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How justified is the hydrogen hype? What investors need to know

Shares in companies developing hydrogen technologies have taken off recently, due to zero-carbon ambitions. But producing the clean fuel can be tricky and inefficient
May 6, 2021

The hottest investment story recently has been that hydrogen is set to play a big part in our transition to a zero-carbon future by about 2050.

Shares in companies developing hydrogen technologies took off in the closing months of 2020, partly in response to the European Union’s Green Deal, which promises around €1 trillion of public and private investment in clean energy by 2030. Exchange traded funds offering ways to own baskets of clean energy stocks proliferated. Many have earned their early investors big, fast profits. UK-listed hydrogen power specialists, such as Ceres Power Holdings and ITM Power, have likewise rewarded believers handsomely.

Hydrogen is a clean fuel—the major waste product being water—and also looks like an answer to some major problems with other clean energy sources: hydrogen cells could fuel heavy goods vehicles and trains that currently burn diesel, whereas batteries strong enough to do this would be too heavy. It might replace fuel oil used for shipping and the fossil fuels used to power some heavy industry. It could even be burned in domestic boilers instead of natural gas.

What’s not to like? Viewed from 30,000 feet, very little. But those who understand the fiddly practicalities are starting to get airtime. Making so-called green hydrogen requires huge amounts of renewable electricity to power electrolysis—splitting water into oxygen and hydrogen. And the process is inefficient: up to 70 per cent of the energy is lost, according to some estimates. Hydrogen is difficult to store and transport. While it seems in theory an ideal replacement for domestic natural gas, the molecules are so small that they leak out of existing gas pipes.

Great investment stories always gloss over the nitty-gritty issues. There are plenty of these with hydrogen, and some of its promise may never be realised. But while workable solutions are further away than the boosters would have us believe, they are likely to emerge eventually. If the pandemic has taught us anything, it is not to bet against scientific research when enough money is being thrown at it and the political will exists to make things happen. For investors, the best judgment is that hydrogen is neither as wonderful nor as impractical as the stories suggest.