Summary: Hydrogen fuel cell technology has been derogatively dismissed as "fool cell" technology, with many doubting it can gain traction. But, after decades of false starts, it looks like the hydrogen economy is finally poised to take off, as governments and private companies announce initiatives that will grow hydrogen's share in the power generation mix.
Related stocks: Linde ((LIN:NYSE)), Air Products & Chemicals Inc. (APD:NYSE), Plug Power Inc. (PLUG:NASDAQ), Ballard Power Systems Inc. (BLDP:NASDAQ), Bloom Energy Corp. (BE:NYSE), ITM Power plc (ITM:LON), FuelCell Energy Inc. (FCEL:NASDAQ), AFC Energy (AFC:LON)
In the clean energy space, most of the attention goes to solar, wind and maybe even hydropower. In the automotive space, the lion's share of attention goes to battery-powered electric vehicles (BEVs). But these are not the only options on the market for zero-carbon energy. In fuel cell form, hydrogen can power everything from vehicles to buildings to power tools, and it does so without emitting carbon.
In simple terms, the technology works as follows: Hydrogen fuel cell vehicles combine hydrogen stored in a tank with oxygen from the air to produce electricity. That activity powers the car, emitting water vapor as the only by-product.
On the subject of using hydrogen to power cars, MRP has previously written that: "While fuel cells pose no threat to batteries' dominance in transportation, dismissing hydrogen and fuel cells would be as premature as dismissing solar in the early 2000s, or wind in the mid-1990s. The sector's growth continues to track, and possibly exceed, the earlier trajectories for solar and wind energy."
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Not everyone is convinced. Fuel cell technology has long been considered too costly and impractical, and many people have expressed doubts that it can gain traction. Tesla CEO Elon Musk famously dismissed hydrogen fuel cells as "fool cells" and "mind-bogglingly stupid." For some reason, Mr. Musk's reaction brings to mind how former Microsoft CEO Steve Balmer also famously laughed at the iPhone in 2007, calling it the "most expensive phone in the world and it doesn't appeal to business customers because it doesn't have a keyboard."
It is certainly true that hydrogen fuel cells have been touted for over two decades as the next miracle in transportation fuel, with little to show in terms of mass adoption. But we are now witnessing one important catalyst that could help the industry take off: Governments and private companies alike are stepping up their efforts to build up a global hydrogen industry.
Pro-Hydrogen Government Mandates
Global efforts to decarbonize the power and transportation sector have pushed a growing number of countries—including Australia, China, Japan and South Korea—into adopting policies that will further the use of hydrogen. The most ambitious plan to date emerged this summer when the European Union (EU) announced it would allocate billions of euros to build up the bloc's hydrogen economy. The goal is to create the conditions that will enable Europe to generate a substantial share of its energy from the element by 2050.
The EU's hydrogen strategy outlines clear targets. If those targets are achieved, Europe will have installed 40 gigawatts (GW) of renewable hydrogen electrolyzers by 2030 (up from one GW today) and increased its annual production of renewable hydrogen to 10 million tonnes (up from practically nothing). By 2050, the EU hopes to have scaled its renewable hydrogen capacity to 500GW.
Needless to say, it is government incentives and mandates that spawned industries in solar, wind and electric cars, enabling them to survive until they became economically competitive with fossil fuels. The same cycle is unfolding with hydrogen.
From 20 Thousand Vehicles Today to 17 Million by 2040
Under 20,000 thousand hydrogen fuel cell vehicles (FCEVs) were sold/leased globally by year-end 2019. Analysts expect the rollout pace to accelerate going forward. Hydrogen fuel cell vehicles have already entered the commercialization phase in at least twenty countries. By 2025, sufficient hydrogen fueling infrastructures will be in place in several regions of the world, giving a significant boost to the market for these vehicles.
Europe alone could have 17 million hydrogen-powered transportation units by 2040, according to Rethink Energy Research's new report, titled "Europe goes all in on hydrogen for the transport economy." That compares to under a thousand units today. The tally would include 9 million passenger vehicles, 5 million light commercial vehicles, 2 million trucks, 240,000 buses and 9,600 trains.
Rethink's research team further anticipates that total demand for hydrogen from Europe's road transport sector will exceed 1,350 kilotons (1.35 million tonnes) per year by 2030, up from just 2 kilotons (2,000 tonnes) today. Demand is expected to accelerate beyond that point, growing nearly sevenfold to reach 13,800 kilotons (13.8 million tonnes) by 2040.
$11 Trillion Market in the Making
Wall Street is also gearing up for the hydrogen economy. According to a media article, Morgan Stanley's Stephen Byrd believes green hydrogen will become economically viable quicker than investors appreciate. Bank of America analysts are equally optimistic, saying the hydrogen economy is on track to explode into an $11 trillion market by 2050. Incidentally, Bank of America likens today's hydrogen market to smartphones pre-2007, noting that we are at the tipping point before the technology goes fully mainstream.
How to Gain Exposure
A hydrogen power boom would be a game changer for the hydrogen-related companies that have soldiered through years of modest sales and negative cash flow. Investors looking to gain exposure to this market can do so in three ways:
- Hydrogen Gas Producers: They can invest in hydrogen gas-sellers like Linde (LIN) and Air Products & Chemicals (APD), whose markets caps are $124 billion ($124B) and $65B, respectively.
- Hydrogen Fuel Cell Pure-Plays: Investors can also turn to pure-play hydrogen fuel cell companies like Plug Power (PLUG), Ballard Power Systems (BLDP), Bloom Energy (BE), ITM Power (ITM), FuelCell Energy (FCEL), AFC Energy (AFC) and Nel ASA (NEL:Oslo). These companies design, develop, commercialize and manufacture hydrogen fuel cell systems, and/or focus on hydrogen storage and dispensing infrastructure. Companies in the second group have market caps of $5B and under.
- Clean Energy Exchange-Traded Funds: The iShares Global Clean Energy ETF (ICLN) invests in companies involved in the solar, wind, hydroelectric, geothermal, ethanol and biofuels industries—including hydrogen.
Most fuel cell pure-plays have seen their share prices soar by several multiples these past 12 months. The gains have not deterred Wall Street analysts from raising price targets on these stocks in recent weeks, citing the massive opportunity ahead for fuel cell companies and hydrogen technologies in general. In the case of PLUG, whose stock is up a staggering 675% in one year, 10 out of 11 analysts currently rate the shares as a Buy. Here's a more extensive list of publicly traded fuel cell companies.
McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm's mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients' attention. MRP's research process reflects founder Joe McAlinden's 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.
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