Bloom Energy Set To Soar On Commercialization Of Hydrogen-Powered Fuel Cells

Summary

• Bloom Energy stock jumped 9.89% (YoY) with investors expressing optimism on the successful operation of the Bloom Electrolyzer.
• Bloom's target of residential areas as important customers for its on-site production and consumption of clean energy will help improve revenue contributions into 2022.
• The use of water (by collaborating with Heliogen) and nuclear power to generate clean hydrogen will help Bloom attain a robust product offering into the future.
• Investors will have a stronger opportunity to gain with iShares S&P Global Clean Energy Index ETF that tracks investment results in the green economy.

Petmal/iStock via Getty Images

Bloom Energy (NYSE: NYSE:BE) finished off the second quarter of 2021 with a robust product offering that involved fuel flexibility and pipeline deals for decarbonization. The company has invested in new carbon capture technology scheduled for demonstration later in 2021. As a futuristic-based growth innovator, Bloom is set to leverage on the net-zero carbon-emission goal set by more than 60% of the Fortune 500 companies. Overall, Bloom's energy technology is set to uplift the company's key pillars: resilience, sustainability, and prediction of costs to consumers.

Thesis

The declaration of commercializing hydrogen-powered fuel cells will be a game-changer in the clean energy sector. However, investments in green energy are yet to pay off despite the bright future of carbon-neutral opportunities. While considering the risks in the renewable energy market, I will discuss why I am bullish on Bloom Energy.

Hydrogen-Powered Fuel Cells

Bloom Energy announced the commercial shipment and availability of its hydrogen servers, powered 100% by hydrogen fuel cells. The company’s stock jumped 9.89% (YoY) with investors expressing optimism on the successful operation of the Bloom Electrolyzer.

In its Q2 2021 earnings call, Chairman and Founder, K.R. Sridhar underscored the fact the Electrolyzer would generate clean hydrogen for the company. Electricity produced from this hydrogen would have zero carbon with the hydrogen dubbed 45% more efficient than any other energy source.

It is also a sign of growth since these fuel cells are based on the solid-oxide structure. Fuel cells emit fewer pollutants thereby causing fewer respiratory diseases and maintaining air quality. During electricity generation, when fuel cells operate on natural gas or biogas, the rate of carbon emissions is reduced by 50%. But, when the solid-oxide fuel cells run on hydrogen or biogas (that is renewable) then the rate of carbon emissions is cut to 0% or neutral.

Source: Bloom Energy

In Q2 2021, earnings call, the company announced a collaboration with Heliogen (NYSE: ATHN) to generate green hydrogen from water. The technology would be powered by heat and electricity from the sun.

Heliogen (whose key investors include Bill Gates) raised $108 million to conduct the green hydrogen production test. Bloom will use Heliogen’s Sunlight refinery that runs on artificial intelligence to generate electricity and produce hydrogen (using the Electrolyzer).

Of special note, is that this technology addresses the solar storage problem that has plagued several states in the US including California.

Source: latimes (California’s Beacon Solar farm)

California’s supply of solar energy has exceeded demand with utility companies wondering how to store the oversupply. Since 2019, researchers have proposed the construction of more solar panels to deal with the problem and ensure constant use.

By 2030, the State targets the attainment of 60% renewable energy production- with an energy source that is 100% climate-friendly. Other sources, set to have an increase in production include hydroelectricity and nuclear power. In my view, Bloom’s collaboration will Heliogen to produce green hydrogen will help to burgeon the hydrogen market and propel the product’s legislative inclusion.

On-site production

Bloom’s fuel cells produce electricity that is used on-site. This factor helps the company achieve its goal of reliability and cost predictability. Production of power at consumer locations is essential in mitigating severe weather and other drastic situations that cause outages.

Q1 2021 saw millions of US homesteads in the states of North Carolina, California, and others in the New England region experience outages due to a tornado. Power grids were overcome by the storm that reached parts of Canada and Mexico.

Approximately, 60% of the homes in Texas use electric heat with the remaining population opting for natural gas/ propane. During the autumn or sprint season, power plants running on natural gas or propane have to shut down to allow maintenance in readiness for the Summer when cooling off will be required.

The quarter also saw Bloom Energy target residential areas in the cities of New York and other parts of the Northeast region. It has already ratified 40 MW worth of electricity generation contracts with property developers. As of Q1 2021, the power (through the fuel cells) was sufficient to power 30,000 homes and protect them from outages.

Other factors such as wildfires, aging power distribution systems, and shortages e.g., of natural gas (leading to price hike) may cause outages and decrease transmission.

Energy Price Hike

An imminent collapse of the global supply chain due to the ravaging COVID-19 pandemic is rapidly pushing energy companies towards collapse. In the UK, up to 1.7 million clients are set to lose their energy suppliers over rising natural gas prices.

According to Bloomberg, Igloo Energy Supply Ltd, Enstroga Ltd, and Symbio Energy admitted their downfall set to affect 233,000 homes.

Source: Trading Economics

Natural gas futures have hit a 7-year high at $5.88 (per million British thermal units – MMBtu) prompted by strong foreign demand, especially from Europe.

In China, power prices are set to increase for industries as demand for thermal power surges.

Source: Bloomberg

Demand for thermal power is moving towards 600 TWh from below 200 TWh in 2001. Coal prices have surged to a record high at $212 per ton due to a tight Chinese supply.

Source: Trading Economics

Chinese investors have expressed their satisfaction with the country’s aim to achieve carbon neutrality by 2060. This understanding has reduced mine investments leading to an increase in imports.

Shifting Market Dynamics

UK’s Ceres Power Holdings (OTCPK:CPWHF) announced an investment of £100 million ($134.72 million) in developing its electrolysis technology. The firm intends to expand its hydrogen production by taking advantage of its solid-oxide fuel cell system. The company’s investors helped to raise £179 million in Q1 2021 to propel the production of green energy through electrolysis.

Ceres Power’s stock has surged 115.61% year-on-year at $14.40. The company’s Q2 2021 revenue surged 96% to£17.4 million buoyed by strong partnerships. Equity support from investors reached £179 million due to the future demand growth for green hydrogen. It will be used for heavy industrial purposes that are now run-on crude oil.

Source: Ceres Power

The UK is turning out as a significant market for green hydrogen-powered energy systems due to the rapid growth of fuel cells.

Revenue reports show that the global fuel cell market is expected to hit $9 billion by 2030.

As of 2018, the hydrogen fuel cell (HFC) market was worth $10.49 billion. It is expected to grow at a CAGR of 21.4% and reach $59.81 billion by 2028. Apart from its industrial application, it is set to be used in motor vehicles, buildings, and national defense systems.

Risks and Opportunities

Bloom Energy’s operating margin in Q2 2021 increased 3% points to 18.7% (QoQ) from 15.7% in Q2 2021. The increase was attributed to a decrease in profits. The company had increased its operating expenses in the quarter by scaling its technological investment.

However, the reduced sale was offset by a 21.6% increase in revenue to $228.5 million in Q2 2021. Gross profit also declined 31.81% to $37.3 million from $54.7 million in Q1 2021. In essence, the commercialization of hydrogen powered-fuel cells will add to the company’s revenue streams into 2022.

Bloom’s revenue outlook for 2021 stands in the range of $950 million to $1 billion which will be achieved on increased product commercialization. In its Q2 2021 earnings call, the company explained that it had delivered an Electrolyzer unit to the Idaho National Laboratory. The intention was to test the application of nuclear energy for the production of clean hydrogen using Bloom electrolyzers.

First off, the integration of green hydrogen in nuclear power plants is an add-on opportunity (for Bloom investors) due to the global decrease in nuclear power generation. According to the Nuclear World Report, generation of this power source declined below 100 TWh in 2020. Capacity, however, peaked in mid-2021 despite a low output.

Renewable energy sources (excluding water) added more power to the EU grid system as compared to nuclear energy. Net capacity addition of nuclear power among startups decreased to 0.4 GW. This decline was in comparison to the 250 GW generated by renewable sources alone.

In Japan, costs attached to the Fukushima nuclear site have risen to $223.1 billion on the government's side. Independent carriers are facing a costs upsurge in the range of $322 billion to $758 billion. Rolls-Royce (OTCPK:RYCEF) announced its intention to build 16 mini-reactors in the UK with scientists decrying the rising costs attached to the commodity. However, it is left to be seen whether the production of clean hydrogen from nuclear energy will provide a cheaper source of power.

On the flip side, the California Dixie fire has ravaged more than 969,309 acres (headed towards the million mark) in the state showing the massive consequence of poor investments in the green economy.

The recent decline in green investments

Investments in green (climate-sensitive) projects have declined in the recent past. The S&P Global Clean Energy Index (SPGTCLEN) declined 4.0% in the week to $1,376.08. It has also plunged 35.88% from the 52-week high of $2,146.15. The index measures company performances in the green energy sector.

However, investors will have a stronger opportunity to gain with iShares S&P Global Clean Energy Index ETF (NASDAQ: ICLN) that has jumped 20.75% in the past year.

Source: Seeking Alpha

The ETF tracks investment results in the global energy sector thereby giving a clearer mix of opportunities carried by expected company outcomes.

The increasing need for renewable power sources has led to First Solar, Inc. (FSLR) rising 43.05% (YoY). Its market cap also reached $10.13 billion. Market leader, FuelCell Energy, Inc. (FCEL) has rallied 156.64% in the past year as the company also plans to produce hydrogen through electrolysis.

Bottom Line

Bloom Energy's idea to commercialize hydrogen-powered fuel cells is a step towards improving revenue generation into the future. Increased technological investments had seen the company's gross profit declined 31.81% in Q2 2021. The article also proposes the ICLN ETF as the better investment option due to its tracking of investment results rather than company performances in the green energy sector. Further, the application of nuclear energy in the production of clean hydrogen will help to curtail costs attached to nuclear power generation. For these reasons, I am bullish on Bloom Energy.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BE, FSLR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.