Hydrogen boom: hot air or new wave?

Hydrogen hit the headlines in 2021 with everyone from billionaires to politicians and even environmentalists espousing its virtues. With the Australian stock market now boasting a number of hydrogen-related companies, is it time for investors to ride the new energy wave?

Fortescue Metals (ASX: FMG) chairman Andrew Forrest has extolled the potential of the “miracle molecule” to help decarbonise industrial sectors including power generation and transport. The company’s green energy subsidiary, Fortescue Future Industries (FFI) has announced a string of potentially multi-billion-dollar “green hydrogen” deals, from Australia to the Asia-Pacific, Europe and the Middle East.

Australian governments, both at the federal and state level, have also backed the emerging green hydrogen industry. In October, the Queensland government and FFI announced the launch of the world’s largest hydrogen equipment manufacturing hub in Gladstone, a “$1 billion-plus” investment aimed at helping make the state “an emerging superpower in renewable hydrogen.” The New South Wales government has also announced up to $3 billion in incentives for the industry, aimed at attracting more than $80 billion worth of clean energy investment by 2050.

The federal government has committed over $1.2 billion to support the hydrogen industry. A recent report, “State of Hydrogen 2021,” highlighted the potential for the Australian industry to reach the scale of the liquefied natural gas (LNG) industry, which in fiscal 2020 generated $48 billion worth of exports. However, the report also noted barriers to the industry’s progress, including both on the demand and supply sides.

“Many of hydrogen’s expected future uses (such as hydrogen blending in gas networks and fuels for vehicles) have only recently begun trials. Like any new industry, it will take some time to build export supply chains and deliver activities to help scale up the industry. For some uses of hydrogen, it will also take time for demand for hydrogen to build,” the report said.

“Progress is expected to be slow at first but will increase as costs decrease and markets increasingly adopt new technologies. This is a natural part of industry development globally but will be accelerated through government support.”

Nevertheless, the global hydrogen sector has continued to pick up speed. Analysts Fitch Solutions estimate global demand will rise to more than 120 million tonnes per annum (Mtpa) by 2030 from the current 80 Mtpa, with increasing demand from transportation, chemical processing and power generation.

While “grey” and “brown” hydrogen production currently account for 95 per cent of the market, “green” hydrogen has dominated over “blue” in recent planned projects, with the green hydrogen project pipeline reaching over 100 gigawatts (GW) by the fourth quarter 2021. (Refer here for an explainer on the different types of hydrogen).

“Australia dominates the global project pipeline in terms of capacity, with close to 29GW planned or in development. This will further support Australia’s ability to invest in liquefied hydrogen exports, due to geographic location and well-established LNG infrastructure and expertise,” said Nick Finch, infrastructure analyst at Fitch Solutions.

While blue hydrogen is currently cheaper than green, BloombergNEF argues renewable hydrogen will be “cheaper by 2030 in all modelled countries, even those with cheap gas (such as the U.S.) and those with pricey renewable power (such as Japan and South Korea).”

The International Energy Agency sees hydrogen use growing sixfold from current levels to reach 10 per cent of total energy consumption by 2050, “all supplied from low-carbon sources.”

ASX hydrogen stocks

Australian investors seeking to tap into the new renewable energy source have no shortage of options, from pure-play hydrogen stocks to diversified energy companies and an exchange-traded fund (ETF).

Small-cap, ASX-listed hydrogen stocks include Environmental Clean Technologies (ASX: ECT), which is developing a “net-zero” hydrogen refinery in Victoria’s Latrobe Valley; Global Energy Ventures (ASX: GEV), which is developing a compressed hydrogen shipping solution; Province Resources (ASX: PRL), which is advancing a green hydrogen project in Western Australia’s Gascoyne region; and Pure Hydrogen (ASX: PH2), which aims to build “Australia’s first integrated hydrogen business.”

Larger companies involved in the sector include the aforementioned Fortescue Metals, together with AGL Energy (ASX: AGL), which is part of a consortium including Wesfarmers (ASX: WES) subsidiary Coregas that aims to produce and export liquid hydrogen from Victoria to Japan.

Chemicals maker Incitec Pivot (ASX: IPL) has partnered with FFI to develop “industrial-scale” green ammonia production at Gibson Island, as part of its “net zero” pathway by 2050. And energy retailer Origin Energy (ASX: ORG) is examining a range of renewable energy projects in Queensland and Tasmania.

Overseas, Morningstar sector strategist Stephen Ellis points to British industrial conglomerate Johnson Matthey (LON: JMAT), U.S.-based industrial gas supplier Air Products (NYSE: APD) and French rail manufacturer Alstom (EPA: ALO) as benefitting from the hydrogen sector’s growth.

Investors seeking broader exposure could consider the recently listed ETFS Hydrogen ETF (ASX: HGEN), the first such hydrogen-focused ETF on the ASX. The fund tracks the performance of the Solactive Global Hydrogen ESG Index, covering 30 international pure-play hydrogen companies.

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However, Morningstar senior equities analyst Adrian Atkins cautions against rushing into the sector.

“What I’m seeing in my space is companies talking about putting some hydrogen into natural gas pipelines, such as 10 per cent hydrogen, 90 per cent natural gas, to help cut emissions,” he said.

“It’s early days but companies such as AGL are partnering with others via a pilot plant.”

He added: “From an investment viewpoint though, hydrogen seems so speculative that it’s too early to invest in. It’s more about combatting climate change than a good way of making money for investors.”

Morningstar senior equities analyst Mark Taylor says: “Given the uncertainties regarding the development of the hydrogen market, we favour pursuing investment opportunities in high-quality companies with proven business models. Australian energy companies like Woodside (ASX: WPL) and Santos (ASX: STO) can leverage their existing gas portfolios to produce blue hydrogen, where emissions are captured and stored in depleted reservoirs.”

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Hot air or an exciting new wave? For now, Australia’s emerging hydrogen companies will be hoping the global decarbonisation trend together with government support helps propel the sector’s growth, with green hydrogen at the forefront.