• Elina Kovaleva

Hydrogen: the lightest element solving the toughest challenges

The desire to address climate change has never been more pronounced. The onset of the COVID crisis raised fears that governments would dial back on climate change regulations as fiscal effort would have to be refocussed elsewhere. There has been a paradigm shift, however, in how Green initiatives are perceived. Addressing our environmental footprint is no longer seen as a limitation, but an accelerator, of economic activity.

The EU’s ambition is to reach carbon neutrality by 2050. Velox believe that Hydrogen’s role is key in this plan as it solves two main problems: (1) reduce emissions for harder to de-carbonise sectors, such as long haul transportation, steel production, chemicals; (2) provide a solution for long term (seasonal) energy storage and thus pave way to a higher share of renewable energy in the mix. In its Vision 2050 document, the EU stated an ambition to grow the share of Hydrogen in its energy mix from the less than 2% currently to 13-14% by 2050. This has vast repercussions across entire energy value chain.

Cumulative investments in renewable hydrogen in Europe could be up to €180-470 billion by 2050. These investments will focus on renewable energy, gas infrastructure, electrolysers and fuel cells. Both political and business momentum is finally strong behind hydrogen investments, after several false starts over the prior decades. Therefore, we have a view that now is the time to give the sector some serious focus.

Even before COVID and the EU Green Deal, the Velox research team focussed on renewable energy, specifically hydrogen. We closely followed developments across the industry in order to spot potential long-term winners in this energy transformation. Having analysed the hydrogen value chain, the Velox team has built a basket of ideas and optimised it to take into account level of conviction, liquidity and risk profile (white line):

Green hydrogen is currently not commercially competitive as the cost of production ($3-8/kg H2) is much higher than the grey hydrogen produced from fossil fuels ($0.9-2/ kg H2). The European Commission is deploying various policy tools and mechanisms to lower green hydrogen costs. 30-65% of costs of green hydrogen is electricity, so driving down energy cost will be key to making green hydrogen competitive. This is why EU is planning 40 GW of renewable hydrogen capacity by 2030. This ambitious target would require a 25-40% increase in wind and solar capacity in Europe. For utilities, the biggest hydrogen opportunity would be in potential "clusters" of developments: Northern European offshore wind, Southern European solar, where companies such as Orsted, Solaria, EDPR have a competitive advantage. Wind turbine manufacturers (such as Vestas and Siemens Gamesa) will benefit from these incremental capacity investments. In the longer term, these companies will also derive a higher proportion of their revenues from recurring maintenance services versus equipment manufacture, which should attract higher margins and valuation.

Our analysis has also taken into account the risks listed below and we are keeping a close eye on them. One of the risks is the potential for technological displacement. There are three main types of technologies for green hydrogen production (1) alkaline electrolysis, (2) proton exchange membrane electrolysis, and (3) solid oxide electrolysis cells (SOECs). Each of the technologies are at different stages of development and commercialisation and each one has advantages, disadvantages and specific use cases. We view this part of the value chain with more caution due to the higher risk of investing in a technology that would later be displaced, like minidisks and blue-rays were displaced by downloads and streaming. There are, however, opportunities to find companies with superior technology and a solid management team. An example would be ITM Power: the Velox team became interested in this company in October 2019 when a leading global industrial gas company Linde announced a joint venture and a stake purchase in ITM. We saw this as an important vote of confidence in ITM’s technology and know-how by a globally-recognised leader in the space.

Green hydrogen investments will no doubt accelerate development of new technologies, and also have the intriguing possibility of reviving growth for some of the ‘old’ economy sectors which otherwise faced challenging growth outlooks. One of the biggest challenges of large-scale hydrogen development will be storage and transportation. Infrastructure investments will need to focus on largescale seasonal & geological storage (such as caves and salt caverns), refuelling stations and pipeline infrastructure. Existing natural gas pipeline systems could be used to transport hydrogen, particularly when the pipe material is polyethylene. The most likely candidates for hydrogen transportation and large-scale storage are existing gas network companies, such as Enagas and Snam.

Velox see great opportunity within this space - with both potential alpha generation and through deploying capital towards making this green step a success.



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