Hydrogen will play a key role in the energy transition and will therefore offer plenty of opportunities for investors. However, investors should not underestimate the diversity of the hydrogen market, according to Candriam.
The Belgian asset manager notes in its report “Hydrogen power - Enabling a virtuous decarbonisation loop” that recent government measures to highlight the potential of hydrogen as an energy source of the future have boosted the performance of certain hydrogen stocks. Some stocks have even tripled in the last twelve months.
Vincent Compiegne, head of ESG investment & research at Candriam, explains: “Governments, investors and companies are doing everything they can to respect the Paris Climate Accord. That’s why we need to find alternative energy solutions that strengthen our global commitment to become a low carbon economy. Hydrogen will not be the only way to become CO2 neutral, but for specific sectors such as steel and cement production it can lead to a lower energy intensity compared to traditional sources. Moreover, our research has shown that technological progress and falling renewable energy costs have put hydrogen on the map as an attractive long-term opportunity for investors.’
Extremely diverse
However, the report also stresses that the hydrogen market is very diverse and that long-term investors should pay attention first and foremost to the size of the potential hydrogen market and the stage of development of different projects.
Indeed, depending on how the technologies are used and on the requirements of the different sectors, hydrogen technologies are at different stages of development. For example, there are applications for trains which are already being tested, but others which will not be economically viable for at least 20 years. This gives investors the opportunity to diversify between different projects, time horizons or business models.
Like Candriam, Goldman Sachs Global Investment Research (GIR) also sees hydrogen as the main driver of the energy transition. Michele della Vigna (photo), head of commodity equity research, has been researching the economic impact of climate change and in particular on the energy sector for several years. He is one of the authors of the comprehensive study “Carbonomics: The Future of Energy in the Age of Climate Change”.
In a recent paper, Della Vigna and his co-authors argue that clean energy technologies will play an important role in the economic recovery from the Covid-19 pandemic. On the basis of the Carbonomics cost curve they developed, they estimate that clean technologies have the potential to stimulate $1,000-2,000 billion a year in green infrastructure investment and create 15-20 million jobs worldwide through public-private partnerships, such as “The Green Deal”.
Lower cost of capital
Renewable energy is estimated to become the largest area of spending in the energy sector by 2021, surpassing oil and gas for the first time in history. ‘This is driven by the cost of capital, which is increasingly diverse: up to 20% for long-term oil projects and 3-5% for renewable energy sources’, according to the report.
Due to the increasing involvement of capital markets in climate change, there has been a seismic shift in capital allocation, according to Goldman Sach’s GIR. Although many investors believe that the current focus on decarbonisation stems from imposed policies, according to Della Vigna, investors themselves are the driving force through their increasing focus on sustainability and climate change.
Historic turning point
‘We are now at a historic turning point where investors are starting to charge completely different capital costs for CO2-intensive companies. This makes it more difficult for these companies to finance their business activities and also has a negative impact on their ability to finance new hydrogen projects. This creates, as it were, a vicious circle in which energy investments are increasingly flowing towards low carbon technologies and CO2-intensive companies are increasingly being put at a disadvantage,’ Della Vigna told Investment Officer.
Moreover, he believes the divergence will only increase. ‘Both investors and society will continue to focus on CO2 reduction, and I can only see that increasing in the future.’
Does this mean the end for the traditional energy giants? On the contrary, according to Della Vigna. ‘The big energy companies can actually contribute to the energy transition. Their mere size means they are one of few players who are actually able to invest in complex projects related to the energy transition,’ he says. ‘This will turn the oil majors of today into broad energy companies. Oil already counts for less than 50% of their revenues for some of these companies.’