ALSTOM – The return of the steam train – but with no smoke - Morphic Asset Management

ALSTOM – The return of the steam train – but with no smoke

At the Morphic Ethical Equities Fund AGM in Sydney last month, several investors asked questions about the revolutionary hydrogen powered trains produced by French rail manufacturer Alstom.

Alstom, which has been one of the Morphic Funds’ largest investments for nearly five years, has pioneered the commercialisation of the hydrail concept, which first emerged around the turn of the century, as a replacement for diesel on low use regional routes that would be uneconomic to electrify.

The world’s first two hydrogen passenger trains went into service late in 2018 in the German state of Lower Saxony. Another 14 are on order. The trains can run for about 1,000kms on a single tank, at a top speed of 140lms/h, carrying 300 passengers – essentially the same as the diesel trains they will replace. At least three other German states are likely to buy similar trains, and Alstom says it has had interest in deploying its Coradia iLint hydrogen trains in Britain, Holland, Denmark, Norway, Italy and Canada.

Are hydrogen trains actually any better for the environment? In terms of emissions from the train itself, there is no contest. The only emission is water vapour. An added benefit is that the trains are virtually silent. But as one of our shareholders asked, where does the hydrogen come from, and what energy does it use to make it?

Hydrogen is mostly produced by electrolysis of water (chemical formula: H2O). Electrolysis is an energy intensive process, but using it for hydrogen production is an excellent way to ‘store’ wind or solar power when it is being produced in excess of grid requirements, such as the middle of a sunny day (solar) or the middle of the night (wind.)  Alstom has been reported as estimating that a 10MW wind farm is capable of comfortably producing 2.5 tonnes of hydrogen per day; enough to power a fleet of 14 of its iLint trains over a distance of 600 km per day.

Ultimately the market opportunity for hydrogen trains is a matter of economics. From a Total Cost of Ownership (TCO) perspective, a recent EU Shift2Rail study suggested that at present on these kind of regional routes, trains like the iLint (known as “Multiple Units” or MUs) cost about €8.7 per kilometre, compared to €8.2 for diesel, and €9 for conventional electrification. However hydrogen trains’ TCO benefits most from falling electricity prices. The TCO also falls with expansion of the hydrogen fuel distribution network or if renewable energy can be used to produce hydrogen near where it is needed. Nor do the diesel TCO costs include charges for pollution or noise externalities.

So how big is the opportunity for Alstom? If the UK is any example, it could be huge. Last year the government there pledged to replace all the 29% of its (mostly aging) locomotives that used diesel by 2040. Diesel is also surprisingly abundant still in other developed countries.

The EU study cited above estimates for growth in European market from the admittedly low base today at between 11% per annum to 41%, depending on improvements in TCO.


EU market potential for FCH trains – scenario comparison



Source: EU Shift2Rail study

As this chart suggests diesel replacement will be slow business. However Alstom’s technology looks well suited to most promising segment, the MUs used for smaller regional trains. Shunting trains, which also tend to be diesel, look prospective as well. The opportunity for diesel replacement in mainline freight is less clear as the size of these trains and the refuelling network complexity required look challenging.

At the moment Alstom has the MU hydrail market to itself – and looks set to dominate the Europe, which has many suitable routes for these kind of trains. But somewhat confirming the extent of the opportunity, Toyota has recently been named as a collaborator for a trial on the East Japan railway, and Switzerland’s Stadler Rail is expected to do a small pilot on an abandoned branch line near Los Angeles (another environmentally conscious urban area where diesel rail is surprisingly common.) Chinese rail companies are also doing trials.

Sadly, despite the number of aging, slow and polluting diesel trains that operate on most regional routes in Australia, none of our states has yet joined the shift.


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