Four reasons why the hydrogen market is floundering and why it could bounce back
Ballard Power Systems Inc. has spent the past 40 years designing and building fuel cells that can convert hydrogen and oxygen into electricity without combustion. (Credit: James MACDONALD/BLOOMBERG files)
Hydrogen is the most abundant element on Earth and has long been eyed by idealistic scientists as a possible replacement for fossil fuels.
No one has kept that dream alive in Canada like Burnaby, B.C.-based Ballard Power Systems Inc., which has spent the past 40 years designing and building fuel cells that can convert hydrogen and oxygen into electricity without combustion — meaning no carbon emissions.
But its business plan depends on the widespread installation of hydrogen infrastructure and, perhaps more importantly, on the production of clean hydrogen. Progress has been slow on both fronts. Here’s why and how it’s affecting both Ballard and the broader hydrogen sector.
Lagging energy transition
Ballard switched to cost-cutting mode last week, announcing upcoming layoffs, the exit of two top executives, including chief financial officer Paul Dobson, reduced capital spending and a “rationalization” of product development.
“In the context of a challenging macroeconomic and geopolitical outlook and amid protracted policy uncertainty, we see a multi-year push-out of the availability of low-cost, low-carbon hydrogen and hydrogen refuelling infrastructure,” chief executive Randy MacEwen said in a press release.
Specifically, the company cited “a slowdown in hydrogen infrastructure development and delayed fuel cell adoption.”
Ballard, which was swept up in a wave of investor excitement about the energy transition in early 2021 — as United States President Joe Biden prepared to take office — has lately been missing the love: its stock has dropped to $2.37 per share from a recent peak of more than $49 per share in 2021.
Randy MacEwen, chief executive of Ballard Power Systems Inc., outside the company’s headquarters in Burnaby, B.C., 2021.
The investor excitement that Biden brought to new energy companies such as Ballard was not entirely hype: his policies have committed billions of dollars to build out a hydrogen sector.
“It’s a significant amount of capital that’s kind of almost a once-in-a-lifetime type of opportunity for funding,” MacEwen told analysts on the second-quarter conference call in August. “The challenge is that the overall investment cycle is coming earlier than the market adoption.”
Ballard said that it received only $5 million in new orders in the second quarter and doesn’t have an order book large enough to need the Texas plant — at least, not yet.
But as Biden prepares to leave office, there’s no guarantee that the policies drafted by his administration will still be in place when or even if hydrogen adoption accelerates.
Where are the promised tax credits?
Beyond grants for isolated projects, there is an even larger question mark hanging over the hydrogen sector related to the U.S. Inflation Reduction Act (IRA).
Hydrogen does not exist naturally by itself, and the method of producing it determines its carbon footprint. If natural gas is used, then emissions will be larger; if renewables are used, it will be lower; if natural gas is used in conjunction with carbon capture, then the emissions profile may sit somewhere in the middle.
The IRA proposes tax credits for up to US$3 per kilogram of clean hydrogen, which consulting firm Ernst & Young Global Ltd. described as “the largest hydrogen subsidies in the world.” Those subsidies are expected to boost hydrogen production by nine to 10 times, according to EY.
That would be a shot in the arm for sector players such as Ballard, but the regulations remain subject to debate in the U.S., so they haven’t affected the market yet.
“It remains unclear whether these regulations will be resolved before the U.S. presidential election,” MacEwen said in August. “This is delaying investment in the U.S. hydrogen industry, including in large-scale clean hydrogen projects.”
China’s presence
The U.S. is the second-largest producer and consumer of hydrogen after China, a market Ballard has long eyed.
In 2018, Ballard struck a joint-venture agreement with a Chinese diesel engine manufacturer and made a $90-million technology transfer as a means to gain entry to what was considered by many to be the most promising market for hydrogen fuel cells.
In 2021, MacEwen spent two weeks, including Christmas, isolated in a room in China and estimated he took 60 trips there in a 70-month period to cultivate business ties.
But years later, the relationship hasn’t generated much business, and MacEwen earlier this month said Ballard is “conducting a strategic review of our China strategy, including all options” relating to the joint-venture agreement as a result of underperformance.
Nicolas Pocard, vice-president of marketing and strategic partnerships at Ballard, said there is widespread policy uncertainty both in the U.S. and in China. He estimated that it’s delaying the production of hydrogen at scale by three years to five years, meaning he sees demand kicking in around the end of the decade.
The number of hydrogen-related projects around the world has risen to 1,572 in May 2024 from 228 in December 2020, according to a report this month by the Hydrogen Council, an organization with 140 corporations interested in the larger adoption of hydrogen.
That’s a nearly seven-fold increase, which sounds impressive, but the number of projects in “the committed stage” has grown more slowly, to 416 from 102, during the same time period.
Pocard said the policy uncertainty is making it harder for hydrogen project proponents to raise capital.
“We are not going to see this acceleration in demand as early as we thought,” he said.
A bright spot
One bright spot has been Europe. In April, Ballard announced that Poland-headquartered Solaris Bus & Coach SP z o.o ordered 1,000 fuel cell engines, with delivery starting in 2024 and continuing into 2025.
It marked the largest order in the company’s history and meant the company’s products would be deployed in Munich, Hamburg, Germany, and 20 other cities across Europe.
It’s one example of the hydrogen sector stirring to life.
“Hydrogen is kind of like a Swiss Army knife,” said Brendan Frank, director of policy and strategy at Clean Prosperity, a Canadian think tank focused on market-oriented solutions to climate change. “But in most cases, it’s competing against something else and it’s not always going to win.”
Producing and transporting hydrogen both involve energy losses, which add expenses to the overall cost.
Hydrogen is kind of like a Swiss Army knife...But in most cases, it’s competing against something else and it’s not always going to win
Brendan Frank
Frank said he sees hydrogen projects succeeding when there’s a certain trifecta: favourable economics, enthusiastic customers and political support.
The hydrogen would be produced using offshore wind, and though details remain vague, it is a sign that the hydrogen market is advancing.
There are also efforts underway in Alberta to develop a hydrogen energy hub near Edmonton that could support industrial uses.
But the actual role that hydrogen can play in Canada may be limited, according to Frank at Clean Prosperity, which modelled several different pathways that the country could reach its net-zero emissions goals.
“We see only a modest deployment of hydrogen as an energy carrier, at two per cent to five per cent of final energy use,” the think tank said in a December report. “Even this low level of hydrogen use requires significant amounts of new infrastructure.”
Still, Ballard is prepared for a market slowdown. It had US$678 million in cash and cash equivalents on its balance sheet and listed about US$36 million in operating expenses last quarter.
“We remain confident in the long-term value proposition of hydrogen fuel cells,” MacEwen told analysts in August.
Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.
