Green hydrogen companies may suffer from lumpiness and volatility in terms of news flow but the likelihood of decades of incremental growth ahead means Jefferies remains bullish about this sub-sector, despite some push-back from clients.
The investment bank earlier this month put out an initiation note on the green hydrogen space, with this corner of the renewables market projected to be worth US$20bn-US$30bn “with multiple possible winners” including 'buy' ratings on ITM Power, Nel and Powercell, and 'holds' for McPhy Energy and Ceres Power Holdings PLC (AIM:CWR, OTC:CPWHF).
As the broker argued in that note, with the total hydrogen market expected to grow eightfold, as less than 1% of hydrogen production is currently green, electrolyser markets therefore have the capacity to grow 800-fold.
On Thursday, Jefferies addressed key pushback it had received on the note.
Analyst Will Kirkness said several clients had a more bullish view on Ceres, “seeing the natural benefit of electrolysers and fuel cells” and expecting positive news flow on partnership announcements.
Investors were also more cautious on Nel, for reasons including its technology, lack of equity partnerships and track record in some areas.
The first was that while supply/demand dynamics look good in the longer term, investors were concerned that volatility is likely as the ecosystem is too immature, which would be “unhelpful” for the news flow that drives share prices in the absence of substantial earnings and cash.
Kirkness conceded that timing “is difficult” and order flow “is lumpy” and likely to be keenly contested as manufacturers try to ramp up.
It is likely markets will “appear dynamic” and as 2024/25 – when the sector is expected to start becoming profitable – rounds into view “we believe visibility of the demand ramp will materially improve”.
It is “key”, Kirkness added, that companies keep bid pipelines and order books ticking up to sustain equity prices.
Some clients were concerned that there is not enough availability of renewable power to enable green hydrogen electrolysis, with the European Union’s 40GW target for electrolysis potentially consuming 13% of the bloc’s electricity production.
With only 10% of current production coming from solar and wind, the analyst said he “would agree that both the stated build out of electrolysers and renewable power projects are too low to meet the more optimistic scenarios of green hydrogen demand”.
But he expects to see announcements upgrading both solar and wind production over the coming years.
Furthermore, the cost of power is outside green hydrogen companies' control, which is important as around 70% of the cost of green hydrogen production is in the electricity to run the electrolyser.
The current price trends show there has been a material reduction in the cost of renewable power and looking forward, some projects and regions may hit green/grey parity sooner than others.
While costs come down, Kirkness said subsidies and incentives will help, such as the recently announced US$3/kg in the US and increasing carbon emission costs and taxes.
Some investors were concerned about big players barging their way into the green hydrogen markets and for the green hydrogen company’s technology to be replicated.
The Jefferies man said this is why the companies he has picked have “established development, robust funding and equity partnerships”.
He said IP protection looks lower in alkaline and PEM (proton exchange membrane) technology but for the likes of ITM he is confident that there will be incremental development and IP monitoring ahead.
Investors mostly shared Jefferies’ view that PEM “looks best placed” with solid oxide electrolysers (SOEC) “appropriate in some end markets”.
Finally, some investors felt longer-term margin aspirations might be too high.
“Given the expected excess demand and that electrolyser/fuel cell cost would be low in the context of total plant and cost of power, we are more relaxed.”