Vanit Janthra
Fusion Fuel PLC (NASDAQ:HTOO), a pre-revenue green-hydrogen company, has seen a significant increase in its stock price post its Q3 FY22 investor update. Post the start of Russia-Ukraine in February, most of the energy companies have ramped up their transition toward sustainable technology which is benefiting companies like HTOO. The company also should benefit from the U.S. Inflation Reduction Act tax credits and grant programs in Portuguese. HTOO plans to ramp up its production and take advantage of this emerging growth opportunity.
Two crucial things that investors closely follow while tracking the company’s progress are the grants it’s securing and the projects it’s winning. The company won €10 mn in grant funding in the third quarter and recently entered an agreement with Electus Energy to develop a 75 KW Solar to Hydrogen facility in Bakersfield, Calif. This powered the bulls and the stock saw a significant run-up last week. Before looking at these developments, let us first understand Fusion Fuel’s business.
Fusion Fuel PLC is a green hydrogen solutions provider with a presence in Europe, the U.S., and Middle East & Africa. What is “green” hydrogen? The color used here is a color code used within the energy industry to illustrate the way hydrogen has been extracted. The green color indicates that the method used to extract hydrogen is environmentally friendly. Green hydrogen is extracted by using electrolyzer devices to split water into hydrogen and oxygen and the electricity supplied to these electrolyzers is coming from renewable sources, such as solar or wind. HTOO has created a proprietary micro-electrolyzer solution (HEVO) that allows it to produce hydrogen at a competitive cost using renewable energy. The company’s business line includes the sale of electrolyzer technology to customers interested in building their own green hydrogen capacity, the development of hydrogen plants to be owned and operated by the company itself, and active management of these hydrogen assets, along with the sale of green hydrogen as a commodity to end users.
The company integrated its HEVO micro-electrolyzer device with the Concentrated Photovoltaic (CPV) module and created HEVO-Solar. This device is helping the company to reduce its energy transportation and conversion losses as well as improve efficiency. HTOO applied for a patent in the recent quarter for its HEVO-Chain device. HEVO-Chain is a standard 19’’ rack cabinet with 16 interconnected HEVO micro-electrolyzers designed for scalability and reducing cost/KW.
In Q3 FY22, the company received approval for €10 mn in grant funding from Component-14 (C-14) of the Portuguese Recovery and Resilience Plan (PRR) to develop the HEVO-Industria project in Sines, Portugal. According to management, the €10 mn grant was the largest single-project grant awarded in the application. The project consists of 300 HEVO-Solar units along with a hydrogen refueling station. This facility will be equipped with Fusion Fuel’s HEVO-Night Solutions and will produce ~764 tonnes of green hydrogen per annum. Additionally, the company also received approval from the POSEUR for its HEVO-Sul project. The Portuguese government has allocated €40 mn in direct grants for the POSEUR program, which aims to support the production of green hydrogen and other renewable gases. Fusion Fuel has been approved for a grant of €4.3 mn for this project.
Looking forward, management is working on securing confirmed orders for 100% of its production capacity in 2023 and beyond. It has derisked its 2023 pipeline with all projects securing grants and virtually all land and permitting underway. The company also has a significant inventory in place to deliver on the committed order book. Approximately one third of the 2023 pipeline is tech sales, with the balance being Fusion Fuel-owned development projects. The management is expecting to deliver €40 mn in revenue in FY23. In 2024 and beyond, HTOO plans to expand its reach in the growth markets of Italy and North America.
HTOO recently entered into an agreement with Electus Energy to develop a 75 KW Solar to Hydrogen facility in Bakersfield. In the United States, the strong solar irradiance along with the Inflation Reduction Act’s (IRA) tax credits should make HTOO cost competitive. The company is strategizing to capitalize on this opportunity. Under the IRA, the H2 tax credits of up to $3/kg are applicable on production and can be claimed for 10 years, or else an investment tax credit of up to 30% can be claimed on the cost of the hydrogen plant. Under the solar tax credits, the solar generating facility will qualify for tax credits of 30% on the investment amount or else can claim production tax credits in the first 10 years for electricity output. Recently, Canada also passed a 40% investment tax credit for clean hydrogen projects.
Given the strong solar irradiance, natural gas infrastructure, and proximity to its other operations, the company also is expanding in Italy. The company has entered into a commercial agreement with Duferco Energia SpA for 50 HEVO-Solar units. It’s also ramping up its production in Benavente each month and is holding a €12 mn inventory, which de-risks 2023 production. Until Q2 of FY23, the company had installed ~100 MW of annual production capacity and is planning to achieve 500 MW of production capacity by the end of 2025.
I believe that as most large corporations are moving towards sustainable energy and a zero carbon emissions target, HTOO should benefit from it. Additionally, many countries have various acts and programs in place to support corporations like HTOO that are working on clean energy. Post the start of Russia-Ukraine conflict in February, most of the companies have ramped up their transition toward sustainable tech which is benefiting companies like HTOO. The company’s presence in Portuguese should help it grow in adjacent geographies by leveraging its capabilities.
If we look at the current consensus estimates, the company’s revenues are expected to ramp up quickly over the next few years but its EPS is expected to remain negative till FY2025. While I like the potential of the hydrogen economy and I’m not averse to investing in new technology companies which are currently loss making, I do look for some sustainable advantage that indicates that the company can emerge as a winner in the long term.
Unfortunately, despite the company’s good near-term prospects, the long-term competitive advantages are missing. Unlike solar cells which witnessed low efficiency (5 to 15%) in their early days and high cost of production, Proton Exchange Membrane (PEM) electrolysis of water already has ~80% efficiency. So, even if we see a meaningful improvement in electrolysis efficiency – it’s unlikely to solve the cost-efficiency problem. Further, some other groups are much ahead of HTOO in solving this efficiency problem, and in a recent peer-reviewed research in one of the top scientific journals Nature, a group claimed that they have already achieved efficiency in the high 90s. In addition, I also don’t believe HTOO has any other advantage like the scale when compared to companies like Air Products and Chemicals (APD) or Linde (LIN) that can help in bringing down investment cost per unit of hydrogen produced.
Electricity is the biggest cost incurred in the production of green hydrogen. I believe the key development which can ensure green hydrogen is available at a cost where it makes economic sense will be a reduction in the cost of electricity produced by renewable sources like solar and wind. And when this happens, it should benefit all green hydrogen companies equally. Frankly, I believe there will be many more companies in the sector at that time.
While the company is benefiting from government grants currently which are helping it reduce costs and making green hydrogen competitive, I don’t think HTOO has any unique advantage which gives me a conviction that it will be a likely winner in the sector in the long term. The threat of technology disruptions in the sector is also high. So, despite good short-term prospects and government grants, I prefer to be on the sidelines.
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