Paul Rodden • Season: 2024 • Episode: 276
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Welcome to The Hydrogen Podcast!
In episode 276, Plug gets a massive win with Amazon and I take a closer look at the struggles affecting the green hydrogen industry. All this on today’s hydrogen podcast.
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Transcript:
Plug gets a massive win with Amazon and I take a closer look at the struggles affecting the green hydrogen industry. All this on today’s hydrogen podcast.
So the big questions in the energy industry today are, how is hydrogen the primary driving force behind the evolution of energy? Where’s capital being deployed for hydrogen projects globally? And where are the best investment opportunities for early adopters who recognize the importance of hydrogen? I will address the critical issues and give you the information you need to deploy capital. Those are the questions that will unlock the potential of hydrogen and this podcast will give you the answers. My name is Paul Rodden, and welcome to the hydrogen podcast.
In an article from the sourcing journal, Glen Taylor writes how Amazon is fueling its forklifts with in house hydrogen. Amazon’s commitment to decarbonisation is extending further into the technology powering its warehouses in partnership with hydrogen solutions provider Plug Power, the E commerce giant completed the installation and commissioning of an electrolyzer system at an Amazon fulfillment center in Aurora, Colorado, the system can split water molecules to produce emissions free hydrogen, which represents a cleaner power alternative to hydrocarbon production and could help propel Amazon to its 2040 Net Zero goal when it co founded the climate pledge in 2019. The one megawatt proton exchange membrane electrolyzer is the first for Amazon and is producing low carbon hydrogen to fuel more than 225 hydrogen fuel cell powered forklift trucks at the site known as DEN8.
The plug one megawatt electrolyzer, which uses electricity and water to produce hydrogen can support up to 400 hydrogen fuel cell powered forklift trucks. This according to the company. The hydrogen produced by the electrolyzer will be compressed on site and stored in a gaseous hydrogen storage tank for use by the forklift trucks. Hydrogen produces water vapor instead of greenhouse gas emissions during combustion, a trade that’s made it more attractive to companies and governments are working to meet climate goals. In a quote from Asad Jafry the Director of Global hydrogen economy at Amazon. Hydrogen is an important tool in our efforts to decarbonize our operations by 2040 in support of the climate pledge, and we’re excited about our ability to produce hydrogen at Amazon facilities.
Through this partnership with plug. On site production will make the use of hydrogen even more energy efficient for certain locations and types of facilities. Plug has been a frequent collaborator with Amazon already deploying more than 17,000 fuel cells to replace batteries and forklifts in more than 80 fulfillment centers in North America. For most of these locations, the hydrogen that powers the forklifts is produced elsewhere liquefied and delivered by trucks to an on site storage and dispensing system. Plug says it recognized an opportunity particularly in locations where more renewable electricity is generated then the site needs at any given time, can use that surplus electricity to produce and store hydrogen on site.
This model also avoids the emissions typically generated in liquefying and transporting hydrogen from one site to another. For this project plug provided design, installation, commissioning and maintenance services for the one megawatt pem electrolyzer and hydrogen storage compatible with the existing refueling infrastructure and fuel cells already in use at the site. Amazon has taken plenty of heat from detractors like environmental nonprofits, such as stand.Earth, and even two of its own institutional shareholders on claims that it isn’t doing enough to reduce greenhouse gas emissions and its supply chain.
In August the science based targets initiative or sbti, or United Nations backed entity that validates Net Zero plans removed Amazon from its list of companies taking action on climate goals. After the company failed to implement its commitment to set a credible target for reducing carbon emissions. Amazon said in response that it is continuing to work with sbti While it sought to set science based targets with other organizations. The company’s 2022 sustainability report released in July cited a .4% Decrease in absolute carbon emissions. But that dip came after three straight years of increases, including 18% alone in 2021. The tech titan has always sought to brush off its critics citing its plan to use 100% renewable energy by 2025, which comes five years ahead of its original 2030 target.
To reach this target Amazon plans for 100% of the electricity it uses to be attributable to renewable energy sources. As for Plug Power, the company has deployed more than 60,000 fuel cell systems at over 180 fueling stations and claims it is the largest buyer of liquid hydrogen, with plans to build and operate a green Hydrogen Highway across North America in Europe plug is operating a state of the art Gigafactory to produce electrolyzers and fuel cells and is developing multiple green hydrogen production plants targeting 500 tons of liquid green hydrogen daily by the end of 2025. Okay, so a much needed win for both plug power and Amazon. But for very different reasons.
Amazon very much wants to be at the forefront of the net zero charge and has made great efforts to do so with hydrogen and collaborations with plug power. Plug on the other hand, it needs projects like these to continue to build revenue and help bump their stock price, which continues to get hammered on the market. But that being said, they seem to be making smarter moves lately and focusing their efforts on projects that can increase cash flow. I know everyone is waiting for their GA plant to finish construction and come online, as well as the mini hydrogen hubs that they’re attached to. The question I have is this. Well, their cash burn rate outpace their project development.
That seems to be the case for many green hydrogen developers, as noted in this next article. Next, in an article in Seeking Alpha, Stephen Simpson writes McPhy energy weakness in green hydrogen market is hitting at a bad time. Stephen writes, This has been a challenging year for green hydrogen on many fronts, with several factors combining to drive up the cost of hydrogen generation and likewise, the levelized cost of green hydrogen. At the same time, government policies and subsidies meant to incentivize adoption and investment had been slow to materialize and often, with laborious opaque processes for would be generators. Higher interest rates are a pretty straightforward contributor to the pressure on hydrogen projects. Simply put, higher rates drive higher discount rates, and lower expected returns from hydrogen projects that in many cases will need a long time to mature and generate meaningful positive cash flows. Typically, post 2030.
Rates have started to ease up and 2024 could well see the Fed transition to rate cuts that could set up stocks like McPhy as strong plays on lower rates, but it will take time for potential customers to revisit projects that have been deferred or cancelled in 2023. Due to unacceptably low expected returns in the face of higher rates. Inflation has also had a significant impact on hydrogen projects and demand from McPhy’s electrolyzers. Estimated capex costs for green hydrogen projects have risen more than 70% from around $1,750 per kilowatt on average to around $3,000 per kilowatt, further pressuring the expected returns from hydrogen projects.
Likewise, inflation has hit green energy sources with wind and solar electricity prices up more than 40% driving the cost of hydrogen production up over one euro per kilogram relative to a levelized cost of around six to seven euros per kilogram. Well, numerous governments have pledged their support for green hydrogen, the rubber has been slow to meet the road. The IRS only recently released its guidelines for clean hydrogen tax credits under the inflation reduction act around three months later than initially expected. While the draft guidelines are basically in line with what investors had come to expect, up to $3 per kilogram in production subsidies. There are a lot of details yet to be finalized, including how hydrogen production is matched to the production of clean energy.
In the EU. More than a few projects have been suspended deferred or outright canceled due to what many participants have categorized as a long process with low visibility. Eventually, there may be enough irritation and political motivation to cut through some of the red tape, but it’s a challenge likely to remain for at least the next few years. And at a time when companies like ITM power and Nel have been announcing some order cancellations and pulling back on capacity expansion targets.
McPhy has actually had some good news on the order Front. Back in mid October, McPhy announced that he had been notified by Siemens energy that the suspension of the ceeog project had been lifted, McPhy will initially be supplying a 16 megawatt electrolyzer, but the delivery isn’t expected to take place until the second half of 2024. Likewise, the company announced an award in December from HMS oil and gas for four electrolyzers 64 megawatts in total for its Radeland compression station in Brandenburg. But the first electrolyzer isn’t scheduled for delivery until 2025. With the other three shipping and 2027. That matters as the clock is ticking on McPhy’s liquidity, the company ended the first half of 2023 with 97 million euros in cash. The company reports final numbers twice a year and a first half burn rate of 38 million euros. At some point reining in operations to reduce costs will also start compromising business development putting the company In an unenviable rock versus hard place position.
The company is taking steps to improve its liquidity in cash burn situation. The company announced in mid December that it was in exclusive discussions with Atawey to sell its hydrogen fueling station business. The author considers this business to basically be a distraction for the company at this point, and if the company can simultaneously reduce costs and cash burn, generate some sort of cash for that business and refocus around his electrolyzer business, then, so much the better. The company has also recently announced a renewed equity financing aligned with best are financed to raise funds through equity issuance, the financing line is limited to a maximum of 4.8 million shares over the next two years with management committed to a 2 million euro minimum drawdown.
While the terms seem okay given the circumstances with the issuance price based on the average price of the shares immediately prior to a drawdown, a 5% maximum discount and a 2% variable commission there is real risk of the company having to issue significant share capital equal to around 15% of the existing share count at low prices, even the full designated amount doesn’t come close to getting the company to free cash flow breakeven in his model. Okay, so some interesting insights into McPhy and the struggles they’re facing along with their peers, including ITM power, Nel, and plug. It’s also an interesting perspective to discuss some of the troubles facing green hydrogen producers that are outside the industries control, such as higher interest rates affecting their projects betas leading to lower potential investor returns, the author also looks at inflation and how that has had a massive impact on capex and the cost of renewable electricity.
And as we look into 2024, I’m sure we’ll see interest rates ease, and I know we all hope to see inflation reduce, that should ease the strain on project development. If not, we could see the location of potential projects shift to geographic regions more willing to have these projects develop, while giving China a wider opening to take the green hydrogen lead.
Alright, that’s it for me, everyone. If you have a second, I would really appreciate it. If you leave a good review on whatever platform it is that you listen to Apple podcasts, Spotify, Google, YouTube, whatever it is, that would be a tremendous help to the show. And as always, if you ever have any feedback, you’re welcome to email me directly at info@thehydrogenpodcast.com. So until next time, keep your eyes up and honor one another.
Hey, this is Paul. I hope you liked this podcast. If you did and want to hear more. I’d appreciate it if you would either subscribe to this channel on YouTube, or connect with your favorite platform through my website at www.thehydrogenpodcast.com. Thanks for listening. I very much appreciate it. Have a great day.
