Unpacking Nel's Competitive Advantages in the Green Hydrogen Market
Similar to other alternative energy equipment manufacturers, Nel, on which we have recently initiated coverage, has also seen its share price run out of (green) fuel. We attribute this largely to deflating wishful thinking. After touching a low in October 2022, at levels last seen just before the start of the pandemic, the share price of this green hydrogen company caught a breath of fresh air on the back of European IRA deliberations and some order wins. This has since fizzled out and following another well-timed capital raise, the share price seems to be holding its own. If we were to look at just the names in pure-play hydrogen production, Nel appears to be better off than ITM, for one, and some other names across the broader market. Based on what we see in this sector, there are aspects we like about it, including players such as Nel.
What we see in the sector
1. IRA and Net Zero Industry Act – The game changing reform announced by Mr. Biden’s government in the US has granted various tax credits for alternative energy technologies, including hydrogen. This tax credit will be available for 10 years (until 2033) and is tethered to the emissions released during hydrogen production. The baseline for determining the eligibility of these credits is the amount of emissions released from existing technologies. For hydrogen produced without any emissions, ie green hydrogen, the tax credit will have a ceiling of $3 per kg of hydrogen produced. So, we expect IRA to be a key demand driver in the coming decade. Finally, while the EU’s Net Zero Industry Act still needs firming up, the recognition of green hydrogen as a strategic net zero technology should unlock demand in Europe. Me
2. Capacity rationalisation – At the height of the green energy market excesses that ensued from the pandemic, various OEMs in the hydrogen industry announced large manufacturing capacity additions in anticipation of huge demand. However, policy uncertainties, particularly in the EU, and questions over the execution capability of the OEMs to deliver projects have held back demand. Consequently, this has led to a rethink of these announced capacity additions. Overall, based on our research, we find two observations worth pointing out. First, the demand dynamics are improving, with Nel having bagged some large-scale orders. And second, the OEMs are now taking a ‘scale-as-you-go’ approach with regards to their hydrogen production plant capacities. The latter is important as we estimate that global supply is still materially ahead of demand.
3. Avoiding (some) pitfalls faced by wind turbine manufacturers? – When Nel announced two significant purchase orders in the last quarter of 2022, the words that caught our attention were ‘There are pass-through mechanisms for steel and nickel price increases.’ While the real impact of this measure is yet to be seen in the financials, we see this as encouraging. It shows that electrolyser OEMs have learnt a lesson or two from the wind turbine OEMs.
How Nel stands out
1. Automated manufacturing, validated product and focused scope – Nel has a fully automated Alkaline manufacturing facility in Norway consisting of 4 lines of 500MW apiece. Lastly, Nel is now narrowing its scope to focus on only Stack and Balance of Stack (for definitions please see the Money Making section), while leaving the Balance of Plant to either the customer or an EPC partner. This is an important consideration as it takes Nel away from the riskier EPC part of the projects.
2. Burgeoning order intake and backlog – Nel has consistently been bagging orders in the last 8 quarters across both divisions. Additionally, the orders in the electrolyser division are moving towards a relatively larger scale (in MW), which shows increasing customer confidence in Nel’s Alkaline products and market demand.
3. Near-term revenue visibility – Of its order backlog of NOK2.6bn at the end of 2022, Nel has deliveries due worth approximately NOK1.5bn in 2023 and NOK1.0bn in 2024 (Source: Annual Report).
4. Lower potential downside from legacy projects – Nel executed several legacy projects in 2022 and while it sees more headwinds for such projects in 2023, it expects profitability to improve in the latter half of 2023, and into 2024. Given the price opacity of these projects it is hard to pin-point how high the profitability will be. But if Nel manages to make a buck on some projects (only Alkaline) even at the EBTIDA level, it would be cheered by the market.
Order intake and backlog (NOKm)
What we see in the sector
1. IRA and Net Zero Industry Act – The game changing reform announced by Mr. Biden’s government in the US has granted various tax credits for alternative energy technologies, including hydrogen. This tax credit will be available for 10 years (until 2033) and is tethered to the emissions released during hydrogen production. The baseline for determining the eligibility of these credits is the amount of emissions released from existing technologies. For hydrogen produced without any emissions, ie green hydrogen, the tax credit will have a ceiling of $3 per kg of hydrogen produced. So, we expect IRA to be a key demand driver in the coming decade. Finally, while the EU’s Net Zero Industry Act still needs firming up, the recognition of green hydrogen as a strategic net zero technology should unlock demand in Europe. Me
2. Capacity rationalisation – At the height of the green energy market excesses that ensued from the pandemic, various OEMs in the hydrogen industry announced large manufacturing capacity additions in anticipation of huge demand. However, policy uncertainties, particularly in the EU, and questions over the execution capability of the OEMs to deliver projects have held back demand. Consequently, this has led to a rethink of these announced capacity additions. Overall, based on our research, we find two observations worth pointing out. First, the demand dynamics are improving, with Nel having bagged some large-scale orders. And second, the OEMs are now taking a ‘scale-as-you-go’ approach with regards to their hydrogen production plant capacities. The latter is important as we estimate that global supply is still materially ahead of demand.
3. Avoiding (some) pitfalls faced by wind turbine manufacturers? – When Nel announced two significant purchase orders in the last quarter of 2022, the words that caught our attention were ‘There are pass-through mechanisms for steel and nickel price increases.’ While the real impact of this measure is yet to be seen in the financials, we see this as encouraging. It shows that electrolyser OEMs have learnt a lesson or two from the wind turbine OEMs.
How Nel stands out
1. Automated manufacturing, validated product and focused scope – Nel has a fully automated Alkaline manufacturing facility in Norway consisting of 4 lines of 500MW apiece. Lastly, Nel is now narrowing its scope to focus on only Stack and Balance of Stack (for definitions please see the Money Making section), while leaving the Balance of Plant to either the customer or an EPC partner. This is an important consideration as it takes Nel away from the riskier EPC part of the projects.
2. Burgeoning order intake and backlog – Nel has consistently been bagging orders in the last 8 quarters across both divisions. Additionally, the orders in the electrolyser division are moving towards a relatively larger scale (in MW), which shows increasing customer confidence in Nel’s Alkaline products and market demand.
3. Near-term revenue visibility – Of its order backlog of NOK2.6bn at the end of 2022, Nel has deliveries due worth approximately NOK1.5bn in 2023 and NOK1.0bn in 2024 (Source: Annual Report).
4. Lower potential downside from legacy projects – Nel executed several legacy projects in 2022 and while it sees more headwinds for such projects in 2023, it expects profitability to improve in the latter half of 2023, and into 2024. Given the price opacity of these projects it is hard to pin-point how high the profitability will be. But if Nel manages to make a buck on some projects (only Alkaline) even at the EBTIDA level, it would be cheered by the market.
Order intake and backlog (NOKm)
Subscribe to our blog
They may claim that they cannot compute the impact as things are moving too fast. This is not accep...