEF’s scenarios. BNEF also predicts that the electricity generation industry is set to increase its share in hydrogen demand to 31%, while only 8 - 9% of the fuel may be used for space and water heating in buildings by 2050.

Of the announced hydrogen projects tracked by the IEA, just 1% is currently operational. Among the planned projects by capacity, the main investments would be in areas focused on industrial applications, chemicals, as well as injecting hydrogen into the natural gas grid. By contrast, the less popular projects are those that want to decarbonise power generation, heat production, and mobility.

Hydrogen theme basket

Overall, BI tracks companies with direct exposure to the development of major market themes that cross industries and regions. The company’s dedicated ‘Hydrogen Theme Basket’ includes 43 companies that are expected to generate a meaningful portion of revenue by 2025 from the manufacture of fuel cells and electrolysers, as well as other activities related to producing, transporting, storing, or using hydrogen fuel to reduce global carbon output.

Among the BI hydrogen theme basket constituents, Enapter, FuelCell Energy, Plug Power, and Doosan Fuel Cell have generated the highest return in the past year, while Pressure Technologies, Nikola, Snam, and Air Liquide were relative underperformers. Looking ahead, hydrogen presents significant growth opportunities for a wide range of sectors, including utilities (Ørsted, RWE, Snam), manufacturers (NEL, Plug Power, Alstom), refiners (Neste), transport (Nikola), metals and mining (Anglo American, ThyssenKrupp), and other companies seeking to curb emission intensity (Linde, Equinor).

Hydrogen stocks dive due to rising rates after stellar year, but value chain outruns global benchmarks

After strong 2020 returns, companies included in BI’s hydrogen theme basket underperformed the MSCI ACWI Index of developed and emerging markets in 1Q21 amid a broader green market sell-off, due to rising interest rates and concerns over project returns. Shares of almost two-thirds of peers fell in 1Q21, dragged down by utilities, renewables, and hydrogen pure-plays. Regionally, North America and Asia fared better than Europe.

However, though the hydrogen industry is in its infancy, shares of companies exposed to the technology have outperformed the MSCI All Country World Index (MXWD) since the start of the pandemic.

This is partly due to a global climate push and the increasing momentum in ESG-focused investing. In the BI hydrogen theme basket, pure-plays (those making fuel cells and electrolysers) have outperformed other subgroups, with Europe leading returns versus other regions. The broader green market stock sell-off in 1Q21 took some of the shine off the hydrogen industry’s outperformance when compared to the broader market.

Hydrogen supply set to turn from grey to green

Hydrogen supply will likely surge in the next decade due to strong regulatory support and subsidies, which Bloomberg Intelligence (BI) believes to lead to economies of scale. Green hydrogen is set to displace the widely used grey one, while blue and turquoise hydrogen will require the deployment of carbon capture, utilisation and storage (CCUS) technology. BI understands that water supply constraints, costly components, and relatively low-energy density will all be key challenges for hydrogen in the coming years.

The growing output of green hydrogen, which is produced from renewable electricity by electrolysis of water, will help displace grey hydrogen, which is made from coal and gas using the steam reforming process. The blue variant relies on capturing emissions in their gaseous form, while the turquoise hydrogen process is more energy intensive but produces carbon in a solid form. The commercialisation of CCUS technology at scale will be vital for the mass deployment of blue and turquoise hydrogen as both use natural gas (prone to methane leaks) as a feedstock.

Currently, BASF and Aker Solutions are seeking to build pilot installations to produce turquoise hydrogen, while Equinor plans to develop blue hydrogen projects.

Between two-thirds and three-quarters of green hydrogen production capacity could be deployed to displace grey hydrogen used in oil refining, ammonia and methanol production over the next decade. After that, BI believes green hydrogen will target new sectors, including metallurgy, heavy-duty transport, and the storage of surplus electricity. As a result, the share of low-carbon hydrogen is set to increase to 75% by 2040 from approximately 12% today, according to the IEA.