Ballard Power Systems catches another wave as political winds shift


Shares rise as U.S. is suddenly poised to emerge as major hydrogen economy — and potential lucrative market for Ballard

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Ballard Power Systems Inc., the Vancouver-based maker of hydrogen fuel cells for use in trucks, trains and ships, announced this week that its second-quarter results were, as its chief executive Randy MacEwen put it on a call with analysts, “softer than planned.”

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Revenue, gross margin and Ballard’s backlog of future orders all declined.

Traders didn’t seem to mind. The company’s share price jumped five per cent to $11.39, the highest point since early May, extending a 33-per-cent surge since late July.

Investor excitement appears less connected to what Ballard has achieved lately, and more connected to the U.S. Inflation Reduction Act, which has a massive climate-change component that could allocate billions of dollars to incentivize the construction of hydrogen infrastructure.

The bill, which passed the Senate last week and appeared set to win the backing of the Democratic majority in the House on Aug. 12, includes tax credits that could finally create a supply of clean hydrogen — a critical missing ingredient if companies such as Ballard hope to participate in the energy transition.

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Suddenly, in a major and largely unexpected shift, the bill has positioned the United States to emerge as a major hydrogen economy and a potentially lucrative market for Ballard products.

“It wasn’t too long ago, maybe two years ago, where the U.S. market really was not a high priority for us,” MacEwen told analysts on Aug. 10. “In fact, we had really characterized the U.S. market as a California market. That has clearly changed.”

Ballard Power Systems chief executive Randy MacEwen.
Ballard Power Systems chief executive Randy MacEwen. Photo by Darryl Dyck for National Post files

The difference between California and the whole of America means that Ballard’s addressable market in the U.S. could grow 10-fold based on population estimates. (A company spokesperson said no one was available to provide additional comment for this article.)

Ballard’s improved fortunes are a fresh reminder of how much the energy system and the transition away from fossil fuels is governed by politics.

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For years, Ballard pinned its hopes on China, where it built a manufacturing facility with its largest investor and strategic partner, Weichai Power Inc. Ltd. But as the Chinese government delayed policies that would foster a hydrogen economy — including subsidies for hydrogen-powered vehicles, charging stations and hydrogen production itself — Ballard’s stock price languished: After surging to $49.51 per share in February 2021, it then declined by as much as 85 per cent, dropping to $7.55 earlier this summer.

Meanwhile, concerns that China is racing ahead on its investments in clean technology have been top of mind for U.S. President Joe Biden, who has described competition with Beijing — and fears that it will control future technologies — as a primary motivator for the Inflation Reduction Act.

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“It’s going to give us the ability — the ability not only to compete with China for the future, but to lead the world and win the economic competition of the 21st century,” Biden said on July 28, ahead of the Senate vote, which required Vice-President Kamala Harris to break a tie. “You’ve heard me say a thousand times: We have to invest in research, development and growth.”

U.S. President Joe Biden speaks about the economy on July 28.
U.S. President Joe Biden speaks about the economy on July 28. Photo by Susan Walsh/AP Photo files

To that end, the Inflation Reduction Act contains subsidies of up to US$7,500 for fuel-cell cars and up to US$40,000 for fuel-cell trucks; and, critically, it offers tax credits for as much as US$3 per kilogram for hydrogen depending on the emissions profile.

Unlike electric vehicles, which can be plugged into the electrical grid, which has been built out over the last century, any company or person that buys a hydrogen fuel cell vehicle must find a source of hydrogen fuel. Currently, that’s not easy.

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Supporting adoption

Hydrogen may be the most abundant element on earth, but it does not occur alone in nature. As a result, it must be separated from other elements, which requires energy — either fossil fuels or renewables. The U.S. already produces 10 million tonnes per year of grey hydrogen, produced mainly from fossil fuels and used by the oil and gas industry. Canada produces around three million tonnes per year.

The Inflation Reduction Act creates a sliding-scale tax credit that offers up to US$3 per kilogram based on the carbon dioxide equivalent emissions profile of the hydrogen.

That’s enough to make green hydrogen, which generated from renewables, cheaper than grey hydrogen, which is produced by burning fossil fuels. According trade publication Recharge News, the cheapest grey hydrogen costs US$1.71 per kilogram in the U.S. Midwest, while green hydrogen in the U.S. Northwest costs US$3.73 per kilogram. With a US$3 tax credit, the green hydrogen would cost US$0.73 per kilogram to produce.

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“This is going to support adoption across a number of market applications,” MacEwen told analysts, citing trains, both coach and transit buses, and trucks.

To be sure, some energy analysts continue to question the economics of hydrogen, saying the massive investments required to create a hydrogen economy will be more expensive and less efficient than other energy alternatives.

Pierre-Olivier Pineau, a professor of energy systems at HEC Montreal, said that even with the subsidy for hydrogen production, he’s skeptical the market will support it. The costs of transporting, storing (hydrogen is highly combustible), and building hydrogen filling stations remain significant barriers, he said.

If the goal is to reduce greenhouse gas emissions, Pineau said it makes more sense to build out rail transport, which is highly efficient compared to truck transport. Even highways with electric cables overhead, so large vehicles hauling heavy loads can perform under any weather condition, might be preferable to manufacturing a fleet of hydrogen vehicles and the infrastructure necessary to fuel them, Pineau said.

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It’s political

Politics have always played a role in the energy system, Pineau said. For years, fossil fuel companies were allowed to release greenhouse gas emissions into the atmosphere. Now, the costs associated with a carbon-based economy — severe weather events such as wildfires, heatwaves, drought and flooding linked to climate change — are forcing a structural change to the energy system.

The industry is building a hydrogen economy replacing “dirty fuel with clean fuel,” when in fact, the energy system needs wholesale changes to make it more efficient.

“It’s repeating the mistake of not looking at the actual system and what’s wrong with it, and looking for the best solution,” Pineau said. “This is where politicians face so much resistance, because they have to pass laws, and there are better solutions but they require change, and change creates opposition, so they pick the third- or fourth-best solution.”

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Pineau and others have said hydrogen is attractive to politicians, in part, because it extends the viability of the fossil fuel industry: Natural gas paired with carbon capture can be used to produce hydrogen, and some existing liquified natural gas (LNG) plants could be converted, with investment, to support hydrogen.

“The problem is they start subsidizing hydrogen and it locks us into a system,” Pineau said.

A hydrogen fuel pump sign at a railway train refuelling station in Germany.
A hydrogen fuel pump sign at a railway train refuelling station in Germany. Photo by Krisztian Bocsi/Bloomberg

Matthew Klippenstein, regional director for Western Canada for the Canadian Hydrogen and Fuel Cell Association, offered a counterpoint: some countries lack the renewable resources, such as sun and wind, and need to import energy, citing South Korea, Japan and Germany as examples.

So, producing and exporting hydrogen would allow Canada to keep its energy export economy alive.

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But Klippenstein also made a political argument that hydrogen is ultimately better for the environment. By producing hydrogen in Alberta from natural gas, paired with carbon-capture technology, the country brings more people into the clean energy economy.

“Some people have an aesthetic dislike for anything related to fossil fuels, fair enough,” Klippenstein said. “My response is the more Albertans you can bring into the low-carbon economy, the bigger the coalition for carbon pricing and climate change is and the faster you’ll see action.”

There are other political forces. Automakers have been investing heavily in battery electric vehicles, not hydrogen. The U.S. legislation contains tax credits to lower the cost of such vehicles, but only if automakers source critical minerals and battery components from either countries with which the U.S. has a free-trade agreement or North American factories and plants.

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Loren McDonald, chief executive of California-based research firm EVAdoption, said he doubts that any vehicle in the U.S. would qualify for the full tax credit today. He said it will likely take half a decade to a decade before a critical minerals supply chain emerges in North America, and several years for companies to set up their battery manufacturing facilities in North America.

U.S. tax credits for electric vehicle makers come with strict requirements most automakers likely can't meet yet.
U.S. tax credits for electric vehicle makers come with strict requirements most automakers likely can’t meet yet. Photo by Stefanie Loos/Bloomberg

David Adams, president of the Global Automakers of Canada, a lobby group representing 15 companies including Volkswagen Group Canada Inc., Toyota Canada Inc. and Honda Canada Inc., said he did not believe his members would currently be able to meet the requirements necessary for the tax credits.

“Canada should definitely NOT emulate this criteria for any future revisions of its rebate,” said Adams via email, adding, “we are going to need to get all of the EVs we can into this market.”

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Lobbyists for automakers in the U.S. are already asking Congress to change the tax credit requirements before the bill is passed in its final version.

‘Limited visibility’

For hydrogen, there’s also the question of what happens in China. Biden has repeatedly stressed that investments in clean energy are necessary to keep pace with the other major world superpower.

In September 2020, Ballard’s MacEwen said China’s target to put one million hydrogen fuel cell vehicles on its roads by 2030 created “a framework for scaled adoption,” which was incentive enough to commission a plant in Shandong province that could produce in excess of one gigawatt of fuel stacks per year.

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That helped fuel Ballard’s share price rise to $49.51 per share at its peak. Today, its manufacturing capacity in China looks like far more than it needs; MacEwen told analysts this week there are 11,000 hydrogen trucks and buses in China, less than a third of which use Ballard technology.

MacEwen noted there’s “policy uncertainty” about when China will look to set a pace to meet its one-million-vehicle target, saying, “very frankly, candidly, (there’s) still limited visibility for the back half of the year.”

The horizon in the U.S. is suddenly clearer, at least until the political winds shift again.

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