The hype of the hydrogen economy may gloss over major technical and economic challenges standing in the way of making it a reality.
Despite that minor detail, hydrogen stocks have defied the broader stock market correction. Since the first day of 2020, fuel cell stocks Plug Power (PLUG) and Bloom Energy (BE) have gained 575% and 164%, respectively. Each easily outperforms the 12.5% rise in the S&P 500 in that span. Both are outperforming the index since the beginning of 2022, too.
Plug Power has long championed the necessity of a hydrogen economy. It took a global pandemic and shifting attitudes about clean energy, but investors now seem to agree. A tweaked business model that leans on manufacturing hydrogen has also helped win over reluctant investors.
Bloom Energy hasn't always been associated with hydrogen, but the company is pouncing on soaring interest from industrial customers. It also has a sneaky advantage over Plug Power that investors have yet to fully realize.
Bringing the Heat for Improved Hydrogen Production
There are four major production processes that can be used to create hydrogen. Three involve electrolysis, which most investors are at least loosely familiar with. Electrolysis is the process of using electricity ("electro") to split ("lysis") water molecules into hydrogen and oxygen.
As with any chemical reaction, a certain amount of energy is required. This is where those devilish details come into play.
Whereas Plug Power uses a process called cold electrolysis to manufacture hydrogen, Bloom Energy can use something called high-temperature steam electrolysis (HTSE).
The latter could produce zero-carbon hydrogen at much higher efficiencies and much lower costs. That's because heat could be used to meet some of the energy requirements for electrolysis, thereby reducing the amount of electricity required. Electricity represents nearly 80% of the cost of hydrogen production for cold electrolysis.
Materials Science For the Win
The competitive advantage of Bloom Energy comes down to the materials used in each company's fuel cells.
- Plug Power uses polymer electrolyte membrane (PEM) fuel cells. The second-generation technology uses materials that are not durable enough to be used at high temperatures. PEM fuel cells also require rare and expensive platinum-group metals (PGM) to operate at peak efficiency.
- Bloom Energy uses solid-oxide fuel cells. The third-generation technology uses materials that can operate continuously at high temperatures, which improves system efficiency. Novel ceramics may be required for future solid oxide fuel cells, but they're easier to source and manufacture than PEM fuel cells.
Whereas PEM fuel cells require roughly 52 kilowatt-hours (kWh) of electricity per kilogram of hydrogen production, solid oxide fuel cells require roughly 38 kWh/kg. That's a nearly 28% decrease in the amount of the electricity required.
Why does this matter? Both companies are eager to utilize electricity produced from wind and solar farms to produce green hydrogen. But only Bloom Energy can utilize electricity and heat from nuclear power plants to produce clean hydrogen, called pink hydrogen.
Bloom Energy has tested its technology with Idaho National Lab, the leading nuclear energy research lab in the United States. The lab's director, John Wagner, had high praise for solid oxide fuel cells, saying:
The Bloom Electrolyzer is, without a doubt, the most efficient electrolyzer we have tested to-date at INL. When hydrogen is produced from a clean, 24/7 source, like nuclear, it can help us address some of the significant challenges we face around decarbonization. Pairing the research and development capabilities of a national laboratory with innovative and forward-thinking organizations like Bloom Energy is how we make rapidly reducing the costs of clean hydrogen a reality and a real step toward changing the world’s energy future.
Bloom Energy has also signed a letter of intent with Westinghouse to jointly explore large-scale hydrogen production from nuclear power plants. Westinghouse is a leading provider of nuclear technology. Meanwhile, electric utility Xcel Energy (XEL) has teamed up with Bloom Energy to test solid oxide fuel cells at its Prairie Island Nuclear Generating Plant.
In addition to lower-cost hydrogen production, nuclear plants are often located within a reasonable radius of major industrial facilities that could consume hydrogen. Wind and solar farms eager to manufacture green hydrogen would need to transport the fuel to customers, which would further increase costs associated with hydrogen produced from cold electrolysis.
Don't Forget the First Rule of Growth Investing
Although Bloom Energy boasts a sneaky advantage over Plug Power on the quest to enable the hydrogen economy, investors cannot forget an important rule of owning growth stocks: You invest in businesses, not technologies.
Unfortunately, both companies are lousy businesses. Bloom Energy reported a first-half 2022 operating loss of $168 million on $444 million in revenue. Plug Power performed even worse, coughing up an operating loss of $286 million on $292 million in revenue in the first six months of the year.
Investors are hopeful the hydrogen economy could lead both companies (and themselves) to riches, but there's a long way to go. In the case of Plug Power, a significant amount of future growth is priced into shares. If that growth fails to materialize on the scale or schedule currently expected, then the fuel cell stock could crater. Bloom Energy is more attractive from both a technology and valuation risk perspective, although I wouldn't own either stock just yet.
