The hydrogen economy has become one of the dominant investing themes of 2020, but investors might regret chasing fuel cell stocks higher.
Fuel cell manufacturers Plug Power (NASDAQ:PLUG) and Bloom Energy (NYSE:BE) have hooked investors on their hydrogen manufacturing ambitions. It seems simple enough. After all, an electrolyzer (the device that produces hydrogen) is essentially a fuel cell running in reverse. Throw in the facts hydrogen fuels can be produced from renewable energy and consumed without generating carbon emissions, and the hydrogen economy begins to take shape.
The pitch looks great in investor presentations, but it's a little too simplistic. There are enormous technical obstacles standing in the way of the hydrogen economy, including one of the most fundamental aspects of energy: transporting it from the point of generation to the point of consumption. Could that be enough to trip up these anointed growth stocks?
Pipeline or pipedream?
One common argument for the hydrogen economy relies on the power-to-gas idea. For example, a solar farm in the desert might generate "too much" electricity in the summer months. The excess could power a fleet of electrolyzers and churn out commercial volumes of hydrogen fuel, which would serve as an energy carrier. The hydrogen fuel could then be used to power vehicles, heat homes, or power gas appliances.
There's just one problem: how does the hydrogen move out of the desert?
It's tempting to assume hydrogen fuels can be easily transported in existing pipeline infrastructure, but a closer look shows it's not so simple.
The National Renewable Energy Lab (NREL) recently reviewed the challenges and opportunities of blending hydrogen gas with natural gas for transportation in existing steel pipelines. Such a practice could improve the environmental footprint of natural gas consumption, provide a way to shuttle hydrogen gas across the country, and be significantly less expensive than building out dedicated hydrogen pipeline networks. But there are unresolved hurdles, too.
Hydrogen embrittlement: Material engineers have contended with this issue for decades. If steel manufacturing processes aren't finely controlled, then the introduction of hydrogen atoms can make the steel more brittle, eventually risking ruptures and explosions if used to fabricate turbine blades or pipelines. Airplanes, helicopters, power plants, and pipelines have fallen out of the sky -- or been projected into it -- due to hydrogen embrittlement. The risk extends to merely transporting hydrogen through steel pipelines, which can absorb hydrogen over time.
On the one hand, the United States is home to over 3 million miles of natural gas pipelines used for gathering, transmission, and distribution. On the other hand, most transmission pipelines are made of steel, which creates safety risks stemming from hydrogen embrittlement.
The NREL review notes hydrogen could be blended with natural gas at concentrations of 5% to 15% by volume without significant increases in risks. But the low density of hydrogen (at one-tenth that of natural gas) suggests a 15% blend wouldn't move very much product. In other words, it would improve the "green" credentials of natural gas by about 2%.
Extraction costs: Assuming hydrogen gas can be injected into natural gas pipelines at a 15% concentration by volume, there are challenges to getting the product back out. The efficiency of extraction technologies is generally proportional to the concentration of the product being extracted. That challenge is compounded by the fact fractional impurities in hydrogen fuels can damage fuel cells.
The NREL report assumes the most efficient extraction technology for low concentrations of hydrogen gas would rely on pressure swing adsorption (PSA) membranes that haven't been invented yet. Even then, the extraction costs alone might exceed the cost required for hydrogen fuels to be competitive in transportation markets.
In addition to hypothetical cost scenarios, the report notes economic risks to pipeline operators installing expensive extraction equipment for a product that might only be transported on a seasonal basis (ex: when solar output peaks in the summer).
Point-of-use standards: Assuming hydrogen gas can be transported in and extracted from natural gas pipelines, there are challenges at the point-of-use. For example, household appliances would need to be redesigned to new standards that are safe for hydrogen mixtures (and you thought the political fight over energy-efficient light bulbs in the 2010s was bad...). Industrial sites would also need additional pressurization and compression equipment for inlet pipes containing hydrogen gas, although existing turbines used for industrial applications aren't designed with hydrogen mixtures in mind.
The brittle future of hydrogen fuels
Individual investors might be drawn to the soaring stock prices and grandiose promises of Plug Power and Bloom Energy, but the hydrogen economy faces a number of obstacles. As the overlooked example of pipeline transportation highlights, hydrogen fuels rely on overly simplistic assumptions and too much storytelling.
It might be technically feasible to transport low concentrations of hydrogen gas in existing infrastructure to avoid the costs of building dedicated hydrogen infrastructure, but the downstream costs associated with steel pipeline monitoring, extraction equipment installation, and household appliance replacement could prove prohibitive.
Outside niche applications, hydrogen fuels simply don't make much sense without extreme capital investment that could scare off companies and governments alike. At least Wall Street is on board.