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Article by Marcel D. Werner, Partner at SENCO Hydrogen Capital as published in Insight/Out magazine #32
This article discusses the supply and demand factors driving the expansion of the hydrogen economy and highlights opportunities for institutional investors, particularly in Private Equity, to invest in key suppliers involved in the energy transition.
Both demand and supply drivers stimulate the hydrogen economy’s growth
Hydrogen is critical for the future economic landscape of industrialized nations, playing a vital role in decarbonizing many industries and ensuring energy supply aligns with climate goals. Two key factors drive the expansion of the hydrogen economy: growing demand for hydrogen as an industrial feedstock (raw material), and its essential role in storing and transporting renewable energy across time and distance.
For decades, hydrogen has been a vital component in industries such as fertilizer production, refineries, and chemicals. Currently, most of this demand is met by “grey” hydrogen, which is produced from natural gas and emits approximately ten times the amount of CO2 per unit of hydrogen. Around 125 million tons of hydrogen are consumed annually. To decarbonize these sectors, a significant transition to green hydrogen – produced via electrolysis, powered by renewable energy sources like wind and solar, for example – is crucial. The increasing volume of international tenders for long-term green hydrogen supply underscores this growing demand.
At the same time, the global capacity for renewable energy generation is rapidly expanding. Countries like Germany now generate over 50% of their electricity from wind and solar power. However, the intermittent nature of these energy sources creates volatility in power systems, leading to situations where renewable energy supply exceeds demand. This results in inefficient curtailment of renewable generation and a rise in negative electricity prices during periods of excess supply. Conversely, when renewable generation is low, non-renewable sources such as coal or gas are often required to meet baseline demand.
The solution to this dilemma lies in energy storage and arbitrage. When market prices for renewable electricity are low, it makes sense to store this energy and release it during periods of higher demand. While batteries can serve as short-term storage (day/night), they are often limited in both capacity and cost-effectiveness. Green hydrogen, on the other hand, offers a compelling alternative, due to its ability to be stored long-term, transported, and used over prolonged periods. Therefore, the continued growth of renewable electricity generation simultaneously drives the supply of green hydrogen, which can serve as both a fuel and an energy carrier.
The hydrogen economy: A growing investment opportunity
The synchronized growth in both demand for decarbonization and the supply of renewable electricity is creating a significant stimulus for the hydrogen economy. According to a recent McKinsey report[1] from the Hydrogen Council, final investment decisions in green hydrogen production increased by 90% between October 2023 and May 2024 alone, totaling $75 billion. Globally, the volume of announced hydrogen-related investments to be completed by 2030 is approaching $700 billion, more than seven times the amount reported in 2020. This rapid growth reflects a global trend, with key markets emerging in Europe, the U.S., and China.
If a gold rush is coming, invest in shovels first!
Many hydrogen infrastructure projects are currently in development, particularly in Germany, but many have yet to secure full financing. Uncertainty around regulatory details, fluctuating subsidy structures, and a lack of established long-term, off-take agreements are some of the most cited reasons for delayed investment decisions. However, most market participants expect significant progress by 2026, presenting vast opportunities for long-term infrastructure investors. Several initiatives, such as Germany’s decision to establish a hydrogen core network and the approval of nearly €5 billion in IPCEI (Important Project of Common European Interest) funding, are setting the stage for this anticipated growth.
Less publicly discussed, but equally significant, is the industrial supply chain underpinning the hydrogen economy. Before the build-up of large-scale hydrogen production, the capacity of equipment like electrolyzers, a technology used to produce hydrogen, must be expanded. Major electrolyzer manufacturers rely heavily on specialized, technology-oriented, medium-sized suppliers (Mittelstand), which are critical for building the necessary infrastructure. These companies supply specialized compressors, valves, and purity-measurement instruments for the hydrogen network, which itself requires significant retrofitting, rather than new pipeline construction.
The manufacturers of hydrogen-powered fuel cells or hydrogen combustion engines – for example – depend on a wide array of specialized suppliers. As the hydrogen economy scales up, these medium-sized companies are expanding their capacities and will require capital for growth. Due to their specialized technical expertise, they are essential to the hydrogen supply chain’s success. This presents a compelling opportunity for private equity investors, particularly those focused on the industrial backbone of the hydrogen sector. As the old investment adage suggests, “If a gold rush is coming, invest in shovels first” – the equivalent of investing in the key suppliers that will enable the hydrogen boom.
[1] Hydrogen Insights 2024 by the the Hydrogen Council in collaboration with McKinsey & Company
