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Déjà Vu – Are Electrolyzers Heading The Way of EVs – Too Many Players
October 31, 2023

C-MACC Hydrogen Weekly Update 18

Déjà Vu – Are Electrolyzers Heading The Way of EVs – Too Many Players

  • Weekly Theme: Too Much Kit
  • News Update
  • Projects Update
  • Ammonia/Methanol Update
  • Power Update
  • Next Week: Other Places To Find Hydrogen    

Key Points:

  • No one is making money in the West making electrolyzers today, but we see a new entrant almost weekly. This setting is reminiscent of the EV industry 2 years ago, which has not ended well for many.
  • What worked for Tesla and BYD was the rapid economies scale that others are struggling to match as the early EV adopters are largely satisfied – hydrogen evolution is not allowing for scale gains, so far.
  • While we see plenty of agreements to deploy electrolyzers, not many are past the investment decision post yet, and the orders are spread out with no clear volume winners but some losers.
  • While Plug Power is probably making more noise than most and appears to have plenty of orders, the stock market does not like the story any more than any of the other suppliers.
  • We note several better-capitalized established equipment suppliers in the mix and wonder whether they will be the ultimate winners, with the independents either acquired or failing.

Exhibit 1: If there is so much real activity in hydrogen, why is the sector performing so badly?

Source: Capital IQ and C-MACC Analysis

Weekly Theme – Too Many Machines From Too Many Producers

In Exhibit 1 we show that, despite all the hype in the market around the importance of hydrogen, the investment community only dislikes the wind and solar sector more based on performance in 2023. For publicly traded companies, especially the smaller and newer entrants, the weak public market perception is also challenging as many need to raise more capital to expand facilities to a point where they have positive cash flow. This is precisely the reason why the public market does not like them, as the capital markets are far less attractive than they were 18 months ago and investors are concerned about excessive dilution, as they should be. The other challenge for the group is that they are not seeing the order book grow fast enough to support the business plans, and we have new entrants appearing, as well as offerings from well-established engineering and electrical equipment makers, all of whom are far better capitalized. In some ways, this looks the same as the EV market, and in others, it is different. After the success of Tesla and the stronger incentives to purchase EVs, we saw a wave of new EV companies hit the market, many more in China than elsewhere, and some high-profile SPAC-based public companies in the US, several of which are now failing or close to failure. While we are seeing a wave of new electrolyzer producers, we do have a “Tesla-like” poster child for others to chase and part of the challenge that brings is that no one is really sure who the market leader is, or if there is one. Each manufacturer claims that they have the best, for different reasons: scale, low capital costs, low operating cost, etc., but there is so far not enough on-the-ground evidence to suggest who will win. What we can be sure of is that many will not succeed, and unlike EVs, there is a stronger case to suggest that the independents may not be the winners – the exhibit below suggests that at a minimum, the investment community is skeptical.

Exhibit 2: The whole space is out of favor, as costs rise and it is unclear who will make it

Source: Capital IQ and C-MACC Analysis

The other major contrast with the EV market is that in this case, the incumbents are not late to the game. In the EV space, the large automakers were slow to catch on which gave Tesla the lead it has achieved today and has given BYD and a few others a strong fighting chance to remain in the market and build large businesses – especially BYD. In the electrolyzer space no one yet has critical mass and balance sheets may play a much bigger role in determining the future of the market. In Exhibit 3, there is a stark difference between Siemens, ThyssenKrupp, Cummins, and Mitsubishi, versus the small public and small private companies. In addition, SLB has plans to enter the market, which would add another very well-capitalized player.

Exhibit 3: Do The Smaller Players Have Enough Technology “Special Sauce” To Counter Large Balance Sheets

Source: Capital IQ and C-MACC Analysis

One of the reasons why the investment community is less interested in hydrogen is driven by one of the reasons they are even less interested in wind and solar – costs are reversing and the idea that we can produce ever cheaper hydrogen is fading. This does a couple of things – it reduces investor estimates of how large the market might be for equipment, but it also spotlights the differences in the technologies, as paying more for a lower operating costs technology may make more sense today than it did 6 months ago. However, if you look at the nominal order books today, almost all the business is going to PEM or alkali technology, with one company switching from PEM to alkali recently in an investment decision, and, interestingly, in a high-power cost market. We have seen one very small switch to solid oxide from PEM, but the momentum today is behind the less efficient technologies. If these companies can gain enough business to move costs down because of scale economies, they may still be preferred suppliers simply because the capital costs are lower – the higher the interest rate environment the greater the incentive to trade capital cost for efficiency. In a world where power costs may look higher and borrowing costs may also look higher, maybe we have not changed the competitive landscape for the electrolyzers sellers very much.

Exhibit 4: The technology you choose could be very influenced by power costs.

Source: Corporate Reports, Client Discussions, and C-MACC Estimates

Our hydrogen report last week- Two Buyers for Clean Hydrogen – Large Volume Cheap and Small Niche – showed a chart of the 20 most expensive countries to buy electric power today. Belgium was number 5 on the list, and Luxemburg was number 17! While Air Liquide is likely not signing a PPA for prices that reflect retail pricing, you must ask why Vattenfall is signing the deal – which would inevitably involve selling power at prices well below what they could get from the retail market. We see this as a fundamental flaw in what is transpiring in Europe today. The region has some of the highest power prices in the World, and if incremental supply gets allocated at lower prices to industry, is the region not effectively subsidizing industry at the expense of the retail consumer? The counterargument, of course, is that if we do not subsidize industry, one way or another, then industry cannot decarbonize. We have been very vocal with our view that Europe is not only trying to move too quickly (which may be commendable), but the region is doing so with too many constraints on what is permissible. We still believe that the political fallout will be significant as Europe tries to push forward, as the costs will be uneven between countries. Some will revolt because they cannot manage or choose not to manage the inevitable cost inflation and economic weakness that will come from following EU directives.

News Update

Incentives/Policy

Technology

Opinion

Projects – Not included below.

Transport

Other

Detailed Projects Update

Each week we will take projects that have hit our radar in the last 7 days and show the success factors that would be needed to make each successful. This week we look at a couple of ideas in India – one likely too ambitious and a couple of blue projects – both of which rank more highly than most of the green projects we have discussed in recent weeks.

Exhibit 5: The Project Tracker Grid

Source: Corporate Reports and Announcements and C-MACC Estimates and Analysis

India’s Adani Group to raise $4 bln to fund green hydrogen plans – Bloomberg News

  • Adani Group looking to raise $4 billion to fund its green hydrogen plans
  • First project: 1 million metric tons per annum green hydrogen facility in Gujarat – starts production in 2027

This seems very ambitious as 1 million tons of hydrogen – assuming a mix of wind and solar-based power – will need 20 GW of power assuming a generous capacity factor of 35%. We do not believe that this can happen by 2027 without driving up the costs of the power source and the cost of equipment for the electrolyzers or the storage for the power. We suspect that something smaller is more likely in that time frame. The GIC project discussed below is likely more manageable.

bp selects Johnson Matthey’s LCH technology for its first low carbon (blue) hydrogen project

  • Announced in 2021.
  • Johnson Matthey’s LCH offers the lowest natural gas usage and can capture up to 99% of carbon dioxide produced.
  • 1.2GW of hydrogen production by 2030.
  • Location: Teesside, H2Teesside.

This may turn out to be a relative subsidy issue if the UK is still importing expensive LNG when this facility starts up. Regardless of how efficient the JM system is, if the natural gas price in the UK is still being set by expensive LNG imports, this will be a bad project, and if the gas is subsidized, other users will have plenty of cause to object. There is also a capital cost issue with this project as the UK is badly short of skilled construction labor and costs could escalate and timelines could shift as a consequence.

Hydrogen Canada Corp. Announces World Scale Blue Hydrogen/Ammonia Facility with Product Bound for South Korea

  • Estimated capacity of one million tonnes per annum of low-carbon ammonia.
  • C$10 million seed round.
  • Low-carbon hydrogen/ammonia supply chain from Western Canada to South Korea and other Asian markets.
  • Location: Alberta Industrial Heartland near Fort Saskatchewan, Alberta.

Blue ammonia in Canada needs to make its case based on cheap surplus natural gas that sells at a discount to the US, as the 45Q advantage in the US does not help in Canada. We believe that the best can probably manage their CCS operations for blue hydrogen/ammonia in the US for something close to the 45Q value and so this will be what the Canadians need to compete with. There may be some slight logistical advantage moving West through Canada to Asia with the ammonia, but the train-to-ship route will be expensive versus direct shipping from the USG.

Duke Energy announces plans to build and operate the nation’s first system capable of producing, storing and combusting 100% green hydrogen in a combustion turbine in Florida

  • Collaboration between Duke Energy, Sargent and Lundy, and GE Vernova.
  • begin with the existing 74.5-megawatt (MW) DeBary solar plant providing clean energy for two 1-MW electrolyzer units.
  • Installed and fully functioning in 2024.
  • Location: DeBary, Volusia County, Florida.

We remain very skeptical about the idea of using power to generate hydrogen to generate power again, and while we understand the storage concept, the capital costs to achieve this storage are going to be prohibitively high when you add the need to build enough electrolyzer capacity to handle peak power generation and then the hydrogen. In theory, the power costs will be very low given the surplus nature of the power being used, but the capital costs will be high and are rising as construction costs increase in the US and the cost of capital rises. This is a very small pilot project – which makes things even more expensive.

Denmark backs 280 MW of electrolysers in first PtX tender

  • Six projects proposed by four companies won state aid in the first Danish Power-to-X (PtX) tender.
  • Build a total electrolysis capacity of 280 MW.

While the larger projects should look better than the small projects on this list, all will be challenged by the high alternative values for power in Europe and while Denmark has some quite attractive wind power economics, the company is the third most expensive in the world today for power, as we noted last week and as shown again below. The challenge for the projects above will not be whether they can push for attractive PPAs from some of the wind developments but whether there are objections that these projects are going ahead at the expense of the regular consumer of power.

Exhibit 6: The chart shows the 20 most expensive countries for electrical power as of October 2023. Europe is not the place to make green hydrogen on this basis, especially if the customers will not pay.

Source: Electric Rate and C-MACC Analysis

GIC and Petronas to Invest in Green Ammonia Project in India

  • 1 million tons of green hydrogen a year, by 2030.
  • Exports of green ammonia to markets including Singapore, Japan, South Korea and Germany by late 2025.

This is ultimately planned to be a huge ammonia complex, although the expectation is to start it up in phases. The economics will depend on whether India can generate enough renewable power and whether ammonia for export is the best use of that power – we suspect not. If the hydrogen was used locally in India as hydrogen or ammonia, we suspect the economics would look better unless premium prices existed in Singapore.

Ammonia/Methanol Update

In our weekly economics report last week, we focused on one of the few bright spots in chemicals right now: the ammonia market. Part of the strength is due to robust farm economics, and that backdrop is also reflected in the very strong ADM earnings today. Ethanol margins are higher, and crop prices, while off their highs of the last two years, remain attractive relative to longer-term history. We see continued cost pressures in Europe subduing fertilizer supply in Europe (see the Yara results below), and this should support ammonia prices, but at the same time, higher farming costs, because of higher input and labor costs should keep upward pressure of crop prices, which should benefit the broader sector. This looks like a much better investment bet than the rest of the chemical space for 2024 currently.

Exhibit 7: Ammonia prices are showing steady improvement.

Source: Bloomberg and C-MACC Analysis

Some of the unreasonableness that we have discussed with respect to energy transition progress may be reflected in the E-methanol estimates below, but given that the interim period is not covered, the 2050 target may work. For all the reasons we discuss above, we do not see affordable green hydrogen for many years – and while E-methanol may be a good way to dispose of captured CO2, the capture piece is also expensive, and the E-fuel would be quite expensive, requiring the user to pay significant premiums. We struggle to see why e-methanol would be a winner over blue ammonia as, for example, a shipping fuel on this basis.

Exhibit 8: Green Methanol: an alternative fuel for heavy vehicles and shipping?

Source: Energy Post, October 2023

Power Update

As reflected in the headline above, we are seeing a wave of quite negative energy transition news this month, with the Siemens Energy story last week only another in a long line of announcements that suggest things are not going to plan – see our Sunday Piece – Too Hot To Handle: If Climate Change Is Real, We May Be Screwed. We put a lot of the blame for what we are seeing today more broadly in energy transition on a wave of irrational exuberance that began a little over two years ago, with old companies announcing aggressive transition targets (Shell, BP, TotalEnergies, for example) and new companies getting attractive funding for untested, but promising technology. The attractive funding either came through the SPAC wave or their equity offerings during high (peak valuation) periods. This enthusiasm was partly driven by cost expectations that were far too low and technological advances that were anticipated too quickly. The pressure on the wind industry to deliver cheaper systems per unit of power and to do so while working in less friendly environments – offshore versus onshore – and doing everything quickly, has landed Siemens Energy in real trouble, but it is not just the failure of some of the systems that it the challenge. Risk appetite has shrunk dramatically in the financing world, just as wind power costs have reversed a multi-year downward trajectory. Siemens Energy cannot invest to fix what has gone wrong and then invest more to meet new orders without more security on the offtake side – hence the request for government guarantees. This is certainly not an ideal situation, as the stock price today reflects – the stock may be down 30% today, but it is down almost 70% from its 2023 high less than six months ago – but the Company is trying to navigate a scenario where the demand is very real, but where those wanting the power do not want to pay more, and where risk is being treated very differently than it was only a year ago. In our upcoming Sunday research, we will look at the change in tack by Shell, the cost inflation that has put the Li-Cycle project in the US on hold, and other indicators that suggest transition has become more challenging from a practical perspective and that both the EU and COP28 may make things worse if all they do is raise the bars without offering practical solutions.

The harsh reality of what is happening to the European wind industry is shown in the chart below. Developers are looking outside Europe and the US for components and materials, with China likely the biggest winner. However, India could do well, partly because it is not China! None of what is happening suggests lower cost power for affordable green hydrogen quickly.

Exhibit 9: The offshore wind market is poised to move toward more developments with less local content requirements.

Source: BloombergNEF, October 2023

Exhibit 10: Europe’s lopsided renewables transition: Solar installations set to soar in 2023 as wind sector’s progress falters

Source: Rystad Energy, October 2023

See PDF for More Analysis in the Appendix

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