In the 1990s, hydrogen was hyped up as the next big energy source and the stocks of companies in the sector soared. Before electric cars established themselves as the evolution from internal combustion engines burning diesel and petrol, many of the biggest car makers were investing heavily in hydrogen fuel cell technology.

But hydrogen never really took off as an alternative to fossil fuels. The technology wasn’t cost effective, or just simply effective, enough. And with most hydrogen produced from fossil fuels such as natural gas, or by passing electricity generated from fossil fuels through water, it isn’t necessarily particularly ‘clean’ energy either even if burning it doesn’t result in emissions.

But hydrogen is making a comeback. In the UK, energy regulator Ofgem is backing a trial involving Cadent, the country’s largest natural gas supplier, and Northern Gas Networks, the regional supplier. The two companies are buying ‘green’ hydrogen produced by AIM-listed ITM Power, which produces hydrogen by running electricity produced by renewable sources through water.

China, Japan and South Korea are also planning to put millions of hydrogen-powered vehicles on the roads, as well as electric vehicles, as they move away from traditional fossil fuel-powered combustion engines.

The result, combined with large industrials again investing millions in fuel-cell hydrogen technologies, government policies to decarbonise economies over the next 3 decades, and a boom in ‘sustainable’ and ‘green energy’ investment funds, has been a new bull market for stocks with exposure to hydrogen.

Around 20 years after their last surge, hydrogen stocks are soaring again. London-listed fuel cell maker Ceres is up 57% so far this year and Canada’s Peers Ballard Power and the USA’s Plug Power are both up by over 300% over the last 12 months. Not one of the three companies turns a profit. ITM Power has gained almost 400% in 12 months, most of it since August/September last year, despite a 36% share price fall over the past week.

Is now the time for investors to consider exposure to hydrogen stocks or have we entered a repeat of the 1990s hydrogen hype cycle?

Analysts at Panmure Gordon urge caution, pointing at the fact the sector trades at a multiple of 22 times to forward looking sales for 2020. Across the FTSE All-World index, average enterprise value is a ratio of 2 to expected annual sales.

Quoted in the Financial Times, Roth Capital analyst Craig Irwin believes the high valuations of companies in the hydrogen sector is being driven by the growth in ESG-branded investment funds. But he also doesn’t see the trend as on that will be short lived:

“It’s part of a secular rally in sustainability which I expect to be a multiyear bull run.”

Perhaps the biggest hope for the sector is gains in the cost efficiency of the kind of ‘electrolysis’ production of hydrogen that ITM Power employs. It currently costs around $3.5 dollars a kilogram to produce hydrogen in this way. That needs to drop to around $2 before it is cost competitive with fossil fuels.

The Hydrogen Council believes around $70 billion will need to be invested in the sector over the next decade, focused on increasing the capacity of electrolysers, expanding refuelling and distribution networks and upgrades to gas pipelines for it to catch up with other low carbon fuels.

Another option, as in the Ofgen backed trial in the UK, is to mix hydrogen in with natural gas in a 20/80 ratio.  ITM chief executive Graham Cooley told The Times:

“If a 20% hydrogen blend was rolled out countrywide it could save around 14m tons of carbon dioxide emissions every year — the equivalent of taking more than three million cars off the road.”

Investment in the technology across the largest Asian economies offers hope with the example of lithium-ion electric batteries seen as a parallel. Mass production in Asia have helped costs to fall by more than 80 per cent per kilowatt-hour since 2010. If fuel-cell technology and hydrogen production sees costs fall significantly as a result of significant investment in mass production, this time could be different for the hydrogen sector.

The stocks do currently look expensive but could be propped up by investor appetite for sustainable energy plays long enough for the technology costs to fall to a level hydrogen becomes a major part of the new low-carbon energy mix.