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Is Hydrogen Mobility at Crossroads After Shell's (SHEL) Strategy Shift?

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In the evolving landscape of clean energy and transportation, hydrogen fuel cell technology has emerged as a promising zero-emission alternative to traditional fossil fuels and battery electric vehicles (BEVs). Major auto biggies such as Toyota (TM - Free Report) , Honda (HMC - Free Report) , BMW AG (BMWYY - Free Report) and Hyundai have heavily invested in this game-changing technology, envisioning a future where hydrogen-powered vehicles play a significant role.

However, the recent decision by the global energy behemoth Shell (SHEL - Free Report) to cease hydrogen refueling for passenger vehicles in California is beginning to cast a shadow on the hydrogen fuel cell market, particularly in California, the epicenter of hydrogen infrastructure in the United States.

Shell currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SHEL Pulls the Plug on Light-Duty Hydrogen Refueling

In a move that took many by surprise, Shell shuttered seven hydrogen fueling stations for light-duty vehicles in California. This decision, effective Feb 6, 2024, dealt a severe blow to the hydrogen passenger car market, eliminating 12% of the existing refueling options for fuel cell electric vehicle (FCEV) drivers.

The decision was attributed to supply complications and other market factors, signaling broader challenges in the hydrogen supply chain and infrastructure development. The closure of these stations not only reduces the available refueling options for FCEV drivers but also dampens the momentum for hydrogen as a clean energy carrier in the transportation sector.

Last year, Shell scrapped plans to build 48 new hydrogen passenger retail fuel stations in California despite receiving $40.6 million in government grants in 2020. Lest you forget, Shell made an entry into the U.S. hydrogen fueling business in 2005, marked by the inauguration of its first pilot station in Washington, D.C.

Shell's recent move deals a significant blow to hydrogen fuel cell passenger technology, which has struggled to gain traction in California and beyond. Reports of supply problems at hydrogen fueling stations in California have been rife since last summer. This has left hydrogen car drivers grappling with high fuel prices, erratic operating hours, fuel shortages and long refueling wait times.

Most of these stations are concentrated in Greater Los Angeles and the San Francisco Bay Area, leaving vast stretches of the state with limited refueling options. This is not a rosy scenario for the nascent U.S. hydrogen fuel cell passenger car market, which is largely dominated by Japan and Korea-based automakers like Toyota, Honda, and Hyundai.

Shell's scaling down of its low-carbon operations, particularly in hydrogen, has been anticipated for some time. Market speculation about its decision surfaced in the latter half of 2023, culminating in an official confirmation in October when it slashed 200 jobs in its hydrogen division.

Despite this retrenchment, Shell remains committed to supporting hydrogen-fueled heavy goods vehicles in the United States and globally. It will keep operating three heavy-duty refueling stations in Southern California.

Navigating the Hydrogen Supply Maze: Challenges and Disruptions

The hydrogen supply chain in California confronts a myriad of challenges, ranging from soaring feedstock costs amid the Russia-Ukraine war to unanticipated operating expenses for refueling stations. Additionally, a decline in Low-Carbon Fuel Standard credit values has further exacerbated the economic viability of hydrogen fueling infrastructure.

Shell's station closures add to a series of announcements in 2023, reflecting the volatile nature of the hydrogen fuel market. In October 2023, True Zero, California's largest hydrogen provider, closed 10 stations. Shell, Iwatani and Messer also shut down several stations in November and December, attributing the closures to supply challenges.

Despite a modest uptick in FCEV sales in California, hydrogen usage has plateaued since mid-2022 as high pump prices dissuade consumers from embracing FCEVs as a viable alternative. In 2023, FCEV sales comprised just 0.7% of total light-duty zero-emission vehicle sales in California, per the California Energy Commission.

Despite automakers' investments in hydrogen fuel cell production, battery electric vehicles remain dominant. In 2023, California registered only 3,143 hydrogen-powered vehicles compared to nearly 400,000 battery-electric cars sold. Shell's refueling station closures might worsen challenges for hydrogen fuel cell vehicles.

Automakers Remain Resolute in the Hydrogen Terrain

Despite the headwinds facing the hydrogen fuel market, leading automakers such as Toyota, Hyundai, Honda and BMW remain steadfast in their commitment to advancing hydrogen fuel cell technology. These companies view hydrogen as an indispensable element in achieving zero-emission transportation and continue to invest in infrastructure and FCEV production.

Toyota and Hyundai have reiterated their dedication to supporting California's hydrogen refueling infrastructure, undeterred by Shell's departure from the passenger car market. They maintain that hydrogen fuel cells offer a viable zero-emission option and are exploring avenues to expand their FCEV offerings. These companies have developed FCEVs, such as the Toyota Mirai and the Hyundai Nexo, betting on the technology's potential to contribute to a zero-emission future. While the limited hydrogen refueling infrastructure and the recent closures by Shell could hinder the near-term sales of their FCEVs, the auto giants remain bullish on the long-term prospects of FCEVs. Last year, Toyota revealed the prototype of its Hilux pick-up, equipped with a hydrogen fuel cell system.

Meanwhile, Honda is creating a CR-V fuel cell variant to be manufactured at its Ohio facility this year. Despite Shell's developments, Honda's plans remain unaffected. The company has invested significantly in hydrogen refueling infrastructure in California, expressing confidence in the existing network to support FCEVs. Quoting Honda’s spokesperson, "We are excited to launch a new FCEV this year, providing another zero-emissions option from Honda in California."

German auto biggie BMW is conducting a global pilot project with approximately 80 hydrogen-powered iX5 crossovers. The BMW iX5 Hydrogen boasts extended range and quick refueling stops, enabling emission-free driving over long distances. The company aims to transition these prototype hydrogen vehicles into full-scale production by 2030.

Despite setbacks, ongoing investments by automakers in hydrogen fuel cell production projects signal enduring interest in the technology.

Looking Ahead

Indeed, Shell's decision to discontinue hydrogen refueling for passenger vehicles in California has sent ripples across the hydrogen economy, raising fundamental questions about the future trajectory of fuel cell vehicles. Nonetheless, the potential of hydrogen to contribute to a cleaner, more sustainable future remains significant. Innovations in hydrogen production, storage and distribution, along with advancements in fuel cell technology, could pave the way for hydrogen to become a key player in the global effort to reduce carbon emissions.

Despite Shell's pivot, many companies, including Shell itself, affirm hydrogen's efficacy in heavy-duty trucks and industry. It plans to invest $1 billion annually in hydrogen and carbon capture. The Energy Department's Hydrogen Hub initiative, backed by $7 billion, reinforces long-term confidence in hydrogen's role in global decarbonization efforts.

While Shell's exit from the hydrogen refueling market in California poses challenges, it also highlights the need for a concerted effort to realize the potential of hydrogen fuel cells. The road ahead for FCEVs and the hydrogen economy is complex, but with continued innovation and collaboration, hydrogen can play a crucial role in achieving a zero-emission future.

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