Electrolyzer manufacturers struggle to turn orders into profits

Major manufacturers of hydrogen electrolyzers saw their share prices slide in the first half of 2023, and second-quarter earnings results showed order intakes failing to translate directly into profitability.

This comes as the clock continues to tick on Europe's goal to produce 10 million mt/year of green hydrogen by the end of the decade, a milestone that engineering and consulting group Worley said could slip out of reach.

"All this infrastructure would need to be developed, permitted, financed, and built in fewer than seven years," Worley said Aug. 28. "When considered alongside the other pillars of EU decarbonization that will need to be implemented concurrently [...] the dimensions of the infrastructure delivery challenge become more apparent."

Manufacturing issues at UK-based electrolyzer manufacturer ITM Power forced the suspension of the 100-MW Gigastack project in the UK, being developed by Orsted and Phillips 66, and a plant redesign has delayed deployment of an ITM project at Linde's Leuna chemicals complex in Germany.

ITM has decided to "focus very heavily on projects that are in execution right now," rather than developing additional projects like Gigastack, Chief Technology Officer Simon Bourne said during an Aug. 17 investor call.

Under new CEO Dennis Schulz, the company is halfway through a year-long restructuring project, aiming to cut down its product offering, reduce costs and scale the production process.

"The company appears to be making good progress in terms of improving its underlying operational performance and contracting, but warranties remain persistently high and financial performance will take time to improve," Berenberg analysts wrote in an Aug. 21 note.

'We're losing money'

Norwegian manufacturer Nel is also struggling to turn orders into profits.

The company reported record-high quarterly revenues of NOK475 million ($44 million) in the second quarter of 2023, up 159% from the year-ago period, but posted an EBITDA loss of NOK138 million (a slight improvement of Q2 2022's NOK197 million loss).

Rising raw material costs and currency fluctuations affected the profitability of orders, and delays are compounding the issue, Nel CEO Hakon Volldal said.

"We're not making a lot of money on those projects. On the contrary, we are losing money," Volldal said. "Some of these contracts did not have pass-through clauses on materials, which we now have. Some of the contracts were not currency-hedged, which we now do."

Large scale is key

The dichotomy between electrolyzer makers' growing order books and loss-making businesses is nothing new.

"Similar to other alternative energy equipment manufacturers, Nel has also seen its share price run out of (green) fuel," Alphavalue analysts said in a note in late March. "We attribute this largely to deflating wishful thinking."

The company's share price had seen a boost from deliberations in Europe about potential responses to the US Inflation Reduction Act and also from some order wins. "This has since fizzled out," the Alphavalue analysts said.

Nonetheless, "if we were to look at just the names in pure-play hydrogen, Nel appears to be better off than ITM, for one, and some other names across the broader market," they said.

Nel stands out because of its automated manufacturing processes, a validated product and focused offering, the Alphavalue analysts said. Order intake is also moving toward a larger megawatt-scale, which shows increasing customer confidence, they said.

"Overall, we are not concerned by the slower orders and backlog growth" at Nel, analysts at Berenberg said. "The company has indicated several times that, as it moves to focus on larger contracts, the order flow is likely to be lumpy given the longer timeframes."

They added that while Nel's revenue growth was encouraging, moving through the backlog of legacy contracts to more recent profitable projects "will be important in providing confidence to the market that there is a reasonable timeline to break even."

German new entrant

Germany's Thyssenkrupp nucera is the newest member of the universe of listed electrolyzer-makers, having completed an IPO in July.

The company is on track to ramp up its manufacturing capacity to 5 GW/year in the next few years, executives said during an Aug. 28 results call. The company is focusing on both Europe and the US, with executives flagging the latter as a key market for growth.

For Europe, Worley noted that meeting the EU's hydrogen targets will require rapid sector growth in the region, with a particular focus on large projects.

"While the EU's renewable hydrogen ambition is just one part of a much larger infrastructure plan, its requirements are indeed daunting," Worley said.

"An undertaking of such scale, speed and complexity can be achieved only with the emergence of an era of hydrogen mega projects."

Europe's largest green hydrogen projects: 2030

Source: S&P Global Commodity Insights

S&P Global Commodity Insights' Camilla Naschert produces content for distribution on S&P Capital IQ Pro.