Investing in ASX hydrogen shares

As the global population increasingly focuses on mitigating climate change and reducing carbon emissions, green energy sources such as hydrogen are gaining traction.

In this article, we'll explore why investing in ASX hydrogen stocks might be a compelling choice for your portfolio. 

What are ASX hydrogen stocks? 

ASX hydrogen stocks represent shares in companies producing, transferring, or marketing hydrogen as a fuel. A flammable gas that can generate power and heat, hydrogen is considered a clean energy source.

Hydrogen produces only water, electricity, and heat when used in fuel cells, offering a high-efficiency, low-emission energy solution. This versatility means hydrogen has potential applications across various sectors, including transportation, commercial, industrial, and residential.

We can produce hydrogen through several methods, but it remains more costly than traditional fossil fuels. The primary challenge is bringing down production costs to make hydrogen more competitive. Research is focusing on enhancing production technology efficiency to achieve cost parity with fossil fuels, which could significantly boost hydrogen adoption.

Why invest in ASX hydrogen shares? 

Hydrogen energy is seen as a promising alternative fuel that can help decarbonise industries, store renewable energy, and potentially replace natural gas. Hydrogen fuel cells operate similarly to batteries, generating electricity through an electrochemical reaction. 

They can power vehicles and serve as a fuel source for homes and businesses. The Australian Government estimates that hydrogen production could generate more than $50 billion by 2050.¹ 

Investing in ASX hydrogen shares offers exposure to the growing shift toward clean energy. Many countries, including Australia, are positioning themselves as leaders in green hydrogen production. 

In the long run, hydrogen could be crucial in powering commercial vehicles, replacing diesel, and decarbonising energy-intensive industries like steel manufacturing, chemical production, and shipping. 

However, it's important to note that the hydrogen industry is still in its early stages. Hydrogen stock investment may become volatile as the sector matures and scales up.

Recent industry developments

The Australian Federal Government has shown strong support for hydrogen development. The 2023-24 budget introduced a $2 billion Hydrogen Headstart program,² which constitutes half the budget's $4 billion renewable energy commitment. 

The aim is to accelerate Australia's hydrogen industry development by providing revenue support for large-scale renewable hydrogen projects through competitive production contracts. 

Top hydrogen stocks on the ASX 

The number of ASX-listed companies involved in hydrogen production is growing. 

Below are some of the top hydrogen stocks listed on the ASX, ranked by market capitalisation from high to low.  

Fortescue Metals Group 

One of Australia's three largest iron ore miners, Fortescue Metals is also engaged in the hydrogen sector via its subsidiary Fortescue Future Industries (FFI). FFI develops technology solutions for hard-to-decarbonise industries while building a portfolio of renewable energy and green hydrogen projects. 

Fortescue had aimed to produce 15 million tonnes of renewable hydrogen annually by 2030 but placed this goal on hold in July. The mining company seeks to combine its metals and energy divisions to simplify the corporate structure, remove duplication, and deliver cost efficiencies. 

Nonetheless, Fortescue remains steadfast in its commitment to scaling up and commercialising green hydrogen. The company has dozens of green energy and hydrogen projects under development globally, but it will initially focus on green hydrogen projects in Australia, the United States, Norway, and Brazil. Further projects in Morocco, Oman, Egypt, and Jordan will follow. 

Woodside Energy Group 

A global energy company, Woodside is moving towards a renewable future with several hydrogen projects in progress. The company is developing a domestic and export-scale hydrogen production facility in Western Australia to support the transition of the local electricity grid to renewable sources. Woodside is targeting to supply industrial customers in Western Australia by 2025. 

Woodside had secured land for a similar facility in Tasmania, which would use a combination of hydropower and wind power to create renewable hydrogen for domestic use. In August, however, Woodside withdrew environmental applications for the project, advising that it was continuing to assess the viability of the opportunity. 

The energy company is progressing with a liquid hydrogen project in Oklahoma, United States, and is discussing pricing and volumes with potential off-takers. Once completed, the project is expected to produce up to 60 tonnes per day of liquid hydrogen.   

Frontier Energy

Frontier Energy is developing the Bristol Springs Project in southwest Western Australia, one of Australia's first commercial green hydrogen projects. A pre-feasibility study found that stage one of the project (a 114MW solar farm) would produce around 4.4 million kilograms of green hydrogen annually. 

The company anticipates that the low estimated cost of production will make the project one of the lowest-cost producers of green hydrogen in Australia. It has more than 500MW of expansion potential, which can improve project returns. 

Frontier also plans to develop Western Australia's first publicly available green hydrogen refuelling station in Perth. Replacing diesel and petrol with green hydrogen in transport and bulk haulage has significant potential to reduce emissions. 

What might the future hold for ASX hydrogen shares? 

Australia is poised to become a significant player in the global hydrogen market, driven by substantial government investment and strategic initiatives like the National Hydrogen Strategy³. This strategy aims to position Australia as a leading hydrogen exporter by 2030. A key element is the focus on creating hydrogen hubs to foster large-scale demand and reduce production costs. 

Establishing hydrogen hubs will enhance infrastructure development, promote economies of scale, and stimulate innovation. These efforts are crucial to turning hydrogen technologies into commercially viable solutions that can compete with traditional fossil fuels.

Pros of investing in hydrogen stocks

Huge potential: Hydrogen is a clean energy source with immense potential. Significant investments are being made globally to enhance hydrogen technology applications, particularly in industries that are difficult to decarbonise. 

Government support: Programs like Australia's Hydrogen Headstart provide a tailwind, accelerating industry development and positioning the country as a critical player in the hydrogen economy. 

Cons of investing in hydrogen stocks

Volatility: Many hydrogen stocks, particularly smaller companies, are still in their development stages. This can lead to significant share price volatility as the market reacts to technological advancements, policy changes, and economic shifts. 

Early-stage technology: Although government incentives help, much of the hydrogen is still at the innovation stage. The transition to widespread use as a mainstream energy source will take time and significant technological advances. 

Are ASX hydrogen shares a good investment? 

With more countries committing to net-zero emissions, hydrogen is gaining attention as a green alternative to fossil fuels. However, the high costs associated with production and the need for economies of scale present challenges. 

Consequently, investing in hydrogen shares might be more suitable for those with a long-term investment horizon and a higher risk tolerance.

For investors who want broad exposure to the hydrogen sector, an exchange-traded fund (ETF) such as Global X Hydrogen ETF (ASX: HGEN) could provide a diversified way to benefit from the industry's growth. 

The hydrogen sector is still in its early stages, with substantial potential for growth. While risks are associated with investing in ASX hydrogen shares, the strong support from governments and the global push towards cleaner energy sources suggest that hydrogen could play a significant role in the future energy mix.