The funds take positions in hydrogen waiting for a revolution

Fund managers are racing against the clock for alternative sources of clean energy. In some cases out of sustainable conviction, in others because they take it for granted that the tsunami will occur despite the recent rise in electricity prices, and sometimes by order of clients or their investment managers. But the reality is that there is a majority of funds and private banks that want to position themselves, and one of the options that they are analyzing to incorporate into their portfolio is green hydrogen.

Hydrogen is an energy source that is storable and emission-free, which can be used to burn in a combustion engine, power a fuel cell for transportation (cars, trains, planes, etc.), store energy, heat or in the reduction of iron to make steel. In other words, it has a huge advantage over other energies. The problem is that its production is not carbon neutral. For it to be, and to obtain what is known as green hydrogen, a very expensive process is needed that makes it difficult to be profitable.

But the need is pressing, in the midst of the energy transition of the UN 2030 Agenda, and for this reason there is more and more investment. Both from companies to develop it, and from funds and private banks to position themselves. Precisely, the consulting firm IHS Market calculated that green hydrogen could be profitable as of 2030. For now, the range of investment options is limited, combining venture capital with a handful of listed companies.

“The great advantage that hydrogen offers is its storage capacity and it is the automotive and energy sectors that are investing more resources to make hydrogen a reality. Currently, there are vehicles that use hydrogen as fuel, being ‘zero in emissions’, but the current hydrogen in the world is not obtained through carbon-neutral processes”, summarizes Borja Fernández de Vega, Portcolom AV’s asset advisor.

The expert recalls that in order for this production to be totally clean, the electrolysis process is needed, by which hydrogen is separated from water using electricity that comes from renewable energies. “In this way, the well-known green hydrogen would be obtained, the great bet of the future. The world’s main electricity companies are building large electrolysis projects, but obtaining green hydrogen is still excessively expensive,” adds Fernández de Vega.

Although the number of investable options is small, it is also growing and is increasingly of interest to large investment houses

Growth trend

Although the number of investable options is small, it is also growing and is increasingly of interest to large investment houses. For now, barely 1% of the world’s hydrogen is considered green hydrogen. The weight of green hydrogen contrasts with its growth trend and the commitment of politicians and many investment houses.

Even so, explains Carlos González Carreira, CEO of Welzia Management, there are “great unknowns” with the technological evolution of companies focused on green hydrogen, so the investor “can expect great volatility until the market is more mature and the big companies are profiled”. In their case, they are betting on green hydrogen producers that lead their sectors, although with a still small weight in their portfolios.

The options to take a position in green hydrogen go through production companies, builders of electrolysis plants, infrastructure providers, service stations or storage facilities. Some examples, the Welzia executive points out, are “ITM Power, a British company dedicated to the production of electrolysis machines to produce hydrogen; or Air Liquide, a French company dedicated to the production, storage and distribution of gases, like hydrogen. The investor also has the possibility to have exposure to green hydrogen through mutual funds and ETFs.” The largest exchange-traded funds (ETFs) manage tens of millions, very few in the universe of passive management.

ITM Power is also one of Ibercaja Gestión’s bets in its New Energy fund, which used to be Ibercaja Utilities. The change, made in February 2021, is an example of the trend towards sustainability of the managers. In this case, there is exposure to the green hydrogen theme “through ITM Power, Nel SA, Plug Power, Linde and Air Products. The first two are mainly producers of electrolysers, while Plug Power has a more ambitious goal to be at all points in the value chain. The last two are industrial gas companies, which are currently the largest producers of hydrogen worldwide,” explains Óscar del Diego, director of investments at Ibercaja Management.

The revolution has begun and will accelerate as the decade progresses. At least, this is the thesis of investment houses. Some of the largest European managers, such as Schroders, take positions. “We have some small investments,” they point out at the British firm. The analysis focuses on choosing companies with “good technology, strong business partnerships and the ability to expand the business rapidly as the market grows. One of the clearest growth areas will be electrolyser equipment, which is critical to production.” of green hydrogen, so we have some investments in this segment.

In Schroders they defend that green hydrogen will be essential for the decarbonisation of economies: “The costs of hydrogen derived from renewable energies are going to fall drastically, due to economies of scale and the increasingly lower costs of renewable energies, so that it is quite likely that green hydrogen will overtake hydrogen derived from fossil fuels within 10 years.”

At Vontobel they recall that, although it is an incipient industry, there are already attractive opportunities in producers of fuel cells, electrolyzers or industrial gas linked to the hydrogen economy: “There are many profitable companies that are directly and indirectly dedicated to the hydrogen industry Hydrogen Industrial gas companies are a source of direct profitability, while electrolyser producers are in their infancy and will need time before they become profitable However, even if a company is in its early stages of development, it is still possible estimate its intrinsic value using an approximation of the future Fully Affordable Market (TAM) for hydrogen, and then create a discounted cash flow model based on its future market share.”

The use of hydrogen and derived fuels could guarantee up to 17% of energy demand and reduce greenhouse gas emissions by a third by 2050, according to Amundi calculations. “The hydrogen economy promises significant growth. This energy vector, recognized as innovative and essential to achieve carbon neutrality, benefits from very high levels of investment by private and public actors. It is the only viable technology to decarbonize by complete our economy,” says Emmanuelle Sée, thematic equity manager at CPR AM, Amundi’s thematic investment center. “Based on an expanding multi-sector ecosystem, the hydrogen value chain seems especially relevant for thematic investment,” he adds.

As a final warning, “all technologies that are in the early stages of development, investment risks and opportunities come hand in hand. And hydrogen is no different. Given the enormous uncertainty surrounding the future potential and growth of the market As well as the volatility associated with the price of publicly traded hydrogen shares, investors should have a long-term investment horizon to realize their respective returns and should not be frightened by short-term headwinds,” warns Tim Bachmann, DWS manager.

Source: The Confidential