When looking at renewable energy generation, most are aware of wind, solar, biomass, biogas, geothermal and hydro. But what about fuel cells? Fuel cells are electrochemical devices capable of generating electricity through an oxidation reaction between hydrogen and oxygen, producing only water and heat as by-products. They are neither a battery nor an engine but, like an engine, they require a constant supply of fuel and do not store energy.
Like many other renewables, the technology is old, discovered in the 1830s and first commercialised in the 1930s. It is a well-proven technology at that, having been used in most Nasa space missions since the 1960s.
Most fuel cells require pure hydrogen as their fuel source, and we will look at various aspects and complications of hydrogen in a later article, but here we focus on a fuel cell business that can but does not typically use hydrogen to generate electricity – Ceres Power (CWR).
A different model
Ceres has been around for almost 20 years, having spun out of Imperial College London in 2001 and floated on Aim in 2004. It has spent that time refining the same original basic fuel cell technology. Its core product is the ‘steel cell’, a ‘stack’ fuel cell system that offers some potentially interesting and attractive features that are beginning to be recognised for their potential in the commercial world.
Unlike many others in the fuel cell and green energy sector, Ceres does not make an end product itself. Instead, it runs a licence-based intellectual property (IP) model, similar in design to that employed by Arm Holdings in the technology sector, in which partnerships and joint ventures are pursued with large, established industrial companies who will then manufacture and deploy ‘Steel Cell’ fuel cell devices in the field. It has been the formation of five such partnership arrangements that have caused the share price to surge in the past two to three years.
Ceres stands apart from the pack in the following ways:
Manufacturing – the steel cell technology offers manufacturing cost advantages in that it uses cheaper substrate materials (essentially car exhaust-quality stainless steel), a silk-screen printing application of the solid oxide layer, and low temperature curing, delivering a highly robust physical cell ‘blade’.
Agnosticism – many fuel cells rely on hydrogen to run, ideally very pure hydrogen. Ceres’ cells are largely fuel-agnostic and, most importantly, can run on existing natural gas (methane) supplies. This means its modules can be used today without having either to wait for hydrogen infrastructure or making additional investment in local hydrogen storage. However, they can still use hydrogen if the customer requires that method.
IP and royalty model – Ceres does not make power units but rather will license its technology to two parties: those manufacturing the base blades and cells, and those creating the finished, installed products. These payments are unitary at the point of sale and there is no recurring revenue from the cells when in use. As there have been relatively few deployed into the field, the sustainability of target royalty levels has not yet been tested.
Reversing talent – a key advantage is that Ceres cells can, in effect, be run in reverse to operate as an electrolysis device to extract hydrogen from water. This is ideal from a sustainable energy perspective, as it produces ‘green’ hydrogen with no fossil fuels involved. The method stands in contrast to ‘blue’ hydrogen: methane ‘reforming’ and carbon capture or ‘grey’ hydrogen – the cracking of methane but releasing carbon by-products into the atmosphere.
‘Grey’ hydrogen constitutes the bulk of global production and, as the name suggests, is far from being a green product. Ceres aims to use the same core fuel cell technology but in reverse, putting electricity (from renewables) and heat into the cells to electrolyse water and thereby produce gaseous O2 and H2. The latter can then be used for H2-only fuel cells, industrial use (eg ammonia manufacturing), and potentially locally produced fuel for hydrogen vehicles. There could be significant value here relative to Ceres’ generation side. It now consumes the bulk of research and development spend but is at a very early stage.
Commerciality – Ceres has secured a number of commercial agreements with partners who will make cells either for third-party sale or their own deployment. To date, Ceres has tie-ups with German industrial giant Bosch, Chinese engine manufacturer Weichai, South Korean industrial machinery manufacturer Doosan, Japanese heating manufacturer Miura and Austrian advanced automotive systems developer AVL. Both Bosch and Weichai are large Ceres shareholders, with stakes of 19.9 and 17.7 per cent, respectively .
Ceres’ products are mainly aimed at the static market, focusing on areas such as data centre core/back-up power, smaller industrial plant, remote housing (mostly now using oil) or combined heat-and-power (CHP) systems for residential and office blocks. Fuel cells are not intended for network generation, as modular units output only 30 or 50 kilowatts (kw) compared with 2-3 megawatts (mw) from an onshore wind turbine, 8mw from offshore, or the gigawatts generated by power stations.
There is also potential in the transport sector, but this lies mainly in larger vehicles such as lorries, buses or marine vehicles. Here, the size, weight, decent operational range and recharge times make batteries harder to use and fuel cells, nominally at least, have a material advantage. The weakness is access to fuel – electricity is ubiquitous, as is fossil fuel, with major investment in hydrogen distribution still seemingly many years away. 2030 is a pivotal date and if growing market share here is not established by then, it may be hard for fuel cells to wrest market share from competing technologies. To date, there has been relatively little investment by car manufacturers, whereas battery technology is already taking large market share.
The historic financial performance looks scary – Ceres has never returned a profit and in aggregate has recorded losses of £283mn, with its largest loss (£23.4mn) in 2021. This means that the progress to date has all been externally funded, primarily by equity issues – eight since 2005 raising a total of £339mn. The largest raise came last year when £181mn came through a placing at £10.60.
Analysts believe Ceres is now within reach of profitability, especially on the fuel cell side, albeit with the group total held back by still sizeable losses in the hydrogen unit. Investec (house broker to the business) has pencilled in revenues of £95mn for FY2025, as well as Ebitda of £34mn and pre-tax profits of £11mn. Before then another £87mn of aggregated losses are forecast.
The green energy revolution has created a highly competitive field with rival technologies claiming (and counter-claiming) that theirs is the best, cheapest, cleanest, longest-lasting technology. That means plenty of prospective threats for Ceres.
Big oil – all of the world's large oil companies have substantial plans to move into renewables in order to stay relevant for their often income-oriented investors. Shell (SHEL), for example, has a renewables budget of $3bn (£2.3bn) – Ceres has around £250mn in total to last until it turns cash flow positive. While these businesses are likely to focus on the already large sectors of wind and solar, they could explore all technologies including fuel cells and thereby become a rival. Alternatively, they might buy up a business such as Ceres or license from it, saving years of R&D.
Rival technology – wind and solar feeding the existing electricity network and batteries in motor vehicles are both now well-established, and these technologies seem to be making large improvements in efficiency and lowering costs at a rapid rate. It is not clear today whether fuel cells will be able to deliver in a similar way. Another as yet unresolved issue is whether people will be willing to adopt distributed, local power generation rather than using a national power grid. But fuel cells do allow independence, potentially lower cost (grid electricity costs c25p/kWh, but natural gas fuel cells at 60 per cent efficiency would produce electricity at 12-15p/kWh), and lower the requirement for nations to invest in as much central generating capacity.
Failure to ignite – Ceres has its partnership agreements in place and its technology is beginning to be deployed into the field, but early success does not always lead to widescale adoption. There are many alternatives and battery technology is advancing so fast that by 2030 the hoped-for market share may not have been harvested. Fuel cell generation is a tiny fraction of global power generation, with a contribution worth c$4bn in 2020 to a global market of c$1,400bn. By 2030, the industry hopes this will have grown to $42bn in a market then worth $2,000bn – still equivalent to just a 2 per cent share. Ceres’ segment is solid oxide fuel cells (SOFC), which in 2020 accounted for around 10 per cent of the fuel cell market.
Should you invest in Ceres?
Waiting for Ceres to deliver commercially and show a profit has been a long process. Any long-term investors have had to provide a lot of funding along the way, which makes it harder to see how well any investors have fared to date. FactSet estimates that since the IPO, total return has been a negative 17 per cent and, during those 18 years, an original investor’s £100 has seen values as low as £5. Compared with the recent highs of almost 1,600p a share, the low point has been closer to 9p. It has been possible to make exceptional returns here with the right timing, but most recently the whole sector has seen a sizeable shake-out and Ceres is now trading at less than half its January 2021 all-time high, dropping two-thirds before rebounding by close to 50 per cent.
This is a volatile investment, and one that is still not profitable even after a long lifespan (although that is not automatically a barrier to investment – look at Ocado). It operates in a highly competitive and fast-evolving field and has only recently begun a fresh investment phase for a new product that could push the break-even point even further out. When a business is at this financial point valuations automatically become more speculative as they rely on discounted cash flow (DCF) valuations, where even modest changes in assumption can cause large valuation swings. As we have seen with technology stocks, when market or ‘risk-free’ interest rates are rising, DCF values tend to fall.
Brokers' opinions on the outlook and valuation diverge significantly. Target prices for the stock range from under 800p right up to 2,600p (the price is now c750p) and forecasts sit across an equally wide spread. Forecasts have been reducing, along with target prices, despite the now more pressing need to decarbonise power generation and the securing of seemingly strong commercial tie-ups by Ceres. There is clearly both risk and a lack of visibility here, and the timing of more substantial profits could be in the 2030s rather than in this decade.
However, if things do take off, with partners achieving good traction, the royalty model could propel Ceres’ revenues ahead very quickly against relatively high but largely fixed overheads. Revenue last year was £32mn, consensus this year is pushing £50mn, fuel cell industry forecasts suggest 23 per cent compound demand growth and there could be considerable value as yet untapped in the hydrogen side. However, most partners’ plants are not likely to deliver before 2024-25.
Investing in Ceres is likely to be a rollercoaster ride, but with sound technology and already solid industrial backing, take a long enough view and there should be market-beating returns available here. Be mindful, nonetheless, that additional fundraising might be required.