Why Hydrogen Fuel Is The Next Big Green Thing

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

As COVID-19 starts to take up less of the world's attention, the issue of climate change and green energy is growing. It's impossible to ignore the impact of fossil fuels and pollution on our environment and our health, and that's propelling hydrogen ETFs and alternative energy sources to the forefront. 

One of the rising stars of the green energy movement is hydrogen fuel. Hydrogen exists in enormous quantities across the earth, but only in a compound with other elements. Before hydrogen can be used as fuel, hydrogen atoms must be separated and stored securely until they are needed. Hydrogen is much less dense than air, so it took some years of research to develop safe, pressurized, inexpensive storage.

Typically, fuel producers use electrolysis to harvest hydrogen from water. Up until recently, the electricity used for the process came from fossil fuels or natural gases, producing "gray hydrogen," but with advances in technology, it's now possible and cost-effective to use renewable energy sources and produce "green hydrogen," which analysts consider has little to no carbon footprint. 

The Rise Of The Hydrogen Market

Hydrogen has a long-duration discharge cycle, is very energy-dense when compressed into a fuel cell, and generates harmless water as a waste product, which makes it an excellent and green choice for storing and transferring energy. While hydrogen is flammable, the same is true for all fuels. High quality, durable containers keep hydrogen securely, plus hydrogen disperses quickly in air and burns at a lower temperature than other fuels.¹

Over the last several years, technology has developed to make hydrogen a practical and cost-effective fuel choice, pushing interest in hydrogen stocks. Renewable energy costs have fallen, lowering the cost of producing truly green hydrogen in sufficient quantities, while the cost of hydrogen electrolyzers has decreased by up to 50% since 2015 and is projected to drop another 40-60% by 2030.² Government incentives and international funding will still be needed to further promote economies of scale to make hydrogen production commercially viable, but the horizon of affordable hydrogen fuel has been established.

Awareness of sustainability and decarbonization has risen in parallel with the tech, driving demand for green hydrogen and benefiting hydro stocks. Public opinion today is more concerned than ever to find alternative, environmentally-friendly fuels, and options such as solar power, wind turbines, and biomass energy aren't able to provide sufficient, consistent and cost-effective energy to fully replace fossil fuels. Governments are enacting favorable policies towards hydrogen energy, and organizations are pushing investment in hydrogen. 

In Asia and the EU, governmental bodies invest over $2 billion annually in hydrogen energy, with Japan investing $560 million in 2019 and China announcing investments in hydrogen-powered transport of over $17 billion between now and 2023, while the US has invested $150 million each year since 2017. Politicians are committing to supporting the initial costs of building infrastructure and supporting rollout. The EU, Australia, Japan, the UK, China, and Korea have all recently announced green strategies and/or targets as part of their climate change policies.³  

The shift to hydrogen fuel isn't just a theory. There are already 7 active hydrogen refueling stations in the UK and 43 retail hydrogen stations in the US, with 19 more under construction. The cost of larger stations has dropped by over 40%⁴ in the last few years, and hydrogen fuel is beginning to be implemented in a number of use cases. In California, there are already close to 7,000 fuel cell elective vehicles (FCEVs) on the roads; Amazon.com, Inc. AMZN and Walmart Inc WMT use hydrogen-powered forklifts in their warehouses⁵, and China and Europe are rolling out hydrogen fuel-cell trains and bus fleets.⁶ 

All this activity around hydrogen fuel makes clean energy ETFs a market that's ripe for investment. 

How To Invest In This Market

Bank of America already compared today's hydrogen companies' stocks to the pre-2007 smartphone market and the pre-dot-com boom, estimating that hydrogen will provide 24% of our energy and open up $11 trillion of investment opportunities by 2050. 

As of the end of 2019, the hydrogen market was worth around $150 billion and rising, as the tech becomes ever-more efficient. More and more companies are entering the market to build the infrastructure, develop more and better ways to extract, store, and use hydrogen fuel, and find effective methods for transporting and delivering it. The largest and most liquid enterprises are included in HDRO, the new Defiance Next Gen H2 ETF from Defiance. 

HDRO is the first US hydrogen ETF, offering an excellent opportunity to invest in hydrogen and access this new and expanding market while mitigating the risk of over-exposure to any single company. The fund tracks the rules-based BlueStar Global Hydrogen & Next Gen Fuel Cell Index, which in turn tracks the performance of equities and companies that generate at least 50% of their revenue from developing hydrogen-based energy sources, fuel cell technologies, and industrial gases. 

Some of HDRO’s leading holdings include Plug Power Inc PLUG, which offers a turnkey hydrogen solution and supplies hydrogen fuel cells to clients like Amazon, NASA, Home Depot Inc HD, and Boeing Co BA; FuelCell Energy Inc FCEL, a global leader in clean fuel cell solutions which has already built hydrogen power plants on 3 continents; and Bloom Energy Corp BE, the company that developed an on-site electric power solution that is a reliable, efficient, yet clean alternative to "dirty" energy. 

The HDRO ETF allows next-generation investors to take part in the green power revolution from the very beginning. ESG investors who care about the environmental, social and governance implications of their choices, forward-thinking traders who like to be involved in the most innovative and disruptive startups, and individuals and groups who are open to cutting-edge trends will all find a good reason to invest in HDRO. 

Footnotes

¹ “So just how dangerous is hydrogen fuel?” Jacob Leachman, Washington State University, March 17, 2017. https://hydrogen.wsu.edu/2017/03/17/so-just-how-dangerous-is-hydrogen-fuel

² “Thematic Investing: The Special 1 – Hydrogen primer,” Bank of America Securities, Global Research, 23 September 2020, p.5.

³ “Roadmap to a US hydrogen Economy,” Fuel Cell & Hydrogen Energy Association, 2020, p.4. https://static1.squarespace.com/static/53ab1feee4b0bef0179a1563/t/5e7ca9d6c8fb3629d399fe0c/1585228263363/Road+Map+to+a+US+Hydrogen+Economy+Full+Report.pdf
⁴ “Roadmap to a US hydrogen Economy,” Fuel Cell & Hydrogen Energy Association, 2020, p.70 https://static1.squarespace.com/static/53ab1feee4b0bef0179a1563/t/5e7ca9d6c8fb3629d399fe0c/1585228263363/Road+Map+to+a+US+Hydrogen+Economy+Full+Report.pdf

⁵ “Thematic Investing: The Special 1 – Hydrogen primer,” Bank of America Securities, Global Research, 23 September 2020, p.54. 

⁶ “Emerging opportunities in the hydrogen market,” Rachel Crouch, December 9, 2020. https://www.projectfinance.law/publications/2020/december/emerging-opportunities-in-the-hydrogen-market/ 

The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company which can be obtained by calling 833.333.9383. Please read it carefully before investing.

Distributed by Foreside Fund Services, LLC.

Investing involves risk. Principal loss is possible. As an ETF, the fund may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. The Fund is not actively managed and would not sell a security due to current or projected underperformance unless that security is removed from the Index or is required upon a reconstitution of the Index. A portfolio concentrated in a single industry or country may be subject to a higher degree of risk. Specifically, the Index (and as a result, the Fund) is expected to be concentrated in hydrogen and fuel cell companies. Such companies may depend largely on the availability of hydrogen gas, certain third-party key suppliers for components in their products, and a small number of customers for a significant portion of their business. The Fund is considered to be non-diversified, so it may invest more of its assets in the securities of a single issuer or a smaller number of issuers. Investments in foreign securities involve certain risks including risk of loss due to foreign currency fluctuations or to political or economic instability. This risk is magnified in emerging markets. Small and mid-cap companies are subject to greater and more unpredictable price changes than securities of large-cap companies.

Image by Erich Westendarp from Pixabay