An Important Role for Hydrogen

It's now two years since I became interested in the investment potential of green hydrogen and added ITM Power to my portfolio. This was followed by several more players and my thoughts on the global potential for hydrogen expanded in this article.

Hydrogen stocks were the flavour of the year in 2020, some doubling in price and which provided a good boost to my returns for the year but inevitably they have since fallen back over recent months.

Many countries in Europe already have hydrogen strategies in place - Germany, France, Spain for example - and billions of euros have already been pledged to support the expansion of hydrogen. The EU has a target of 40GW of low carbon hydrogen by 2030 compared to just 5GW in the UK.

Last weekend, India's Prime Minister, Narendera Modi placed green hydrogen at the heart of the country's energy security and climate action. India is the world's third largest emitter of CO2 so an important development.

China, the world's largest source of greenhouse gas emissions (28%), is also the world's largest producer of hydrogen. However most of this is currently produced using coal. It is likely that they will gradually move towards green hydrogen as they transition to a carbon neutral economy by 2060 ( may become 2050).

UK Hydrogen Strategy

Last year the PM set a target of 5GW for green hydrogen in his 10 point plan for a 'green industrial revolution'. As part of this plan, this week the government has published it's long-awaited hydrogen strategy (link to 60 page pdf)

"Working with industry, our ambition is for 5GW of low carbon hydrogen production capacity by 2030 for use across the economy. This could produce hydrogen equivalent to the amount of gas consumed by over 3 million households in the UK each year. This new, low carbon hydrogen could help provide cleaner energy to power our economy and our everyday lives – from cookers to distilleries, film shoots to power plants, waste trucks to steel production, and 40 tonne diggers to the heat in our homes.

Meeting our ambition means rapid ramp up of production and use of hydrogen over the coming decade. In every country of the UK, there are ambitious, world-leading projects ready to deploy at scale, saving carbon and creating jobs". Kwasi Kwarteng, Energy Minister

The Minister travelled north to the new factory of ITM Power in Sheffield for the launch of this new strategy and the paper features a case study of ITM and its electrolytic hydrogen production!

The government clearly recognises that hydrogen will play a critical role in our transition to net zero emissions by 2050 and it could provide one third of our energy requirements. What they seem more unclear on is to what extent this will be clean, green hydrogen made from renewables and what role blue hydrogen (made from fossil fuels) will play. 

They have adopted a 'twin track' policy. There are lots of reference throughout to "low carbon" hydrogen which of course = fossil fuel. Making hydrogen from fossil fuels is problematic as it relies up capturing the CO2 emissions - a technology that is to date unproven.

So far as I can make out, hydrogen will not make much of a contribution to our plans for decarbonisation of the economy by 2030 or even 2035. It seems the emphasis is more for the longer term goal of 2050 by which time HMG estimates we will need 250 - 460TWh of hydrogen (currently we use around 20TWh mostly from fossil fuels). The target for 2030 is just 5GW.

Homes

Heating accounts for three-quarters of emissions from our buildings and represents around a quarter of all our CO2 emissions so this area will be critical on the road to net zero. The vast majority of our homes and commercial premises are heated by natural gas so it will be a huge challenge to replace all those gas-fired boilers.

We are still awaiting the Heat/Homes strategy so it will be interesting to see whether HMG clarify the role hydrogen will play in the future compared to heat pumps. For the time being, this strategy talks about a 20% blend of hydrogen and natural gas to 2030 to heat up to 3 million homes. 

The range from 2035 is 0 - 45 TWh...i.e unknown! Could be big, could be zero...we could do with some leadership and clear vision in this area.

Industry

The strategy is clearer and shows that  hydrogen will play a big part in the decarbonisation of a range of sectors where electrification is not feasible or just too costly. Long distant heavy-duty transport, buses,  shipping, trains, chemical industry and high temperature furnaces used in steel for example.

Already in service in London

Blue v Green Hydrogen

My impression is that blue+carbon capture is the preferred option for this government, certainly over the coming decade. The lack of emphasis on green hydrogen is a mistake imho. Just last week, academics from a US university warned that using blue hydrogen could produce 20% more emissions than continuing to use natural gas.

Chris Jackson stepped down as chair of the UK Hydrogen & Fuel Cell Assn. following publication of the government's strategy saying:

 "I believe passionately that I would be betraying future generations by remaining silent on that fact that blue hydrogen is at best an expensive distraction, and at worst a lock-in for continued fossil fuel use that guarantees we will fail to meet our decarbonisation goals,"

Most green groups as well as the green energy providers are urging HMG to avoid blue hydrogen and focus on green.

Conclusion

The is a decent first effort in parts but much more work is required to get up to speed. The strategy is muddled and needs more work to give a clear lead to the private sector and policy makers in business. In some ways it plays into the hands of the fossil fuel industry by supporting blue hydrogen and why the support for carbon capture which is far from a reliable and proven technology at this point?

Mr Muddle

We need more urgency in our ambitions to decarbonise and 5GW of hydrogen just indicates this government lacks a sense of urgency which prompted the 'code red' warning on climate from the IPCC last week.

We are late with this half-hearted strategy and risk losing out commercially to other countries such as Germany with its focus on green hydrogen, S Korea, US and China who are more far-sighted regarding the benefits of getting ahead with support for their hydrogen industry.

HMG admits there will not be significant amounts of hydrogen for some time and it will not be heating our homes in the coming decade - around 1TWh by 2030 compared to total energy consumption of  435TWh used currently. This tells me the government have yet to accept that we actually have a climate crisis...they lack urgency and ambition. We can't afford to dilly-dally on the way forward for the coming decade, we have a narrow window to get this right, the crisis demand bold and decisive action from our politicians now.

So, marks out of 10...maybe a 4, must do better! We have a climate emergency, HMG declared this in parliament in 2019 so it's about time they started to act like we have an emergency and drop the complacency.

Code Red for Humanity - IPCC Climate Report

The Intergovernmental Panel on Climate Change (IPCC) have delivered their assessment on the state of global climate change. This will be the first update since the last report in 2013 and will be a key report for leaders when they meet up in Glasgow for COP 26 in November.

This report from the world's leading climate scientists shows how close we are to the brink of an irreversible and multi-faceted global catastrophe caused by extreme weather resulting from global warming.

We are now in the last chance saloon and the next meeting of global 'leaders' at COP 26 could well be the last opportunity to act decisively and urgently to address the crisis.

Key Findings

Obviously everyone can see the effects of global warming in the news - most recently the devastating floods in Germany and China, wildfires in Turkey and Greece as well as the whole west coast of the US and Canada. Clearly the world must know that the climate crisis is not something coming down the line in the future...it's already here.

The main points :

• The past 5 years have been the hottest on record
• Humans are responsible for this warming
• Warming was 1.1C higher by 2020 compared to the period 1850 - 1900
• 1.5C will be reached by 2040 but more likely in the early 2030s if global emissions are not slashed
• Sea level rise of 2m by 2100 cannot be ruled out
• We currently emit around 40 billion tonnes of CO2 each year...a further 500 bn will take us to 1.5C (carbon budget article)
• There will be an increase in extreme events "unprecedented in history" even at 1.5C

So, the lights are flashing red on the climate dashboard but this has been the case for some time and I don't think many people will be surprised by the key findings.

Credit BBC (click to enlarge)

The reality is that 75% of global warming is caused by the burning of fossil fuels so the world must quickly wean itself off this addiction and move to green alternatives such as wind, wave, solar, geothermal and hydrogen...we already have all the technology in these areas, we just need to shift the funding away from coal, oil and gas. Global financial markets can be part of the solution to this existential crisis.

Investments

One of the fundamental aspects of life is that everything is interconnected to everything else. We have seen how a new strain of virus in one part of the world quickly spread around the globe and suddenly brought the whole economy to a virtual standstill.

The climate crisis poses a far greater threat than coronavirus. It is an existential threat to the way we have lived for many thousands of years. We clearly need to address this threat with the same focus and determination used to tackle the pandemic - there will be no vaccine to save us from climate change.

We are seeing more stormy weather, more wildfires as the warming continues year on year. But what really concerns the climate scientists is the increasing risks of triggering a tipping point which would lead to runaway warming which we could not stop. This is the effect of feedback loops where one aspect of warming makes a change to another aspect which in turn amplifies the first aspect more. So, a warmer planet leads to melting of the polar ice and permafrost which then releases trapped greenhouse gases such as methane which warms the planet even more.

By continuing to ignore the science and delay meaningful action we are literally playing with fire.

Wildfires in Greece...10th day and no sign of an end

We saw the reaction in the markets last March at the outbreak of the pandemic. All of a sudden we see a 10% drop in a single day and investors are like rabbits caught in the headlights. I can't imagine what would happen when news of a global tipping point broke. Hopefully we can get our act together and head off the worst of the climate crisis but to be honest, our record so far does not fill me with confidence.

My overall impression is that the investment professionals such as bankers, city analysts and most fund managers are well behind the curve when it comes to the risks associated with climate change. I suspect most will regard it as a problem for the future which may slow down economic growth. I think this attitude reflects a lack of understanding of the threats posed by global warming. As the former governor Mark Carney said last year "Once climate change becomes a defining issue for financial stability, it may already be too late". So, I believe the smart investors will be getting up to speed on the economics of climate, evaluating the risks and outlook and then re-evaluating their asset allocation.

Personally, I think the risks to the markets and wider global economy posed by the climate crisis at this point are high and investors should proceed with caution. Others may well disagree, and I absolutely accept that everyone will have their unique perspective, but at the very least evaluate the risks.

Conclusion

Global leaders, the top business executives and the global community can no longer afford any further delay in making the difficult decisions needed to address this crisis. I must admit that given their track record, I am not really optimistic they will get to grips with the issues and take the actions required and therefore from an investor point of view I will certainly be reducing equities and increasing bonds to de-risk my portfolio over the coming months

In May, the IEA set out their roadmap to limit warming to 1.5C and which ruled out all new coal, oil and gas exploration and development from this year to have a chance of meeting this limit.

"The world will soon face catastrophe from climate breakdown if urgent action is not taken" Alok Sharma, President of COP 26 (Aug 2021).

For many people all around the world this has been the hottest summer of their lives...however it will most certainly be the coolest summer of the rest of their lives. Politicians, policy makers, business leaders, celebrities, ordinary people ...we all need to act now. In 5 years time it could well be too late to avert the crisis.

"This is not the first generation of world leaders to be warned by scientists about the gravity of the climate crisis, but they're the last that can afford to ignore them" Doug Parr, Greenpeace UK.

Feel free to share your thoughts and feelings on the climate crisis. Leave a comment below...all views on this important subject welcome.

WisdomTree Precious Metals ETF - Portfolio Addition

This precious metals ETF (ticker PHPP) offers investors a simple and low cost way to hold a basket of precious metals in their portfolio. Each of the four metals - gold, silver, platinum and palladium - are secured by a physical allocation backed by HSBC bank who act as custodians. This means physical gold bars or silver etc. are stored  away in the treasury vaults of a trustee and this provides more security than collateralised ETCs or 'swaps'. It's an exchange traded commodities or ETC which works in a similar way to ETFs and is traded on the market in exactly the same way.

The Case for Gold

I must admit that I have never been a fan of holding gold in the past but obviously as a defensive asset it can provide stability when the markets are turbulent or there is global tensions rising. In the past, gold has proved to be a safe have during difficult times such as the financial crisis of 2008/09.

Also these metals provide a hedge against inflation. Unlike fiat currency such as the GDP or USD, you cannot 'print' more gold or silver - they cannot be inflated. Inflation is creeping up - currently 2.5% and forecast to rise to 4% next year here in the UK. Meanwhile the BofE base rate remains at an all-time low of 0.1%...something surely has to give.

Finally, these metals tend to be negatively correlated to other assets such as equities and bonds so this should provide some evening out and stability as one asset falls the other advances and vice versa.

I am starting to see more risks associated with the increased debt from government borrowing due to Covid - the government borrowed over £300bn in 2020/21 - the highest since WW2. Total government debt has risen 18% in the past year to £2.2 trillion (£1.87tr April 2020).

Then add to this record debt and rising inflation the huge risks associated with the climate crisis which our leaders seem incapable of getting to grips with. These are likely to impact negatively on the global markets over the coming years so it seems like a sensible precaution to try to protect some of the gains made over the last decade.

Returns

The fund has returned a total of 58.2% over the past 5 years which equates to an average annualised CAGR of 9.6%. The year-to-date however is just 0.7% so I am hoping there will be a little more to come over the rest of this year and beyond but the main aim is not to lose value during any downturn.

PHPP share price past year

Conclusion

Investing is mainly about risk and reward and of course asset allocation will play a big part in the success or otherwise of any strategy. Some will be happy to push the boat out for the potential of higher returns from equities. Others will prefer the slow and steady game with a good balance of diverse assets in the mix. There is no right or wrong approach and much will be down to each individuals tolerance for volatility and of course time frame.

For me, at this point I am starting to see more downside in the future and will be looking to reduce the risks associated with equities and look at a range of safer options.

The purchase price earlier this week was at £112.50 and the fund will form a part of my defensive allocation which includes bonds and which together account for 10% of my portfolio. I would expect this to build up to 20% to 25% over the coming months.

As ever, this article is merely a record of my personal investment decisions and take on the risk/rewards associated with the current markets. It should not be regarded as an endorsement or recommendation - always DYOR!

Trojan Ethical Fund - Portfolio Addition

This fund was added to my defensive portfolio following the dramatic market turmoil at the start of Covid last year. As the year unfolded and the markets started to rebound I sold the fund along with many other investments to fund my house move which was completed last November.

At the start of 2021 my portfolio was 100% equities but I am now starting to rebalance my allocation to build back up some of the defensives which were sold off last year. In the past week or so I have reduced my Google, Microsoft and NIBE shares after a really strong run this past year - Google up more than double since purchase last April and Microsoft up 75% - and the proceeds have been divided between iShares Index Linked Gilts (INXG) and this defensive ethical fund.

2 Yr Chart...Google v FTSE All Share Index
(click to enlarge)

What It Does

This is a multi-asset fund aiming to deliver above-inflation growth. The assets are similar to the larger Trojan Fund but subject to ethical considerations. Therefore all investments are screened to exclude Arms, Pornography, Tobacco, Fossil Fuels, Alcohol, Gambling and High-Interest Lending. The fund will only invest in securities guaranteed by the G7 countries - UK, US, Canada, France, Germany and Japan.

The fund was set up in March 2019 to complement their Ethical Income Fund and is managed by Charlotte Yonge who has been with Troy since 2013 and who also co-manages their £4bn flagship Trojan Fund with Sebastian Lyon. The emphasis is very much focused on the preservation of capital which is now starting to become more of a focus for me rather than attempting to make more and more profits. Returns have been very acceptable for a defensive fund...7.2% in 2019, 10.9% in 2020 and 4.6% to end June.

Trojan Ethical 1 yr Chart (click to enlarge)

Total return since March 2019 is 24.4% compared to FTSE All Share 10.2%.

Holdings

Asset allocation will vary but currently

Global Equities           35%

UK Equities                  8%

IL Bonds                     31%

Gold                            12%

UK T Bills                     8%

Cash                              6%

Some top equity holdings include Microsoft (5.7%), Google (5.3%), Visa (4.4%), Medtronic (3.8%), Unilever (3.5%), American Express (3.3%), Nestle (3.1%).

I am starting to become concerned about the levels of borrowing and QE arising from the prolonged Covid situation as well as the slow progress from our so called leaders on the climate crisis. I will expand upon these concerns in a future article but I am starting to see a few bears on the horizon so it just feels like a good time to reduce equities and start moving some of my portfolio back into safer waters.

The purchase price was 119p and fund accounts for just 4% of my green portfolio.

As ever, this article is merely a record of my personal investment decisions and take on the risk/rewards associated with the current markets. It should not be regarded as an endorsement or recommendation - always DYOR!