Green hydrogen stocks in India: The next big opportunity or a long road ahead?

Hydrogen has been a very promising sector for India. The government aims for India to have an annual capacity for 5 million tons of green hydrogen by 2030 in the National Hydrogen Mission. This has brought excitement to many investors like you regarding the potential of green hydrogen stocks. It takes efforts, though, to build the green hydrogen sector and therefore, as an investor, you should have a fair understanding of the opportunities and barriers. This article discusses the most important factors that will propel growth in green hydrogen stocks compared to the challenges the industry must overcome.

Analysis of growth drivers

India has favourable conditions for green hydrogen production. The country has abundant solar and wind energy sources that provide clean electricity for electrolysis to split water. The current demand in transport, refining, steel and fertiliser production can be easily met by green hydrogen. It allows for industries such as steel to make the shift from fossil fuels to clean energy. Below are some factors that may help foster the development of green hydrogen stocks:

• Government policy support through subsidies and allocation of land in renewable energy parks for hydrogen projects.

• Falling costs of renewable energy and electrolysers. Analysts estimate green hydrogen costs could become competitive with fossil fuel-based hydrogen by 2030.

• Potential for exports to markets like Europe and East Asia, which are planning to import hydrogen.

• Undertakings by major industrial conglomerates such as Reliance, Adani and JSW to invest billions in green hydrogen capacities in the coming decade.

• Partnerships with international companies that bring technical expertise. For example, Acme has an agreement with Norwegian firm Scatec to develop a green ammonia plant.

Examining the challenges ahead

Despite the favourable conditions listed above, you need to balance optimism with realism about the early-stage challenges for green hydrogen as an investable theme.

• The technology for electrolysers and renewable energy storage for round-the-clock hydrogen production needs maturation. Efficiency levels and costs need to improve.

• Competition with fossil fuel-based hydrogen prices will be key. Current green hydrogen costs of Rs 300-400 per kg are far above grey hydrogen costs of Rs 50 per kg. Sustained higher green hydrogen prices could affect demand.

• Infrastructure like hydrogen transport networks and storage facilities need development for the ecosystem.

• Bank financing may be reluctant initially given technology risks and uncertainty over returns. The sector will need patient capital and risk-taking abilities.

• The lack of a domestic hydrogen economy and demand from sectors like transportation, which are centred on fossil fuels currently. Demand creation is critical.

• Geographical constraints for renewable energy generation. States like Rajasthan and Gujarat have high potential while others may lag.

Thus, as an investor, you need to assess if companies have solid strategies to tackle these challenges and capital to ride out long gestation periods before profits begin flowing. The path to a competitive green hydrogen industry has its hurdles despite the attractions for you as an investor.

Assessing the outlook for green hydrogen stocks

The outlook for green hydrogen stocks in India may be positive but realising the actual potential requires navigating the risks and competitive challenges of this emerging sector. As an investor, you need to avoid excessive optimism and identify companies that are making smart early moves.

Seek out players that have these characteristics:

• Strong technical capabilities for electrolysis and hydrogen generation based on renewable energy sources. Thus, proficiency in this technology is vital.

• First-mover advantage in building capacity and securing strategic market tie-ups for offtake. Being an early leader in such a sector matters.

• Healthy balance sheets and access to inexpensive capital to fund initial losses before scale benefits accrue. Financial strength does count here.

• Comprehensive strategies for driving demand creation in the domestic market in sectors like steel and transportation. Volume is the key to cost economics.

• Location advantages in states with abundant solar and wind resources like Rajasthan and Gujarat to produce competitive renewable electricity as input. Sites play an important role.

This framework can help you make discerning choices if you decide to invest in green hydrogen energy stocks. Companies that meet these criteria may have an edge versus others when the industry expands.

Conclusion

The upside potential from India's green hydrogen push makes this a tempting sector for investors like you with a high risk tolerance. However, be measured in your expectations. Building a competitive green hydrogen industry will require traversing a tricky course before the vision meets reality. Keep the risks and challenges in perspective while assessing opportunities. Avoid presumption and allow strategies and results to speak. The road to returns from green hydrogen stocks promises to be lengthy but may prove rewarding for patient, prudent capital.