ITM’s struggles show challenge for growth

There is no shortage of reports telling us that green hydrogen electrolyser makers are poised for growth in the next decade. It is an easy conclusion to reach with the surging policy support for green hydrogen in Asia, Europe and the US. 

But supplying this fast-growing market will not be simple for electrolyser makers. We can get a snapshot of the challenges in the half-year results of ITM Power.

On 31^st January, green electrolyser maker ITM Power released interim results for the six months ending on 31^st October 2022. The figures show the firm made a £54.1m loss for the period on sales of just £2m, which is partly because it had to delay the delivery of electrolysers for a 24MW project at Leuna chemical complex in Germany. The company also reported it had cash reserves of £317.7m at the end of the half. 

Sir Roger Bone, chairman, gave a succinct and brutal appraisal of the results: “We raised capital to pursue an expansion strategy and in doing so underestimated the competencies and capabilities required to scale up and to transition from an R&D company to a volume manufacturer. As a consequence, we set unrealistic targets for project completion. This has produced an unacceptable financial performance.”

The firm is taking steps to turn around this performance. On 1^st December, Dennis Scholz became the company’s new chief executive; and the company has also cut 25% of its workforce, which is around 100 jobs, to put itself on a profitable footing.

The company’s financial and supply challenges are not putting off customers. On 31^st January, the company revealed it has signed deals to supply proton-exchange-membrane (PEM) electrolysers totalling 200MW to Linde Engineering for a project in Germany. The facility is set to be operated by RWE and powered by offshore wind.

Grappling with growth

ITM called the deals a “key milestone on ITM Power’s journey towards high-volume manufacturing of an industrialised project”. This journey is not proving easy so far, and ITM will certainly not be the last to face up to these challenges. This gives an insight into some of the business challenges that electrolyser makers will face, on top of the challenges that face in commercialising their electrolyser technology.

We see five such challenges:

1. ‍Deals are getting larger: Orders for green hydrogen electrolysers are getting very large quickly. For ITM, the 200MW Linde order is eight times bigger than the delayed 24MW Leuna deal, which means that its logistical challenges are not going away. But 200MW is not even the largest deal in the market.
   
   For example, Plug Power announced a 1GW order with H2 Energy Europe in May 2022 for electrolysers for a green hydrogen plant in Denmark, which has been heralded as the first gigawatt-scale green hydrogen electrolyser order; Ohmium International signed a 343MW deal with Tarafert last September; and Longi Hydrogen won a 300MW contract from Sinopec last May. These may all be exciting deals but that excitement cannot mask the challenge with scaling quickly, including the significant upfront costs of building factories.
2. ‍Uncertainty over supply and demand: Momentum is building in the green hydrogen market, but electrolyser makers do not yet know if they are entering a market where supply will exceed demand, or vice versa. If demand exceeds supply then manufacturers may find their production capabilities stretched as they seek to fulfil deals for their electrolysers. Conversely, if supply exceeds demand then they may face additional cost pressures from developers.
   
   With conflicting predictions, we cannot yet tell which will materialise. This will also have knock-on effects in areas such as the supply of raw materials.
3. ‍The impact of consolidation: Electrolyser production is becoming a crowded market, and we would expect a wave of consolidation to begin in the next two years as manufacturers seek to pick up new technology and build their order pipelines. This will also change the dynamics of the sector as large industrial players seek to dominate an emerging market and push out smaller rivals.
4. ‍Picking technology winners: Manufacturers will also need to cope with the fact that one of the main electrolyser technologies – alkaline, PEM and solid oxide – is likely to become dominant. We saw a similar battle 10-15 years ago between geared and direct-drive wind turbines, and would expect to a similar dynamic in electrolysers as some will reach commercial maturity quicker.
5. ‍Policy support arms race: The manufacturing industry will be shaped by the emergence of policies in key markets in Asia, the Americas and Europe to promote green hydrogen projects and manufacturing. We wrote last month about the potential for China to dominate electrolyser manufacturing as it has in solar, but policymakers in the US and EU are seeking to support growth in their domestic supply chains too. These trends will apply extra pressures.

This is a fast-evolving sector where every major new order will subtly shift the market dynamics. For manufacturers, including ITM, it’s going to be one hell of a ride.