The Auto Industry's Hydrogen Revolution Is Powering the Future

Elah Alkalay
Vladi Umanskey
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A Hyundai Motor's Nexo hydrogen car is fueled at a hydrogen station in Seoul, South Korea, August 13, 2019.
A Hyundai Motor's Nexo hydrogen car is fueled at a hydrogen station in Seoul, South Korea, August 13, 2019.Credit: Kim Hong-Ji/Reuters
Elah Alkalay
Vladi Umanskey

In 1900, everyone in the transportation industry was trying to find solutions to the problem of horse manure, which filled city streets. At the same time, Henry Ford developed in his garage the car that would change the world just a decade later. There were still no paved roads, no gas stations and a lot of unsolved problems – but the minute there was a good solution, the change was much faster than anyone could foresee.

The story of the auto industry in the beginning of the 20th century is a wonderful analogy to the present situation in the global energy market – it’s just that the horse manure is now the pollution produced by the traditional oil and natural gas industry, and the cars are the young hydrogen industry. It is no wonder that for years hydrogen has been regarded as the ultimate source of energy. It is light, available, packed with energy and nonpolluting – and it is the most common element on Earth. We know how to produce energy from it in different types of engines, and the end product is mostly water.

The process in which hydrogen and oxygen are turned into water and energy happens in fuel cells – basically a battery that does not wear out and is 200 times as efficient as the equivalent lithium battery. In short, hydrogen is the perfect element, the perfect process and the perfect battery. However, for a great many years its use has been stymied by its cost of production, transport and safety.

Recently, though, it seems that something has begun to change due to three factors. First, the burgeoning renewable energy sector has significantly reduced the cost of producing hydrogen (hydrogen produced this way has been given the name “green hydrogen” because not only is it cheap but also, unlike a carbon based process, does not omit CO2 while producing H2). The process of producing renewable energy has also served to localize our search for energy solutions and made hydrogen useful for various applications without the need to transport the hydrogen. Producing the hydrogen locally from renewable energy serves as a great energy storage solution, a very efficient replacement for other batteries currently used. The third factor is that the government funds allocated to research in the industry have grown significantly, raising the probability of expanding solutions and applications and improving competitiveness of the technology.

The use of hydrogen-based solutions continues to expand. The more common renewable energy becomes, the more local solutions are adopted and the more efficient production becomes, the greater the chances that hydrogen-based solutions will expand at a rate even broader and faster than expected.

According to the Hydrogen Council, a group of companies and organizations around the world that acts to promote the use of hydrogen energy – by 2050, about 18 percent of the total energy demand will be based on hydrogen.

In Europe, China – and it can be assumed that soon too in the United States – tens of billions are being invested in promoting the hydrogen industry. This year we received a demonstration of what happens when large amounts of government money are directed at a specific development goal. Within just a few months we received a number of approved vaccines for the coronavirus. The change in sentiment regarding hydrogen has also been expressed in shares of companies, such as FuelCell energy, which has risen over the past year by over 1,000 percent, compared to a rise of just 15 percent in the S&P 500 Index.

Even if you are conservative and think that change happens slowly and these values are inflated, because there are other solutions for electric vehicles and storing electricity, it is still worth getting to know a few sectors in which the hydrogen industry has existing solutions in the market that seem likely to expand. Here are a few companies and channels, through which it is possible to get exposure to this new industry.

In the new world order, created by the coronavirus, malls and large stores have been replaced by huge warehouses, while digitization and the move to cloud computing services require large and growing data centers. Companies that are able to add hydrogen-based fuel cells lower their costs and make their operations more resilient and more efficient.

When hydrogen is produced on site from a surplus of renewable energy, it can be used to efficiently and cheaply power forklifts in warehouses or backup batteries in data centers. The cost efficiency of such applications is quite clear, and so it is no wonder that they are becoming more common.

Toyota Motor Corp's revamped Mirai hydrogen fuel cell car is displayed at its launching event in Tokyo, Japan, December 9, 2020.Credit: Tim Kelly/Reuters

Plug Power, which focuses on the development of hydrogen fuel cell systems that replace standard batteries in electric powered vehicles,also provides refueling stations for forklifts. The firm’s shares have yielded over 700 percent this year. The company has a value of over $11 billion, but its operations produced revenues of $230 million in 2019. The company has big development plans. Its goal for this year is to reach over 100 charging stations for daily use based on 40 tons of hydrogen, for 35 million refuelings – and revenues of $310 million. The company forecasts that by 2024 there will be 500 refueling stations in the United States, which will provide 85 tons of hydrogen a day.

According to a majority of forecasts, hydrogen will be used to power trucks, buses, ships, trains and planes – before it will reach your family car. This market segment is characterized by driving on fixed routes, a need for high efficiency and sensitivity to ongoing operating costs. Spreading out the refueling stations along the regular routes allows the local production of green hydrogen, without the need for building a large transport infrastructure for it. Most of these manufacturers are already cooperating with the industry.

One example is the cooperation between Japanese automotive giant Toyota and the Seattle-based truck company Kenworth, which recently developed the T680 FCEV fuel cell heavy truck. Toyota recently announced that it was ready to supply a number of new Class 8 heavy duty trucks based on fuel cells in cooperation with Kenworth for work in the Port of Los Angeles. The trucks are partly the result of a $41 million grant to the company from the California Air Resources Board, with the goal of reducing carbon emissions in hauling cargo. This is an example of what happens when institutional money encourages business development.

Other huge corporations including Schindler, Samsung, Hitachi, Bosch and LG are developing a foothold in the industry.

On the other hand, not every cooperative venture is as lucrative as some investors hoped. Nikola, which produces trucks powered by hydrogen-based fuel cells, is an example. It had its IPO at the beginning of 2020 on the wave of a deal materializing with General Motors in the background. Its share crashed when the markets realized the deal was scaled back from a major investment in the firm to just a non-binding memorandum of understanding on future cooperation between the companies.

Another firm operating in the sector is Bloom Energy. In December, it set up a mobile lab, powered and operated using fuel cells, in the San Francisco Bay area for COVID-19 testing for underprivileged groups living nearby. Bloom Energy’s fuel cells are still based on natural gas, which is more available than clean hydrogen, but it is expected that the use of natural gas will drop as the availability of green hydrogen increases.

As in every technology race, it is worth examining an investment strategy that balances between specialist companies, small and nimble – and the giants with much larger budgets, but with a great deal more bureaucracy, too.

A different strategy, which enables exposure to the hydrogen sector, is to invest in manufacturers of components for fuel cells. For example, the Belgian firm Umicore SA, which recycles and manufactures raw materials for batteries – cathodes for the hydrogen fuel cells – and is ranked among the 100 leading companies in the world in the area of sustainability.

And there is an Israeli solution too: GenCell, which had its initial public offering on the Tel Aviv Stock Exchange in November and has already reached a market cap of 1.1 billion shekels ($340 million). GenCell, which operates in 18 countries, has developed a solution for manufacturing hydrogen from ammonia, along with fuel cells specifically for the supply of electricity in sites not in the range of the electric grid – for example, communications towers, defense facilities, isolated villages, etc. Its product meets the strictest safety standards, including in cases of earthquakes and traffic accidents, making it on a higher level than the lithium batteries produced by Tesla.

Vladi Umanskey is an asset manager manager at IBI investment house specialzing in global equity. Elah Alkalay is the chairwoman of the IBI Mutual Funds. 

This article is not to be viewed as investment advice. IBI and the authors may have an interest in the shares and companies mentioned in the article.

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