A major shift in industrial policy is roiling the hydrogen energy and fuel cell industry in China. For many years considered a technology only suited to fuel cell electric vehicles (FCEV), fuel cells have recently been included in studies for grid-level energy storage as well as an efficient method to convert green hydrogen back into usable power. While hydrogen energy technology has long been considered a way to lower emissions in the transportation sector, policymakers in China now see the technology as a way to decarbonize other industry verticals.
The “PRC Hydrogen Energy Industry Development Report,” released in 2020, originally declared 2021 a year for pilot projects. This report suggested that new projects should be started in the chemicals, construction, and energy storage industries, in addition to continuing to support projects in the transportation industry.
2022 was also a good year for China’s nascent fuel cell industry, with the announcement in March of the “Hydrogen Energy Medium- to Long-Term Development Plan (2021 ~ 2035),” which catalyzed the markets by sending positive signals to investors. The development plan recommended supporting industrial and innovation funds and also encouraged fuel cell firms to raise capital by going public on markets such as the Shanghai Science & Tech Innovation Exchange and the Shenzhen Innovation Exchange.
Despite these positive signals from policymakers, the industry in China still faces three major challenges. First, the government has promoted the idea of “chokehold” technologies, implying that foreign powers are deliberately withholding key technologies and materials to retard the industry’s development in China. Policymakers have called for fuel cell technology companies to “break out from the siege” by developing local versions of catalysts, PEM membranes, and GDL carbon paper, to name a few. Such talk encourages imitation, not innovation, and is bad for the long-term health of the industry.
Another challenge for the industry is the small scale of firms that operate only in the hydrogen energy or FCEV industries. Such firms experienced stunted growth because of the restrictive subsidy dispersal requirements during the FCEV Golden Age from 2017 to 2019, when only a few fuel cell firms ultimately received funding, and because many have been left out of the Pilot Cities Clusters “whitelist” program, implemented in recent years. A third challenge to the industry is the lack of variation between firms, which confuses investors looking to support unique or innovative technologies. Indeed, regional protectionism has made lobbying and marketing more important than reliable technology for some fuel cell firms.
Sources of capital for fuel cell firms generally come from five different sources in China. First, state-owned enterprises (SOE) like State Power Industry Corporation (SPIC) and PRC Railroad Corporation (PRCRRC), invest in technologies declared strategic by policymakers, such as upstream green hydrogen generation and hydrogen refueling station pumps, valves, and dispensers. Second, research institutions like Tsinghua University and Sichuan Energy Investments look to financially support firms importing and localizing advanced foreign technologies. Third, Universities like Tongji University and the PRC Geosciences University invest in R&D projects. Fourth, governments invest in industrial parks and also subsidize fuel cell firms to establish local production and operations. Examples of city governments making such investments include Wuhan and Suzhou.
A fifth source of funds are private investors, of which there are about 30 active in the hydrogen energy and fuel cell industry in China today. A review of deals negotiated by these private investors reveals a number of different investment strategies. The first strategy is one of diversification, where investors look for firms with products or services that are in demand in other application verticals in addition to the FCEV industry. The thinking behind a diverse investment strategy is that the fuel cell industry today is still too small to support large orders and so firms in the industry that don’t have a broadly-appealing product are stunted.
A second investment strategy is the opposite of the diversification strategy. This second strategy calls for narrow focus in investing into a chosen component or segment in the value chain, such as investments in hydrogen transportation and storage technologies by Green Motion Investments. Other investors adopting this focused strategy include funds looking to link upstream green hydrogen generation directly with intermittent renewable energy (IRE) to lower the cost of the molecule. Finally, a third strategy is to invest only in firms that offer a way to “cash out” by going public. The chairman of Green Motion Investments, Huang Kuan, recently opined that an injection of venture capital and private equity into the market might increase liquidity as investors seek to build up fuel cell firms for an eventual IPO.
Fuel Cell Buses in China
There is no doubt that the overall scale of investments into the fuel cell industry in China is increasing. The total value of investments into the industry in 2021 exceeded 80 billion RMB, mostly in the provinces of Hebei, Sichuan, and Henan. This investment figure already exceeds the total of the previous years from 2015 to 2019. Forecasted investment figures for 2022 look to be even higher, possibly reaching 100 billion RMB. For 2022 investments have been concentrated in the Yangtze River Delta, especially around the city of Shanghai.
The increasing value of investments may be in proportion to the widening of the definition of the fuel cell industry as policymakers encourage firms to expand beyond FCEV fleets into chemicals, petrochemicals, and energy storage. There has also been a shift in investment focus from downstream off-take applications towards midstream storage and transportation and upstream hydrogen generation projects. As of 2022, investment into upstream generation accounted for about 30% of the total, with downstream application projects 15% and fuel cell technology and equipment 45%.
2021 was the first year when upstream green hydrogen generation started attracting capital. Over 14 new green hydrogen projects were announced in 2021, mostly funded by SinoPec, PetroChina, and Baofeng Energy. Investors are showing strong interest in solar firms that recently expanded into the electrolyzer business, such as Xi’an Longi Solar and Hefei Sungrow Solar.
Some investors have stated that the electrolyzer industry is a good investment because technical goals are relatively clear so there is little question of a firm’s R&D direction. On the other hand, relatively clear technical goals can also be interpreted as low barriers to entry, leading to an influx of new firms claiming to produce electrolyzer technology that might be difficult for prospective investors to differentiate.
In contrast, investors shy away from midstream storage and transport projects, such as pipelines or large-scale hydrogen liquefaction. These projects are too big, according to investors, and also offer too little profit margins. Downstream, however, continues to popular, with investors dividing the market into two types: fuel cell system firms and fuel cell component firms. In 2021 over 20 investments into fuel cell systems firms totaled about 573 million USD. In 2022 systems integrators like FTXT and Dongfang Hydrogen also received large tranches of investment.
While the original FCEV industry continues to receive funding, the shift in policy to encourage application of fuel cell technology across other industries has inevitably lowered the attractiveness of only investing in FCEV fleets, especially as previously strong markets like Guangdong Province continue to suffer due to lack of hydrogen infrastructure. Investors continue to watch FCEV fleets in closed areas like technology parks, mines, and ports, as well as fleets operating on set routes, like buses, logistics trucks, and forklifts.
SinoHyTech is the only publicly-listed fuel cell system firm in China. The company listed in late 2020, stock prices rose in 2021, and then dropped in 2022, probably as investors search for other business for the company, now that the profitable Beijing Winter Olympics have passed. An example of an investor in the industry is Vision Battery, which focuses on batteries, hydrogen energy and fuel cell equipment and compressors, and specific application solutions. Executives describe Vision’s investing strategy as trying to solve industry pain points, such as the domestic production of battery materials and, regarding the hydrogen and fuel cell industry, increasing the reliability of equipment.
New policies in 2022 shifted the center of the fuel cell industry from a narrow focus on FCEV fleets to a broader focus on other downstream applications, such as the chemical, petrochemical, and steel industries. Investors have responded both in developing new projects in these new target industries as well as shifting the focus of their investments from downstream applications to upstream green hydrogen production. Indeed, many professionals in the industry believe the transportation industry has already solved the fuel cell system and drivetrain technical challenges, the next challenge is upstream fuel supply. As the pace of investment in the industry increases more funds will be available to build large-scale infrastructure projects.