Long blog - the green hydrogen investor dilemma
It's possible to be a leading player in a fast-growing industry and still not be profitable
One of the big challenges for investors in analysing industries that have massive growth "potential", is disentangling what is hope from what is likely. And if the growth potential is not just hype, working out if companies can actually grow profitably.
An article in Hydrogen Insight (31st October 2022) quotes the Rystad Energy senior sector analyst Lein Mann Bergsmark saying that "some hydrogen electrolyser makers will go bankrupt this decade amid brutal over supply. They face tough choices, expand too slowly and risk losing out on gigawatt scale orders; expand too fast and risk failing to sell equipment from expensive gigafactories that are operating at sub scale". Maybe this is harsh, but ...
What is the big investing theme - green hydrogen is often portrayed as the Swiss army knife of energy sources, something that can turn its hand to almost any application. And as a result, many studies forecast a massive surge in demand. But as Michael Liebreich so eloquently expresses in his Clean Hydrogen ladder, some uses make sense, but for many applications, we actually have better alternatives. Yes, demand will probably rise strongly, but many of the "best" applications are in heavy industry - which has material implications for which companies will create & retain value.
Overall, even when we cull out the hype, we can see a great future for green hydrogen as an industrial feedstock, replacing existing hydrogen produced with fossil fuels and acting to assist in decarbonising industries such as chemicals and steel. And given that its growing off a very small base, with a less than 5% of the total hydrogen market share, y/y growth will be strong. Our note of caution is more about where the industry winners, from an investing perspective, might be found.
We discuss the outlook for green hydrogen in a long blog for The Sustainable Investor, in the first part of a series on the hard to decarbonise themes.
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