Green technologies can be difficult to navigate because of their political nature. As investors, we need to take off our ethnocentric goggles and examine economic viability objectively. For example, we use Lazard’s levelized cost of energy (LCOE) to evaluate whether green energy sources perform better than their “dirty” counterparts. Our investment in the world’s largest renewable energy company has proved to be lucrative, and we won’t be selling that firm unless they stop increasing their dividend.
We believe subsidizing green technologies won’t scale. There’s either money to be made solving problems using technologies, or there isn’t. We’re not running a charity, and we invest solely for the purpose of generating a return on our hard-earned dollars. Some argue subsidies are what help technologies gain traction to eventually become profitable, solar being one example. Not that it matters, as retail investors have received the short end of the stick when it comes to investing in solar. The takeaway is that we should only invest in technologies when they become economically viable to avoid VHS vs Betamax situations.
One investment thesis receiving lots of attention from the investment community is green hydrogen. Today, we’re going to look at why the hydrogen economy is not economically viable in its current form, starting with the most important component – hydrogen itself.
As at the end of 2021, almost 47% of the global hydrogen production is from natural gas, 27% from coal, 22% from oil (as a by-product) and only around 4% comes from electrolysis.
Credit: International Renewable Energy Agency
Producing hydrogen from fossil fuels seems to defeat the purpose, but that’s what’s happening today.
3 Types of Hydrogen, Two Applications
About 96% of hydrogen produced today comes from fossil fuels with colors used to represent the various sources. As expected, green hydrogen is the good stuff, provided the electrolysis needed to produce it – which burns up 30% of the energy input right off the bat – is renewable energy.
Let’s temporarily set aside the hydrogen transportation thesis which is probably what most investors visualize when they think about the hydrogen economy.
The world needs hydrogen as an input for a number of critical industrial processes, the largest being the production of ammonia. Companies around the world produce $60 billion worth of ammonia every year, primarily as fertilizer, according to an article by Science which says “the evangelists for renewable ammonia will have to displace one of the modern world’s biggest, dirtiest, and most time-honored industrial processes: something called Haber-Bosch.” A $60 billion industry could be displaced by the invention of a process to produce ammonia using green hydrogen.
Perhaps we can all agree that the low-hanging fruit for green hydrogen would be to replace dirty hydrogen at the same cost or cheaper. Environmentalists would be happy and so would investors. Then, we could begin working on reinventing other industry processes that use dirty hydrogen so then there would no longer be a need to produce hydrogen using dirty fossil fuels. So, put down your placards and stop demanding that everyone else change their behavior. Go do a STEM degree and get to solving these problems, because there’s an equally challenging problem coming next – the hydrogen for transportation problem.
A Hydrogen for Transport Showstopper
“He who shall not be named” once said that fuel cells should be called “fool sells.” That should be taken with a grain of salt given the conflict of interest between electric vehicles and hydrogen vehicles which are competing forms of green transportation. Still, first principles thinking would have us start with a very simple question. Does the electricity required to produce green hydrogen result in a net output that’s worth the effort? In other words, if it takes a lot more electricity to produce green hydrogen than you receive, just use the electricity to power electric vehicles and stop mucking around. The below diagram shows how the best use of renewable energy right now is to power electric vehicles, not burn itself up performing electrolysis to produce green hydrogen.
The 95% fuel production efficiency of electric cars vs the 52% efficiency of green hydrogen can’t be ignored. The problem gets even worse when comparing overall efficiency. Squandering our precious renewable energy on electrolysis and large energy storage losses doesn’t seem economically viable or friendly to the environment. We’re having a hard time seeing hydrogen for transportation make sense anytime soon.
The only steelman argument we can come up with is that technology can solve these problems. Fine. Just remember that electric vehicle efficiency will be seeing improvements over time as well. At a minimum, hydrogen for transportation needs to have the energy efficiency of electric vehicles to be economically competitive, and exceed that efficiency to be the dominant form of propulsion. Proponents of green hydrogen point to its ability to refuel much quicker – 3-4 minutes vs 15-20 minutes for EV fast charging. A savings of 12-16 minutes per refuel may appeal to some niche use cases, but that’s only if you can find a hydrogen fueling station.
While Shell is giving up on their hydrogen infrastructure deployments in the UK, they’re doubling down in Germany where large automotive companies and chemicals firms send mixed messages to the investment community as to the potential for green hydrogen. The BMW iX5 hydrogen fuel-cell SUV is now entering low-volume production and will begin testing in select regions next spring,” says Car and Driver which goes on to say that unlike many automakers, “the German brand believes hydrogen fuel-cell vehicles will play a big role” in becoming carbon neutral by 2050. BMW talks about “the continuous build-up of hydrogen refueling stations since 2020,” but the numbers don’t seem to reflect much penetration.
Hydrogen-powered vehicles can fuel up quicker, but they’ll have a harder time finding places to fuel up. A two-part series by BloombergNEF – Separating Hype from Hydrogen – proposes that “none of the compelling use cases for hydrogen are widely distributed.” That means there will never be a big demand for hydrogen filling stations since the overwhelming bulk of its use will be “in the chemicals industry and the power system.” At least a few green hydrogen transportation companies disagree.
Some Transportation Use Cases
Even if hydrogen refueling infrastructure is never ubiquitous, there are still transportation use cases that could be economically viable. In past research pieces we’ve looked at two of them – Plug Power (PLUG) and Nikola (NKLA).
Material Handling Vehicles
Plug Power has been talked about since the dot-bomb days. You might call them the Amazon of green hydrogen were they not working with Amazon already. And Walmart. These marquee names were highlighted as a risk in last year’s piece on Plug Power Stock: Why We’re Not Buying It. That sentiment hasn’t changed, because we don’t invest in companies which sell a product for less than it costs to produce. Below you can see how Plug Power’s cost of goods sold (COGS) has exceeded revenues over the past four quarters.
Given the unexplainably large interest in Plug Power from retail investors, we’ll look to do an update on the firm in the coming weeks. In that, we’ll talk about the latest news from Plug including last month’s announcement about supplying green hydrogen to the next company on our hydrogen radar – Nikola.
Green Hydrogen Long-Haul Trucking
Another obvious use case for the hydrogen economy is long haul trucking. Ply the interstate highways of America and you can easily conceptualize how hydrogen refueling stations might happily coexist alongside large truck stops that are strategically placed to accommodate the needs of truckers. One special purpose acquisition company (SPAC) selling that green hydrogen dream to investors was Nikola, a company we covered in a piece titled All About Nikola Motor Company’s Stock Offering. The article concluded:
Nikola needs to manufacture trucks and sell them at the rate which they are projecting. The inability to execute on the plan could reflect a fundamental problem with the business model and/or hydrogen fuel cell technology not living up to its expectations.
Credit: Nanalyze
Turns out it was Nikola that didn’t live up to expectations after its founder and CEO was indicted on three counts of fraud. The new CEO planned to produce between 300 and 500 truck units last year, but the Q3-2022 states they produced 75 Nikola Tre BEVs delivering 63 of those to dealers. Once they file a 10-K for 2022 we may come around to see what they’ve accomplished. Mainly, we’ll be looking for revenues from those trucks they’ve built.
As electric vehicles continue to gain traction, hydrogen offers a way to address niche use cases until technology can make it economically viable at scale. Six years ago, we wrote that Hydrogen Fuel Cell Vehicles Still Have Miles to Go, and that opinion hasn’t changed much. Green hydrogen isn’t a technology we’ll be investing in anytime soon.
Conclusion
Ammonia is one of the most heavily-produced industrial chemicals in the world, and the top utilizer of dirty hydrogen. Environmental advocates should be focused on funding technology that displaces the biggest culprit of dirty hydrogen production. Then, we can begin working on the difficult problem of figuring out how to make green energy more energy efficient for transport use cases. Venture capitalists may look to fund some technologies that help solve these problems, but for retail investors, one thing seems obvious. The hydrogen economy in its current state is a pipe dream that’s not economically viable.
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