Hydrogen’s Spark Gets Swamped by Rising Interest Rates
While energy security has increased political ambitions for the clean-burning fuel, investors have become more skeptical about what remains a distant opportunity
Vladimir Putin has given low-carbon hydrogen projects a lift this year, but you wouldn’t know it by looking at the stock market.
Mr. Putin’s mounting threats to Europe’s natural gas supplies have strengthened the case for developing clean-burning hydrogen, both politically and economically. Many governments have doubled down on hydrogen commitments that increase fossil fuel importers’ energy security, while high prices for coal, gas and European Union carbon credits have also improved the cost competitiveness of so-called green hydrogen, made by splitting water with renewable energy.
New projects just keep coming. Most recently, BP and TotalEnergies TTE 4.35%▲ unveiled billion-dollar hydrogen investments. Big oil companies are notable players because they bring cash, megaproject expertise, political influence and experience in processing, transporting and selling gases.
Yet pure-play hydrogen stocks have significantly underperformed the market, with some share prices nearly halving. Last week’s decision by German industrial icon Thyssenkrupp to shelve its plans for a minority listing of its hydrogen division underlined that point. Investors are being put off by higher interest rates, slow policy decisions and a hangover from 2020’s astronomical jump in valuations.
Rising interest rates reduce the expected value of returns on longer-term, cash-hungry plays like clean hydrogen. Most projects won’t start producing the gas at scale for at least another half-decade. Manufacturers of the electrolyzers that produce green hydrogen and the fuel cells that use it to produce power are in the midst of scaling their operations, which is a relatively high-cost phase. In many cases, their profit margins have also suffered recently as small production runs limit their power to negotiate in the face of cost inflation or supply chain delays.
Another hurdle is political. Despite all the high-level talk, government action on detailed policy to back it up has been slow. In the U.S., cheap, clean hydrogen is an “earthshot” ambition for the Energy Department, but crucial hydrogen tax credits were stalled in the Build Back Better bill, though there are some efforts to revive them. The EU doubled its 2030 hydrogen targets to help replace Russian fuels, but officials are still debating important details of the infrastructure rollout and what will qualify for incentives. Policy incentives have primarily focused on supply, but demand needs help too.
“The policies to support the deployment in Europe are still delayed. They’ve got I don’t know how many hundreds of megawatts of projects that are there, which are just waiting,” says Pierre-Etienne Franc of Hy24, a clean hydrogen infrastructure fund that recently raised more than €1.6 billion, equivalent to $1.7 billion.
Strong policy support in Asia is helping to develop the market there. Some worry that China might come to dominate manufacturing of hydrogen equipment as it does with solar panels. But electrolyzers’ in-life service requirements could help local players to compete, as has happened with suppliers of wind turbines.
Even after this year’s falls, hydrogen stocks remain expensive on enterprise values of between 3 and 26 times sales. ITM Power, NEL and McPhy Energy make electrolyzers, while Ballard Power Systems, Powercell Sweden and Plug Power manufacture fuel cells. Ceres Power and Bloom Energy are working on the more experimental solid oxide technology.
How long their stocks flounder depends partly on central bankers, but politicians may also need to match their hydrogen promises with more action before the current malaise has a good chance of clearing.
