Fortescue Metals founder Andrew Forrest, New South Wales Premier Dominic Perrottet and Queensland Premier Anastasia Palazczuk have something in common: they’re all talking up green hydrogen.

Forrest and the QLD premier unveiled the world’s largest green hydrogen manufacturing facility in early October, while the NSW Premier promised up to $3 billion in incentives for hydrogen investment. Meanwhile, Fortescue Metals (ASX: FMG) has pledged to eradicate the emissions produced by customers of its iron ore by 2040 with help from green hydrogen.

Interest in green hydrogen is global. The Hydrogen Council, an industry body that represents companies across the hydrogen value chain, estimates some 350 projects are underway. Seventeen governments have hydrogen strategies and another 20 are in progress, according to the International Energy Agency.

But what is hydrogen and what makes it green? What is it used for and is there a way to invest in the hype without getting burnt? In today’s Charts of the week, we take a whistle-stop tour through green hydrogen and what it means for investors.

What’s hydrogen and why is it green, blue and grey?

Hydrogen excites people because it can be burnt for fuel without producing any carbon dioxide or other greenhouse gas emissions.

But there’s a catch. Hydrogen doesn’t occur naturally and must be manufactured via a process called electrolysis, where an electric current is run through water to separate out the hydrogen.

Today, most of the electricity used is generated with fossil fuels and the final product is called “grey hydrogen” to reflect the emissions involved in production. The hope is that plentiful wind, solar or hydro power can be used instead to create “green hydrogen”—a fuel manufactured and burnt with zero emissions.

There’s also “blue” hydrogen”, where fossil fuels are used to make hydrogen, but the emissions are captured and stored.

How does it help the energy transition?

Investors need to approach any discussion of hydrogen remembering that it’s not a “solve-all” for climate change.

Green hydrogen is most useful in sectors where batteries and electricity aren’t feasible or too expensive, such as steel making and bulk transportation, according to Michael Liebreich, chief executive at Liebreich associates and founder of Bloomberg New Energy.

In the case of steel making, which contributes 8% of the world’s emissions, green hydrogen would be an emissions free replacement for the coking coal that is currently burnt to turn iron ore into steel.

Other likely candidates for green hydrogen are as a fuel for shipping, aviation and industrial vehicles (think the trucks used on mine sites), where batteries are too bulky, short-lived or expensive. Green hydrogen could be burnt directly or converted into ammonia to be used as fuel.

Steel making is the focus of Andrew Forrest’s green hydrogen push with Fortescue Metals.

The plan is to manufacture green hydrogen in Australia using cheap renewable energy before exporting it for use in Asia. There are also hopes Australia could produce “green” steel domestically. Fortescue plans to build a pilot plant in the Pilbara this year.

A 2020 Grattan Institute report argued that the green steel industry in Australia could create $65 billion in export revenue, nearly on par with Australia’s iron ore exports.

Liebreich argues that while hydrogen has many theoretical uses, in practice it will only be used where it outperforms viable alternatives. His “hydrogen ladders” arranges potential uses on each row—the higher up the ladder the more likely. Each is colour coded according to the alternatives available.

In the case of artificial fertilisers, which is what the vast bulk of hydrogen is used for today, the lack of alternatives makes green hydrogen a sure bet.

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But while hydrogen could be used to power cars or an electricity grid, Liebreich say this is unlikely as other renewable energy technologies are more economic. Hydrogen fuel cells in cars are less efficient than batteries and most car makers have abandoned the hydrogen car. The energy required to produce and transport hydrogen means it’s not economical as a regular source of power generation.

“In almost all use cases there is a good reason why hydrogen is not currently used—because other solutions are cheaper, simpler, safer or more convenient,” he said in an August note.

Industrial, not commercial applications

Morningstar analysts agree and recommend investors looking to ride the hydrogen boom stay focused on industrial uses and certain forms of transport.

Outside of Fortescue, the listed opportunities are overseas. Industrial conglomerate Johnson Matthey (JMAT), industrial gas supplier Air Products (APD) and rail manufacturer Alstom (ALO) all stand to materially benefit from the hydrogen opportunity, according to Morningstar sector strategist Stephen Ellis.

This month, Air Products announced a US$4.5 billion “blue” hydrogen complex in Louisiana. Morningstar equity analyst Krzysztof Smalec says the firm has “emerged as a leader in blue and green hydrogen”.

It last closed at US$292, an 11% discount to the fair value of US$330.