Why hydrogen is attracting renewed investor interest
Is clean hydrogen about to take off? With strong policy signals in the US and EU, institutional investors are beginning to think so.
Young businesses seeking capital in industries of the future have grappled with shifting winds since US and European central banks started raising interest rates in early 2022. Yet clean hydrogen companies and specialist funds have successfully continued raising investment. Despite many hydrogen companies being caught between an uncertain profitability outlook and a promising growth story, they are attracting capital from some of the world’s biggest institutional investors.
Take Hy24, the specialist investment manager that closed its Clean H2 Infra Fund in October 2022, advised by Societe Generale. Hy24 raised €2bn in capital, making the Clean H2 Infra Fund the world’s largest pure play clean hydrogen infrastructure fund. Its investors include not only large international industrial groups with strategic interests in hydrogen, but also some of the world’s leading institutional investors.
Hy24 is not alone. A number of companies from across the hydrogen value chain listed on Europe’s stock exchanges in recent quarters through successful initial public offerings while others already listed have also raised capital. There’s eagerness to invest in the decarbonised gas that governments are championing as the clean alternative to hydrocarbons in heavy industry and transport. That’s despite the relatively small number of pure play hydrogen companies and uncertainty about their prospects for profitability.
Commenting on the latest surge in interest in hydrogen among investors, Yoann Charenton, Equity Research Analyst at Societe Generale explains: “Hydrogen, which has a wide range of applications, is seen as a decarbonisation lever on the path to net zero.”
Ambitions to scale up by 2030
Governments in Europe and the US have highly ambitious goals for scaling up the hydrogen ecosystem. The EU, for instance, aims to produce 10 million tonnes of domestic renewable hydrogen and import a further 10 million tonnes by 2030 – just over five years from now. That requires a significant upsurge in activity in a hydrogen industry where many projects have been announced in recent years but few have reached fruition.
Clean hydrogen is often referred to as the ‘Swiss Army Knife’ of decarbonisation because it can be used in hard-to-abate sectors that are difficult to wean off fossil fuels. These include heavy industries such as ammonia/fertiliser and methanol production, steel making, cement and glass production, followed by heavy transport like shipping, rail and aviation.
The US and EU have signalled that they will give the hydrogen ecosystem the support it needs. In the US, the 2022 Inflation Reduction Act will subsidize the nascent hydrogen ecosystem through production tax credits, while the EU aims to support the scale-up of clean energy value chains with the 2023 Net-Zero Industry Act and a new European Hydrogen Bank.
Events are moving fast and the devil is in the detail. Just before the start of the summer, the European Parliament adopted a delegated act defining what can be labelled as renewable hydrogen. And as August came to an end, the European Commission set the terms and conditions for its highly anticipated Hydrogen Bank pilot auction, which is slated to begin on 23 November 2023. At the same time, the US Treasury Department is hashing out how hydrogen production tax credits will be implemented. These should act as a catalyst, giving a green light to hydrogen project developers.
A tipping point?
There are signs that large clean hydrogen production projects are approaching a critical stage, as they look to structure offtake agreements that will make them bankable. “The key question today is can we get industrial customers to commit to long-term offtake contracts, which is what you need to raise project finance?” notes Louis-Aynard de Clermont Tonnerre, Societe Generale Corporate & Investment Banking’s Global Head of Power, Utilities & Infrastructure. “This is the big thing because if you want large scale projects you can’t just fund them with equity – you need debt as well.”
Once big projects are structured and financed, the clean hydrogen ecosystem should grow quickly. Institutional investors may find attractive opportunities across the ecosystem, including: equipment manufacturers, solutions providers, project developers and infrastructure operators.
“Once the large new projects get going, they will have a significant ripple effect on the whole value chain and allow the industry to move down the learning curve,” says Charenton. “Many of the companies that deliver hydrogen equipment are relatively small, but they need to see orders to gain in size. We believe that this should materialise as project developers tap into incentives, financial support schemes become available, and the standards and legislations governing clean H2 are clarified.”
However, the supportive growth trend will prompt increased competition including from China, spurring both cost reductions and further innovation across the supply chain. This state of flux could lead to quickly shifting market shares. The prospects of subscale independent players could be transformed, with a wave of mergers and acquisitions as the industry consolidates to gain scale and financial strength.
Sensing a tipping point, institutional investors do not want to miss out. Indeed, a late March 2023 Societe Generale European Hydrogen Investor Day was attended by a diverse array of investors who wanted to discuss the current state of the hydrogen ecosystem and the prospects for the future, as well as to understand hydrogen’s decarbonisation potential and find new opportunities.
Among them, Alexandre Cornu, who is managing a dedicated hydrogen fund for CPR Asset Management (Amundi Group) in Paris, declared: “This conference perfectly fitted the topics that we are focusing on at the moment in the hydrogen sector, in particular following the recent newsflow both in the US and in Europe. Being able to meet with top executives of the hydrogen ecosystem is extremely valuable and helps confirm the attractive long-term growth prospects that we anticipate for the sector.”
As clean hydrogen adoption increases, investors will have a wider range of options for where, and how, to deploy their capital. For the world to be on track for net zero emissions by 2050, investments of some USD 700 billion are needed by 2030 – only 4% of which is currently committed, according to the Hydrogen Council.1
1 Hydrogen Insights, May 2023. https://hydrogencouncil.com/en/hydrogen-insights-2023/