The chief executive of Norwegian electrolyser Nel has said that the growing demand for high-quality electrolysers — and developers’ fears that the supply will run out — has enabled the company to increase its prices and therefore its profit margins.
“As our clients are increasingly worried about electrolyser production capacity from quality producers, the market balance is moving in Nel’s favour,” said Håkon Volldal as the company’s third-quarter results were announced.” We are now able to negotiate better terms and conditions, a trend we foresee to continue going forward.”
In an earnings call with market analysts on Thursday, Volldal — who became CEO on 1 July — elaborated on the change in market conditions.
He said that increased losses the past quarter were due to, among other things, low margins on electrolyser sales signed in 202-21.
“If you look at profitability, it's negative and it's impacted by the fact that these smaller contracts that we are delivering on now, that we signed in ’19 and ’20 and ’21, had a different margin structure,” Volldal explained. “The market was not as vibrant and dynamic as it is today. We had to fight hard to win the contracts, some of them were taken with a low margin.
We're not talking to dreamers anymore
Nel CEO Håkon Volldal
However, moving forward, the company will ensure better margins and prioritise bigger projects, he added, describing the market outlook as “extremely positive”.
“We're not talking to dreamers anymore. We're talking to people that have industrial backgrounds that have financing in place. They have secured land. They have secured electricity. They have all the prerequisites in place and they have a solid business case. In a market where customers are concerned about supply, of course, you're able to increase prices.
“Customers realise that they are not the only ones looking into hydrogen. And then even though there are 25, 30 providers of electrolyser stacks, not all of them are experienced, not all of them have the scale to deliver. Actually, very few have the scale to deliver. So they are concerned that near term, it will be difficult to get sufficient electrolyzers”.
Volldal referred to external market research that predicts global manufacturing capacity will reach 40-50GW in 2025.
“I think it will be a fraction of that,” he said. “There's no way it will be 40-50GW in 2025. It will take a much longer and customers realise that. So they come to Nel because we have installed production capacity. We take them to [Nel’s production facility at] Heroya. They see that this is not just a PowerPoint.
“It's a real factory with real output, automated equipment, trained operators. And they also know we have a track record of delivering on what we promise. So we continue to secure high-quality large-scale orders with attractive margins.”
Constantine Levoyannis, head of EU affairs, told Hydrogen Insight that Nel was the only alkaline electrolyser manufacturer running a fully automated factory, which currently has an annual capacity of 500MW, which will grow to 1GW by early 2024 and has the room to expanded to 2GW.
“Compared to our competitors, we have the advantage of having a fully operational factory in which we can copy-paste our production line, while others are starting from scratch,” he said.
And while the current market situation has enabled Nel to raise its prices and snag better margins, Levoyannis says the company is nevertheless “at the forefront of efforts to reduce the capex costs of electrolysers”, adding that it believes it can drive costs down 50% through automation and economies of scale alone.
In the past few months, Nel has announced two major contracts, the first a 200MW electrolyser order from an unnamed US developer. And earlier this week, company announced a $56m order, which Hydrogen Insight understands to be about 150-170MW of alkaline electrolysers, from Australian oil company Woodside Energy to supply alkaline for a 290MW green hydrogen project in the US state of Oklahoma.
“Under this contract, we will deliver additional equipment such as technology to regulate gas and liquid loops in the system. Although it is fair to assume the system is slightly smaller than 200MW, the margins are better,” Nel’s head of investor relations, Wilhelm Flinder, told Hydrogen Insight earlier this week.
After publishing the quarterly results on Thursday, Nel’s share price fell slightly. The company’s operating income was NKr183m ($17.2m), down 20% from the third quarter last year. The order backlog increased to a record high Nkr2.1bn, not counting the new Woodside Energy order. Net losses amounted to NKr260m.
In the annual report for 2021, published in March this year, the company stated that “competition is intensifying as Nel and others are ramping up production capacity. In addition, Nel has continued to be negatively impacted by disruptions in the value chain and travel restrictions due to the Covid-pandemic. At the same time, raw material costs have increased. In combination, all of these factors have put pressure on our margins and are expected to continue to do so in the medium term.”
So far this year, the Nel shares are down almost 30%.