Government policies in the US and Europe are boosting newfound investor confidence in hydrogen electricity projects — helping backers to look beyond previous big losses in the clean-technology sector.
As part of the global effort to combat climate change, countries around the world are pumping money into hydrogen fuel technology. In the US, last year’s Inflation Reduction Act created a new tax credit for clean hydrogen, as well as doling out $2bn in grants for hydrogen fuel cell electric vehicles. And, in the previous year, the US Infrastructure Investment and Jobs Act authorised $8bn for hydrogen projects.
In Europe, the European Commission is creating a “hydrogen bank” with €800mn from the EU’s innovation fund for low-carbon technologies, to subsidise hydrogen fuel. Similarly, in the UK, the government has proposed to double hydrogen production to 10 gigawatts by 2030 as part of its energy security strategy, and in March announced a list of companies that can apply for funding. Meanwhile, Australia has committed close to A$1.6bn ($1bn) to accelerate its hydrogen industry development.
Hydrogen’s attraction is that it is clean when it burns — but producing it requires heat from an established energy source. Truly “green” hydrogen can be created through water electrolysis using solar, wind or other renewable energy. However, most hydrogen is currently made using natural gas or fossil fuels, which subtracts from its clean credentials.
As a result, environmentalists have argued that hydrogen’s potential has been exaggerated, which has made investors nervous.
Hydrogen has also proved to be a risky investment in recent years. Nikola, once a highly valued maker of electric trucks, was lauded for its hydrogen fuel technology. But, when a short seller alleged the company was making inflated claims about its technology’s potential in 2020, Jeff Ubben, co-founder of US activist hedge fund ValueAct Capital and former Nikola investor and board member, was forced to defend the truckmaker.
At the time, he told the Financial Times the company was misunderstood, saying: “We are not trying to sell trucks, we are trying to sell hydrogen”. Even so, Inclusive Capital, the fund Ubben set up on his exit from ValueAct, sold its Nikola stake in 2022 and, in May 2023, the truck company said its share price had fallen so far it was in danger of being delisted from the Nasdaq exchange.
More recently, hydrogen projects have been hit by the cost inflation that is weighing on new facilities under construction. Increased capital expenditure for these projects could make hydrogen fuel unaffordable, says Pierre-Etienne Franc, chief executive of Hy24, a fund that announced €2bn of investments for hydrogen projects in October 2022.
Hy24, which is backed by a diverse mix of investors including TotalEnergies, Baker Hughes and Axa, is a joint venture between French private equity group Ardian and Zurich-based FiveT Hydrogen, an investment manager specialising in hydrogen investments.
“Hydrogen is suffering now,” acknowledges Franc, but he is confident this will not last, as long as capital expenditure costs can be kept down and policies are put in place to support hydrogen deployment.
“Higher hydrogen costs could become ‘unacceptable’ to people — that is the big trouble we have,” he explains. JPMorgan warned in a March report that investors should “be wary of over-optimism” in hydrogen as solar, wind and other low-carbon alternatives look more economically attractive.
Still, some big investors remain undeterred.
In April, US green hydrogen manufacturer Ohmium raised $250mn from private equity firm TPG and others. The cash will help Ohmium expand to its manufacturing production.
TPG first launched a climate division within its impact investing unit in 2021. “Despite a challenging macro [economic] backdrop, we’re seeing rapid growth in the green hydrogen market,” says Ed Beckley, a partner at TPG.
Unprecedented regulatory support has been a catalyst, he says, as governments are more focused on energy security. While conventional renewables are still preferred for electricity, he believes hydrogen “will play a critical role in decarbonising hard-to-electrify industries”.
“Both [sources] need to grow significantly over the coming decades in order for us to achieve our decarbonisation ambitions,” he points out.
Companies involved in hydrogen infrastructure projects argue that more investment is needed. The Hydrogen Council, a Brussels-based lobby group comprising Microsoft, Airbus and BP among others, said in May that billions of dollars have been committed to hydrogen projects but “investment decisions are lagging, with only 10 per cent of investment volumes having passed final investment decisions”.
Hydrogen would also benefit from advances in ancillary energy projects, such as electricity storage, noted Deutsche Bank in a May report. For electrolysers to produce green hydrogen, electricity storage is needed because solar and wind power generation can be intermittent — but this adds to the overall cost of hydrogen, the bank said.
Stephen Ellis, an energy analyst at Morningstar, suggests that, after all the hype around Nikola and other hydrogen start-ups in the past few years, “investors’ attitudes have transitioned from a more bubbly mentality” to a more sober outlook.
Interest is now higher, thanks to the Inflation Reduction Act, and deals are being done. He cites the example of Chart Industries, a gas company, which in March completed its acquisition of air and gas products provider Howden to build out its hydrogen production.
But Ellis adds: “It is going to take some more time for some of the more ambitious expectations of a massive market for hydrogen to play out.”
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