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Liontrust Insights: Green hydrogen: fuel of the future?

By Mike Appleby, Fund Manager within the Liontrust Sustainable Future Team

Amid ongoing debate about reducing emissions as part of the energy transition, there is growing excitement about hydrogen’s potential as an ultra-low carbon fuel of the future.

We definitely see a role for hydrogen in some aspects of transport, as well as in potentially decarbonising heat and as a storage medium for electricity. Our Sustainable Investment team has been looking at hydrogen for many years and the relatively recent resurgence in Hydrogen 2.0 appears to have a number of benefits over Hydrogen 1.0, which peaked with fuel cells before withdrawing to the sidelines a decade or more ago.

How this will pan out, however, and the best ways to invest in this theme are still uncertain and we anticipate it will be some time before the economics are right for mass adoption.

The beauty of hydrogen is that when burned, the main by-product is water; the critical factor from an emissions standpoint, however, is how that hydrogen is produced. At present, virtually all hydrogen comes from using natural gas as a feedstock (grey hydrogen). Blue hydrogen is when this process captures and stores most of the resulting carbon emissions; green hydrogen, meanwhile, is made by electrolysing water (using electricity from ultra-low carbon sources such as wind and solar). Within this, it is key where the water for electrolysis comes from and technologies that enable the use of sea water are interesting and will be needed in areas of scarcity.

From an environmental and investment perspective, we are only interested in green hydrogen. Blue is a good idea and it is easy to see why the incumbents like it but we have yet to see carbon capture and storage technology to make this economically viable. Using grey hydrogen as a future fuel also makes no sense as, by our calculations, the carbon emissions in producing it are worse than simply burning natural gas.

In terms of application, hydrogen is being used in transport, particularly replacing batteries in warehouses for forklift trucks and similar machines. We see further potential for green hydrogen as fuel stock in logistics (trucks, trains and marine) but these newer applications are unlikely to be scalable and economic before 2025 to 2030.

Green hydrogen is also being used in pilot applications, particularly industrial processes such as chemicals and refining in Europe. This is proving an excellent learning ground and has the capacity to drive up the scale of this industry and bring down costs within it. This also includes green hydrogen production facilities using primarily wind-powered electricity.

In heating homes, we think replacing natural gas with hydrogen will take time before grids are capable of carrying high proportions of the latter (many in Europe are being upgraded to plastic piping) and we are still some way from green hydrogen being cheap enough to make that switch economically viable. There are trials under way to add hydrogen to the grid to around 30% levels (the remainder being natural gas), which has the potential to reduce emissions. Our view is that electrically-driven heat pumps will gain traction as we move towards 2030 to 2035 before we eventually see this green hydrogen gas network scaling up, likely to be in the late 2030s or early 2040s.

Looking at investment opportunities, there are listed companies where hydrogen makes up the vast majority of their business, such as Plug Power and Ballard Power in the US. We also have ITM Power in the UK, which makes electrolysers and builds systems for clients (including storage and balance of plant), while Aker Clean Hydrogen recently listed in Norway.

It is tough, however, to predict the profitability of these companies as they scale up and, given how rapidly this space is evolving, visibility of returns is difficult to assess. Coupled with the fact that hydrogen has quickly captured the market’s imagination, this means many of the positive prospects these companies face are largely reflected in valuations. While we are not saying they are overvalued, we have low conviction in seeing much upside from current levels and so do not invest in any of these stocks currently.

That said, we continue to watch these companies and think the next 12 to 24 months will be a fascinating time to see how this area evolves. This should provide better visibility for the future and conviction in finding investable companies accelerating the shift towards economic green hydrogen and benefitting from potentially huge future demand.

Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital.

The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities – fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business.

MeDirect Disclaimers

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

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