Investors are continually on the lookout for opportunities in the emerging low-carbon energy economy. But while some investment firms have been quick to respond to market signals related to the scale-up of hydrogen technologies—such as surging share valuations—others remain tentative and are waiting for robust signs of maturity before taking the plunge.

Opportunities to gain exposure to hydrogen are numerous, but individual companies are often small in scale or a component part of a wider energy company, which may contain businesses the investor does not want to be exposed to.

Some remain cautious due to the relatively low technological maturity of the sector. Ursula Tonkin, head of listed strategies at Anglo-Australian infrastructure specialist Whitehelm Capital, says that investment within hydrogen is “certainly” on the radar of the infrastructure investment firm, but a tentative approach is required.

“The nascent green hydrogen economy is only just taking its first few steps. At present, investment in the area is fairly speculative” Tonkin, Whitehelm

Institutional investors, such as pensions schemes, are typically attracted to infrastructure for a set of characteristics that are not currently present in the hydrogen economy: stable, inflation-adjusted dividends or yield without significant risk to invested capital.

“The nascent green hydrogen economy is only just taking its first few steps. At present, investment in the area is fairly speculative,” she says. “We would look at established [hydrogen] projects with long-term contracted cashflows. [But] these opportunities are more likely to open up later in the decade after the green hydrogen sector can demonstrate a greater level of certainty. Lower risk and stable investments are key tenets of our infrastructure investment philosophy.”

Tonkin acknowledges that there are opportunities for those investing today but they are typically not mature. “Popular hydrogen-related equities such as Connecticut-based FuelCell Energy, Plug Power and Ballard Power Systems have seen sizeable gains in the past few months, but are highly volatile.”

Long-term opportunities

While asset managers typically acknowledge the long-term prospects of hydrogen, they are put off by short-term volatility.

Vincent Compiegne, head of ESG investment and research at investment group Candriam, the New York Life ESG-focused asset manager, says that “advancements and the falling costs of renewables have positioned hydrogen as an attractive, long-term opportunity for investors,” citing hydrogen as a “catalyst for value creation over the long term”.

A report from investment research firm Edison found that, while share prices for many stocks exposed to hydrogen grew rapidly during 2020, their susceptibility to setbacks in market growth is of concern. Additionally, few firms are consistently profitable.

“Hydrogen is likely to play an important role in the world’s green energy transition” explains Tonkin, “however, some areas may shine while others languish”.

For example, one often-touted area of the hydrogen revolution is road travel, but the Whitehelm investment specialist says it is “overhyped” owing to the high costs involved and other competing technologies such as the more established battery electric vehicles.

She believes the integration of hydrogen into existing natural gas distribution networks is an area more likely for applications to proliferate.  Mandating small concentrations of green hydrogen within conventional gas networks could “create sufficient demand to see green hydrogen produced at scale, with meaningful cost reductions”, Tonkin explains.

But to facilitate an energy transition, a huge level of investment must be placed in developing infrastructure capacity and ensuring that it too has sustainability at its core. “Minimal electrolyser capacity exists, so a big push is needed if hydrogen is to come from renewable energy sources,” she says. “Regardless of hydrogen becoming mainstream, it will only be green if it is sourced from renewables.”

Candriam’s research suggests that the sector still needs to undergo a period of further maturity if hydrogen is to become a “serious competitive option in the near future”. The group singles out developments in technology and regulation as being key.

Tonkin is aware of the political appeal of hydrogen—as it is in line with countries’ net-zero commitments—but is wary of the prospect of being left with “potential dead-end projects”.

She suggests that investors look to the more dependable options in the short-term, such as creating hydrogen for industrial applications. “Replacing hydrogen produced from natural gas in industrial processes such as fertiliser production is less politically exciting, but offers a more reliable application of hydrogen which may be more appealing to infrastructure investors,” she adds.

It is for these reasons that the investment appeal of hydrogen could still take some time to catch on.

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Author: Tom Higgins