The last few weeks have been tough in the clean energy space, with high interest rates not only pressuring stock valuations but also affecting business fundamentals. Notably, higher funding costs sparked wind projects cancellations and a slowdown in residential solar installations. If hydrogen names have not been spared by these funding headwinds and concerns about their growth outlook, recent initiatives in the US and in other countries could help ease them.
First, the White House and the Department of Energy (DOE) selected seven regional hydrogen hubs last month to receive up to $7 billion in funding support, amid the US Bipartisan Infrastructure Law’s provisions. The program aims to kickstart the production of “clean hydrogen” (green: water electrolysis; and blue: use of natural gas but with a carbon capture technology) along with the set-up of the infrastructure needed to get it to industrial users.
These hubs, spanning from the Appalachian to the Pacific Northwest, provide distinct environments for hydrogen production, each securing funding ranging from $750 million to $1.2 billion. These federal commitments are expected to draw private investments totaling approximately $40 billion according to the White House, marking a notable advancement in the US hydrogen industry.
Against this backdrop, the projected annual production of over 3 million metric tons of clean hydrogen from these selected hubs represents almost one-third of the country’s 2030 production goal of 10 million metric tons.
Overall, this $7 billion funding for hydrogen production on US soil combined with the introduction under the Inflation Reduction Act of the $3/kg subsidy for clean hydrogen production is anticipated to significantly enhance the economics of clean hydrogen production and to speed up its adoption across a wide range of sectors.
Importantly, the program should help ease funding issues in the hydrogen ecosystem and, at the same time, present a substantial revenue opportunity for electrolyzer and fuel cell manufacturers such as Plug and Bloom, which are strategically positioned in multiple aspects of the selected hydrogen hubs.
That said, as the hub selections will now kick off a long process that includes multiple phases, from design to permitting and construction before getting to full commercial operation, we believe that the revenue opportunity for hydrogen players will not be significant before a couple of years.
Another major commercial revenue opportunity for hydrogen is taking shape, with various utilities across the world currently testing a blend of hydrogen with natural gas for heating purposes. In the UK for instance, National Grid has successfully introduced a 2% blend of hydrogen into its high-pressure gas network, with plans in place to scale this proportion up to 5%. This move coincides with its proposed investment of up to £6 billion between 2026 and 2030, with one-sixth dedicated to hydrogen-related grid initiatives.
Furthermore, the UK government has recently completed consultations and is on the brink of deciding on its support for transitioning to a blend of up to 20% hydrogen. This policy determination, anticipated by the end of 2023, will be succeeded by a comprehensive safety assessment the following year. As of now, it looks like such a blending volume can be implemented without a major overhaul of the gas infrastructure.
Looking ahead, advancements in the UK network infrastructure are expected to facilitate higher blending levels, with projections suggesting the possibility of blending up to 100% hydrogen, as corroborated by insights from industry experts.
The UK is not alone in this type of initiative, as utilities in many countries including the US and Canada, Chile, Portugal and India are also in trial mode with hydrogen blending volumes generally in a 5-20% range.
In conclusion, while the short-term will obviously remain tricky, the various advancements in the hydrogen economy underscore a massive growth potential in the medium and long term. True, hydrogen names have been hardly hit in the last two years due to profitability delays and funding concerns but, as we get increasingly confident that the hydrogen business will scale and profitability improve over the next couple of years (thereby reducing funding needs), a rerating is now just a question of time.