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 methane 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 75% 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 the USA is 10,000,000 tonnes per year. (https://www.energy.gov/eere/fuelcells/hydrogen-production).

Fuell Cell Energy's market share is thus 0.000205% of hydrogen production in the USA.

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)

Conclusion

As Fuel Cell's electrolyser is among the most efficient on the market in terms of energy production it is very realistic that the company will at least continue with market benchmark performances and thus maintian market share.

Traction of 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.

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

Fuel Cell energy have over the last 5 years led a greater transition to their solid oxide electrolysis via a ceramic membrane. This is why there is extremely strong growth in 2019 and 2020. The last two years have, however, fallen below the industry growth rate of 8.8% (https://www.grandviewresearch.com/industry-analysis/hydrogen-generation-market). Furthermore, the reduced growth that started in 2021 was not explained or justified in the their accounts. It is thus likely growth in the next 10 years will be more or less in line with industry growth and the larger growth phase between 2018 to 2020 was due to the initial development of their fuel cell systems.

Revenue Analysis

Total Revenues / and total cost of revenue

• 2018 89.4 million / 86.3 million
• 2019 60.7 million / 82 million
• 2020 70.8 million / 79.6 million
• 2021 69.6 million / 85.2 million
• 2022 130.4 million / 160 million

The large jump between 2021 and 2022 is from a sale of a fuel cell unit which was the first one they sold. They previously kept ownership of the units to concentrate on power generation revenue. This sale was also attributed to the surge in costs according to the accounts.

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 (https://ourworldindata.org/renewable-energy)

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

Cost of hyrdrogen energy vs fossil fuels

The annual growth of hyrdrogen energy of 8.8% to 2030 is based off the assumption the current cost ratio between the different energy sources.

Green hydrogen currently costs between 3$ to 8$ per kg (https://sustainability.crugroup.com/article/energy-from-green-hydrogen-will-be-expensive-even-in-2050#:~:text=Some%20level%20of%20storage%20will,%2Fkg%20(real%202022).) This is dependent on the renewable infrastructure in the local region. Thus, if renewable capacity is increased the cost of green hydrogen could be as low as 3$ per kg even with no advances in technology and subsequent reductions in cost.

In October 2021 the cost of green hydrogen was lower than the cost of grey hydrogen in many parts of the world (https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/electric-power/102221-european-green-hydrogen-costs-already-competitive-with-fossil-fuels-say-producers). This was mainly due to the energy crisis caused by the Ukraine war. Although caused by a singular event, it appears the war is projected to last years. This will likely shift the balance between grey and green hydrogen as well as hydrogen energy itself against fossil fuels.

However, the reduced costs of renewable energy, which are needed for green energy, are very unpredictable. This is shown by solar's 50% reduction in costs over the last 8 years (https://sustainability.crugroup.com/article/energy-from-green-hydrogen-will-be-expensive-even-in-2050#:~:text=Some%20level%20of%20storage%20will,%2Fkg%20(real%202022).). Although wind only had a cost reduction of 10% over the same period it is impossible to tell what price reductions in wind energy will occur in the next 8 years.

What can be seen is the increase in global investment in renewable energy every year since 2014, reaching 755 billion in 2021 (https://renews.biz/75215/global-energy-transition-investment-hits-755bn-for-2021/).

Furthermore, the biggest factor that will likely lead to an exponential surge in hydrogen energy is transportation. The sale of new petrol and diesel cars will be banned in the USA from 2035 and in many European countries this will happen in 2030 (https://www.reuters.com/world/us/biden-pledges-end-gas-powered-federal-vehicle-purchases-by-2035-2021-12-08/). Currently the only substitute are electric and hyrdrogen cars but electric is much more dominant. As petrol and diesel cars ceased to be manufactured towards 2030 in Europe it is almost inevitable this will lead to exponential increases in investment in hydrogen abstraction and storage which will bring innovations.

Combined with this, heating of homes from hydrogen will almost inevitably undergo an exponential surge towards 2030. The UK government has stated that 3 million homes in the UK will be heated by hydrogen by 2030 (https://www.thisismoney.co.uk/money/bills/article-9905101/Millions-homes-hydrogen-powered-2030-drive-energy-bills.html). This is over 10% of UK homes.

Thus the average projection of growth of hydrogen production of 8.8% annually is likely to be accurate for the coming years but in the few years before 2030 it is likely to be underplayed. I thus project a great 'surge' in hydrogen production towards 2030 (https://renewablesnow.com/news/hydrogen-production-to-surge-by-2030-as-more-countries-embrace-it-720430/). Analysts have stated that the period post 2020 is the time hydrogen will become mainstream - going from MW to GW (https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Dec/IRENA_Green_hydrogen_cost_2020.pdf). I thus differentiate from the mainstream view that the hydrogen surge will begin after 2030, as illustrated by PWC (https://www.pwc.com/gx/en/industries/energy-utilities-resources/future-energy/green-hydrogen-cost.html). From the political steps taken by governments production and investment should surge 2 or 3 years before 2030.

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)
• 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 billion, up from 30.793 billion in 2021
• operating profit was 5.369 billion in 2022, up from 4.984 billion 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

Fuell Cell is thus a smaller player than many in the hydrogen industry. It is also much more horizontally integrated than players like Linde. However, despite this, due to the numerous methods of carrying out electrolysis it is much more difficult to obtain monopolistic power of coercion in the market. Furthermore, despite being a much smaller company than others it is still more efficient than most in terms of energy input to output.

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.

Fuel Cell Energy’s price to earnings ratio is -5.91 in comparison to Bloom Energy which uses the same methodology of abstracting hydrogen and is also an American competitor has a higher P/E ratio of -8.45. This means that Bloom Energy has a more inflated share price while considering earnings per share. This is understandable given it is a much larger company with more widespread operations and is also more efficient than Fuel Cell. Given the size difference between the companies Bloom Energy is a safer investment as it is more consolidated within the hydrogen industry. Furthermore, Fuel Cell’s 2022 operating loss as a percentage of total revenue was 23.25% as opposed to Bloom’s 21.7%This is even after Fuel Cell sold an operating unit for the first time to boost revenue and improve the operating margin.

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.