Global Investors Are Looking At Hydrogen More Seriously

If you were a shareholder in a British hydrogen fuel cell company a year ago, chances are that today you would be very happy.

AFC Energy and Ceres Power, which make fuel cells, and ITM Power, which makes electrolysers, are all listed on the Alternative Investment Market (AIM) in London, and all have provided 5x 3x and 10x returns, respectively, for their investors in recent times. Others like Plug Power, Powercell and Ballard have also returned at least 3x.

There are three major reasons for this.

Not just hype this time

First, this time it is not just hype. Given the climate change targets set by world leaders in the lead up to COP26, hydrogen’s time could be now. During earlier market bubbles, the world didn’t need it.

For example, US listed company FuelCell Energy latest quarter posted revenues of $18.7m, and the Green New Deal in the US may provide additional fuel cell subsidies that could further boost revenues quickly. Plug Power received a $1.5 billion strategic investment from South Korean conglomerate SK Group a few months ago. Ballard is working with Eltek Nordic, a Norwegian power conversion company, to provide a fuel cell backup power system for telecom networks. Last year, Bloom Energy announced a huge deal with SK Engineering and Construction from South Korea to supply fuel cells powered by hydrogen energy.

In the UK, ITM Power is working in a joint venture with industrial gas giant Linde and AFC Energy has announced a partnership with Spanish construction major Acciona. ITM Power’s new 1GW plant in Sheffield was completed earlier this year, and will cut the cost of electrolysers by nearly 40% in three years. The company is planning to build another gigawatt-scale factory, possibly 2GW in size, after raising £172m ($234m) in its last funding round.

But it is hard to entirely dispel the notion of a bubble. ITM Power for example only recorded £3.29m ($4.4m) of sales in 2020, yet it has a market value of over £1bn ($1.3bn). In January this year, ITM reported half-yearly results which showed a 92% drop in revenue to just £200,000 ($300,000), partly due to Covid-19 disruption. Its share price has fallen more than 40% since January. AFC Energy has generated zero revenue so far yet trades on a P/B ratio of around 30 times. Ceres Power has annual revenues of £31.68m but is far from profit and still trades a P/B ratio of over 13x.

A commercial necessity

Second, there is an urgent recent impetus provided by strategic lawsuits from climate change activists and increasing interest from activist shareholders.

In the Netherlands, environmentalists achieved a victory in court: a judge at the District Court of the Hague ruled Shell must significantly reduce its CO2 emissions by 2030. The ruling obliges the multinational oil company to reduce its emissions by 45% by 2030 compared to 2019, in the parent company as well as in subsidiaries, with suppliers and end users.

At Chevron, a majority of shareholders rebelled against the company’s board by voting 61% in favour of an activist proposal from Dutch campaign group Follow This to force the group to cut its carbon emissions.

Exxon failed to defend its board against a coup launched by dissident hedge fund activists at Engine No. 1 – which own just 0.7% of the company but managed to convince the larger investors to back their approach. The fund successfully replaced two Exxon board members with its own candidates to help drive the oil company towards a greener strategy.

The Shell Dutch ruling in particular means there is now a direct cost to companies of not investing in a broad range of renewables. Hydrogen has to be part of the strategy.

Governments are backing hydrogen

Now, the world needs the technology. 20 years ago, it didn’t. Governments are also starting to take this seriously, with overtures to the sector finally turning into concrete targets, legislation and funding.

Governments in Europe and the UK recognise renewable hydrogen will be crucial to decarbonise the final 20% of global energy consumption and limit global warming to 1.5 degrees celsius by building upon the renewable progress achieved by cheaper renewable power combined with battery storage.

While the UK government has not released a full hydrogen strategy consistent with its COP26 ambitions, it will hopefully recommend hydrogen’s benefits will be greatest in hard-to-reach applications such as steel making, heating, and heavy-duty freight transport. It will likely say the best use cases are when used in addition to applications and fuel cell technologies that don’t rely on widespread availability of pure hydrogen and applications such as steelmaking where hydrogen is used as a chemical reagent rather than just an energy source.

The UK government’s Committee on Climate Change predicted two years ago that 6 – 17GW of electrolyser capacity will be required in the UK by 2050. Around that time was when energy network operator National Grid first said it was entirely credible that hydrogen gas “could be the solution to many of the hardest parts of the transition to net-zero.”

What this means for investors

Until recently, hydrogen was an area that was on investors’ horizon, but not of immediate interest. Now that the UK government is becoming more serious in funding and building an indigenous value chain – like it is doing in the battery space with the Faraday Institution and companies like Faradion – investors may be more willing to invest the substantial risk capital behind it that is required. ITM Power’s last funding round was 2.5x oversubscribed, for example.

That said, many potentially viable parts of the market will not reach self-sufficiency unless governments provide investment and implement policies that explicitly encourage hydrogen adoption.

Energy funds and investors such as Greencoat UK Wind PLC, NextEnergy Solar Fund PLC, Foresight Solar Fund Ltd and Mercia Asset Management are increasingly looking at hydrogen. Others like Air Liquide, Linde PLC and Air Products & Chemicals are investing increasing resource into this space. Many ESG investors are investing in green hydrogen.

In India however, ESG investing has never really caught on. Funds like Ajit Dayal’s Quantum Mutual Fund are few and far between, and it is unlikely any significant carbon emitter is likely to suffer the fate of Chevron and Exxon.

Cleantech and hydrogen investment into India

The US and China remain the hotspots for cleantech valuations and investment, partly driven by a Fear Of Missing Out (FOMO) amongst investors. At $670 billion, Tesla’s market capitalisation is now worth as much as the combined market cap of the nine largest car companies globally.

Chinese startup XPeng is an EV manufacturer listed on the NYSE, which expects to deliver just 25,000 cars in 2021, but was valued at $1.7 million per vehicle. EV manufacturer Nio from China delivered just over 7,000 vehicles in January this year, but is not far from a $100 billion valuation .

Investors in Europe and the UK tend to be much less swayed by FOMO. They rarely go for such steep valuations and focus more on profitability. For them to invest in this space in India poses several challenges.

The Cairn Energy and Vodafone retrospective tax rulings have hurt India’s image abroad badly. Investors will think twice before putting money into India if a reliable tax environment is not available. Taking money out of India can be a headache.

According to Jonathan Cohen, Head of Energy at London-based law firm Howard Kennedy LLP: “With regard to the India-UK collaboration in cleantech and renewables, this has been an area of much success over recent years with numerous examples of UK investment into Indian energy storage, wind, solar PV, zero-emissions transport and hydrogen companies. However, whilst challenges remain for foreign investors investing in India including contract enforcement issues, IP protection and uncertainty over taxation provisions, the UK remains the second largest investor in India at a macro level and it is expected that this trend will continue.”

On hydrogen specifically, he says “With the UK’s hydrogen market developing at a great pace, it is clear that investors and project sponsors will be looking carefully at India’s hydrogen potential in areas such as CCUS, electrolyser manufacturing and green hydrogen production from Indian solar PV and wind.”

There are some practical impediments to Indian companies successfully raising funds abroad. The first is a lack of investment readiness for a lot of Indian companies. Pitch decks tend to be poor, and promoters do not have an understanding of how to raise capital abroad. For example, Indian companies rarely agree to pay adequate professional fees or commissions appropriate for the London or New York market.

Karthik Durgaprasad, Chair of the India Special Interest Group at Cambridge Cleantech says: “Over the last decade the UK investment community has shown a strong interest towards opportunities in India. Surely, they see the unlimited potential in the cleantech sector and are aware of the technical and political developments in India. However, there is wide gap between interest expressed and investments committed to these projects.”

“In the last five years I have participated in various projects involving investors and UK SMEs expanding into the Indian market,” he goes on to say. “UK fund managers and investors are more comfortable investing in familiar geographies like Europe and do wish to take the extra burden of entering a complex market like India, despite the returns. The initial cost of due diligence, the ongoing costs plus dependency on a third party to monitor are also prohibitive, especially for Indian companies seeking series A funding rounds $1 – $3m.”

He also says “There is a mismatch between knowledge-intensive a UK SME trying to expand in India and the total addressable market in India. It is a challenge for a UK SME to scale up and service the Indian market without the right advice, IP, ground support and financial resources. Availability of reliable data for research, trusted and cost-effective intermediaries to support the transaction still remain a challenge for both UK SMEs and investors to confidently invest in India.”

With significant upside opportunities already available in markets like the US, Europe, Japan, China and the UK, and faced with an uncertain regularly, tax and subsidy environment in India, only the most experienced foreign investors may feel comfortable stepping into the hydrogen market in India today.

But as the Indian market grows and the policy landscape becomes clearer, there will be ripe opportunities for joint ventures in India for strategic investors from abroad. Like for ITM Energy and some of its peers in other markets, new investors in 2021 into hydrogen in India could turn out to be in the right place at the right time.

Pratik Dattani Author


Managing Director for boutique consulting firm EPG. He was earlier UK Director for the Federation of Indian Chambers of Commerce and Industry, sits on various charity boards and frequently writes on public policy.

Published Date

October 31, 2021

"You must not lose faith in humanity. Humanity is an ocean; if a few drops of the ocean are dirty, the ocean does not become dirty."

– Mahatma Gandhi