Plug Bit Off More Than It Could Chew with Liquid H2
Plug is probably headed for restructuring. I’ve know this is not a novel concept. I would argue that it is their bid to get into liquid hydrogen that is killing them, and that is a novel. More importantly, I want to make clear that Plug is not a mainstay of the hydrogen industry despite their success in somehow convincing some investors of this idea. It’s another company that went into something that was beyond its reach while trying to go after too many other segments of the H2 industry. In other words, if Plug does go bankrupt, it’s not another nail in the coffin of H2, it’s more of the same as most other failures we’ve seen in H2.
The short version is that Plug will burn through more like $1B trying to get its five hydrogen production and liquefaction sites and running, they don’t have the experience or partners to do it, they are counting on the revenue from the liquefied H2 distribution to manage their cashflow, and the non-operational status of these projects has tanked their cashflow.
Three important caveats:
1. Do not make investment decisions on plug based on this article. This is not financial advice. This is me making clear that Plug’s restructuring should not be considered another nail in the coffin of the industry
2. I will bring up their DOE loan. I am entirely unfamiliar with the details of the LPO’s loan process with Plug – my work as director of analysis at the DOE was limited to financial assistance like grants, and was entirely separate from the loans work. Do not read into anything I say here as though I know any details of the loan
Article flow:
Background on H2 – what really is H2
Background on what Plug does – and why competing directly in LH2 with the Industrial Gas Companies is not a winning strategy
A reminder that a company that isn’t already seriously established in H2 needs to focus on one thing – which Plug does not do
About that DOE conditional loan – I don’t see it coming through
What I do like about Plug – and what might survive after restructuring
Conclusion
Background: what H2 currently is
I’ll keep this short because I’ve written about it already. Hydrogen is already a $200B market. It’s used to refine fuels, make the fertilizer that allows us to grow enough food to feed the world, and in many parts of the chemicals industry. This is not and will never go away, even if the refining portion shrinks as we use less fossil fuel.
Plugs planned ~100 tons per day of H2 would be 35,000 tons per year, compared to the 10,000,000 tons per year used in the US. Plug is not an important part of the hydrogen economy, and if and when it falls, it is not a sign that the entire economy is bad, but that Plug made some seriously bad choices.
Plug is a forklift and forklift fueling company
Plug made its way in H2 as a H2 forklift integrator and fueler. Plug now makes and operate electrolyzers, does hydrogen liquefaction and transport, integrates other vehicles, and has small fueling stations for these vehicles.
Their misguided growth into LH2 stemmed from a shortage of LH2 for delivery to vehicles in the US. This hindered Plug’s expansion. Around then is when Plug started to vertically integrate.
In 2020 and 2021, plug raised $972M and then $1.8B from public markets. At the time they were using 20 tons per day of LH2 and planned to build out five hydrogen production and liquefaction hubs in the US. They planned on needing 85 tons per day by 2024, but the LH2 supply wasn’t there.
In 2022 Plug decided it was going to compete head-on with the Industrial Gas Companies – which turned their cash burn into a cash conflagration
Plug bought up Joule Processing in early 2022 to get into the liquefaction game, partnering with several companies that notably weren’t the three IGCs that have experience in H2 liquefaction. As I said in my last article, you’ll see most folks who try this will go bankrupt.
Plug did not even develop novel liquefaction techniques or systems, they tried to replicate the abilities of three IGCs and compete head-on with undifferentiated hardware. This is not what startups should do.
Beyond their technical limitations, the capital required for liquefiers makes no sense. A 45 ton per day liquefier would be on the order of $300M. A round-the-clock powered electrolyzer to feed this would be on the order of $200M. Yes, it can cost more to build liquefiers than it does to build electrolyzers.
If Plug built five such plants it would be on the order of $2B of all-in costs. They are in the process of building them, so you can assume this is where most of their cash went.
Worse, Plug’s plants aren’t starting operations on time and have had mechanical issues. The Georgia plant opened late and well beyond cost and was directly called out as being part of their cash flow issues in 2023. Opening their Tennessee plant required them to pull long-lead-time parts from their Texas plant, meaning their Texas plant will open much later. Everything will continue to push out, and these plants that were supposed to generate free cash flow are instead hemorrhaging all the money and goodwill they have left.
The other issue: no specialization
Plug went on a buying spree to vertically integrate into many parts of the hydrogen ecosystem. Producing electrolyzers is hard enough. Being a renewables project developer, hydrogen developer, liquefier developer, hydrogen transporter, offtaker, and vehicle maker is quite a bit to bite off. Two articles ago I argued that without specialization and strong engineering skills, most hardware startups will fail.
With the massive expense of liquefier sites dragging everything else down as well, something is going to break.
Major concerns – the cashflows and that conditional DOE loan being used as a lifeline
Plug has announced two major dilutive offerings this year: a $200M one in July when plug stock was around $3 and a $1B raise in January when it was closer to $4 per share. We’re now sitting around $2/share.
In late 2023 Plug confirmed they were in the late stages of the DOE loan process. In May 2024 it was announced as conditional, and in in July they raised funds to keep cash on hand. Before the July raise, they had $62M in readily available cash on hand after burning through $1.6B in the past 12 months.
The price that Plug sits at right now will limit their ability to continue using their stock price as a piggy bank. Meanwhile, those conditional DOE loans aren’t being disbursed. LPO’s annual report shows the office only disbursing $2.1B in the past 3 years out of the $360B given to them from the IRA and from the $10B of $40B available prior to the IRA. Given the $17B in new conditional loans in 2023, many prior conditional loans that have yet to meet the conditions, and the ranking member of the Energy and National Resources Committee of the senate calling for an investigation into the Plug loan, it’s not a leap to say that it’s probably not coming.
With Plug on the ropes and bleeding cash, it would be high risk for the DOE to issue those loans. Without those loans, it is hard to see how Plug will be able to finish their liquefiers. The revenue from operating liquefiers is required to have free cash flow. They aren’t operating. With so much money sunk into liquefaction (and other projects that aren’t generating revenue yet), the cost of building $2B of non-operating liquefaction systems could bring them down.
Unfortunately there is a bit of smoke-and-mirrors here. Plug is relying on the conditional loan to keep their stock price high enough to do at-the-market offerings and keep them afloat. This lifeline runs out eventually.
Post-restructuring
Restructuring is meant to take what is good about a company and keep it alive to partially pay back lenders while selling off or writing down the rest of the obligations of a company. Typically during a restructuring, stockholders value goes to zero, bondholders and other debt take a serious haircut, any many bondholders may end up with shares in the restructured company.
The profitable parts of Plug are definitely their forklifts. Luckily for them, solutions to deliver H2 as gaseous are on the rise and their forklifts will no longer be dependent on LH2 that is in short supply – expansion will soon be possible.
Their electrolyzer business is an open question. If final 45V guidance keeps the three pillars, their electrolyzer business faces headwinds and may be parted out. If 45V is more rational than originally proposed, this could remain a core business
Liquefaction? It may well be the thing that bring Plug down. It will likely be parted out. Maybe an industrial gas company or even an oil company or other energy company would buy these assets at a steep discount.
No matter how it plays out, expect to see a more nimble Plug emerge without some of the assets they are building now.
Conclusion
Plug Power may go into restructuring. When this happens, it is not a harbinger of the H2 industry. Keep in mind that their planned 100 tons per day by the end of ‘24 would have been 0.35% of the total US H2 consumption. Whatever splashy articles come out about the doom of H2 if Plug goes under, ignore them. Plug is not important to H2.
Almost none of what they are doing is commercially important. I love bringing up that I was one of the co-lead authors on the inaugural DOE hydrogen commercial liftoff report. Importantly, you will notice in the report that LH2 was called out as niche, expensive, and not important for a scaling H2 economy and commercial liftoff. You also won’t see forklifts anywhere. Outside of electrolyzer production, which many others in the US or within our ally countries do, nothing that Plug is doing actually matters for commercial liftoff. So if they go under, don’t malign the entire H2 economy.
