Downloaded from Capital IQ by Michael Bond ([email protected]) at S&P Global Market Intelligence Inc. on Thursday Feb 25 2021 12:18:30 AM, Sessionid:mkkfvya5qfganwbs4xuhec1o Europe Equity Research 23 February 2021 EMEA Hydrogen A revolution in need of realism; separating the opportunity from the optimism Alternative Energy - Hydrogen Patrick Jones AC (44-20) 7742-5964 [email protected] Bloomberg JPMA PJONES <GO> J.P. Morgan Securities plc ESG & Sustainability Research Jean-Xavier Hecker AC (33-1) 4015 4472 [email protected] J.P. Morgan Securities plc European Autos Jose M Asumendi (44-20) 7742-5315 [email protected] J.P. Morgan Securities plc CEEMEA Oil & Gas Alex Comer (44-20) 7134-5945 [email protected] J.P. Morgan Securities plc European Utilities Javier Garrido (34-91) 516-1557 [email protected] J.P. Morgan Securities plc US OFS Sean C Meakim, CFA (1-212) 622-6684 [email protected] We believe a Hydrogen Revolution is quickly gathering momentum to J.P. Morgan Securities LLC drive energy transition across several ‘hard-to-abate’ sectors. However, European OFS investors should also be wary of over-optimism given H2 adoption for James Thompson some end-uses appears more challenging and less economic vs other low (44-20) 7134-5942 [email protected] CO2 alternatives. Our proprietary policy and economic analysis shows J.P. Morgan Securities plc green H2 could be cost competitive across most regions by 2030E, but blue H2 could be lower cost in North America. Investing in H2 is also likely to remain challenging, in our view, both with major corporates & smaller H2- focused companies. After the dramatic performance of H2-focused stocks over 2020, we believe investors ought to take a more relative approach to the nascent H2 subsector. In EMEA, we initiate coverage of ITM Power (ITM.L) at Overweight with a GBp700/sh PT (link) and Nel (NEL.OLS) at Neutral with a NOK28/sh PT (link). In the US, we are OW on Nikola, Neutral on Bloom & Plug Power, and UW on FCEL. See page 151 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For the exclusive use of Michael Bond ([email protected]) at S&P Global Market Intelligence Inc. www.jpmorganmarkets.com Downloaded from Capital IQ by Michael Bond ([email protected]) at S&P Global Market Intelligence Inc. on Thursday Feb 25 2021 12:18:30 AM, Sessionid:mkkfvya5qfganwbs4xuhec1o Patrick Jones Europe Equity Research (44-20) 7742-5964 23 February 2021 [email protected] Jean-Xavier Hecker (33-1) 4015 4472 [email protected] Why the H2 revolution is real this time. H2 interest is now far wider than in past episodes of ‘hydrogen hype’. National H2 strategies now consider the whole H2 value chain & corporate net zero emissions targets are driving H2 investment to decarbonise ‘hard-to-abate’ sectors, which cannot simply switch to renewable power. Also, the critical barrier for water electrolysis (‘green H2’) is renewable power costs and these, have already and will likely continue to decline, while the electrolyser industry quickly scales up. Green H2 costs rapidly falling, but regional differences will be critical; Blue H2 could play a transitional role in the US. Our proprietary green H2 cost model indicates green H2 costs could fall from $3.4-5.0/kg today to $1.7-2.8/kg by 2030, allowing green H2 to compete in many regions. However, regional variances will be critical, with blue H2 offering a potentially lower-cost transitional, option in North America, albeit non- technical barriers should not be underestimated. Turquoise H2 could play a role post 2030 if the technology can be commercially developed. We expect pipeline transport costs will not be a major hurdle, but seaborne transport costs will be far higher. Nevertheless, this will likely be needed to move H2 from where it is low cost to produce (MENA, Australia, Latam) to where demand is emerging without low-cost domestic production (i.e. Korea, Japan). But H2 adoption across some industries more challenging; refining, ammonia, steel, & heavy-duty vehicles could lead H2 transition; but heating, power gen & cement production appear less certain. We expect several sectors to lead the H2 transition. Sectors where H2 is used today (refining, ammonia) will likely move quickly, facing lower hurdles and costs to transition. H2-derived steel is also quickly gathering pace with several EU producers setting hard volumes targets for H2-steel by 2030. However, H2 adoption will be more difficult in other sectors. We expect other energy storage options will remain lower cost than H2 for grid-scale energy storage, while passenger FCEV costs still need to fall by ~45% to be competitive vs ICEs. Investing for the H2 revolution: confident in future H2 volumes, harder to see H2 value; initiate coverage of ITM at OW & Nel at Neutral. Investing for an H2 revolution presents a dilemma: H2 exposure (especially green H2) for major corporates is still relatively low, while many H2 pure- plays are still EBITDA negative. We also believe electrolyser manufacturers could face stiff competition as more companies bring on new lower-cost capacity. We expect EMEA-listed H2 electrolyser manufacturers ITM Power & Nel to benefit from rapidly growing global H2 electrolyser demand, but after both stocks remarkable performance vs the market and persistent FCF burn, we now believe investors should be more focused on relative winners. We expect ITM to turn FCF positive by FY'25, but maintain a strong cash position. In contrast, Nel’s greater FCF burn raises greater financing risks, in our view. We determine fair values for ITM & Nel using CY'30 multiples discounted back to CY’21 across three global electrolyser shipments scenarios. This reveals ~34% upside potential for ITM and ~5% for Nel. Therefore, we initiate on ITM at Overweight with a 700p/sh PT and Nel at Neutral with a NOK28/sh PT. In the US, we are OW on Nikola, Neutral on Bloom & Plug Power, and UW on FCEL. 2 For the exclusive use of Michael Bond ([email protected]) at S&P Global Market Intelligence Inc. Downloaded from Capital IQ by Michael Bond ([email protected]) at S&P Global Market Intelligence Inc. on Thursday Feb 25 2021 12:18:30 AM, Sessionid:mkkfvya5qfganwbs4xuhec1o Patrick Jones Europe Equity Research (44-20) 7742-5964 23 February 2021 [email protected] Jean-Xavier Hecker (33-1) 4015 4472 [email protected] ESG & Sustainability research Hugo Dubourg (33-1) 4015 4471 [email protected] Table of Contents J.P. Morgan Securities plc Executive Summary .................................................................6 Sajal Jain (91-22) 6157 3097 Hydrogen – Quick chemistry 101..........................................11 [email protected] Not a new molecule...............................................................................................11 J.P. Morgan India Private Limited The lightest chemical element in the universe ........................................................11 European Mining & Steel An energy vector, rather than an energy source......................................................11 Dominic O'Kane (44-20) 7742-6729 A less dense but more calorific gas than methane...................................................12 [email protected] Understanding current and future demand drivers.............13 J.P. Morgan Securities plc Hydrogen is mostly used as a feedstock currently...................................................13 Luke Nelson (44-20) 7134-5297 Understanding the H2 opportunity..........................................................................14 [email protected] Where can the H2 opportunity realistically materialize?..........................................16 J.P. Morgan Securities plc How much could H2 demand grow?.......................................................................17 European Oil & Gas Comparing H2 in Climate-Energy scenarios ...........................................................18 Matthew Lofting, CFA Understanding current & future supply................................20 (44-20) 7134-6301 [email protected] How to produce hydrogen? Understanding the H2 Rainbow ...................................20 J.P. Morgan Securities plc H2 Policies – catalysts are materializing..............................23 Christyan F Malek (44-20) 7134-9188 Is it different this time?..........................................................................................23 [email protected] An acceleration of country H2 specific commitments in 2020.................................24 J.P. Morgan Securities plc Cost reduction is a key strategic priority….............................................................28 European Cement Increased climate ambitions are likely to reduce the competitiveness of fossil fuel Elodie Rall alternatives............................................................................................................31 (44-20) 7134-5911 Beyond H2 specific deployment, renewables will be key for the development of [email protected] Green H2 ..............................................................................................................37