The government is currently trying to decide between seven different colors of hydrogen.
Now, you might be wondering… Since it’s an invisible gas, how can hydrogen have any color at all?
As usual, it comes down to money.
Two weeks ago, the Department of Energy announced $7 billion in funding to launch “Clean Hydrogen Hubs” around the country – on top of the new tax credit created in the Inflation Reduction Act.
Section 45V of the Inflation Reduction Act offers tax credits for producing hydrogen and will go into effect in next year.
This will allow companies to claim up to 60 cents for every kilogram of hydrogen they make – depending on how much carbon dioxide gets released in the process.
And this is where the “color” of hydrogen comes in…
There are many ways to produce hydrogen. And the companies developing hydrogen technologies have come up with a “color code” to explain how they’re making the fuel that could power our economy in the future.
And right now, the government is deciding which color codes qualify as a “clean hydrogen production facility.” They include black, grey, blue, turquoise, green, pink, and white.
Companies with hydrogen technology are lobbying hard to make sure their “color” of hydrogen gets included so they can claim the lucrative tax credits.
And they’re itching to get started… Because there’s another provision in Section 45V that increases those tax credits by 5X if construction of a hydrogen production facility starts within two months of the final rules being published.
That means they could get up to $3 per kilogram of hydrogen.
Producing hydrogen from renewable energy currently costs $3 to $6 per kilogram. So the new tax credits could offset most of the cost and make hydrogen production profitable and competitive with other fuels.
A lot of money is on the table in this government push to accelerate the production and use of hydrogen.
Today I’ll show you why the government is subsidizing clean hydrogen technology and explain the different “colors” of hydrogen. I’ll also tell you which companies could benefit from the Section 45V tax credit.
Why the Government is Subsidizing Clean Hydrogen Technology
The government is exerting a lot of effort to clean up our economy by reducing our carbon emissions and reliance on fossil fuels.
And currently, they’re relying a lot on batteries for this clean up.
We use batteries to store solar and wind energy. And we’re in the process of trying to replace gasoline engines with battery electric vehicles.
But, batteries just aren’t good enough to replace everything.
They have one major flaw: they have a low energy density.
A lithium ion battery can store 100 to 200 watt-hours per kilogram. Gasoline has an energy density of about 12,900 watt-hours per kilogram. That’s more than 60 times higher.
That means batteries are impractical for certain uses, like trucking, mining, and construction. These require a lot of energy and often don’t have access to the power grid to recharge.
Adding a bulky, heavy battery just makes their job harder.
Hydrogen on the other hand has an energy density of about 33,300 watt-hours per kilogram.
That’s 2.6x higher than gasoline. So you can store more energy in a lighter weight with hydrogen. That makes it an attractive carbon-free fuel to use when batteries aren’t good enough.
Hydrogen can also help reduce the amount of carbon dioxide emissions in the production of iron and steel.
Right now, Iron and steel production make up nearly 30% of global industrial carbon dioxide emissions.
By using hydrogen, that percentage can be reduced significantly.
Here’s how – iron atoms in iron ore are bonded to oxygen atoms. To get pure iron or steel, the oxygen atoms have to be removed in a chemical process called “reduction.”
This is done by heating the ore to a high temperature in a blast furnace with coal. The carbon in the coal reacts with the oxygen in the iron ore to form carbon dioxide. Every ton of steel produced releases 1.9 tons of carbon dioxide.
But hydrogen can also be used to reduce iron ore. And instead of producing carbon dioxide, hydrogen reacts with oxygen to produce water.
So hydrogen could be a good solution to remove carbon emissions from “hard to clean” industries like iron and steel. That’s why the government is encouraging investments in hydrogen technology.
The “Colors” of Hydrogen
This brings us back to the “colors” of hydrogen:
“Black hydrogen” is the traditional way hydrogen is made. It reacts coal with steam at high temperatures and pressures to release hydrogen. In the process, it produces a lot of carbon dioxide.
“Grey hydrogen” uses a similar process as black hydrogen, but starts with natural gas instead of coal. Grey hydrogen is currently the cheapest way to produce hydrogen and costs about $1 per kilogram. But it releases 9 to 12 tons of carbon dioxide for every ton of hydrogen produced.
“Blue hydrogen” uses the same chemical process as grey hydrogen. But instead of releasing the carbon dioxide into the atmosphere, it is captured and stored underground. So it can claim to be clean and have zero emissions. Shell (SHEL) and Exxon Mobil (XOM) have large investments in blue hydrogen.
“Turquoise hydrogen” also starts with natural gas, but uses a different chemical process called “methane pyrolysis.” Instead of producing carbon dioxide gas, turquoise hydrogen produces a solid form of carbon that is less polluting. Mitsubishi Heavy Industries (MHVYF) is backing companies developing turquoise hydrogen technology in the US.
“Green hydrogen” is produced without any greenhouse gas emissions. It uses electricity from renewable energy sources to split water into hydrogen and oxygen. Air Products and Chemicals (APD) and Linde (LIN) are developing many green hydrogen projects.
“Pink hydrogen” also creates hydrogen from water and electricity. However, instead of getting power from renewable sources, pink hydrogen’s electricity comes from nuclear power plants. Constellation Energy Group (CEG) is hoping to invest $1 billion in nuclear-powered hydrogen.
“White hydrogen” is naturally occurring hydrogen trapped underground. It can be tapped by drilling a well.
Out of the seven colors listed above, two of them stand out as the top contenders for the Section 45V tax credit.
Companies Likely to Benefit from the Section 45V Tax Credit
Companies Likely to Benefit from the Section 45V Tax Credit
Blue and green hydrogen technologies are the most promising and likely to replace black and grey hydrogen over the coming decades.
A forecast from Rystad Energy predicts that blue and green hydrogen will grow from less than 5 million tons this year to over 77 million tons by 2040.
So now is the time to consider investing in companies that will lead the hydrogen economy in the future — like the four I mentioned earlier: Shell (SHEL), Exxon Mobil (XOM), Air Products and Chemicals (APD), and Linde (LIN).
And an even better way to play this trend, is to invest in a company that produces a key piece of technology that is critical for producing green hydrogen.
One company we recommended in our Intelligent Income Investor service has grown its dividend for 18 years and currently yields 3.1%.
Its shares trade at 11x earnings and we believe this is a 27% discount from its fair value. That means it’s a great time to build a position while it’s cheap.
To find out what this pick is and learn more about Intelligent Income Investor, click here.
Now is the time to buy before the hydrogen economy takes off.
Happy investing,
Justin Law
Analyst, Intelligent Income Daily