Hydrogen burns brightly in 2021 with M&A, investment opportunities

28 December 2020

  • Capital needed for building distribution capacity and new technologies 
  • Vertical integration through hydrogen stack appealing to incumbents 
  • Energy majors taking steps into space 


Increasing pressure to step away from hydrocarbons in favor of clean energy sources sets up 2021 to be an active year for hydrogen, according to sector executives and advisors. 


It starts with favorable conditions for growing the industry. More nations are setting policies and investing in infrastructure for carbon-free energy, while energy giants are pivoting to clean energy to satisfy investors and meet market demand.  


In addition, new technologies are being developed to capture the carbon byproduct of standard hydrogen production, and also to lower the cost of another method that is completely carbon-free. And finally, incumbent companies in the hydrogen stack, buoyed by increasing valuations, are well positioned to vertically integrate and take control of hydrogen from production to end use. 


Janet Howard, co-leader of the hydrogen energy advisory team at Canadian law firm Fasken, sees many entry points. “There are power producers that need to integrate hydrogen; distribution that needs the infrastructure; facilities that need to be set up; and end users who have their specific needs,” she said. “If you have capital, you can access anywhere along that spectrum.” 


What color is your hydrogen? 


Not all hydrogen is created equal. Grey hydrogen (sometimes called brown or black) is hydrogen produced using fossil fuels such as natural gas, and accounts for the vast majority of the hydrogen produced in the world today. The process has cost advantages but throws off carbon waste. Blue hydrogen, meanwhile, uses carbon capture and storage for the greenhouse gases produced in the creation of grey hydrogen. Green hydrogen is the Holy Grail, and is produced by extracting hydrogen from water through electrolysis powered by renewable energy. That process is dramatically more expensive now but is the focus of investment for many investors and strategics. 


“Even just taking the current hydrogen that is being used and produced in the US and making that into blue hydrogen, or eventually someday green hydrogen, would make a difference in terms of CO2 emissions,” said Kate Hardin, executive director for the Deloitte Research Center for Energy & Industrials.


Andy Marsh, CEO of integrated hydrogen fuel cell company Plug Power [NASDAQ:PLUG], said his company is focused purely on the growth potential of the green market.


“The people pushing blue hydrogen are trying to use their old infrastructure and save their assets. What consumers are looking for is green hydrogen, including governments,” Marsh said.


Latham, New York-based Plug Power closed two acquisitions in June for hydrogen generator United Hydrogen and electrolyzer company Giner ELX for USD 103.5m in aggregate deal value.


Working in blue hydrogen’s favor in the near term is its cost competitiveness, ability to use existing midstream energy infrastructure and minimal disruption of upstream energy producers. The Canadian government unveiled a hydrogen strategy earlier this month that relies on blue hydrogen while also fostering green hydrogen’s development, Howard said. 


While it seems like blue hydrogen would be the preferred method of existing power and energy companies, some are committing to green hydrogen. Earlier this month, ACWA Power, CWP Renewables, Envision, Iberdrola [BME:IBE], Ørsted [CPH:ORSTED], Snam and Yara announced they would team up to create a 50x increase in their green hydrogen production capacity by 2026, hoping to make green hydrogen cost competitive, they said in the announcement.


Protecting their turf 


Companies that have spent years developing and commercializing hydrogen technology could seem like targets for larger energy or industrials companies. 


But climbing valuations this year have changed the math. Incumbent hydrogen companies Bloom Energy [NYSE:BE], Ballard Power Systems [NASDAQ:BLDP] and Plug Power all will emerge from 2020 with stronger balance sheets and shares. As a result, they are set up to be able to look to vertically integrate and lead the industry instead of being targets of existing power or industrial companies.


Marsh noted that Plug Power’s stock price is up 10x this year. After the company developed and integrated several technologies, it now has downstream membrane, fuel cell fork lift and hydrogen supplier capabilities “under one roof.” And the company is now looking at the potential for joint ventures and investing in other parts of the hydrogen sector.


Ballard CFO Tony Guglielmin said his company is well positioned to vertically integrate and called the hydrogen space “in the early stage of rapid commercialization.”


Marsh said utilities, power generation and oil and gas companies are all competitors and partners at this point. He noted that Hydro Quebec launched an electrolyzer initiative this year, while Brookfield Renewable [NYSE:BEP] is providing renewable energy for Plug Power’s green hydrogen production. Plug Power would be “willing to work with” oil and gas companies soon, he added.


There will be pressure to sell. Howard noted that US-based SPACs have been sniffing around hydrogen companies, touting their access to capital as a way of supercharging growth.


Where dollars are flowing 


Companies in the hydrogen space are usually viewed in distinct buckets if they are not vertically integrated. There are companies focusing on production, distribution and end-use. 


The enabling technologies for hydrogen production – particularly green hydrogen – are at the front of the line for VC investment now. Electrolyzers specifically designed for hydrogen production are drawing much of the attention but small modular reactors (SMRs) were mentioned in the Canadian hydrogen strategy announcement as part of the green hydrogen production mix. Nuclear reactors operate at high enough temperatures to produce hydrogen from water and SMRs occupy a small footprint while still meeting production needs. 


With a lack of a national policy in the US around hydrogen, Hardin said funding for hydrogen technology could follow the path of electric vehicles, which have seen funding from oil and gas companies, their venture arms, and other sources of private funding. “There is a huge ecosystem around electric vehicles. We’re beginning to see that around hydrogen as well.” 


A 2014 study by SMR developer NuScale Power, the furthest along the path to commercialization in the US, and the US DOE’s Idaho National Laboratories backed up the idea of using SMRs to produce. They determined that a 300 MW NuScale light water reactor plant could supply the hydrogen demand of a mid-sized ammonia production plant. In an announcement earlier this month, the company said the reactor appears to be capable of even greater hydrogen production than previously thought. 


Infrastructure build out will be another significant cost. Robert Do, CEO of hydrogen company SGH2, said the first significant growth will come with corporate and government users that can have centralized fueling for their fleets of vehicles. That can spill over into freight and transportation, where hydrogen’s energy density makes it a better fit than battery power. SGH2 is developing modular hydrogen production facilities that could be co-located with industrial operations, making it readily available for the end user.


A fueling network for passenger vehicles is much further off, sector sources agreed. It could be similar to how EV charging infrastructure has developed, starting with larger presences in markets – such as California and Washington DC – that are more aggressively slashing carbon. Success in those markets should breed more investment and broader national rollouts.


“Maybe by 2050 you might have 18% to 20% of fleets and vehicles overall being powered by hydrogen. It’s not a 10-year journey we’re on, it’s definitely a 20- to 30-year journey,” said Jim Thomson, vice chairman of US Power, Utilities & Renewables at Deloitte.


Whatever form the production and distribution infrastructure takes, Howard said to watch for innovative deal structures as clean power incentives and carbon taxes emerge to encourage hydrogen adoption. One possible structure could involve an investor or group receiving tax credits associated with a given project, similar to how tax equity investors finance renewable energy projects, she said.


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