Hydrogen produced sustainably has enormous potential as a fuel in situations when electricity alone is insufficient, but the route to widespread use remains difficult for investors to negotiate.
The use of hydrogen as a green energy source, according to Morgan Stanley, will have a significant influence not just on the environment, but also on investors. By 2050, hydrogen may cut CO2 emissions by 6 gigatons, or 10%, and generate a $ 2.5 trillion industry.
Ten hydrogen-focused foundations have been formed in Europe, compared to only one fund two years ago. However, this is a new sector, and there is a lot of ambiguity regarding the technology that will be critical.
Although hydrogen is very affordable, the full infrastructure, such as making airplane engines compatible for hydrogen use, takes significant investment. In the long term, you will benefit.
That is why the hydrogen market is essentially a stock market: who will survive in the long run? Investors, according to Morgan Stanley, should concentrate on firms that can provide benefits in the longer term, such as chemical companies.
Of course, analysts have their own single stock favorites. However, if I take a step back and consider the supply chain as a whole, it becomes an issue of risk vs benefit. Upstream, certain electrolyzer names, for example, offer over 100% upside in our opinion, but this must be considered in the context of an ongoing argument, as I indicated, over whether electrolyzer technology will become the industry standard, putting all your eggs in one basket. Downstream, rail and aircraft have potential, but they have incredibly lengthy time horizons, which risk compounding forecasting errors decades in the future.
So, in my opinion, some of the finest bets are in the midstream – chemical names with best-in-class green ammonia systems, for example. And it shows in their superior intellectual property posture in comparison to the rest of the supply chain.
Inspection businesses, for example, will gain from 0.5 percent to 1% of all worldwide hydrogen capex spent on safety testing. That is true regardless of whether technology or country is the first to use it. Given the high level of uncertainty around the rollout of this technology, we favor midstream firms, particularly those that are technology and nation neutral.