The 'low emissions' megatrend:

Is it too early to invest in green hydrogen?

Insync Fund Managers

December 2023

The 'low emissions' megatrend is decarbonising business models, driving long term value for investors and helping corporates and countries attain climate related goals.

Insync Funds Management CIO, Monik Kotecha said, 'The main levers of the low emissions megatrend are cost competitive renewables that have experienced massive drops in their establishment, then production costs, compared to their fossil fuel and nuclear peers.'

This, he said, is what is driving the 'electrification of everything' including transportation, heating, industrial operations, etc. 'More than just clean energy generation, it also encompasses digitally optimised energy efficiency systems, decentralised energy generation and overhauling entire electricity grids.'

Half of the world's demand for energy is projected to be served by 'clean molecule' sources by 2050 and hydrogen, the first, lightest and most abundant element in the universe, is set to play a vital role.

'Electrification alone won't get us to net zero,' Mr Kotecha said. 'Hydrogen as part of an energy mix could supply sectors not suited to electricity, such as heavy machinery and heavy industries, in lieu of fossil fuels.'

Seen as a potentially environment-friendly transformative force Mr Kotecha said hydrogen is an enticing prospect for investors, green hydrogen in particular. 'However, it is vital to temper enthusiasm with a dose of realism, given the hurdles on the path to profitability.'

At the heart of the challenge, he said, lies competition with fossil fuels. 'Currently, they are more cost-effective and often heavily subsidised by governments, which means green hydrogen is dependent on external private financial support. Subsidised carbon economics continues to dominate over environmental concerns, and this will remain a challenge until subsidies, scale, infrastructure, and technology advances for green hydrogen level up the current 'unlevel' playing field.'

Most hydrogen today is produced by extracting it from oil, coal or natural gas. In order to justify substantial capital investment for an environment-friendly production source, high-capacity utilisation is essential.

'Green hydrogen is made by splitting the water molecule via electrolysis to create hydrogen. This demands a stable green power source, which is no small feat - although this complex issue is rapidly being overcome.'

A variation to green hydrogen is pink hydrogen (electrolysis powered from nuclear energy). New salt based nuclear reactors already under construction could proffer a cost effective and far safer and environmentally friendly power source than today's typical fission reactors, thus meeting the need for stability of supply.

However, it is likely that the green hydrogen sector will require a more extended investment horizon to realise its full potential or until new technology breakthroughs like those encountered in solar impact the economics.

'In other words, unfortunately, we don't think green hydrogen has yet reached an essential economic tipping point to be a profitable component of the low emissions megatrend, nor produce companies that meet our high profitability criteria, but we will continue to watch and see.'

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

Disclaimer
Equity Trustees Limited ("EQT") (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) ("Insync"), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

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