Why Ellerston is backing a picks-and-shovels approach when it comes to energy supply

LW: What are the major challenges facing green hydrogen?

Bill Pridham: There's been a lot of pros and cons associated with hydrogen, but let's take a little bit of a step back first in terms of why this is becoming such an important topic right now. The Russian-Ukraine war has created a lot of headlines around energy security. So energy security now is just as important as the price of energy. Where's my energy going to come from and how secure is that supply as well? So the world's realised, firstly, that we need to decarbonise. That's been going on for a while, but now we need to have that security of supply. So that's where hydrogen really comes in.

Now, the problem that hydrogen has, especially green hydrogen, which is from renewable sources, is the cost. So it has historically cost a lot more to produce green hydrogen than your typical coal. So what has happened over the last 12 months is you've had a number of governments come through with incentive packages and production tax credits to help reduce the cost of hydrogen production. When you think of producing one kilogramme of hydrogen, roughly three-quarters of it is energy. So it's kind of counterintuitive. You're creating all this energy to produce this hydrogen and then you have to transport it as well. And that's been the other barrier - the production, transport, and storage of it. There's not a lot of infrastructure around that. So the pushback on it is the cost of producing it and secondly, how do we get it out there? And those have been the two pushbacks from a hydrogen adoption point of view.

Given those challenges, why do you believe it will (and can) be widely adopted?

Why hydrogen, especially green hydrogen, can be widely adopted is twofold. Firstly, you have global government support in terms of fiscal packages and incentive packages. They've all put their monetary weight behind hydrogen. I talked about the Inflation Reduction Act. That's creating a production tax credit and investment tax credit to incentivize hydrogen production. And not just the production, it's also the transport and storage. The whole package is being incentivized to make sure that happens. We've had the Green Infrastructure Act in Europe as well focused on hydrogen. So we have a lot of government support around hydrogen. They want this to work. And hydrogen has been around for a long time, it's not a new technology. So you think of the grey hydrogen market, which is basically powered by coal. It's roughly a US$190 billion market, so there's a big market where this green hydrogen can grow into.

The second point is, from an electrification point of view, the world wants to get electrified, but it's very hard to electrify old-school manufacturing. Think of cement plants, think of steel plants, it's very hard to decarbonise them. Hydrogen is a really good source of energy to do that. And secondly, think of heavy vehicles, boats, trains, and big heavy mining trucks, it's very hard to electrify that, whereas hydrogen really benefits that. So you've got government support plus real end markets there where you can really put them together.

Why is this an exciting opportunity today?

From my perspective, I like to provide the picks and shovels. So I'm not going to try to predict. Let's face it, hydrogen may not be that end source. Maybe it's ammonia or maybe it's some other source of energy that we haven't really focused on as much. But I think there's enough support behind hydrogen that it's going to be the one that governments and the world is going to support. So I like to invest in the companies that are providing the picks and shovels, the infrastructure, rather than trying to predict which molecule's going to win.

But I think when I look at what's happening, the governments are putting their money where their mouth is, and that creates a groundswell. So you're seeing a lot of hydrogen projects around the world being developed. There are a lot of big multinational companies announcing multi-billion dollar hydrogen projects. India has just announced another hydrogen plant as well. So when you think about hydrogen, the US, UK, Europe, India, and here in Australia, all these big hydrogen projects are being announced. And what happens over a period of time is it creates its own scale and it gets that economy of scale, and then you'll see that really be a lot more efficient. And over time it will become a much cheaper source of energy for us.

So it's not too early?

It's not too early to invest in this space, but it's too early to say where it's going to end up and who's going to be the winner from all this. That's too early to call, but it's not too early to provide that infrastructure to make it happen.

Can you take us through some examples?

Yeah, so there are two of them that I'm really focused on right now. The first one is a company called Bloom Energy (NYSE: BE). And Bloom is all about resilient, reliable, and sustainable power at the end of the day. So they actually have a couple of projects going on with the nuclear plants in the US. So the idea is that they can plug into nuclear power and produce hydrogen from excess power during low-demand periods. So that's a company that has stationary power, that can produce hydrogen and produce it at a very low cost relative to other technologies that are out there today. They have a number of projects going on globally. Roughly 80% of the Korean market uses Bloom servers in terms of production over there. And they have a large Korean partner helping to support that as well. And it doesn't matter what comes through in terms of the end molecule, it can use any, but the idea is that it's agnostic to whatever becomes the most prominent source.

The second one - and this is the real picks and shovels play - is Chart Industries (NYSE: GTLS). So Chart is one of the leaders globally in terms of producing products or equipment that can produce, manufacture, and store industrial gases. And hydrogen is one of those. They have the dominant share in hydrogen. So what I like about that is that you've got this business where it doesn't matter who's spending as long as they're spending and they are going to benefit from that. And they're big here in Australia as well. So you see this business that is agnostic at who's going to spend as long as the spending's going to happen. They are the key player in doing that. They bought a business recently called Howden, which gives them more content in all these hydrogen deals as well. So those are the two ways I'm looking at it. I don't like to play on the companies that are really spending a lot of the CapEx. I want to be investing in companies they're spending the CapEx on.