As part of Cowen and Company’s “Energy Transition Series,” analysts spoke with The Hydrogen Council Executive Director Daryl Wilson to explore the adoption of hydrogen and fuel cell technologies—from stationary to mobility applications. Also addressed were use-cases relating to complementary battery technology and costs of hydrogen as a fuel source. Cowen analysts discussed, too, how Cummins and Wabtec are operating in this market.
The Hydrogen Council’s aim is to accelerate the adoption of clean energy.
Part of the conversation were Cowen analysts Jeffrey Osborne (Managing Director, Energy-Sustainability & Mobility Technology), Matt Elkott (OEM Transportation Analyst), Marc Bianchi, Thomas Boyes, Emily Riccio, Carson Sippel, Jonathan Hunter, James Schumm and Elliot Alper.
Osborne and Elkott share what they learned below.
A Fuel Cell and Battery Story
Hydrogen and battery technologies will “progress in parallel but serve different needs” in transport applications, is among Osborne’s takeaways from Wilson, who is the former CEO of Hydrogenics, a Ontario, Canada-based fuel cell and electrolyzer company that was effectively acquired in 2019 by Cummins as part of the company’s New Power division.
• Cost and use-case. Wilson discussed how cost affects use. Osborne’s takeaways: “As the costs of both technologies come down, batteries and fuel cells as well as ultra-capacitors will be more and more associated. Despite the trajectory for ongoing cost reductions and moving up scale on the battery side, the mass energy density of batteries will still never equal that of a fuel cell. Therefore, massive heavy-duty transport applications like large trains is one use-case where batteries are not expected to favor fuel cells.”
“We [Cowen analysts] note, however, that fuel cells and batteries can be used in tangent, which was done on board Alstom trains in Germany,” Osborne reported.
Osborne’s other takeaways from Wilson on technology use: “In addition to trains, other heavy applications such as trucks over 10 tons and buses with longer daily routes will favor fuel cell to batteries. For many applications, the advantage of using a fuel cell over a battery and vice-versa comes down to the duty cycle of the vehicle. This includes the mass of the vehicle, the mass of the payload, the terrain of the route, and the predictability of the route.
— “For many applications, the advantage of using a fuel cell over a battery and visa versa comes down to the duty cycle of the vehicle.” —
“If a route has a hilly terrain for example, batteries will be less efficient. In terms of the predictability of a route, if a fleet vehicle has an eight-hour return window, they can use batteries; whereas if the route is longer and less predictable, fuel cells would be the more convenient option.
“Faster charging time is another meaningful advantage to fuel cells depending on the schedule of the vehicle fleet. While heavier vehicles that require more route flexibility will likely have a greater use case for fuel cells vs. batteries, the future is both a fuel cell and a battery story.”
• Hydrogen Types. “Wilson also addressed the different types of hydrogen and how they would contribute to the overall use of fuel cells over time,” Osborne noted.
Osborne’s takeaways from the discussion: “Fuel cells are significantly cleaner than traditional forms of energy generation, as the technology relies on a chemical process to generate electrons compared to combustion-driven engines. What is not necessarily ‘green’ is the type of hydrogen used.
“Gray hydrogen is derived from fossil fuels like oil and coal, both of which emit CO2 into the air during combustion, and is fairly inexpensive at approximately $1 per kilogram. If carbon capture technology is added to the process, you can create blue hydrogen, which is in the about $2 per kilogram range.
“Green hydrogen is produced through electrolysis and can take interment renewable assets like wind and solar to produce hydrogen. This is the most costly way to generate hydrogen at between $4 and $5 per kilogram.”
“Wilson believes that in the interim, blue hydrogen, as the cost leader, will become the most prevalent form of hydrogen as more emitters move to carbon-capture technology as a way to stem overall emissions,” Osborne noted.
— “Wilson believes that in the interim, blue hydrogen, as the cost leader, will become the most prevalent form of hydrogen.” —
“Longer term, as green hydrogen scales, there is a path to between $1.50 and $2.00, which would make it competitive with other forms of hydrogen,” Osborne reported from Wilson’s discussion. Osborne added that “NEL in Norway released a target this morning of $1.50 per kilogram by 2025.”
• Hydrogen Fuel Cell Use: Stationary Power vs. Mobility. “Although there are several use-cases for hydrogen fuel cells, Wilson spoke at length around the consumption of hydrogen in two primary areas: stationary power and mobility,” Osborne noted. “Companies such as Ballard Power, Bloom Energy, FuelCell Energy, and Plug Power all offer hydrogen fuel cell-based stationary power offerings for uses such as backup power.
“Wilson believes that stationary power will continue to be a primary use-case for hydrogen fuel cells, particularly as the cost curve continues declining. He highlighted Microsoft’s decision in July 2020 to test hydrogen fuel cells for backup power at data centers—as opposed to Microsoft’s current decision to use diesel fuel—as the company hopes to eliminate use of diesel over the next decade in conjunction with its plan to be carbon negative by 2030. We [Cowen analysts] note that Microsoft is a member of The Hydrogen Council, which serves as further validation that The Hydrogen Council continues to gain global recognition.
“As it relates to mobility, Wilson is bullish on hydrogen fuel cells’ role across several mobility sub-sectors including passenger cars (i.e., Toyota Mirai), heavy-duty trucks, trains, and other areas. More specifically, Wilson highlighted the advantage that hydrogen fuel cells provide in heavy-duty trucks, given fuel cells’ ability to provide better performance in applications that involve higher mass and payload. However, he acknowledged that the future of mobility is filled with both hydrogen fuel cells and batteries. We [Cowen analysts] agree with this claim and explore it in more detail in our ‘Future of Mobility’ report, which we published last fall.”
• The Hydrogen Fuel Cell Capital. “Given the common comparison between the declining cost of solar and the expected cost declines of hydrogen and associated hydrogen fuel cell infrastructure, we [Cowen analysts] asked Wilson if he expects China to become the global hydrogen leader (both in deployment and supply chain),” Osborne reported. “He expects Europe—not China—to be the hydrogen fuel cell capital and further build upon its current leadership position. Wilson noted that Europe already has a sizable first-mover advantage in hydrogen fuel cells, and does not think China will be able to acquire a solar-like grasp on the hydrogen fuel cell market.
“In addition to his [Wilson’s] optimism on Europe’s position in the hydrogen fuel cell market, he expects a notable ramp in the U.S. market in the coming years, as state governments and corporations alike realize the value-add that hydrogen fuel cells provide—particularly in states such as California and Texas. In fact, he noted that Texas is currently home to more than 40 steam methane reforming (SMR) plants, which is noteworthy given the fact that SMRs produce most of the hydrogen in the U.S. today.”
Spotlight: Cummins (CMI) and Wabtec (WAB)
“Wilson’s insights affirm our [Cowen’s] favorable long-term view of CMI’s ($248.03, Market Perform, $239 PT) New Power Segment, which includes hydrogen, battery and other sustainable technologies,” Elkott reported. “His view that transportation equipment operators will not necessarily have to coalesce behind one renewable energy source bodes well for [CMI’s] ability to allocate its investments strategically, although we [Cowen analysts] believe hydrogen has become more of a priority for the manufacturer in the last 12 months. Wilson appeared to believe that his 60% hydrogen cost reduction estimate over the next five years could lead to profitability for many suppliers, sometime along that timeframe. This is important because the skepticism expressed by some investors about hydrogen may be attributable in part to the reluctance of key companies like CMI to provide specific breakeven point guidance.
— “Wilson appeared to believe that his 60% hydrogen cost reduction estimate over the next five years could lead to profitability for many suppliers, sometime along that timeframe.” —
“As of late November, the company was expecting its New Power Segment to lose $500MM over the 2020-2022 timeframe, with no concrete timeframe for profitability beyond that.
“CMI, which currently has more than 2,000 fuel cell installations across a variety of on- and off-highway applications, as well as more than 500 electrolyzer installations, expects to generate electrolyzer revenue of at least $400MM in 2025. To put this in perspective, its total revenues peaked at $23.8 billion in 2018, at the height of the last up-cycle.
“Our [Cowen’s] estimate for total New Power Segment revenue this year is $95MM. The $400MM projection assumes a market size in 2025 of 3.5 gigawatts. It also assumes a market share of 15% of those sales. The company then assumes a cost for those electrolyzers of $750,000 per megawatt, which represents a cost decrease from approximately $1MM currently.
“We [Cowen analysts] expect new technologies to continue to represent an outsized catalyst for CMI’s stock in the long term, but likely less so over the next 6-12 months given the strong momentum leading up to the November Hydrogen Day and as investors await some more specific outlook commentary in the coming quarters (See our report: Hydrogen: Promising LT Growth; No Big Impact in Near-to-Intermediate Term).
“Wilson’s acknowledgement that the future of mobility is filled with both hydrogen fuel cells and batteries affirms our favorable view of the sustainability attributes of WAB ($80.86, Outperform, $86 PT), a freight locomotive manufacturer and provider of components and services for freight and transit rail equipment.
“In 3Q20, WAB received an order for transit hybrid locomotives for New York City and its first zero-to-zero order for a Class I railroad. Management noted that it is having many conversations on new locomotive technologies with customers in the U.S. and other world regions. WAB remains our top ESG pick in the transportation equipment sector.”
More Railway Age articles on alternate technology-powered locomotives:
CP Embarks on Hydrogen Locomotive Pilot (With more information here: 2021 Railroader of the Year: Keith Creel, Canadian Pacific)