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Plug Power Shows One Way to Survive Cleantech’s Booms and Busts

(Bloomberg Markets) —

The momentum behind cleantech stocks may be fading—again. For about a year, companies pushing to decarbonize and electrify the world captured the market’s imagination as never before. But now, as investors try to determine which companies can make it over the long run, they may want to consider the story of Plug Power Inc.

The hydrogen fuel cell maker, based in a suburb of Albany, N.Y., has already survived boom-bust cycles that devastated many other cleantech companies. Its shares reached almost $150 in early 2000, then flirted with penny-stock status for much of the next two decades. The company changed management and adjusted its business strategy. Then, as investors’ appetite for climate-friendly technologies returned, Plug Power became a Wall Street darling again, with a market value that topped those of utility giants such as PG&E Corp. and Consolidated Edison Inc. in early 2021.

Plug Power’s renaissance was emblematic of a broader revival in the cleantech sector. As the cost of batteries and wind and solar power declined, new technologies became economically competitive. Tesla Inc.’s stock surged more than 700% in 2020, making it one of the world’s most valuable companies. Funds tracked by BloombergNEF pumped more than $17 billion into climate-related startups last year, up from $1.4 billion a decade earlier.

“I believe we’re in a growth phase—it’s not subsidy-driven, it’s really technology-driven,” says Craig Irwin, an analyst at Roth Capital Partners LLC, who’s recommended buying Plug Power shares since November 2019. “So there will be ups and downs on investor enthusiasm, but I expect fundamental growth out of several companies in this space.”

Devastating droughts, fires, hurricanes, and heat waves drove Wall Street to embrace the reality of climate change. Just a few years ago, environmental, social, and governance investing, or ESG, was a niche play for many investors. But by late 2019, there was growing conviction that decarbonization and the transition away from fossil fuels were megatrends, not fads. “It’s a world where climate is in the news every day,” says Abe Yokell, a managing partner at Congruent Ventures, a venture capital firm with a focus on sustainability. “It has sunk in from a consumer- and corporate-risk perspective.”

Plug, which hasn’t turned an annual profit in its almost 22 years as a public company, didn’t take this investor enthusiasm for granted. It raised about $3.28 billion through convertible note and stock offerings during 2020 and early 2021, and sold a 10% stake to South Korea’s SK Group for about $1.6 billion. In March it revealed an accounting error that forced it to restate financial results from 2018, 2019, and 2020 and disclose a material weakness in its financial controls. The stock was down 17% for the year through July 21.

PLUG POWER WAS BORN in 1997, the same year the Kyoto Protocol was adopted to fight global warming. But Plug’s founders were more focused on another emerging business threat: electricity deregulation.

California had just opened its electricity market to more competition, and Enron Corp. was pushing other states to do the same. DTE Energy Co., whose electric utility serves Detroit, wanted a backup plan in case Michigan’s market was also deregulated and new power plant operators moved in to compete, says Tony Earley, DTE’s president at the time. So DTE formed a joint venture with Albany-based Mechanical Technology Inc. to develop fuel cells and named it Plug Power. General Electric Co. was an early investor. Earley joined the company’s board.

Plug’s initial idea was to sell fuel cells for homes. The devices, which produce electricity through an electrochemical reaction instead of combustion, had been around for years but never found a viable market. Plug’s fuel cells, powered by natural gas from DTE, would be able to supply houses with both electricity and heat.

The concept quickly ran into problems, Earley says. Natural gas prices rose sharply in the early 2000s, making Plug’s proposed at-home generation uneconomical. Manufacturing costs were too high. And Plug’s gas-powered cells didn’t look like a climate change solution. Although cleaner than combustion engines, they still produced carbon dioxide.

“As the environmental movement gained speed, they were not wild about this technology,” Earley says. “It was just a different way of dumping carbon into the atmosphere.”

When Andy Marsh joined Plug as chief executive officer in 2008, venture capital interest in cleantech was booming. But Plug was still trying to figure out how to turn its technology into a marketable product. Marsh, who’d just sold a company he founded after spending almost 18 years at the fabled Bell Labs, was hired to do exactly that. He arrived to find Plug exploring “six or seven” applications for its technology, with no obvious winner.

“Most people I talked to, it was, ‘Gee whiz, this is really neat, really cool,’ ” says Marsh. “And then you’d ask, ‘Why would you buy it?’ And there was never a clear description.”

Two contenders stood out: using fuel cells to power forklifts and material-handling equipment in warehouses, and attaching cells to mobile phone towers in remote locations. Plug Power installed about 25 such phone tower systems in India, using propane for fuel. But people kept stealing the propane, and suppliers often delivered substandard fuel. The warehouse idea, with Walmart Inc. doing a demonstration project, seemed more solid. By 2010, it became Plug’s main business.

“The reason we focused on material handling was because we could really write down a value proposition,” Marsh says. “We could see how we could save customers money.”

Plug’s fuel cells have always run on hydrogen, even the ones designed to power people’s homes 20 years ago. But those residential fuel cells contained a component called a reformer that stripped out the hydrogen from the natural gas. If you’re fueling a forklift, you don’t want or need a reformer—they take up space and add complexity without providing any benefit. It’s easier to deliver hydrogen to where the forklifts will be used and run them on that.

“It’s a much more simple application, so that helps us with efficiency, it helps with up time, it helps with cost,” says Teal Hoyos, Plug Power’s director of marketing and communications. Phasing out fossil fuel wasn’t the primary goal in the shift to pure hydrogen, she says—but now, of course, it’s one of Plug’s big selling points.

By 2010 the cleantech bubble had burst. Venture capitalists used to the quick turnaround of traditional tech investments became impatient. Nancy Pfund, founder and managing partner of DBL Partners and an early Tesla Inc. investor, describes such investors as drive-bys, saying there was a “tourist quality” to cleantech investing at the time.

“I hope it’s gone,” Pfund says. “It feels like the challenge is more evident and serious. The amount of people betting their careers on climate change is at an all-time high. In that sense, it’s very different than 10 to 15 years ago.”

Government support and political polarization were complicating factors. Although U.S. backing helped some cleantech companies get off the ground, it also added a tinge of politics that continues to shadow the sector. To critics of renewable energy, the 2011 bankruptcy of Solyndra LLC—a Fremont, Calif., manufacturer that had snagged a $535 million federal loan guarantee during the Obama administration—branded the industry as dependent on progressive politics and noncompetitive on its own.

PLUG’S DECISION TO FOCUS on forklifts created a steady stream of revenue that rose almost every year. Last summer it made a big bet that helped send its stock soaring.

Plug bought two companies: one that distributes hydrogen, and another that makes electrolyzers, devices that strip the hydrogen from water. Marsh said the company would become a supplier of “green” hydrogen, meaning it would use renewable power to create the hydrogen. Governments around the world have identified green hydrogen as an environmentally friendly solution to powering manufacturing and other industries that rely on fossil fuels. Plug’s stock closed at $5.57 the day before the deals were announced. Seven months later, it briefly topped $70.

QuickTake: Why Hydrogen is the Hottest Thing in Green Energy

The company’s mass manufacturing process has differentiated it from rivals that are making bespoke fuel cells, according to Jeff Osborne, managing director and senior analyst covering sustainability and mobility technology at Cowen & Co. in Stamford, Conn. “Plug has really perfected the high-volume manufacturing of a very repeatable product,” says Osborne, who’s rated the stock “outperform” since at least 2014. For cleantech, “that’s been the global turning point—that the industry can stand on its own two feet.”

Not everyone is convinced. In January, short seller Kerrisdale Capital Management LLC issued a dismissive report on Plug Power that said the process of making, storing, and transporting hydrogen was too inherently inefficient for the hydrogen economy to ever take off. It also questioned the lofty valuation of a company that still relies on forklift sales.

As an industry, cleantech remains vulnerable to investor disillusionment. A key difference this time is in the economics. “There’s just no denying that the market fundamentals are different,” says Emily Kirsch, founder and managing partner of Powerhouse Ventures, a clean-energy and mobility venture fund.

Because big solar and wind power farms require space, they’re springing up in rural areas, where the new technologies are creating jobs and winning support.

One sign that cleantech is maturing: The failure of a single technology or business is less likely to be viewed as a sign that the broader industry will never generate reliable returns for investors.

Plug Power has survived for more than 20 years by adapting to the market and by pivoting from residential to commercial customers, from natural gas to green hydrogen, and from a focus on energy deregulation to a climate and sustainability business proposition. Marsh says he’s just glad that enough of Plug’s people stuck around through the difficult years to reach the point where its technology may finally take off.

“Thank God these guys didn’t quit,” he says.

Baker and Eckhouse cover power and renewable energy for Bloomberg News in San Francisco and Los Angeles.

To contact the authors of this story:
David R Baker in San Francisco at dbaker116@bloomberg.net
Brian Eckhouse in Los Angeles at beckhouse@bloomberg.net

© 2021 Bloomberg L.P.

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