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A New Way To Invest In The $11 Trillion Hydrogen Boom

·6 min read

After decades of stagnation and multiple false dawns, the hydrogen economy is now ready for prime time.  Investments in hydrogen technologies have skyrocketed over the past two years, with hydrogen being touted as the 'fuel of the future.' Meanwhile, industry experts predict that hydrogen could become a globally traded energy source, just like oil and gas, while Bank of America says the industry is at a tipping point and set to explode into an $11 trillion marketplace.

Investors who wanted to gain exposure to the hydrogen have had to mostly rely on fuel-cell makers such as Plug Power Inc. (NASDAQ:PLUG), Bloom Energy Corporation (NASDAQ:BE), and Ballard Power Systems (NASDAQ:BLDP).

That is, until now. Defiance ETFs, the creator of a line of next-generation exchange-traded funds (ETFs), has just launched the first-ever hydrogen ETF, Next Gen H2 Fund (HDRO).

HDRO ETF mainly focuses mainly on pure-play hydrogen companies generating half or more of their revenues from the hydrogen-based energy and fuel cell space. The fund comes with a relatively low expense ratio of 0.30%, considerably lower than the 0.46% expense ratio by iShares S&P Global Clean Energy Index ETF(ICLN); 0.68% by the Global X Autonomous & Electric Vehicles ETF(DRIV), and 0.69% by the Invesco Solar Portfolio ETF (TAN).

The HYDRO Methodology

Although HYDRO will mainly focus on pure-play hydrogen technology companies, the fund's underlying index, the BlueStar Hydrogen & NextGen Fuel Cell Index, can include up to a 15% weight in non-pure plays. However, vehicle manufacturers will not be included.

To be eligible, companies must meet certain size and liquidity requirements, and can come from either developed or developing markets. Most stocks will be drawn from the United States, the United Kingdom, and South Korea.

In total, HYDRO will hold 25 securities and reconstitutes quarterly.

As you might expect, the fund's top holdings will be leading fuel-cell names such as Plug Power, FuelCell Energy, and Ballard Power Systems.

$11 Trillion Economy

Sylvia Jablonski, Defiance ETFs' Chief Investment Officer, has reiterated Bank of America's estimate that the hydrogen fuel market will have $11 trillion in investments by 2050, and generate $2.5 trillion in direct revenues. That represents 7,300% growth for a market currently valued at ~$150 billion.

Jablonski notes that hydrogen's biggest attraction lies in its ability to be a 100% green fuel.

For a sector that has been vilified for so long, those bullish projections can appear like a bad case of blue-sky thinking. Yet, they are beginning to take shape right under our noses.

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Last year, the European Union set out its new hydrogen strategy as part of its goal to achieve carbon neutrality for all its industries by 2050 that will see the regional bloc develop a minimum of 40 gigawatts of electrolyzers within its borders and a similar amount of green hydrogen capacity in neighboring countries that can export to the EU by the same date.

And now the private sector is looking to give the EU a serious run for its money.

The world's green hydrogen leaders have joined hands with an ambitious goal to drive a 50-fold scale-up in green hydrogen production over the next six years.

The Green Hydrogen Catapult Initiative is a brainchild of founding partners Saudi clean energy group ACWA Power, Australian project developer CWP Renewables, European energy giants Iberdrola and Ørsted, Chinese wind turbine manufacturer Envision, Italian gas group Snam, and Yara, a Norwegian fertilizer producer.

The companies hope to drive 25GW of green hydrogen production by 2026, a scale that could significantly drive down hydrogen costs to below $2/kg thus making the fuel source competitive with fossil fuels in power generation.

Green hydrogen is produced using renewables as an energy source in the electrolysis of water.

Low-cost hydrogen

High costs are the biggest reason why the hydrogen marketplace has been lagging at a time when the renewable energy sector is booming.

Indeed, it's a big reason why EVs are quickly going mainstream while hydrogen fuel cell vehicles (FCEVs) remain a niche market.

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For instance, consider that fueling a hydrogen fuel cell vehicle (FCEV) in California costs around $16.50 per kilogram compared to $3.182 per gallon of regular petrol in the same state. Light-duty FCEVs are typically 2.5x more fuel-efficient than comparable gasoline-powered vehicles, which means that achieving price parity with gasoline would require that 1 kilogram of hydrogen sells for not more than $8.08. 

The economics for EVs are much better.

The average EV driver in the U.S. is currently paying $1.23 for an eGallon compared to $2.16 for a gallon of regular gasoline for an ICE motorist.

The push to take hydrogen costs below $2/kg is, therefore, a potential game-changer for the entire hydrogen ecosystem because it could mean that, for the first time ever, hydrogen becomes cheaper than gas.

In fact, a recent analysis by the Hydrogen Council suggests that $2/kg as the tipping point required to make green hydrogen and its derivative fuels competitive in power generation, steel and fertilizer production, and long-range shipping. Green ammonia, which is made from green hydrogen, and being tested in the marine industry and also as a possible replacement for fossil fuels in thermal power generation. Compared to its grey brethren, green ammonia produces zero carbon when burned; boasts an energy density 80% higher than hydrogen, and is much safer than hydrogen.

The icing on the cake: the consortium of green hydrogen producers says we can expect to see $2/kg hydrogen in just four years' time.

"From an industry perspective, we see no technical barriers to achieving this, so it's time to get on with the virtuous cycle of cost reduction through scale up. Having led the race to deliver photovoltaic energy at well-below US$2 cents per kilowatt-hour, in certain geographies, we believe the collective ingenuity and entrepreneurship of the private sector can deliver green hydrogen at less than US$2 per kilogram within four years,"" Paddy Padmanathan, CEO of ACWA Power, has declared.

Suddenly, seemingly overvalued hydrogen stocks such as Plug Power Inc. (NASDAQ:PLUG), Bloom Energy Corporation (NASDAQ:BE) and Ballard Power Systems (NASDAQ:BLDP) actually look like bargains.

Like most clean energy sectors, hydrogen stocks have gone into correction mode after last year's wild runup. Still, they remain in the green with PLUG up 42% YTD; BE has gained 4.4% while BLDP has rallied 11.7% in the timeframe.

By Alex Kimani for Oilprice.com 

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