While green hydrogen, produced using renewable energy to split water into hydrogen and oxygen, is hailed as a clean energy solution, concerns persist over its cost and practicality. Investors and experts in the field are skeptical about its short-term prospects.
One significant challenge lies in the high capital costs associated with building the necessary electrolyzers for green hydrogen production. According to experts, these costs can only be recouped with consistently high capacity utilization, which requires a stable and reliable source of power for electrolysis.
Since the enactment of the Infrastructure Investment and Jobs Act (IRA) in the United States about a year ago, there has been a 58 percent increase in low-carbon hydrogen project announcements. However, many of these projects rely on intermittent renewable energy sources, which can result in lower capacity utilization compared to base-load power sources.
Hydrogen’s Cost Competitiveness Questioned
Experts, like Argonaut’s Adrian Norris, suggest that the only cost-competitive forms of hydrogen generation currently involve fossil fuels, hydro, or nuclear energy. The unpredictability of weather-dependent power sources like wind and solar can limit capacity utilization, making hydrogen production less economically viable.
Ian Simm, CEO of Impax Asset Management, shares this caution. While the Biden administration’s climate bill and government subsidies represent potential game-changers for the hydrogen sector, there is considerable uncertainty about how these subsidies will be implemented. Governments worldwide have committed over $280 billion in subsidies to the low-carbon hydrogen sector, but questions about scalability and business models remain.
Hydrogen Stocks’ Performance and Valuation
The performance of hydrogen-related stocks has been volatile. The Solactive Global Hydrogen Index, which includes companies like Plug Power, NEL ASA, and Ballard Power Systems, has dropped over 20 percent this year and significantly more from its peak in November 2021.
Simm suggests that valuations of green hydrogen-related stocks have at times been overly optimistic, anticipating a swift policy transition to support the industry. However, in the short term, it’s challenging to foresee a rapid surge in demand that would justify substantial investment.
The primary obstacle, according to Simm, is the lack of scalable and clear business models in the hydrogen sector. Many publicly listed hydrogen companies primarily focus on electrolyzers, which face concerns about commoditization.
The Long-Term Hydrogen Perspective
While green hydrogen’s short-term future remains uncertain, experts like Simm remain bullish about its potential over the long term. They see green hydrogen as a key tool in decarbonizing industrial heat. However, until scalable and robust business models emerge and concerns about capacity utilization are addressed, the hydrogen sector may face economic challenges in the near future.
The hydrogen dilemma underscores the complexities of transitioning to sustainable energy sources and the need for innovative solutions to overcome economic and technical hurdles on the path to a greener future.
