Hydrogen power has been on the market for decades but has never really been able to break the glass ceiling of mass-market appeal, mainly due to a host of technical and cost issues. But some experts now believe that the hydrogen economy is ready for take-off, with Goldman Sachs predicting hydrogen generation could eventually grow into  a $1 trillion per year market.  The EU has hatched a highly ambitious plan to install 40 gigawatts of electrolyzers within its borders and support the development of another 40 gigawatts of green hydrogen in nearby countries that can export to the EU by 2030. The EU has also pledged to cut Russian gas imports by two-thirds by the end of the year and has doubled down on green energy fuels by increasing renewable hydrogen production.

And Citigroup analysts are now particularly bullish about one hydrogen sub-sector: fuel cells.  Fuel cells are used in specialty vehicles such as forklifts and by energy consumers to complement electricity from the grid to smooth energy costs and ensure reliability. According to the analysts, the global fuel cell industry is a direct play on the green energy debate, and “reaching the part that batteries cannot.”

“Fuel cells enable both de-carbonization and energy resilience, and we see them as crucial in harder-to-abate sectors like commercial vehicles and marine,” a Citi team told clients in a note on Tuesday, carried by MarketWatch.

Citi’s base case sees the fuel cell market hitting 50 gigawatts (GW) and $40 billion by 2030, good for more than 35% CAGR in dollar terms, with further acceleration to 500GW/$180 billion by 2040.  “The fuel cell equity story has had false starts before, but we see the impetus from emissions policy as well as announced hydrogen plans as creating attractive opportunities,” the analysts have said, highlighting policies such as the U.S. Inflation Reduction Act.

Citi has picked U.K.-based Ceres Power (LSE: CWR), New York-based Plug Power Inc. (NASDAQ: PLUG), Belgium’s Umicore SA (EBR: UMI), and Japan’s Toyota Motor Corp.(NYSE: TM) as the bank’s buy-rated stocks with high exposure to the fuel-cell theme.

What Is Holding The Hydrogen Boom Back?

But for all the buzz surrounding the hydrogen economy, the sector has badly underperformed the market this year. Hydrogen and fuel-cell stocks have been pounded, losing about 70% YTD  compared to -25.1% by the S&P 500. Even the leaders of the space have not fared much better: PLUG stock has returned -31.3% YTD while shares of peer FuelCell Energy, Inc. (NASDAQ: FCEL) have lost 45.7% over the timeframe.

But it’s not been all doom and gloom, though: back in August, Plug Power signed a deal to supply liquid green hydrogen to Amazon Inc. (NASDAQ: AMZN) beginning 2025 to help decarbonize the ecommerce giant’s operations.

As part of the deal, Plug will grant Amazon a warrant to acquire up to 16M common shares, with an exercise price for the first 9M warrant shares of ~$22.98/share, and for the rest a price equal to 90% of Plug's 30-day volume weighted average share price when the first 9M shares are vested. Amazon would vest the warrant in full if it spends $2.1B over the seven-year term of the warrant across Plug products, including electrolyzers, fuel cell solutions and green hydrogen.

Under the deal, Plug Power will supply 10,950 tons/year of liquid green hydrogen beginning January 2025, something the company has termed as a "growth opportunity" that is expected to help it reach its $3B revenue goal by 2025. On its part, Amazon says the contract should provide enough annual power for 30K forklifts or 800 heavy-duty trucks used in long-haul transportation.

Despite the bright long-term outlook for the hydrogen sector, companies like Plug Power have been recording ballooning operating costs leading to widening losses. For Q2 2022, PLUG’s operating expenses increased 132% year-over-year to $114.44 million; operating loss widened 63.9% Y/Y to $146.91 million while net loss and net loss per share worsened 73.9% and 66.7% year-over-year, respectively. For the full year, PLUG has a consensus loss per share estimate of $0.94, good for 14.8% year-over-year increase.

Meanwhile, FuelCell saw Its Q3 2022 loss for the period ended July loss from operations expand 164.5% year-over-year to $28 million while adjusted EBITDA loss widened 301.5% year-over-year to $20.77 million. The company’s consensus revenue estimate of $27.87 million for the fiscal 2023 first quarter indicates a 12.4% Y/Y decline.

Varying Expectations

These are still early days into the hydrogen boom, and analysts are saying that varying expectations around how financing and offtake deals are structured is one of the reasons why deals have been hard to close.

Currently, there is no merchant market for hydrogen. For hydrogen projects to become financeable, they must have a bankable offtake scheme. But expectations around how financing and offtake deals will be structured vary widely, adding complexity to the contracting process, as Frank O'Sullivan, managing director at venture capital firm S2G Ventures, has told the ACORE Finance Forum. There's also no shortage of investors interested in the hydrogen sector, but many are sitting on the sidelines and watching to see how the first round of deals pans out.

"There isn't a single model that defines, this is how the hydrogen play works. There will be several models, and those models have not emerged yet," O'Sullivan has said.

It's a viewpoint reiterated by Greg Cameron, executive vice president and chief financial officer of hydrogen fuel cell maker Bloom Energy (NYSE: BE). According to Cameron, on one end, there's the acquisition of energy needed to drive electrolysis. On the other end, there are the off-takers, who may come from diverse industries with different expectations for how a contract should be structured.

Luckily, O'Sullivan says that the path to getting actual hydrogen infrastructure off the ground is relatively clear. The capital costs associated with electrolysis are declining, while access to renewable energy that's cheap enough to generate hydrogen from water and still sell a cost-competitive fuel is on the horizon.

Rachel Crouch, a senior associate at giant  British-American multinational law firm Norton Rose Fulbright, has proposed that existing use cases for hydrogen--which today rely almost exclusively on gray hydrogen--may be among the first green or blue hydrogen opportunities to be financeable because the offtake picture is already clear and is likely easier to model.

Crouch suggests ammonia is one such area because a market already exists for ammonia, and several green ammonia projects have been proposed or are in the early stages of development.

She sees petroleum refining as another area where bankable early green or blue hydrogen projects are likely to emerge because refineries are among the largest users of hydrogen as a fuel stock. In this case, early-stage hydrogen projects may contract with refineries as offtakers, and notes that several pilot projects are already being developed in this sector. Crouch adds that specialty vehicles are also showing early promise where hydrogen is already being used to power fuel cells.