With only a couple of exceptions – the GFC in 2008 and the pandemic in 2020 being the outliers – consumption has risen relentlessly for many, many years (Exhibit 1).

As you can also see, the vast majority of the energy being consumed comes from fossil fuels – either directly through the burning of oil, gas or coal in homes, offices and transportation vehicles, or indirectly through the burning of fossil fuels in electric powerplants.  The troubling implication of burning ever more fossil fuels is a disastrous change in climate conditions, which haven’t been properly addressed yet.  Recent attempts to get the rise in temperatures under control have not convinced me that our political leaders are walking the walk as much as they are talking the talk.  Rather worryingly, current CO2 emission levels are disproportionate to anything we have seen over the last 800,000 years (Exhibit 2).

In our two research papers on hydrogen from May 2021 (which you can find here), I provided a great level of detail as to why rising CO2 levels are problematic and shall not repeat myself.  That said, one paragraph from part I of the 2021 paper summarises the issue quite well:

“CO2 controls the amount of water vapor in the atmosphere.  In other words, the more CO2, the more pronounced the greenhouse effect and the higher the temperature is.  Now, if you look at [Exhibit 2], CO2 emission levels have exploded since the early days of the Industrial Revolution.  The chart has only been updated through 2017 but, according to the UK Met Office, CO2 emissions in March 2021 averaged 417.14 ppm (parts per million).  In other words, CO2 emissions continue to rise explosively.”

To get global warming under control before it is too late (whatever that means), it is therefore obvious that something drastic needs to happen.  In that context, “something drastic” translates into a conversion to green energy forms such as green electricity and/or green hydrogen, and the sooner that can happen, the better.

The EU Commission has recently added nuclear energy to their list of green energy forms.  Strictly speaking, I should therefore include nuclear in this discussion, but this paper is about the lithium-ion technology vs. hydrogen fuel cells, and nuclear is quite irrelevant in that context.  Furthermore, I have already covered nuclear extensively.  See for example here.

Two good reasons to drop fossil fuels for good

Two recent events have further increased the necessity for immediate action on fossil fuels:

1. Russia’s dependence on oil and gas exports for hard currency income combined with its invasion of Ukraine earlier this year have made fossil fuels a central element in the sanction programme against Russia.

2. Scientists have warned that the Thwaites Glacier in Antarctica (a large glacier the size of Britain) is melting quickly.  A complete collapse of Thwaites will lead to a rise in seawater levels of more than 2 metres, but that is unlikely to happen any time soon. More likely, a part of it – the part that has already partially broken away from the main glacier – will soon collapse into the sea, and that will cause seawater levels around the world to rise by about 65cm.  This could happen within five years (see the story here).

The combination of a mad man in Russia and seawater levels rising more than many nations can handle, increases the likelihood that many countries around the world will do their utmost to phase out fossil fuels as quickly as possible, and that is why one needs to understand the ramifications for all alternative energy forms.

Rising energy consumption and melting glaciers in Antarctica are obviously two sides of the same story.  A continued rise in demand for energy, and that will almost certainly happen as living standards continue to improve in most parts of the world, will continue to affect CO2 levels and therefore also the climate, unless the willingness to act swiftly improves.

So, will lithium-ion batteries prevail, or will hydrogen?  In that context, I will assume that liquid hydrogen is the most likely form of hydrogen to be adopted.  As a gas, hydrogen is far too explosive to appeal to the broader market, I believe.  Academics actually disagree as to which of the two energy forms that are likely to come out on top, although a growing number of commentators argue that there is room for them both.  More on that below.

Electric batteries vs. liquid hydrogen – the pros and cons

Energy density

The most obvious advantage of hydrogen relative to lithium-ion batteries is its much higher energy density.  Whereas a lithium-ion battery has a density of only 200 watts per kilogram, the density of hydrogen is no less than 35,000 watts per kilogram (source: MotorBiscuit.com).  The implication of this is that vehicles travelling over longer distances will need a disproportionately large battery to cope.

The massive difference in energy density is particularly relevant in the aviation industry.  Modern commercial aircrafts could never fly on lithium-ion batteries, as these would have to be enormous.  Although the energy density of hydrogen is about three times that of conventional jet fuel, the difference is not big enough to be a significant problem.  Take for example Airbus, which plans to launch its first zero-emission commercial aircraft in 2035.  The plan is for this aircraft to fly on liquid hydrogen based on the hydrogen fuel cell technology.

Energy efficiency

Where energy density favours hydrogen, it is the other way around, as far as energy efficiency is concerned.  Relatively poor energy efficiency is actually a major sticking point as far as hydrogen engines are concerned.  Due to longer processing times and the number of additional steps in the process of generating electricity in hydrogen fuel cells, more energy is lost, making hydrogen fuel cells less efficient.

On average, the lithium-ion battery technology loses ‘only’ 20-30% of its efficiency in the process, whereas the hydrogen fuel cell technology loses 70% or more (Exhibit 3).  The car industry is therefore likely to favour lithium-ion batteries – at least until the hydrogen technology becomes more efficient – whereas heavy-duty vehicles may not always have a choice.

Intermittency

The unreliable nature (intermittency) of wind and solar makes hydrogen comparatively attractive.  Sometimes the sun doesn’t shine and, at other times, there is not enough wind.  If renewables account for a high percentage of the energy mix, the intermittency is difficult to manage – at least until energy storage solutions improve.  The country with the highest proportion of its electricity being generated by wind – Denmark – is already struggling with this problem, although wind’s share of total power production is still ‘only’ about 55%.

Hydrogen offers a solution to that problem, as you can store almost unlimited amounts of it.  During times of high winds, when there is a surplus of energy, one option would be to use the excess energy (which Denmark gives away to neighbouring countries at present, virtually for free) to fuel the electrolysis process, which is the key process when you turn water into liquid hydrogen.  The hydrogen can then be stored and used when required.

Infrastructure

Both technologies fall short on infrastructure.  In most countries, the electric grid is hopelessly inadequate for an era of electrification.  In fact, it would break down pretty much everywhere if all cars were electric.  Upgrading the grid worldwide is therefore a must but shall require a huge amount of capital.

Likewise, establishing a hydrogen-friendly infrastructure shall require massive investments which is unlikely to happen anytime soon.  An unintended consequence of the green transition on the back of an inadequate infrastructure is therefore that fossil fuels will probably be with us for longer than most of us think.

Fuelling vs. charging

A key concern amongst prospective buyers of electric cars is the long charging time of lithium-ion batteries.  Filling up your car with petrol or diesel takes no more than a couple of minutes, and a car driving on liquid hydrogen won’t be any different.  By comparison, charging an electric car takes an eternity.  Although certain brands have recently introduced cars that can be charged in minutes rather than hours (take for example Hyundai’s new IONIQ 5 which can be charged to 80% in less than 20 minutes), in general, the charging time still makes it a challenge to appeal to buyers who drive a lot.  It is therefore fair to say that, when it comes to fuelling vs. charging, lithium-ion batteries are way behind hydrogen.  That said, the gap is likely to shrink a lot over the next few years, as energy storage technologies improve.

Safety

You often hear supporters of electric cars argue that driving on hydrogen is unsafe, as it is highly explosive, but that is a silly argument.  Hydrogen gas is very explosive, but liquid hydrogen is no more dangerous than other flammable fuels.  I quote:

“Hydrogen is no more or less dangerous than other flammable fuels, including gasoline and natural gas.  In fact, some of hydrogen’s differences actually provide safety benefits compared to gasoline or other fuels.  However, all flammable fuels must be handled responsibly.  Like gasoline and natural gas, hydrogen is flammable and can behave dangerously under specific conditions.  Hydrogen can be handled safely when simple guidelines are observed and the user has an understanding of its behaviour”.  (Source: eere.energy.gov.)  

Storage

Just as both technologies fall short on infrastructure, so they do on storage solutions.  While storing electricity is known to be problematic, few are aware of the storage problems related to liquid hydrogen.  The problem is that liquid hydrogen boils at -252.8°C, i.e. it must be stored below this temperature level at all times (in so-called cryogenic tanks).  This adds considerably to both cost and weight.  Having said that, flying on lithium-ion batteries is a much bigger issue weight-wise.  Quite simply, it isn’t feasible, given today’s technology.  Hydrogen is therefore almost certain to be the fuel of choice in the aviation industry, although the conversion shall require enormous investments.

Use in industry

Many industrial companies are massive users of electricity.  As very high temperatures are often a requirement in the manufacturing process, and as hydrogen is much better suited to handle than electric batteries are (because of its higher energy density), one would expect the use of liquid hydrogen in industry to spread quite quickly.  Precisely how they plan to deliver the hydrogen to companies around the world you can read more about in this article in the Financial Times.

Cost

The cost of producing green hydrogen has historically been prohibitively high, but massive investments into the technology more recently combined with escalating fossil fuel prices following Russia’s invasion of Ukraine, have dramatically reduced the price gap.  Moreover, it is widely expected that the cost of generating green hydrogen will continue to fall steeply in the years to come.  Already, hydrogen fuel cells are more cost-efficient than lithium-ion batteries in lorries that travel long distances, and Wood Mackenzie expect those costs to fall a further 35-50% over the next three years (see the story here).

Production capacity

The pipeline on liquid hydrogen production capacity has grown seven times since December 2020.  Although most of the projects in the pipeline are still in the early stages of development, as you can see in Exhibit 4, hydrogen production capacity is scheduled to grow sharply in the years to come.  This will remove a significant hurdle for the hydrogen fuel cell technology to become more widespread.  Until recently, the consensus view was that hydrogen will struggle to grab a reasonable market share, as production capacity amongst liquid hydrogen producers wasn’t big enough to make a difference.  That view is rapidly changing.

Lithium production capacity is to a significant degree a function of lithium reserves and, in that respect, South America stands out, as it sits on the largest pool of lithium reserves worldwide (Exhibit 5).  You could argue that some South American countries (e.g. Bolivia) are not in possession of the infrastructure required to mine all those reserves anytime soon.  On the other hand, most lithium reserves in South America are in brine water which is more accessible, and much cheaper to mine, than lithium reserves in solid rock.  At current prices, rock mining and brine water mining are both profitable, though.  As far as reserves are concerned, in short, there is plenty of lithium left to fuel the global car fleet for many years to come.

Power-to-X:  The ultimate game changer?

Power-to-X means converting power (electricity) into something else.  As I have already pointed out, power can be converted into liquid hydrogen by adopting the electrolysis approach, and that hydrogen can either be used straightaway or stored for future use, which power cannot.

Power-to-X is an essential element in the green transition.  Many private homes are now heated with an electric heat pump, i.e. power is used to heat homes but not the old fashioned way – no radiators are needed.  I estimate that my electricity bill has dropped by 35-40% after installing a heat pump.

Power-to- X is a winner for the simple reason that not everything can run on batteries.  Lorries and trains, ships and planes are the best examples.  Power-to-X is essential for these transportation groups, and the same logic applies to energy-intensive processes in industry.  Power-to-X can also be deployed to produce the chemicals used when manufacturing various medical products, and Power-to-X makes it possible to eliminate oil from the process when manufacturing plastic products.  Last but not least, Power-to-X allows us to manufacture protein, which may come quite handy as the globe becomes more and more populated.

In other words, if the electricity that goes into the electrolysis process is green, then suddenly, we have made oil virtually obsolete, and a huge proportion of our manufacturing has turned green.  The opportunity set is almost endless (Exhibit 6).

The future landscape

To many I have spoken to, the choice between lithium-ion batteries and hydrogen fuels cells has almost become a religious issue.  They either believe or they don’t, and plain logic makes no impact.  A good example is Elon Musk who is fond of using the term hydrogen fool cells.  That said, I have come to realise that picking the winner of this battle is not as straightforward as I would have hoped.  As I have already pointed out, both technologies have some major plusses in their favour, but there are also disadvantages attached to both.

Probably the biggest advantage associated with the hydrogen fuel cell technology is the ability to store energy in large quantities when needed – for example when high winds generate excessive amounts of electricity.  Storing significant amounts of electricity for long in batteries is simply not an option, given the technology available today.

For that reason alone, at least until other energy storage solutions improve, it is almost unthinkable that hydrogen won’t play a central role in tomorrow’s fossil fuel-free world.  All the added advantages that Power-to-X brings to the table raises the probability even further that the hydrogen fuel cell technology is a long-term winner.

That doesn’t imply that the lithium-ion technology is a loser, though.  I am sure it will be phased out eventually, as most technologies are, but research into alternative battery technologies suggests that a replacement is at least 15 years away, so you have little to worry about in that respect.

Furthermore, it is naïve to think that fossil fuels will be completely phased out anytime soon.  The current bout of inflation has probably reduced that probability even further.  That said, even if total demand for electricity grows by 25% globally from current levels of about 13,000 mtoe annually (see Exhibit 1 again), Power-to-X has the potential to reduce fossil consumption to 6-7.000 mtoe annually (source: Siemens).

Risks to be aware of

The Russian invasion of Ukraine has made it obvious that, if anything, the green transition is not happening fast enough.  Whether we can actually speed things up is another question.  In theory we can, but are we – or rather, are our political leaders – willing to do so?  The green transition is not only tremendously expensive but also inflationary.  At a time where more inflation is about the last thing we need, all those politicians running around with a spine made of boiled spaghetti (and there are many of them) may choose to hang on to fossil fuels a bit longer.

In other words, although the green transition will almost certainly be completed at some point, the timing of it is not crystal clear.  Adding to that, longer term, many commodities and elements that stand to benefit from the green transition may be pushed aside when fusion energy is finally rolled out.  Supporters of the hydrogen fuel cell technology maintain that heavy-duty vehicles will never be able to take advantage of the lithium-ion battery technology.  The battery in those types of vehicles will simply have to be disproportionately big, they argue.

That argument ignores the advent of fusion energy, though. The American aircraft manufacturer, Lockheed Martin, have developed and patented a small, mobile fusion reactor (7 by 10 feet), which generates sufficient electricity to keep an aircraft (or drone) flying for at least a year without refuelling.  The technology can also be deployed in small communities, not large enough to justify a normal-sized nuclear power plant.  Lockheed Martin estimate that the output from one such reactor can generate enough electricity to keep a community of up to 80,000 people supplied with electricity.

The advent of fusion energy, when it is eventually rolled out, could spell the end of life for many other energy forms – such are the advantages of this new technology.  However, it is still (at least) ten years away from being rolled out, so there is nothing to worry about in the short to medium-term.

How to invest in the energy transition

I am pretty convinced that the two technologies discussed in this paper – lithium-ion batteries and hydrogen fuel cells – will both continue to play an important role in the green transition.  Eventually, they may both be replaced by more efficient energy forms but not in the foreseeable future.  There is nothing meaningful on the drawing board for the next 15 years.

Lithium first: the lithium-ion battery will continue to dominate the car market for many years to come.  Overall demand for lithium – which also happens to be the fuel in fusion reactors – will further accelerate when the fusion technology is finally commercialised.  For those two reasons, lithium is a natural way to play the green transition.

How should you play it?  Chile, I believe, will assume the same role in the lithium-mining community, as Saudi Arabia has assumed amongst oil producing countries.  Therefore, the obvious place to start is Chile.  Before I throw any names at you, I can inform you that, on the 24th of May, I will be meeting with the CEO of a company that owns a share of the largest high-grade lithium reserves in the world – in Chile.  I will share my thoughts as to what to invest in after that meeting has taken place.

Whereas investing in mining companies is the most obvious way to invest in lithium, investing in the hydrogen fuel cell technology is more complex.  Effectively, you have four options:

1. Invest in companies that have developed technological solutions that allow electrolysis to take place.  ITM Power, listed on London Stock Exchange, is an obvious choice.

2. Invest in blue-chip companies committed to hydrogen one way or the other, and there are many of those.  Siemens is a good example – see for example this paper.

3. Invest in oil majors committed to the green transition, and a good example of that is BP.

4. Invest in green energy companies that stand to benefit whether one or the other technology prevails.  This is my preferred option, and the company I have zoomed in on is Ørsted – a Danish company listed on Copenhagen Stock Exchange.

Ørsted has been a dreadful investment since the stock price peaked in early January 2021 at DKK 1,384.  Now, some 16 months later, the price is DKK 734.  As far as I know, nothing disastrous has happened to Ørsted. I can think of only one significant issue showing up on the radar screen, and that is increased competition from oil majors, eager to get a slice of the pie in the green transition.

The stock price of Ørsted has also suffered from a massive hangover in all green stocks after the extraordinary bull market in 2020, but you can hardly blame the company for that.  With Biden looking increasingly likely to win the battle for the White House, investors all over the world loaded up on anything green in anticipation of a profound change of the US policy on climate change.

With a 24% market share, Ørsted is the world leader in offshore wind farms.  Last year, Ørsted announced plans to develop a large hydrogen plant on the border between Belgium and the Netherlands (see here).  This appears to be a very shrewd move by the company – turning the electricity it generates in its windfarms into liquid hydrogen.  Having that option is particularly beneficial at times of excess power supplies – for example when windy conditions result in higher electricity output than warranted – an outcome which is not that unusual in the middle of the night.

Conclusion

The war in Ukraine has highlighted the need to speed up the green transition.  Although we cannot make ourselves entirely independent of fossil fuels anytime soon, we can reduce consumption sufficiently to make us independent of Russian oil and gas relatively quickly.  Assuming that is the primary near-term objective, we need to put the development of the hydrogen fuel cell technology on the front burner, as Power-to-X holds the keys to such an outcome.  Although the EV market will continue to grow, the grid is inadequate to speed up the conversion.  Therefore, Power-to-X is the solution to making us independent of Russian fossil fuels quickly – not lithium-ion batteries.  In terms of asset allocation, I would therefore favour an exposure to the hydrogen fuel cell technology over lithium-ion batteries, although I would make a meaningful allocation to both.

The growing attention to climate change in the public space will make it increasingly difficult for our political leadership not to do something drastic soon.  Imagine the political backlash, should seawater levels rise by 65cm as a result of the partial melting of the Thwaites glacier.  You should therefore take the opportunity to load up on green stocks, many of which are still down significantly from the levels reached in early 2021.

Niels C. Jensen & Sina Dolen

13 May 2022