2 Stocks That Could Benefit From Hydrogen Power

The problem with renewable energy sources like wind and solar is their intermittent nature and the fact that it is hard to store electricity on a large scale, the way we do with oil or natural gas. Tesla's (NASDAQ: TSLA) Megapack, in which large-scale batteries store power for use in peak periods or when renewable sources can't generate electricity, may prove to be the solution to the storage problem. However, it is still in the nascent stage. In the meantime, there is another possibility: hydrogen.

Hydrolysis: A solution to the energy storage problem

Most of us will remember the high school chemistry experiment of separating water into hydrogen and oxygen by running a current through it (the process is called electrolysis). This is a roundabout way of solving the storage problem -- by using solar or wind power to create electricity, excess power can be used to convert seawater into hydrogen and oxygen which can then be transported via pipeline or stored locally in lieu of using a natural gas peaker plant. If the electric power is created with zero-emission wind or solar, the carbon footprint will approach zero.

Picture of solar panels and hydrogen storage

Image source: Getty Images.

Hydrolysis is a much cleaner source of hydrogen

The Department of Energy's Fuel Cell Technology Office (FCTO) recently allocated $64 million to hydrogen research in the hopes of bringing down the cost of hydrogen generation to compete with natural gas (which is the current source of hydrogen). The press release says, "This investment will support transformational research and development (R&D), innovative hydrogen concepts that will encourage market expansion and increase the scale of hydrogen production, storage, transport, and use."

Hydrogen generation is still a long way from being ready for prime time. The cost of generation is still too high and not competitive with natural gas, which is the current source of hydrogen to begin with. That said, the Department of Energy is committed to stepping away from natural gas, for both environmental and price volatility reasons. The plan will be to find ways to lower the cost of hydrogen production all throughout the supply chain. A big part of that will be investing in research to lower the cost of electrolysis. Currently battery storage looks like the better option, but there still may be a place for hydrogen generation. 

How can an investor get exposure?

Unfortunately for U.S. investors, the biggest companies involved in electrolysis are overseas. The leaders there are McPhy, Siemens, ThyssenKrupp, and ITM Power. There aren't many options in the U.S. 

Two companies manufacture large-scale hydrolysis equipment: Cummins (NYSE: CMI) and Parker Hannifin (NYSE: PH). Cummins recently completed its acquisition of Hydrogenics, a leader in fuel cell and hydrogen production technology that it owns jointly with French industrial gas company Air Liquide. This partnership will give Cummins exposure to the entire hydrogen ecosystem, from production, delivery, and use via hydrogen engines.

Hydrogenics will fit in the electrified power segment, which is dedicated mainly to research and development. This segment is not expected to meaningfully contribute to the bottom line any time soon, but it represents a huge growth potential. Hydrogen could also fit in Cummins' more traditional engine applications, where hydrogen and oxygen are introduced into the fuel right before combustion. This increases the energy released, burns the fuel more completely, and reduces carbon output. Parker Hannifin also offers hydrolysis equipment, but it is more targeted toward laboratory applications, at least at the moment. 

Hydrogen is a tomorrow story

The hydrogen economy has had a number of false dawns, and the issue has always been cost. Unfortunately, it takes a lot of energy to break down water and then compress the gas for transport. That is a physics problem, not an economics one. However the marginal cost of solar and wind is tiny, so any excess energy can be used to create hydrogen which is then used when wind or solar cannot generate electricity. Hydrogen is not a replacement for renewable energy, it is a way to store it and transport it.

As of now, battery storage is winning the race, but perhaps hydrogen will have some technological breakthroughs. The government would like to see if that is possible. Hydrogen may never get there, and even if it does, we are a long way from large-scale hydrogen renewable energy. However, at least two American industrials, Cummins and Parker Hannifin, will be at the forefront, if it happens. Buy now on hydrogen possibilities? No. But if you like these stocks to begin with, hydrogen could represent some upside way down the line. 

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Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Cummins. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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