Renewable energy is the future. There’s no two ways around it. While electric cars may be making all the headlines, there is another technology that I think is far more viable. Prime Minister Boris Johnson has announced his hopes that the UK would become the ‘Qatar of hydrogen’.
But what is hydrogen? How is it different and what are its benefits?
Hydrogen is the simplest atom in existence and it is very, very abundant. However, it is also highly reactive, meaning it usually combines with other elements to form compounds. This is how we get water (hydrogen and oxygen). That reactivity gives it great energy potential, if it can be separated from whatever it’s bound to.
Hydrogen has an advantage over the lithium-ion batteries used to power electric cars. It is far more energy dense, so it can power heavy machinery or industrial manufacturing.
People can also transport it easily without the hydrogen losing energy in the process, unlike electricity sent over long-distance cables.
Renewable energy conversion
Right now, ITM Power (LSE: ITM) is my top pick in this field. The company builds the modular hydrogen electrolysis machines which separate hydrogen from water. The machines are attached to existing renewable infrastructure, producing green hydrogen.
Green hydrogen is any hydrogen produced by a method which does not release carbon dioxide, standing in stark contrast to blue or grey hydrogen, which are both made by reforming methane gas and release CO2 as a by-product.
ITM has a lot of debt right now but has recently raised £250m to fund construction of two new factories and is poised to meet growing demand.
My main worry with ITM is that it has struggled to turn a profit for several years and still isn’t forecast to do so for at least another three. However, I believe that this is because demand for hydrogen has historically been low — fact which is currently changing.
Another hydrogen-based company on my radar is AFC Energy (LSE: AFC). This company manufactures the fuel cells needed to turn hydrogen fuel into electricity. What makes AFC special is their patented alkaline fuel cells which are able to run on lower purity hydrogen with the same efficiency.
On the financial side, unfortunately, AFC suffers from many of the same setbacks as ITM power. High debt, low revenue, and it has yet to turn a profit.
But AFC is growing. It increased revenues in 2021 and expects further growth through 2022. On top of that any company that uses its alkaline fuel cells will be able to use cheaper, lower grade hydrogen, giving AFC a competitive advantage.
Hydrogen power still remains untested at a commercial scale and I consider it a riskier investment compared to more established fuel companies.
But the market has a clear desire for hydrogen.
JCB just signed a multibillion-pound deal with Fortescue Future Industries (a subsidiary of Fortescue Metals Group) to import green hydrogen all the way from Australia.
What I’m betting on is that other firms around the world need access to a low carbon fuel. I fully expect ITM and AFC to have some growing pains, but to ultimately come out on top. This is why I’m adding them both to my portfolio.
The post Renewable energy stocks: here are my top 2 UK hydrogen fuel companies appeared first on The Motley Fool UK.
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James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.