About 18 months ago, I wrote about the launch of HydrogenOne Capital Growth (HGEN ), the sole fund in the AIC’s Renewable Energy Infrastructure sector focused predominantly on capital growth. Investors’ enthusiasm for the trust waned over the course of 2022, on the back of the general selloff of growth stocks/unlisted and unprofitable companies.

Today, it trades on about a 23% discount to an NAV which has not much changed since the trust’s £107m launch in July 2021, and no doubt some investors will suspect is on a declining trajectory.

However, the case of renewable, ‘green’ hydrogen – the only variety produced in a carbon-neutral way – remains undimmed and, if anything, it is strengthening. Green hydrogen offers a route to decarbonising a wide range of industries, particularly those that are heavy consumers of energy.

The diversion of excess production of renewable energy into hydrogen generation at times of peak supply (when intraday power prices are exceptionally cheap) also offers another form of energy storage that can be held indefinitely and take the place of natural gas powered plants when generation from renewable sources dips.

Until recently, HGEN has not had much direct exposure to hydrogen generation businesses, but this is changing.

It made its first foray into the area in March 2022 with a £3m investment in Gen2 Energy, a Norwegian developer of green hydrogen projects with up to 700MW of projects in its pipeline with production targeted for 2025-2027.

There is beauty to the idea of Gen2 using renewable power generated in remote locations in Norway, which would be expensive to transmit to cities in the country or Denmark and Germany, to create green hydrogen that it can then ship by tanker to where it is needed.

This is a good example of co-locating big users of power with the generation capacity, reducing transmission wastage. The approach is being used throughout Scandinavia with uses such as batter factories and ‘low latency’ data centres. The latter process high data volumes with low levels of delay – where cooler temperatures come in handy too).

It is something that might happen here in the UK too if REMA, the government’s review of electricity market arrangements, concludes that regional electricity pricing makes sense. That would encourage a long-term shift of industry to where the power is generated and could help with the UK government’s ‘levelling-up’ agenda.

In May 2022, HGEN invested £5m into HH2E, a German specialist in developing projects to decarbonise industry, using green hydrogen. This was a co-investment alongside infrastructure fund manager Foresight Group (FSG). The investment came with the right to make co-investments alongside Foresight in HH2E’s projects.

The clever idea here is to develop hydrogen generation plants that do not need a constant supply of power. The value of that is neatly illustrated by an update that Harmony Energy Income (HEIT ) published last week on progress with its Pillswood battery project.

HEIT said that on 12 December the UK’s highest ever wholesale day-ahead price was recorded at £2,585MWh, whereas on 29 December the UK saw a new record low price of £-50.08MWh as very high wind generation coincided with unusually low overnight demand. Pillswood near Hull made good money buying low and selling high.

Similarly, HH2E’s projects will be able to avoid buying power at times of unusually high prices and recharge their batteries when prices are low.

Its first project, in connection with Switzerland’s MET Group, is a €200m 100MW plant on Germany’s Baltic coast targeted to be operational from 2025. The plant will combine a 50 MW alkaline electrolyser, which splits water into hydrogen and oxygen, with a 200 MWh high-capacity battery to deliver constant hydrogen production with a variable power supply. The customers are expected to be transport and industrial users in northern Germany. The project is scalable to 1GW by 2030. HGEN did not make a direct investment in this project.

HH2E’s second project is at Thierbach in the Borna region of Saxony. Again, it’s an initial 100MW project with ambitions to scale to 1 GW over time, using the same technology. This time, the initial phase is being funded by Foresight and HydrogenOne. It will supply green hydrogen from a 100MW plant that will produce about 6,000 tonnes annually for customers including large industrial users in the chemical industry and commercial operators of air and ground transport.

HydrogenOne’s contribution to this first phase is €2.8m. On Foresight’s side, JLEN Environmental Assets (JLEN ) is investing up to €5.7m for a 25% stake in the project alongside Foresight Energy Partners, in which it also has a stake, and Foresight ITS inheritance tax mitigating funds.

HH2E says it has identified another 15 potential locations for plants across Germany. It hopes to have 4GW of production in place by 2030 but this suggests that, if it could secure funding, it could end up with a multiple of that, and that’s just one company in one country.

The investment that is needed in this sector is considerable. I can easily envisage one or more income-producing funds dedicated to this sector and listed in London. First, investors need to embrace the idea, but I love that the investment companies sector has exposure to cutting-edge ideas like this.

James Carthew is a co-founder and head of investment companies research at QuotedData. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.