ICAEW.com works better with JavaScript enabled.

Investing in the technology of green hydrogen

With ambitious net-zero targets across Europe, policymakers are looking to green hydrogen as a solution across several sectors. Oaklins Smith & Williamson’s Philip Barker looks at a technology that’s attracting much interest and investment

Hydrogen can be blue, grey or green, depending on how it is produced and its by-products. Blue and grey hydrogen are produced using fossil fuels, and the process releases CO2. Green hydrogen is mainly produced through the electrolysis of water; if the electricity comes from a renewable process (such as wind, solar or hydro), the resulting hydrogen has close to zero full lifecycle greenhouse gas emissions.

Hydrogen is highly efficient, with one kilo producing the same energy as 2.1kg of natural gas or 2.8kg of gasoline. More and more countries are turning to hydrogen-focused policies and strategies to achieve their net-zero targets.

The production and storage of green hydrogen are versatile. It can therefore be used for commercial, domestic, industrial or mobility processes, offering significant opportunity to decarbonise a range of sectors. As well as heating, ventilation and air conditioning (HVAC), oil and gas, energy and transport sectors are seeing significant steps being taken by global leaders as they look to green hydrogen to fuel their future.

With regards to heating, in 2019 the UK government announced a gas and oil boiler ban in new homes built in 2025 and beyond, to decarbonise the HVAC sector. Therefore, green hydrogen offers significant potential. Hydrogen boilers are not yet available in mainland Europe, but players such as Bosch, Baxi and Viessmann are developing prototypes that are widely expected to replace the gas and oil boilers currently used in an estimated 85% of UK households. The UK government’s hydrogen strategy, building on its 10-point plan for a green industrial revolution, pledged to pilot a town powered entirely by hydrogen by 2030, with milestone targets along the way: a hydrogen neighbourhood in 2023 and a hydrogen village by 2025.

Despite its clear benefits, hydrogen is a long way from being a perfect alternative. There is the sheer cost of developing and building the energy grids and infrastructure. The International Energy Agency estimates the cost of green hydrogen at $3 per kg, compared to $0.90-$3.20 per kg for natural gas (although by 2050 it reckons the price of green hydrogen will have reduced to $1 per kg). And despite hydrogen being the most abundant gas available to us, its ultra-light density and flammability create technical and safety challenges in its transportation and storage.

Collaboration across nations

With investors pouring in capital to develop a more mature market, different players across the value chain are collaborating through M&A or joint ventures to increase their technological know-how, build scale or improve their competitive positioning.

First, operators are collaborating to leverage complementary strategic capabilities. Component suppliers and established original equipment manufacturers (OEMs), for example, are reducing supply chain complexity through strategic partnerships. In April, Bosch partnered with PowerCell to combine its production expertise and existing customer base with the fuel-cell maker’s stack technology.

The second area is technological know-how, where two competing parties in other areas of the market share knowledge, expertise and risk in order to accelerate the rate of development for green hydrogen innovations. In November last year, Volvo and Daimler Truck entered into a joint venture partnership to develop hydrogen fuel cells.

Hydrogen operators also provide the opportunity for established players to overcome the high barriers to entry into green hydrogen business. Therefore, early-stage companies that have spent years developing and commercialising hydrogen intellectual property could be attractive targets for larger energy or industrial companies. In September 2019 Cummins, a manufacturer of diesel and natural gas engines, acquired Hydrogenics, a manufacturer of hydrogen generation technologies, for $290m (£213m).

Pricing it right?

Hydrogen is now securing backing from companies and governments alike. To support the expansion in renewables, there has been a surge of both investor interest and capital. The total investment into projects and along the value chain through to 2030 amounts to an estimated $500bn.

This has led to rising multiples for pure-play hydrogen operators, with long-term potential despite little short-term income or profitability. In terms of public trading multiples in the past 12 months, ITM Power, a UK-based manufacturer of hydrogen electrolysers and energy systems, peaked at a revenue multiple of 286x (average 217x) and Plug Power, a US-based developer of hydrogen fuel cells, at 106x (average 36x).

On the public markets, it appears that investment hype has resulted in significant volatility, making the process of valuing illiquid assets extremely challenging.

The story is similar for M&A transactions. In December 2020, Xebec Adsorption, a manufacturer of air and gas purification and filtration equipment, acquired HyGear Technology and Services, a producer of industrial hydrogen and nitrogen gas processing plants and purification systems for $95m (8.8x 2019 revenue multiple and 29.3x 2019 EBITDA multiple).

Who’s investing?
The hydrogen space is considered ‘hot’ due to the favourable macro tailwinds that support a sustainable future growth story, and M&A appetite from strategic buyers is high. In a bid to secure access to hydrogen technology, leaders from complementary sectors including oil and gas, energy and utilities have been committing significant capital to hydrogen M&A opportunities.

Snam, a leading Italian energy infrastructure conglomerate, has made significant strides in positioning itself away from natural gas and towards hydrogen, having completed investments in the space, including the €33m (£28m) minority investment in British AIM-listed electrolyser producer ITM Power. And in April, the Oaklins firm in Switzerland advised on the sale of Fischer Spindle Group, a leading Swiss supplier of electronic micro turbo compressors for air supply in hydrogen fuel-cell powertrains, to Weichai Power, a Chinese manufacturer of automotive and transport systems.

Given the significant multiples in the sector, pure-play hydrogen operators such as Bloom Energy on the NYSE and Ballard Power Systems on NASDAQ have scaled their balance sheets and, instead of being targets of larger conglomerates, are able to vertically integrate their operations across the hydrogen value chain.

While there is some M&A activity from mainstream private equity, the soaring multiples and premature nature of the market has so far had an impact on the appetite for buy-outs of pure-play hydrogen operators. Due to the lack of long-term regulatory frameworks and market structure, the risk-reward profile remains a challenge for large-scale private capital. As a result, equity financing interest is clustered towards early-stage venture capital funds, with a number of dedicated hydrogen funds having recently emerged. Examples include Hydrogen Ventures – a collaboration between Climate Change Ventures and Wellington Street Partners – and AP Ventures, which are well positioned to support early-stage innovators on their growth trajectory.

Another emerging trend is the formation of hydrogen special-purpose acquisition companies (SPACs), which have received the backing of some high-profile hedge funds as they focus investment strategies on the clean energy arena. Due to the emphasis of future growth and forward-looking projections, SPACs are likely to play an important role in helping early-stage hydrogen companies scale quicker by providing access to public market capital for innovation and development.

About the author

Philip Barker, M&A director at Oaklins Smith & Williamson. He is head of industrials and global head of Oaklins HVAC sector vertical.

About the article

Read the full article in the Corporate Financier November 2021 edition. Access this magazine as well as our extensive archive brought to you by the ICAEW Corporate Finance Faculty.