The need to decarbonise is a systemic issue. We still rely heavily on the hydrocarbon industry to provide us with the energy to drive, fly, and heat our homes.
In fact, if we are going to reach the Net Zero Emissions plan as set out by the International Energy Association (IEA), 80% of global energy consumption needs to be generated by renewable sources – but today, we’re only at 13%. One of the key challenges in the energy transition lies in electrifying the “hard-to-abate” sectors, which account for an estimated 30% of global emissions.
A not-so-new technology likely to aid the transition is hydrogen, which the IEA expects to provide about 10% of energy consumption in 2050. With three times the energy per unit of mass compared to gasoline, hydrogen is ideal for energy-intensive industries. It is readily found in water, and like electricity, serves as an energy carrier rather than a source, enabling it to be stably transported over long distances.
Green Hydrogen for a Greener Tomorrow
Hydrogen production is associated with an extensive colour scheme. To achieve net zero goals, the aim is to create green or, at the very least, blue hydrogen. The former uses renewable electricity to split water molecules into H2 and oxygen and the latter incorporates carbon capture, utilisation, and storage (CCUS) facilities to limit the CO2 released. Today, less than 1% of the hydrogen produced is green or blue.
Unfortunately, hydrogen has its faults and is seemingly not a straight substitute for the current oil and gas infrastructure. For starters it is very light and diffusible, hence higher volumes of hydrogen are required to be transported to meet the equivalent energy demand from say, natural gas. Moreover, its small molecules can permeate metals, causing embrittlement and the potential for hazardous leaks. Additionally, hydrogen is highly flammable, odourless and colourless, making leak detection more challenging.
Another consideration is the cost of renewable hydrogen. On average, Bernstein estimates average green hydrogen costs about $6/kg – varying by region due to renewable energy costs. However, for it to be competitive with crude oil on an energy equivalent basis, the price would need to fall to between $1 - $2/kg. But, with unprecedented political support, economies of scale should aid technical developments in renewable power and electrolysers with the IEA expecting the cost of clean hydrogen to fall 30% by 2030.
Despite 2050 rapidly approaching, green and low-carbon hydrogen is still a nascent industry facing various barriers to widespread adoption. Investors face the risk of determining how exactly the energy transition is going to play out. At Evenlode, our investment process is focused on finding high-quality companies with an enduring competitive advantage. We consider ten key risks, grading them on an A-E basis where A is the top score, E is the inverse, and C is what we would expect an average listed company to achieve.
Our Holdings
Within the energy transition and the hydrogen market we focus on the suppliers to the oil and gas (O&G) industry rather than O&G companies themselves. The risk of a company’s end markets seeing medium to long-term impairment is captured in our Long-Term Industry Outlook (LTIO) risk factor, which assesses disruption threats and the industry growth rates. We consider the LTIO risk alongside nine other risk factors, to determine our portfolio allocation, regardless of the valuation attraction.
Our largest exposure at an individual company is Rotork (ROR), a long-term holding in the Evenlode Income fund, which derives 40% of its operating profit from actuators sold to the O&G end markets. An actuator is responsible for converting different types of energy into motion, for example, Rotork’s products will be controlling the opening and closing of valves in a downstream pipeline to regulate the pressure and modulation of the liquids and gases. We grade Rotork a C on LTIO, as we balance the lower O&G demand in the future with the opportunities of renewable infrastructure being even more actuator intensive.
As the need for rapid decarbonisation evolves, innovation plays a crucial role in bridging the gap between the old and new energy worlds. Some of the difficulties discussed earlier are being addressed through innovation. For example, Victrex (VCT), a holding in our Evenlode Income fund, is a world-leading manufacturer of high-performance polyetheretherketone (PEEK) polymer, known for its high resistance to thermal, chemical, and mechanical erosion. PEEK’s compact molecular structure provides low permeability, making it suitable for sealing or lining in the transport and storage of buoyant H2 particles.
Another example is Halma (HLMA), a recent addition to the Evenlode Income fund. This group of global companies specialise in targeting niche markets across safety, environmental, and medical end markets. Halma focuses on producing sensing and detection equipment specifically for identifying hydrogen gas leaks and addressing the pitfalls of traditional sensor technologies used in flammable gas detection. We actively monitor long-term trends like the energy transition and hydrogen development to assess their potential impact on our portfolio companies within our risk management framework.
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