The hydrogen sector, buoyed by support from policymakers, attracted unprecedented interest from investors last year, with valuations achieving record highs. However, since peaking early this year, share prices of pure-play companies have generally plateaued, and some institutional investors are looking elsewhere to take advantage of opportunities in the growing hydrogen economy.

Electrolyser companies, which produce the technology used to make green hydrogen, continue to receive a great deal of interest, says Richard Hulf, managing director at HydrogenOne Capital. “The best opportunities are clearly in fuel cell and electrolyser manufacturers,” he says. “Their order books are full for the next two years, which is telling. There is already a lot of clean up happening in the grey hydrogen sector, and that is where we suspect a lot of orders are coming from.”

“What is stopping projects springing into action is agreement on the hydrogen price” Hulf, HydrogenOne Capital

But while buying shares in companies directly involved in creating low-carbon hydrogen is the most obvious route to gaining exposure, this approach faces constraints. It is a simple case of too much capital chasing too few listed companies, as Hulf says. “Share prices are getting ahead of themselves,” he adds. “Companies are being valued now on what they will be worth in a year’s time. But if you have a long-term horizon, that is irrelevant.”

Concern about overvaluation seems to be putting off otherwise interested investors, making them look elsewhere to access hydrogen opportunities. Christian Roessing, senior investment manager at Pictet Asset Management, specialises in clean energy stocks and is not convinced by hydrogen pure plays. Instead, he is looking to established energy companies that are investing in hydrogen.

“Our current approach towards green hydrogen is through our renewables utilities,” he says. “Renewables are cost-competitive and the companies are profitable—the opposite of the pure-play hydrogen companies today.

“We think these utilities are also in a good position to capitalise from the green hydrogen expansion, given it is an area with high barriers to entry with high infrastructure, engineering and capex requirements and strong synergies with renewables. Currently, green hydrogen is ten times more expensive than hydrogen from fossil fuels, so we would need a lot of subsidies to make it economical in the coming years.”

Creating a new market

Fortunately for investors, there is stronger support coming in the form of subsidies. Nitesh Shah, head of research at WisdomTree, notes the policy commitments made by the governments of several large economies in recent years. For instance, the EU combined and nine non-EU countries have announced hydrogen roadmaps that would lead to 65GW of electrolyser capacity being reached by 2030.

“While these may be ambitions without specific concrete funding behind them, the policy direction is clearly positive for hydrogen,” he says. “As we have seen with lithium-ion batteries, production on a larger scale can drive down costs. If green hydrogen costs can fall, the adoption of hydrogen fuel cells may rise.”

65GW – Total electrolyser capacity by 2030 if EU and nine other countries hit targets

There may be billions of much-needed subsidies waiting in the wings for hydrogen, but clarity around this is lacking. Hulf says legislative support is helpful, but a mutually agreed hydrogen price, commodification, is needed to strengthen the investment case.

“What is stopping projects springing into action is agreement on the hydrogen price,” he says. “Because all these projects are isolated, they depend on long-term offtake contracts. All participants about to sign [contacts] know governments have a lot to spend—but are waiting to see how much. The last piece of the jigsaw is government backing for a small part of the hydrogen offtake price. That will probably come through in contracts for difference, which is how the renewable power market in the UK started up. That will fall into place within the next year.”

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Author: Jon Yarker