Ceres Power joining hydrogen rush

Energy policy has never been such a hot topic. Even before low-cost retailers starting going bust because of the extreme rise in wholesale prices, the UK government has flagged massive investment in new technologies to cut household emissions as well as funding carbon abatement efforts in heavy industry. 

Ceres Power (CWR), apart from being another of IP Group’s (IPG) success stories, pitches its fuel cell technology as a key part of a future stable energy market. Investors might remember them from 15 years ago, when a deal with British Gas was set to put their “miniature power station” fuel cell in everyone’s kitchen as a greener way to heat a house and provide domestic electricity as part of a ‘combined heat and power’ (CHP) unit.  

The idea now is broadly the same, although the technology has moved on, and Ceres is also working on hydrogen electrolysis cells. The company has flagged 2024 as a key year, when licensees Bosch (also a major shareholder) and Doosan each hit major manufacturing capacity of 200 megawatts (MW) and 50MW respectively. Existing shareholder Weichai Power, which also owns a fifth of Ceres, could soon become a closer partner through a joint venture as well, the company said. 

In the first half, Ceres booked revenues of £17m, almost double the Covid-19-hit first half of 2020. The company makes money from its licensing, as in the Bosch and Doosan arrangements, and selling the fuel cells itself. Licensing fees provide over half of revenue, and were principal driver of the sales jump. Ceres reported an adjusted Ebitda loss of £4.5m, similar to last year. 

The loss comes from heavy investment in new capacity, although the company is still running a pilot plant with 2MW capacity rather than full-scale operation to make its cells. Its order book stood at £42m as of 30 June, compared to £54m at the end of 2020. 

Ceres shies away from simple explanations of its technology, but its US competitor Bloom Energy (US:BE) says its own solid oxide fuel cells  (SOFC) “convert fuel into electricity through an electrochemical process without combustion at high efficiency”. The fuel can be natural gas, biogas or hydrogen. 

The company’s newer technology area is electrolysers, which produce hydrogen from water and electricity. Ceres has earmarked £100m to develop a solid oxide electrolyser (SOEC) from its £179m fundraising in March. The success of ITM Power (ITM) on the market shows the interest in this, and the UK government is about to hand hundreds of millions of pounds to ‘clusters’ around the country that integrate hydrogen production with heavy, highly-polluting industry. 

Ceres has a few years before it reaches cash-profit territory, according to broker forecasts. The consensus compiled by FactSet sees £29m cash profit in 2025 on sales of £69m. Of course, a major uptick is possible if orders surge, potentially through the new hydrogen business, although development and both licensee and internal capacity will take some time to ramp-up. 

We would first turn to a more established hydrogen business, like ITM, in this space, but the billions of pounds looking for a hydrogen projects to invest in should flow through to Ceres as well. Buy. 

Last IC View: Buy, 1,120p, 19 Mar 2021