President Biden recently signed the Inflation Reduction Act into and while there’s ample debate about the bill’s inflation-reducing capabilities, what’s not up for argument is that this is one of the most substantial examples of government-led climate spending on record.
Predictably, market observers aren’t lacking for opinions regarding how the Inflation Reduction will impact, perhaps adversely, fossil fuels equities while propping up renewable energy equivalents. What’s clear is that market participants view the new law as a boon for solar and wind stocks.
No doubt about it – solar and wind command the bulk of the attention when it comes to renewable energy sources as alternatives for traditional home and commercial power consumption. They’re also the renewable energy concepts most clients are familiar. However, not to be lost in the equation are forms of clean energy that often go overlooked.
That includes hydrogen. Hydrogen has long been glossed over relative solar and wind by the investment community, but hydrogen was making inroads among investors even before the Inflation Reduction Act was passed. Good news: The legislation could act as an accelerant for this form of renewable energy.
Examining Hydrogen Opportunity
One of the primary benefits of climate-focused funds is that these products avoid some of thorny issues associated with standard ESG products, including ratings fluidity and social and governance controversies. Additionally, data confirm that companies and governments need to make tackling climate change a bigger priority. Simple economics confirm as much.
Hydrogen is very much part of the sustainability investing equation and one that could offer clients attractive tactical growth opportunities.
“An area where there is substantial new incentive to deploy technology is in the use of hydrogen. An industrial gas, hydrogen is a widely used building block in the chemical, refining, plastics and fertilizer sectors,” notes KraneShares portfolio manager Roger Mortimer. “More than 95% of the 10 million tonnes of hydrogen produced annually in the US today is ‘grey’, meaning that it is produced with fossil fuels (typically natural gas)3. The production of grey hydrogen produces ten times as much CO2 as it does hydrogen by weight4, making it a critical high-emitting sector to resolve.”
There’s a color coding system with hydrogen – blue, brown, gray and green. For climate backers and investors alike, the goal is to see green hydrogen take center stage. The Inflation Reduction Act could be a step in that direction.
“Energy policy experts believe that green hydrogen will be both blended with natural gas in existing power generation infrastructure, reducing the associated emissions, and utilized in dedicated zero-emission processes, for which new infrastructure will be built,” adds Mortimer.
“Green hydrogen production cost is a function of both the cost of the electrolyser and the cost of the power to run it. If excess renewable electricity is used, the marginal power cost is extremely low.”
The U.S. has the lowest grey hydrogen costs in the world, but green hydrogen costs here range from $3.73-$6.50/kg. The Inflation Reduction could help drive that closer $3/kg, which could foster increased adoption.
Ideas for Hydrogen Exposure
Owing to the fact that hydrogen is a still nascent investment concept, stock picking in the space can be tricky to say the least, but advisors have options. Those include the KraneShares Global Carbon Transformation ETF (KGHG). That exchange traded fund includes a variety of Inflation Reduction Act beneficiaries.
As Mortimer notes regarding KGHG, “large incumbent energy and industrial players have many of the qualities required to succeed in the energy transition, including large existing operations and customer bases; the relevant project management skills; and adjacencies to emerging areas. A targeted strategy of investing in these companies, where management is committed to the energy transition, offers, in our opinion, the potential not only for significant environmental impact but also for superior growth and revaluation among the leading participants.”
Related: Three Trends That Will Help Define the Green Transition