'We need a couple of large orders to restore faith in our business but green hydrogen developers hesitant to invest': Nel CEO

Norwegian hydrogen technology company Nel saw its revenue grow by nearly 80% in 2023, but still saw a net loss of NKr855m ($81m) for the year, the firm revealed in its Q4 and full-year results today.

While CEO Håkon Volldal told investors on a call today that he is confident the company will secure large-scale projects with better contractual terms to rebuild its shrinking backlog, he also admitted that it could take time to reverse the trend, particularly given the delay in subsidies reaching developer pockets.

“We need to tick off a couple of large orders to restore faith in the business case,” said Volldal. “We remain confident based on what we see, we believe in our products, we believe in the projects, but we also acknowledge that it takes more time than we expected.”

The Norwegian company’s order intake fell every quarter in 2023, with only NKr183m — NKr131m for electrolysers and NKr52m for fuelling — secured in Q4, a significant 81% drop year-on-year.

“If there’s one thing we would’ve liked to show, or that would be different, it’s the order intake in the quarter,” Volldal said. “We have been on a downward trend, it’s been pointed out by numerous people that we will lack the next big order, and we agree.”

Nel had in the first month of 2024 secured a €5m order from Samsung C&T for a 10MW electrolyser, with additional revenue from a renegotiated supply contract for Fortescue’s 80MW Phoenix Hydrogen Hub in Arizona.

“So far into the first quarter, we are above the Q4, so at least we have reversed the trend in the first quarter,” Volldal said. “But we are waiting for the larger orders to materialise. While we wait for those larger orders, we will reduce the order backlog because we continue to deliver on contracts that have been signed.”

Nel’s order backlog, which has shrunk since the second quarter, currently sits at almost NKr2.1bn for electrolysers and NKr364m for fuelling, which Volldal described as “close to 1.5-times trailing 12-month revenues”.

The CEO also highlighted that that as of the final quarter of 2023, the company’s cash balance sits at NKr3.4bn, stressing: “We have a solid cash position and there is no immediate need for additional equity.”

Rebuilding the backlog

Volldal stated that additional orders to rebuild the backlog could come from existing customers in the near future as projects develop.

Around 400MW of the electrolyser orders in Nel’s backlog only account for the stack, with customers yet to place follow-up orders for balance-of-plant gas separation units.

“Customers typically buy stacks first, and then the balance-of-stack equipment, and the exact timing of order intake depends on the maturity of the individual projects,” he said.

“It’s very hard to source this, or almost impossible to source it from other sources than Nel,” he noted, estimating that these intrinsic follow-up orders could add an extra NKr500m to the backlog.

But beyond these expected add-ons to existing orders, Nel tracks approximately 9GW of potential sales across its “top 20 leads”.

The firm is also engaged in paid front-end engineering and design (FEED) studies — a precursor to a potential order — with Samsung Engineering for a gigawatt-scale system in Asia and an undisclosed customer for a multi-gigawatt project in the US.

“We remain confident, but we see that the timeline from when a customers starts to talk about placing an order for electrolyser equipment until it actually happens, that period is longer than it was back in 2022,” Volldal said.

He cited two major reasons: the greater cost of capital and a delay in announced subsidies reaching developers.

While the US had passed a lucrative production tax credit of up to $3/kg in the Inflation Reduction Act in 2022, the Treasury only released its draft guidance on how lifecycle emissions would be calculated in December — with the final rules yet to be decided.

Meanwhile, although the EU is currently evaluating bids for its €800m ($865m) pilot auction for green hydrogen projects, developers will not actually sign grant agreements until November this year.

Volldal reiterated Nel’s ambition to corner more than 20% of the market for electrolysers outside of China.

“We don’t see a lot of competition from China yet,” he noted in response to an analyst question. “We see some situations where you have Chinese suppliers bid on projects, and then we also see indirect competition from China, meaning that you have European companies with production in China bringing that technology into Europe.

“My personal opinion is that we will see non-price criteria in upcoming EU tenders that will favour European manufacturers.”

Better margins on electrolysers

Nel’s total revenue increased to NKr1.8bn in 2023, a substantial increase from the NKr994m it secured in 2022. “There are few companies that grow their top line by 80% [in a year],” Volldal pointed out.

Similarly, while its earnings before interest, taxes, depreciation and amorisation (Ebitda) remained negative, with a loss of NKr474m, the margin shrunk from minus 78% in 2022 to minus 27% in 2023.

“We’re still not exactly where we want to be. We want to have positive numbers, but this is a major step in the right direction for Nel,” Volldal said.

However, the CEO pointed out that Nel’s alkaline electrolysers now have an Ebitda margin of minus 3% — “close to break-even” — while its newer proton exchange membrane (PEM) division is much further away from profits at a minus-24% margin.

“We are still delivering on some of the legacy projects with a scope involving third-party deliveries with low margins, where execution is difficult, and where conditions are not fantastic, because we signed contracts with no passthrough on the commodity prices, etc,” Volldal said, noting that higher nickel and steel prices have impacted the company’s bottom line.

“If we were to do the same revenue in ’24, but with the current backlog of projects, the margins would look much better.”

Volldal also noted that the near-break-even margins on alkaline electrolyser production are despite the production line at its plant in Herøya, Norway being run at less than 100% capacity.

“We’re building line two, but just to put it into perspective, we don’t need four lines running at full speed to make money on Herøya, we have proven we can do it with less than 100% capacity utilisation on one line with the current margins that we deliver,” he argued.

The CEO further described the expansion of annual manufacturing capacity at the Norwegian site to 1GW and at Nel’s facility in Wallingford, Connecticut to 500MW as “on track and budget”.

“We have that as an opportunity if demand comes, but it doesn’t make sense to expand the facility unless we have demand to back it,” Volldal said.

He added that Nel is waiting on a decision from the Department of Energy on its grant application, which could trigger additional incentives from the state of Michigan beyond the $50m already guaranteed.

The company is also in the midst of testing its next-generation, pressurised alkaline electrolysers, with Volldal hinting at “very promising results” when it comes to power consumption.

Similarly, the firm is working with General Motors to automate its production lines for PEM electrolysers. “We aim to significantly, and I mean significantly bring down the cost of the current PEM platform and also improve energy efficiency,” Volldal said.

Fuelling spin-off

Nel is now set to join other electrolyser manufacturers such as ITM and McPhy in splitting off its hydrogen refuelling business, although it plans to spin the segment out into its own publicly listed company.

“It’s fair to ask, if you want to be focused, why are you both in electrolysers and fuelling? It’s a fair question and that’s why we have been pondering for over a year, and we have now decided to explore a spin-off and separate listing of the fuelling division,” Volldal announced on the call.

“There are today few synergies between the electrolyser and fuelling divisions. There are few similarities between the products,” he said, noting that “the design is different, the production approach is different, customers are different”.

The spin-off could result in a 250-employee, Denmark-headquartered hydrogen refuelling company listed on the Oslo Stock Exchange, with a new board and management team. Nel will then become a pure-play electrolyser company with 425 employees.

The fuelling division’s Ebitda went from a loss of NKr352m in 2022 to a loss of NKr202m in 2023, which Volldal attributed to better margins on equipment and services, reduced warranty and quality costs, and “a leaner organisation with fewer employees”, although the margin remains further into the red than Nel’s electrolyser segment.