A number of converging factors are shining a light on hydrogen’s potential to revolutionize the global energy industry and help solve the climate crisis
AS A CLEAN ENERGY SOURCE, hydrogen almost couldn’t be more ideal. Not only is it a ubiquitous raw material, comprising some 90% of the universe,1 but hydrogen gas can also be used as a fuel—powering cars, heating homes and enabling heavy industry—that leaves only water and heat as byproducts.2
Right now, producing hydrogen gas is a fossil fuel-intensive endeavor, but when produced using sustainable energy, like solar and wind, hydrogen gas has the potential to be one of the greenest of green fuels. According to The Special 1 — Hydrogen Primer, a report from BofA Global Research, the rapidly decreasing cost of wind and solar power, improvements in the hydrogen production process and the urgent need to address climate change could make hydrogen a major factor across much of the global economy.3
“We believe we are reaching the inflection point for harnessing hydrogen effectively and economically,” says Haim Israel, head of Thematic Investing Strategy at BofA Global Research and lead author of the primer, adding that it could be key in the fight against global warming.
“The potential for green hydrogen as an investment theme is compelling because the decarbonization agenda is real.”—Martyn Briggs, thematic investing strategist at BofA Global Research
For hydrogen to live up to its potential, however, it will require massive investments and collaboration from both private industry and government.4 As businesses strive to reduce their impact on the environment, they will increasingly have to turn to energy sources—such as hydrogen—that can be produced and used with minimal impact. And governments that have set aggressive carbon emissions reduction targets will have to turn to innovative technologies to meet them. The good news: The combination of renewable electricity and sustainably produced hydrogen—also known as “green” hydrogen—may help us get to a net-zero carbon emissions global economy by 2050.5 That could make hydrogen more than just another niche renewable energy platform.
Because of its versatility, it is estimated that hydrogen could create as much as $11 trillion in investment opportunities over the next three decades.6 “The potential for green hydrogen as an investment theme is compelling because the decarbonization agenda is real,” says Martyn Briggs, thematic investing strategist at BofA Global Research and one of the authors of the report. “As we’re seeing more emphasis to reduce the world’s carbon footprint, we’re realizing that renewable electricity, alone, can’t get us over the finish line.”
Why green hydrogen could be a game changer
Green hydrogen gas is produced through electrolysis, a process that splits water into hydrogen and oxygen. Widespread adoption of that technology could, in effect, create a new industry and generate increased demand for its components, such as platinum, which is a key part of both fuel cells and electrolyzers.7
Fuel cells that use hydrogen to create electricity are the end use for hydrogen gas that’s gotten the most attention. But fuel cells are only one end use for this simplest of atoms. Numerous other areas of the economy could also benefit, including metals, mining and steel production, which currently tend to have large carbon footprints. Imagine, for example, a steel plant operating its blast furnaces with green hydrogen gas instead of liquid natural gas.8 This type of adoption could benefit the planet by reducing carbon emissions and could potentially benefit shareholders as well, since investors may be attracted to new leaders in green energy adoption.9
And since hydrogen fuel cells can be scaled up or down, individual cells can be used to power cars, trucks and buses. While only a few thousand hydrogen fuel cell electric vehicles (FCEVs) are on the road today, BofA Global Research projects that the market is quickly gaining steam and could reach 240,000 FCEVs worldwide by 203010—fueled by reductions in cost and strong support from a number of governments, including China, Japan and the European Union.11
This, in turn, would create a demand for the fueling infrastructure—pipelines, storage and transport—needed to service a hydrogen-based fleet. Longer-term, we may even see the adoption of green hydrogen among companies involved in aerospace and shipping.12
Why public policy and private investment are both essential
One of the prerequisites to scaling up green hydrogen adoption is increased coordination between government policy and private capital. According to Briggs, neither one on its own is enough to move the needle on wide-scale hydrogen adoption. “We will need to see greater harmonization between the two, whereby governments establish research budgets, financial incentives and clear targets—and companies subsequently ramp up to meet those targets. Private money won’t simply fund this without clear visibility from the public policy sector. Instead, we’ll need to see economically viable solutions and a reasonable return on investment.”
This could be aided by a shift in policy to focusing on “climate solutions” rather than debating “climate change,” suggests Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Governments are spending enormous amounts of money combating issues that climate change creates—floods, fires, destruction of arable land and the list goes on. If we could change that equation and take those dollars to reinvest in solutions, that absolutely changes the game.”
“Governments are spending enormous amounts of money combating issues that climate change creates. If we could take those dollars to reinvest in solutions, that absolutely changes the game.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank
This may already be starting to happen. In some instances, governments are setting sustainability targets that focus on areas like decarbonization, the number of FCEVs needed to be produced or electrolyzer capacity. Indeed, the European Union recently made its European Hydrogen Strategy the centerpiece of its Green Deal13—while Australia, Japan, China, the United Kingdom and Korea all have green hydrogen strategies and/or targets of their own.14
For now, producing green hydrogen costs substantially more than the more common “gray” hydrogen, which is produced with natural gas—a financial reality that won’t change overnight.15 Yet established industries are finding ways to progress toward clean energy goals. Industrial gas companies, for example, don’t yet have the capacity to create green hydrogen but are creating joint ventures and partnerships that will do so.16
This is where investors could join forces with businesses to make a difference—and not just in supporting hydrogen-based startups. Although not without risk, investors are increasingly choosing to support companies with a strong focus on sustainability, including reducing the impact of their operations on the environment.17 And as more companies and industries seek to adopt cleaner energy sources, such as green hydrogen and other renewables, the opportunity set should continue to expand. While hydrogen alone can’t solve the challenges of climate change, it could be a critical part of a greener and cleaner global energy system.
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2 U.S. Department of Energy, Hydrogen and Fuel Cell Technologies Office, “Fuel Cells” January, 2021.
Information is as September 2020.
Opinions are those of the author(s), as of the date of this document and are subject to change.
Investing involves risk including possible loss of principal.
Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.