FuelCell Energy, Inc.

FuelCell Energy, Inc. (FCE, together with its subsidiaries, designs, manufactures, sells, installs, operates, and services stationary fuel cell power plants for distributed base-load power generation. It offers SureSource1500, a 1.4-megawatt (MW) platform; SureSource 3000, a 2.8 MW platform; SureSource 4000, a 3.7 MW platform; SureSource 250, a 250-kilowatt (kW) platform; SureSource 400, a 400-kW platform; and SureSource Hydrogen, a 2.3 MW platform that is designed to produce up to 1,200 kilograms of hydrogen per day for multi-megawatt utility, microgrid, and distributed hydrogen applications, as well as on-site heat and chilling applications.

It also provides a SureSource Capture system that separates and concentrates carbon dioxide from the flue gases of natural gas, biomass, or coal-fired power plants, as well as industrial facilities; solid oxide fuel cell/solid oxide electrolysis cell stack technology. The company's SureSource power plants generate clean electricity, usable heat, water, and hydrogen. In addition, it provides engineering, procurement, and construction services; project financing services; real-time monitoring and remote operation, online support system, preventative maintenance, parts and supplies, on-site and classroom training, and power plant refurbishment/recycling services, as well as technical services in the areas of plant operation and performance, and fuel processing. It serves various markets, including utilities and independent power producers, industrial and process applications, education and health care, data centres and communication, wastewater treatment, government, microgrids, food and beverage, and commercial and hospitality. The company primarily operates in the United States, South Korea, England, Germany, and Switzerland. FuelCell Energy, Inc. was founded in 1969 and is headquartered in Danbury, Connecticut.

About

FuelCell Energy Inc. founded in 1969 and headquartered in Danbury, Connecticut is an American energy company specialising in the design, manufacturing, operation, and maintenance of fuel cell power plants. Its proprietary fuel cell technology utilises carbonate fuel cells that are fuelled by renewable biogas to generate clean electricity. The company offers a range of fuel cell products, including stationary fuel cell power plants for electricity generation, hydrogen-based energy storage systems, and fuel cell solutions for electric mobility applications. Their technology focuses on reducing carbon emissions and providing reliable, efficient, and clean energy solutions. Fuel cell technology is considered a clean and efficient alternative to traditional energy sources, making it an attractive investment option for those interested in the renewable energy sector.

The company targets utility companies, industrial companies, universities, municipal water treatment facilities, government facilities and other commercial entities as customers. It currently has over 50 U.S. patents and has installed over 50 megawatts of fuel cell systems worldwide.

Industry Outlook

The vast majority of hydrogen produced today is from the steam methan process - 95% in Europe (demaco-cryogenics.com/blog/steam-methane-reforming-to-green-hydrogen/). This process, while energy efficient, also produces carbon monoxide and carbon dioxide which is bad for the environment and thus defeats the purpose of the exercise.

In 2021 2.5% of final energy consumption came from hydrogen (www.iea.org/reports/global-hydrogen-review-2022/executive-summary). However, as the vast majority of hydrogen is abstracted using hydrocarbons, mostly natural gas, this figure is misleading.

The global market for all hydrogen production was 151 billion in 2022 and will reach 276 billion in 2032 (https://www.gminsights.com/industry-analysis/hydrogen-generation-market). The steam methane process method will be 236 billion in 2032. The green hydrogen market was 3.25 billion in 2021 and due to reach 58.5 billion by 2030 (https://www.globenewswire.com/en/news-release/2023/02/21/2612013/0/en/Green-Hydrogen-Market-Size-Envisaged-to-Reach-USD-58-53-Billion-By-2030-Forecasted-39-6-CAGR-Polaris-Market-Research.html#:~:text=According%20to%20the%20research%20report,39.6%25%20during%20the%20forecast%20period.).

Thus, while grey hydrogen production is set to grow it is far outpaced by green hydrogen.

A helping factor to the rise of hydrogen is the lowered costs of renewable energy which is required for green hydrogen. A key example of this is solar energy which is 25% the price of what it used to be (https://www.marketsandmarkets.com/Market-Reports/green-hydrogen-market-92444177.html). Similarly the cost of electrolysers for green hydrogen is about half the price of what it was 5 years ago, particularly from the developments in the oxide membrane which allows for near 100% efficiency for factories with already hot settings.

Climate goals have been set by almost every country in the world. Hydrogen is a key and realistic method of countries achieving these goals. This is why the EU 10 million tonnes of renewable hydrogen by 2030 and to import 10 million tonnes by 2030 (energy.ec.europa.eu/topics/energy-systems-integration/hydrogen_en). This is despite the EU only having 2% of hydrogen in their total energy consumption, below the global average of 2.5%.

The EU and UK have pledged to be carbon neutral by 2050. In a carbon neutral world Deloitte have estimated that clean (renewable and low carbon) hydrogen could increase from 90 million metric tons (MT) today to 660 MT in 2050, making up 22 per cent of the final energy demand globally then (https://www2.deloitte.com/uk/en/focus/climate-change/zero-in-on-hydrogen.html?id=gb:2ps:3gl:4climate:6brand:hydrogen%20fuel-589416397834&gclid=Cj0KCQjwiIOmBhDjARIsAP6YhSWJ2CXJuVX_AQ2ZI8mssGp-oPosa9iCh6nAAgUj0Z3nMVmttpUVSxYaAku7EALw_wcB). Furthermore, as political pressure dictates greater use of the energy, the costs according to Deloitte will inevitably come down.

The distributed power generation market is expected to reach $257 billion by 2028, driven by increasing energy demand, grid security concerns and sustainability initiatives. Fuel cell adoption is projected to grow at 19% CAGR, supported by dropping costs and technological improvements.

The global carbon capture market may surpass $6 billion by 2027 as companies and governments prioritise decarbonisation. FuelCell's carbon capture solution is uniquely suited for smaller-scale applications in industrial and production facilities.

The global fuel cell market is expected to reach $24.1 billion by 2027, growing at a compound annual growth rate (CAGR) of 20.4%. Key drivers are needed to reduce carbon emissions, government incentives for clean energy, and demand for highly efficient and reliable decentralised power.

Within this, the commercial and industrial segment is estimated to expand at 24.2% CAGR through 2027. FuelCell is positioned to benefit from growth in distributed generation.

These trends provide strong tailwinds to support FuelCell's growth strategy.

However, at the same time the infrastructure is not in place for hydrogen to be rolled out on a mass scale as of yet. Particularly with the topic of transportation - there are only 15 hydrogen filling stations in the UK currently.

Fuelcell in the hydrogen context

Fuelcell abstracts hydrogen using solid oxide electrolysis. This is a high temperature methodology which is superior against alkaline electrolysis methods in terms of energy efficiency (www.sciencedirect.com/science/article/abs/pii/S0360319913022684).

Toyota's port at long Beach has a 2.3 MW Fuel Cell (from FuelCell Energy) produces 1.3 tonnes (565 hydrogen output per 1 MW input) of green hydrogen each day.

The company currently has 36.3 MW fuel cells in operation which translates to 20.5 tonnes of hydrogen per year.

The current production rate of hydrogen in North america is 691,000 tonnes per year since 2022 (https://www.airswift.com/blog/green-hydrogen-projects-usa).

Assuming Fuel cell energy can have those working progress projects finished in the near future their current market share will be 0.0029% of the North American market.

PlugPower

uses the proton exchange membrane to abstract hydrogen. PlugPower's EX-425D system requires an input of 1 MW for an output of 425 KG of hydrogen. Furthermore, their EX-2125D system has an input of 5 MW with an output of 2125 KG of hydrogen (also 425 hydrogen output per 1MW input). FuelCell Energy is thus more efficient than PlugPower.

Bloom Energy, Headquartered in California

• also using solid oxide. They have made 700 installations globally.
• their electrolyser produces 1.2 tonnes of hydrogen a day from 1.8 MW input of energy.
• They claim to be the most efficient hydrogen company

Linde

• based in Europe
• uses the polymer membrane for electrolysis
• has installed close to 200 hydrogen fueling stations and 80 hydrogen electrolysis plants worldwide
• much more vertically integrated in the hydrogen industry
• largest plant is in Norway - 24 MW producing 10,000 KG of hydrogen per day - 416 kilos of hydrogen per MW

ITM

• Partnered with Shell in projects such as the the pan-European REFHYNE project which will have a capacity of 10 MW and will produce 1300 tonnes of hydrogen per year which was funded by the EU. There is also a plan to make a REFHYNE 2 with a 100 MW capacity to produce 15000 tonnes of hydrogen per year (https://www.refhyne.eu/refhyne-2/).
• ITM uses the polymer membrane for its electrolysis, thier 2 MW systems produce 26 kilos of hydrogen per hour (864 per day)

The main issue and cost currently is the high temperature needed for this process - at over 600 degrees celsius which is iteself a high cost to achieve and maintain (www.marketsandmarkets.com/Market-Reports/fuel-cell-generator-market-207434513.html). However, if placed next to industrial factories the heat could be taken from them leading to almost 100% efficiency.

Competitors to FuelCell energy are: Bloom Energy, Doosan Fuel Cell (from South Korea), Powercell Sweden AB, Ballard Power Systems (Canada), Loop Energy (Canada) and ABB (Switzerland)

The use of electrolysis to abstract hydrogen as opposed to the steam methane process is due to experience a 16% annual growth rate up to 2028 (www.businesswire.com/news/home/20190618005111/en/Navigant-Research-Report-Shows-the-Global-Market-for-Electrolyzers-is-Expected-to-Grow-at-16-Annually-Through-2028)

Traction of Green Hydrogen produced by Fuel Cell Energy

It should be noted that Fuel Cell Energy solid oxide electrolysis with a ceramic membrane has the potential to be completely green if operated with renewable energy but arent in all cases supplied this way. For these purposes of illustrating their position in the green hydrogen market we will assume they are all supplied with renewable energy.

The company started selling these fuel cells significantly in 2018.

• 2018 operating capacity of 11.2 MW, ones in process of being made 83.1
• 2019 operating capacity of 26.1 MW, percentage change from previus year: 133%. Ones in process of being made 47.1
• 2020 operating capacity of 32.6 MW, percentage change from previus year: 25%. Ones in process of being made 40.7
• 2021 operating capacity of 34 MW, percentage change from previus year: 4.3%. Ones in process of being made 41.3
• 2022 operating capacity of 36.3 MW, percentage change from previus year: 6.8%. Ones in process of being made 26.8

The last few years clearly saw a reduced growth rate.

Hydrogen accompanies by surge in renewable energy

As green hydrogen must be accompanied by renewable energy it is important to look at increases in renewable generation

Each is shown as an increase in TWH production from the previous year

• 2018 54 TWH
• 2019 75 TWH
• 2020 115 TWH
• 2021 136 TWH
• 2022 289 TWH

Main competitors

Bloom Energy

• Revenue of $462.6 million and Gross margin of 15.4% in the fourth quarter of 2022 but Operating loss of ($40.6) million (https://www.bloomenergy.com/news/bloom-energy-reports-fourth-quarter-and-full-year-2022-financial-results/#:~:text=Gross%20margin%20of%2012.4%25%20in,(%24114.5)%20million%20in%202021.)
• Revenue of $1,199.1 million in 2022, an increase of 23.3% compared to $972.2 million in 2021;
  • Gross margin of 12.4% in 2022, a decline of 8.0 percentage points compared to 20.3% in 2021.
  • Operating loss of ($261.0) million in 2022, an increase of $146.5 million compared to ($114.5) million in 2021.

Linde

• revenue in 2022 was 33,364 million, up from 30,793 million in 2021
• operating profit was 5369 million in 2022, up from 4984 million in 2021

ITM

• Revenue in 2021 was 4.3 million, 5.6 million in 2022
• gross loss in 2021 of 6.5, 23.5 million in 2022. This jump has been explained by extra costs incurred by REFHYNE I and Leuna projects.(https://itm-power-assets.s3.eu-west-2.amazonaws.com/2022_Annual_Report_d61e87a868.pdf)
• Pre tax loss of 27.6 million in 2021 and 46.7 in 2022

Recent Financial Performance

In its most recent quarterly earnings report for Q1 2023, FuelCell Energy reported:

• 116% Y/Y revenue growth to $47.2 million driven by higher generation under service agreements and construction activity. Gross margin improved significantly to -7% from -36% in the prior year period as project margins increase.

• Operating loss narrowed to $29.5 million, while net loss was $30.5 million or -$0.08 per share. The company maintains a strong cash position of $492 million to fund operations and growth initiatives.

• FuelCell had $492 million in cash reserves as of Q1 2023 to support growth plans. But additional financing may be required long term.

• Total debt stands at $379 million.

Value Drivers

Key drivers that may unlock upside value:

• Accelerating project backlog and financing partnerships to ramp installations
• Improving production efficiency and costs as projects scale
• Expanding high-margin recurring revenue from service agreements
• Commercializing carbon capture technology
• Advancing hydrogen fuel cell development

The company continues to operate at a net loss but has been growing revenue rapidly in recent quarters. Management set a goal to achieve revenues of over $300 million by 2025. Cost improvements and carbon capture viability will be key to getting there profitably. Investors should closely analyse the company's revenue growth, profit margins, expenses, and cash flow trends to evaluate its financial health and sustainability.

Competitive Advantages

FuelCell Energy's advantages include:

• High electrical efficiency levels up to 60% vs. 30-45% for combustion engines
• Fuel flexibility with the ability to utilise biogas from wastewater treatment, landfills and dairy farms
• Ultra-low nitrogen oxide, sulfur oxide and particulate emissions
• Minimal water usage, water treatment enabled
• Carbon capture solution concentrates CO2 for utilization/sequestration

This can make the economics attractive vs. alternatives like solar, batteries or reciprocating engines.

Risks

Key risks include:

• No profitability yet and the possibility of dilutive capital raises.
• Policy support key; new IRA credits should help economics
• Project execution risk still high
• Carbon capture viability not yet proven at scale
• Emerging competition from Bloom, Doosan, Plug Power hydrogen solutions

FuelCell competes with hydrogen fuel cells, gas turbines, solar, wind and battery storage in the distributed generation market. Key competitors include Plug Power, Bloom Energy, Ballard Power and Doosan Fuel Cell.

Lithium-ion batteries are emerging as a strong competitor for short-duration energy storage applications.

Competition is based on electrical efficiency, reliability, costs, financing and policy support. FuelCell will need to diligently improve its value proposition against alternatives.

The company's balance sheet remains stressed. Improving operational execution and lowering costs will be critical to creating a sustainable business model without relying purely on subsidies.

Investment Thesis

FuelCell Energy is a speculative turnaround play on the growth of distributed carbon-free baseload power and carbon capture. While still unprofitable, its proprietary fuel cell technology provides unique advantages in high efficiency, fuel flexibility and emissions reductions. At 5x 2023 projected sales, the stock appears to discount significant execution risk. But success in commercialising the carbon capture solution and improving profitability could catalyse the shares. Investors should size positions accordingly given the binary, high-risk/high-reward nature of the opportunity here.

The company represents a high-risk, high-reward speculative investment opportunity. For investors with longer time horizons and higher risk tolerance, shares could return multiples if execution is strong. But the downside is substantial if growth stalls.

The company's weak financial profile and early stage of commercialization warrant caution.