Investing in Hydrogen: Fuel for Thought
Share
Investing in Hydrogen: Fuel for Thought
Momentum behind hydrogen, which has been variously described as the “Swiss army knife” of energy, and the “silver bullet” for decarbonisation, is building. In particular, for so-called “green hydrogen”, regarded as the cleanest type of hydrogen. So, what exactly is hydrogen, and what variants currently exist? Why is it so important to the energy transition, and why, in our view, does it represent a potential long-term investment opportunity?
Defining hydrogen
Hydrogen is a natural, flammable gas and the most abundant chemical element, accounting for around three quarters of the mass of the universe. It is also a hugely important source of secondary energy, that’s to say, an energy source derived from the processing of “primary energy” sources like natural gas, and coal for electricity, or oil for heat, which are found in nature. Secondary energy sources are also known as “energy carriers” due to their ability to carry energy from one place to another in a usable form. In the case of hydrogen, its uses extend even further to include energy storage.
Hydrogen is carbon free when converted to electricity and it finds multiple applications, principally in three areas; heavy industry (e.g. steel, cement and petrochemical manufacturing), transport (e.g. to power heavy vehicles) and power generation (allowing to store renewable energy).
As an environmentally friendly alternative to fossil fuels, its potential in supporting the clean energy transition cannot be overstated. It is estimated that hydrogen could contribute to 20% of CO2 emissions reduction targets by 2050 (in a net zero scenario) by decarbonising hard-to-abate sectors such as steel, chemicals and long-haul transport – where reducing emissions is currently problematic1.
But, for that to happen, the way hydrogen is produced must itself become zero-carbon.
Hydrogen, being a secondary energy source, cannot be “cropped” directly from nature, and must be produced. The energy industry uses colour codes to distinguish between the various hydrogen production processes.
These include, but are not limited to:
Grey hydrogen
The majority of hydrogen (c.95%2) currently produced is grey hydrogen, which is created by separating methane or natural gas through a process known as “steam reforming”. The snag with grey hydrogen is that its production generates a significant amount of greenhouse gas emissions, and does not entail the use of carbon capture and storage (CCS), a means of mitigating climate change by capturing carbon dioxide emissions from industrial processes and then storing them underground. It is therefore not compatible with net zero.
Blue hydrogen
This uses the same steam reforming process as grey carbon, but with the addition of CCS. Its considerably lower carbon footprint makes it naturally preferable to grey.
Green hydrogen
Green hydrogen is produced through water electrolysis using electricity generated by low carbon primary energy sources, such as renewables or nuclear. Today, green hydrogen only accounts for around 2%3 of global production, owing to production costs, which are currently higher than grey.
Costs, though, are falling, and green hydrogen will be cheaper to produce than grey hydrogen by 2030, according to the International Energy Agency (IEA), owing to decreasing renewable prices and economies of scale with increased adoption of electrolysers.
Scaling-up green hydrogen production and utilisation is therefore a major challenge for the net zero transition.
Unprecedented momentum
Across the world, the momentum behind hydrogen, and particularly green hydrogen, is strong and growing as countries strive to meet emissions targets and enhance energy security.
Hydrogen is deemed by the EU to be critical in achieving its objectives of reducing greenhouse gas emissions by at least 55% by 2030 and achieving net zero emissions by 2050.
The EU Hydrogen Strategy, published in 2020, for instance, aims to “decarbonise hydrogen production and expand its use in sectors where it can replace fossil fuels” and to grow the share of hydrogen in the energy mix from 2% today, to 13-14% by 20504.
The European Commission’s REPowerEU plan, unveiled in May 2022 set a target of having 20 million tons per year of available green hydrogen by 2030.
More recently, under new ambitions proposed by the European Council in March 2023, 42% of hydrogen used in industry should come from renewable fuels in 2030, increasing to 60% in 2035. Moreover, the share of hydrogen from fossil fuels consumed in the EU should not exceed 23% in 2030, and 20% in 2035, versus approximately 95% today5.
In the US, great progress is also being made in fast-tracking the development of a hydrogen economy. The Inflation Reduction Act (IRA) provides a tax credit of $3 per kilogram, for hydrogen produced with renewable energy and nuclear energy. This should improve the financial returns of dedicated low carbon energy assets.
The Infrastructure Investment and Jobs Act (IIJA), passed by the Senate in 2021, provided $8 billion in funding to create regional low-carbon hydrogen hubs, $1 billion for an electrolysis program to reduce hydrogen production costs, and $500 million each for creating hydrogen manufacturing and hydrogen-recycling equipment supply chains.
A trillion-dollar opportunity?
Globally, demand for hydrogen is expected to see a sixfold increase from today’s levels, to 530 million tons per annum under a 1.5 degrees scenario6.
That means that governments and companies will have to invest more than $6 trillion to 2050 to produce and transport enough low carbon hydrogen to meet demand in Industry, Transport and Renewables balancing in power grids.
This unlocks investment opportunities that extend across the hydrogen value chain from production to transportation and storage.
There are of course many challenges that lie ahead. Production of green hydrogen needs to become more efficient and less expensive. And this will require an acceleration of renewables capacity.
But the momentum is there, with governments and companies across the world pushing forward the development of what could become a multi-trillion dollar industry.
1. Hydrogen for Net-Zero: A critical cost-competitive energy vector, November 2021
2. Energyeducation.ca / Types of hydrogen fuel
3. Gouvernement du Québec: Government information and services / Energy production, supply and distribution
4. European Commission, July 2020 – A hydrogen strategy for a climate-neutral Europe
5. European Council, March 2023 https://energy.ec.europa.eu/topics/energy-systems-integration/hydrogen_en
6. Source: International Energy Agency (IEA), NZE scenario; BCG - Investment Strategies for the Hydrogen Age, March 2023
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below and in the fund’s Key Investor Document (“KID”) and prospectus available on our website www.amundietf.com.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
COUNTERPARTY RISK - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index components. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
Important information
This material is solely for the attention of professional and eligible counterparties, as defined in Directive MIF 2014/65/UE of the European Parliament (where relevant, as implemented into UK law) acting solely and exclusively on their own account. It is not directed at retail clients. In Switzerland, it is solely for the attention of qualified investors within the meaning of Article 10 paragraph 3 a), b), c) and d) of the Federal Act on Collective Investment Scheme of June 23, 2006.
This information is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities or services in the United States or in any of its territories or possessions subject to its jurisdiction to or for the benefit of any U.S. Person (as defined in the prospectus of the Funds or in the legal mentions section on www.amundi.com and www.amundietf.com. The Funds have not been registered in the United States under the Investment Company Act of 1940 and units/shares of the Funds are not registered in the United States under the Securities Act of 1933.
This material reflects the views and opinions of the individual authors at this date and in no way the official position or advices of any kind of these authors or of Amundi Asset Management nor any of its subsidiaries and thus does not engage the responsibility of Amundi Asset Management nor any of its subsidiaries nor of any of its officers or employees. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is explicitly stated that this document has not been prepared by reference to the regulatory requirements that seek to promote independent financial analysis. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Neither Amundi Asset Management nor any of its subsidiaries accept liability, whether direct or indirect, that may result from using any information contained in this document or from any decision taken the basis of the information contained in this document. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
This document is of a commercial nature. The funds described in this document (the “Funds”) may not be available to all investors and may not be registered for public distribution with the relevant authorities in all countries. It is each investor’s responsibility to ascertain that they are authorised to subscribe, or invest into this product. Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice.
This is a promotional and non-contractual information which should not be regarded as an investment advice or an investment recommendation, a solicitation of an investment, an offer or a purchase, from Amundi Asset Management (“Amundi”) nor any of its subsidiaries.
The Funds are Amundi UCITS ETFs. The Funds can either be denominated as “Amundi ETF” or “Lyxor ETF”. Amundi ETF designates the ETF business of Amundi.
Amundi UCITS ETFs are passively-managed index-tracking funds. The Funds are French, Luxembourg open ended mutual investment funds respectively approved by the French Autorité des Marchés Financiers, the Luxembourg Commission de Surveillance du Secteur Financier, and authorised for marketing of their units or shares in various European countries (the Marketing Countries) pursuant to the article 93 of the 2009/65/EC Directive.
The Funds can be French Fonds Communs de Placement (FCPs) and also be sub-funds of the following umbrella structures:
For Amundi ETF:
- Amundi Index Solutions, Luxembourg SICAV, RCS B206810, located 5, allée Scheffer, L-2520, managed by Amundi Luxembourg S.A.
For Lyxor ETF:
- Multi Units France, French SICAV, RCS 441 298 163, located 91-93, boulevard Pasteur, 75015 Paris, France, managed by Amundi Asset Management
- Multi Units Luxembourg, RCS B115129 and Lyxor Index Fund, RCS B117500, both Luxembourg SICAV located 9, rue de Bitbourg, L-1273 Luxembourg, and managed by Amundi Asset Management
- Lyxor SICAV, Luxembourg SICAV, RCS B140772, located 5, Allée Scheffer, L-2520 Luxembourg, managed by Amundi Luxembourg S.A.
Before any subscriptions, the potential investor must read the offering documents (KID and prospectus) of the Funds. The prospectus in French for French UCITS ETFs, and in English for Luxembourg UCITS ETFs, and the KID in the local languages of the Marketing Countries are available free of charge on www.amundi.com, www.amundi.ie or www.amundietf.com. They are also available from the headquarters of Amundi Luxembourg S.A. (as the management company of Amundi Index Solutions and Lyxor SICAV), or the headquarters of Amundi Asset Management (as the management company of Amundi ETF French FCPs, Multi Units Luxembourg, Multi Units France and Lyxor Index Fund). For more information related to the stocks exchanges where the ETF is listed please refer to the fund’s webpage on amundietf.com.
Investment in a fund carries a substantial degree of risk (i.e. risks are detailed in the KID and prospectus). Past Performance does not predict future returns. Investment return and the principal value of an investment in funds or other investment product may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability.
It is the investor’s responsibility to make sure his/her investment is in compliance with the applicable laws she/he depends on, and to check if this investment is matching his/her investment objective with his/her patrimonial situation (including tax aspects).
Please note that the management companies of the Funds may de-notify arrangements made for marketing as regards units/shares of the Fund in a Member State of the EU or the UK in respect of which it has made a notification.
A summary of information about investors’ rights and collective redress mechanisms can be found in English on the regulatory page at https://about.amundi.com/Metanav-Footer/Footer/Quick-Links/Legal-documentation with respect to Amundi ETFs.
This document was not reviewed, stamped or approved by any financial authority.
This document is not intended for and no reliance can be placed on this document by persons falling outside of these categories in the below mentioned jurisdictions. In jurisdictions other than those specified below, this document is for the sole use of the professional clients and intermediaries to whom it is addressed. It is not to be distributed to the public or to other third parties and the use of the information provided by anyone other than the addressee is not authorised.
This material is based on sources that Amundi and/or any of her subsidiaries consider to be reliable at the time of publication. Data, opinions and analysis may be changed without notice. Amundi and/or any of her subsidiaries accept no liability whatsoever, whether direct or indirect, that may arise from the use of information contained in this material. Amundi and/or any of her subsidiaries can in no way be held responsible for any decision or investment made on the basis of information contained in this material.
Updated composition of the product’s investment portfolio is available on www.amundietf.com. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them.
Indices and the related trademarks used in this document are the intellectual property of index sponsors and/or its licensors. The indices are used under license from index sponsors. The Funds based on the indices are in no way sponsored, endorsed, sold or promoted by index sponsors and/or its licensors and neither index sponsors nor its licensors shall have any liability with respect thereto. The indices referred to herein (the “Index” or the “Indices”) are neither sponsored, approved or sold by Amundi nor any of its subsidiaries. Neither Amundi nor any of its subsidiaries shall assume any responsibility in this respect.
In EEA Member States, the content of this document is approved by Amundi for use with Professional Clients (as defined in EU Directive 2004/39/EC) only and shall not be distributed to the public.
Information reputed exact as of the date mentioned above.
Reproduction prohibited without the written consent of Amundi