Firms operating in the hydrogen sector saw a weaker performance in the first quarter of 2021 after rising interest rates and concerns over project returns caused a sell-off in stocks, according to a report by Bloomberg Intelligence (BI).

The research firm has created a basket of companies to track performance in the sector. To be included, members must expect to generate a meaningful portion of revenue by 2025 from the manufacture of fuel cells and electrolysers or other activities related to producing, transporting, storing or using hydrogen.

After strong 2020 returns shares of almost two-thirds of firms in the BI hydrogen basket fell in the first quarter. But the poor performance of these firms is likely to be a temporary phenomenon, according to the report.

$1.5bn – Average annual hydrogen investments, 2018-2020

“Although 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,” the report says.

BI expects investments in the sector to rise dramatically in the next few years. Investments averaged about $1.5bn a year over 2018-20, Bloomberg data shows. This will likely increase to $38bn per year during 2019-40 and $181bn annually during 2041-70, if projections by the IEA on hydrogen deployment are accurate.

Annual demand-growth potential for hydrogen could reach 5-7pc, according to BI, with hydrogen growing to supply 7pc of global energy use by the middle of the decade.

“Net-zero climate goals, the rising expense of carbon permits and declining cost of wind and solar will be the key drivers of green hydrogen production and use,” the report says.

Early movers

Companies across many industries are making early bets on hydrogen. Among energy, chemical and metallurgic companies, Shell, Orsted, Engie, Neste, Linde and SSAB are expanding hydrogen activities.

Within the industrials group, Alstom has made investments in hydrogen trains. Meanwhile equipment suppliers such as Plug Power, ITM Power and Faurecia have positioned themselves to benefit from the hydrogen boom.

Governments will need to initially enact policies such as contracts for difference, high carbon prices and tax incentives to provide investment certainty for hydrogen producers, infrastructure operators and potential consumers, according to Elchin Mammadov, senior industry analyst with BI.

“Investment opportunity abounds, though subsidies are essential for the initial scale-up and to achieve cost reductions, since hydrogen production is very expensive,” he says.

To encourage regulated utilities to invest in hydrogen networks, authorities will also have to allow grid operators to include hydrogen-related works in their rate base.

“Investment opportunity abounds, though subsidies are essential for the initial scale-up and to achieve cost reductions” Mammadov, Bloomberg Intelligence

Technological advances will be needed in the production of green hydrogen to address water scarcity by developing the use of saline water in electrolysis, as well as to replace precious and rare-earth metals in proton exchange membrane electrolysers and in batteries used together with alkaline-based electrolysers.

Uncertainty about future carbon prices, subsidy levels, economies of scale and the learning curve mean there is a huge variation in forecasts for hydrogen investment and consumption growth.

Consultancy Wood Mackenzie estimates a cumulative $1tn of capital investments will be needed by 2050, while the IEA's projections imply about $2.5tn during the same period.

---

Author: Tom Young