Creating a viable hydrogen economy - A Future of Energy point of view


Venture capital is betting on hydrogen to be the surprise of the decade

Hydrogen analysis 

For many, the exponential cost decline in solar and wind was the surprise of the last decade. Hydrogen now looks likely to be the next energy technology that is ready for a scale-up. In 2021, venture capital activity in hydrogen totaled almost €2 billion. Will 2022 be another record year? What are investors investing in, who are they and what are their tactics to mitigate risk?

Surprises can happen

The energy industry is a capital intensive and slow-moving industry, whose speed is often compared to that of an oil tanker. However, the industry does experience the occasional shock to make it change its course. For example, few analysts expected that with the COVID-19 pandemic in the 2020s we would experience one of the most severe crises in decades. The war in Ukraine of course has also upset the energy market substantially. The EU now has the ambition to decrease its Russian natural gas dependency by two-thirds within less than a year.

The commercialization of solar and wind electricity in the 2010s has also been a surprise to many. This development has ensured that sectors that are relatively easy to electrify can be decarbonized. We imagine in the coming years to see a lot more of this. The question for the next decade is: will hydrogen be a similar surprise, this time to decarbonize hard-to-abate sectors such as heavy industry, aviation and long-haul trucking?

Investors pay to play

Venture capital is clearly betting on such a surprise to happen. This is based on the expectation that, given its strong growth, hydrogen will follow a similar commercialization path as solar and wind technology have taken, given the hydrogen market is growing fast. Over the last years we have seen strong growth in Venture Capital funding with 2022 expected to be another record year, see Figure 1. In 2021 invested capital nearly tripled, primarily driven by strong growth in early-stage venture capital deals. Remarkably, some very large early-stage deals were made in 2021, namely in FTXT Energy Technology (Raised €125m in Dec ‘21[1]); EnerVenue (Raised €110m in Dec ‘21); Universal hydrogen (Raised €53m in Oct ‘21); and Lhyfe (Raised €50m in Sep ’21**[2]).

The number of deals in 2021 also doubled. While invested capital tripled in 2021, the number of deals merely doubled, meaning average deal size increased significantly. This indicates that parties seem to be willing to “pay to play”.

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Figure 1: Venture Capital funding received (EURm) and deal count, 2014 - Q1 2022 (Source: Pitchbook)

Is activity shifting east?

The strong investment growth we saw in 2021 was made possible by almost the same proportional contribution from North America, Europe and Asia with a small decrease in the contribution of investment in EU-based companies.

Already in 2022, quite substantial investments have been made (~€620m invested capital to date). If this pace continues, it could well be another record year for the hydrogen space. It is striking that the share of Asia’s activities is increasing in Q1 2022 in relative terms, suggesting the geographical activity is shifting east. This trend requires close attention as it asks the question of whether or not the hydrogen technology development and manufacturing will go the same route as the solar PV industry.

A large variety of investors that don’t want to miss out

Data show that there are a large variety of investors active in the hydrogen space given the multiple applications of the technology (including oil & gas companies, utilities, battery manufacturers and investors from the broader mobility space). Given the strong growth in early-stage investments in 2021, it also seems that competition is increasing. Companies and investors want to ensure their involvement at an earlier stage so as not to miss out on growth and underlying technological developments. This is supported by the fact that many investment rounds are supported by a relatively large consortium (often backed by existing shareholders), see Figure 2 for more detail.

The largest deals in Q1 of 2022 were predominantly focused on hydrogen production indicating the interest of venture capital to scale-up this industry. Given the precedent set by solar and wind technology this suggests a bet on further cost reductions to enable successful technology deployment at scale. The largest number of deals was made by Shell Ventures between 2017 and Q1 2022, showing their interest in this emerging market (see Figure 3).

Figure 2: Top 10 deals in Q1 2022 (Source: Pitchbook)

Figure 3: Top 5 Corporate investors between 2017 and Q1 2022 (Source: Pitchbook)

How to mitigate risk in an emerging technology market

The risks that corporates face from emerging technology markets are two-sided. On the one hand there is the financial risk of investing in the technology, which after passing the research phase must meet commercial requirements in order to scale. On the other hand, there is the risk of missing the opportunity, notably automotive OEMs missing the recent electrification trend and requiring (lots of) money to play a (very) expensive catch-up game.

Forming alliances has become the standard for alleviating these risks, as recently we have noticed an uptick in the number of corporates engaging in the hydrogen ecosystem through partnerships and investments, following three broad risk mitigation trends.

Firstly, corporates are combining in-kind services with cash when executing investments. An illustrative recent investment was in September 2019 when Nikola Motor Company raised USD 100m in Series D venture funding from CNH Industrial, in addition to USD 150m in services, including product development, engineering and technical assistance. Limiting the immediate cash investment may be more palatable for corporates, as it not only limits cash outlay but also increase their influence on the development of the technology and range of applications. Investment strategies in this regard serve to ‘externalize’ R&D development.

Secondly, we observe investment diversification through multiple venturing style investments across the hydrogen sector. Examples of this approach are illustrated by the venturing activities of Hyundai and Robert Bosch. Hyundai closed one investment in 2020 for Hydrogenious LOHC, a hydrogen storage company and three hydrogen investments in 2019; 1) Impact Coatings, which created a fuel cell coating solution 2) H2Pro, which developed an E-TAC water splitting technology and 3) GRZ, a hydrogen storage company. Robert Bosch acquired a 13% stake in the stationary fuel cell company Powercell Sweden in 2019 and a 14% stake in the Solid Oxide Fuelcell (SOFC) company Ceres Power in 2020. This diversification within an ecosystem creates potential for synergies and knowledge sharing as corporate investors position themselves across the hydrogen value chain.

Thirdly, partnerships are being formed both across and within industries. This mitigates the first mover risk and serves to grow confidence in participating in the ecosystem for all types of companies. One such example is NortH2, a consortium of Shell, Equinor, RWE and Eneco. This partnership aims to develop one of Europe’s largest green hydrogen projects featuring fully integrated production, transport and storage of hydrogen, signaling the firms’ ambitions to be important players in the hydrogen economy.

We anticipate that as the market becomes more established, focus will shift to later stage transactions. Eventually a consolidation play may occur, highlighting by a next wave of M&A with true hydrogen leaders emerging, and those who missed out acquiring the (activities of) others.

Many companies, analysts and market watchers have been surprised by the enormous cost reductions that solar, wind and even batteries have seen over the last decade. The conditions are ripe for green hydrogen to take the same fast track towards large scale commercialization. To make use of this development, companies need to get in the market now to gain expertise, understand the mechanisms at play, and know what to focus on. They need the partners that can hedge the risks and possess the regulatory presence to steer discussions. 

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[1] FTXT Energy Technology raised another undisclosed amount in Feb ‘22
[2] Lhyfe raised another €17m in Feb ‘22

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