Nikola Stock Jumped Because Cummins Believes in the Future of Hydrogen

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Diesel engine giant

Cummins

is bullish on the future of hydrogen as a transportation fuel. The company hosted a hydrogen technology day Monday. What Cummins management said motivated investors to act, but Cummins stock wasn’t the one moving Monday.

Nikola

stock, instead, was on the rise.

Cummins (ticker: CMI), for its part, aims to be a big player in the coming hydrogen economy and showcased its fuel-cell and hydrogen-production technology for investors. “Key messages from Cummins today: One, we are committed to [hydrogen], and two, it’s coming,” New Power Business president Amy Davis tells Barron’s.

The hydrogen economy is essentially a catch-all term for replacing gasoline and diesel fuel with hydrogen gas. Hydrogen, when used in a fuel cell or burned, doesn’t produce any carbon dioxide, the gas blamed by scientist for global warming and climate change.

Cummins stock fell 2.1% on Monday, despite the potential of the hydrogen business. Nikola (NKLA) stock, on the other hand, was up 3.4%. Nikola probably has Cummins to thank for the positive price reaction since hydrogen economy numbers provided by Cummins agree closely with figures Nikola talks about.

“Hydrogen provides a pathway to store energy from renewables,” said Cummins management when asked about the potential for hydrogen technology. The sun, of course, is always on, generating power. Humans just needs a cost effective way to capture and store that energy.

One way is to use electricity generated from renewable resources to split water in to hydrogen and oxygen—and then store the hydrogen. Cummins makes electrolyzers that accomplish the task as well as having its own fuel-cell technology.

Cummins says one megawatt of electrolyzer capacity costs about $1 million now, and will fall to about $750,000 by 2025. One megawatt of electrolyzing capacity can make about 400 kilograms of hydrogen each day.

A semi-truck, pulling a trailer, hurtling down a U.S. interstate highway gets roughly 7 miles a gallon. An average truck driver can typically cover 500 miles to 600 miles each day. That means, very roughly, one megawatt of electrolyzing capacity can power a heavy duty truck for a few days.

Thousands of megawatts of electrolyzer capacity would be required to transition to a hydrogn-fuel-transportation paradigm. It will take time. And thousands of megawatts of electrolyzing capacity are on order from European and Chinese customers. Cummins believes it can sell hundreds of millions of dollars’ worth of electrolyzers between now and then.

That represents a small portion of overall sales. Cummins is expected to produce about $21 billion in sales in 2021. Still, producing hydrogen represents a new business and supports the sale of Cummins hydrogen-fuel-cell technology in the future.

Cummins also said its electrolyzers can make hydrogen gas for about $3 to $6 a kilogram depending on the price of renewable energy and including about 60 cents a kilogram for the capital cost of the electrolyzers. Cummins’ hydrogen-production-cost range is close to the $4 per kilogram Nikola management uses with investors.

Hydrogen at $4 a kilogram is competitive with diesel fuel, according to Nikola. Low prices are important for the entire hydrogen economy. Cummins added that distributing hydrogen gas can cost $4 to $7 a kilogram. That’s a lot and is one reason why on-site hydrogen generation is important.

There are a lot of numbers floating around and some competing business models. Nikola, for instance, wants to run hydrogen-filling stations. Cummins can sell electrolyzers. There are also still a lot of unanswered questions about hydrogen as a long term, zero-carbon fuel solution for the globe.

Investors are buying into hydrogen potential, though. Cummins stock is up about 30% year to date, better than comparable performance of the

Dow Jones Industrial Average

and

S&P 500.

Nikola stock is up about 88% since announcing plans to become a publicly traded company via a special-purpose-acquisition-company, or SPAC, merger in early March.

Cummins stock is worth, very roughly, $30 billion. Nikola’s stands at about $8 billion. For a brief stretch in June, Nikola stock traded for almost $94 a share, making the company more valuable than Cummins.

Nikola stock didn’t stay at those lofty levels. The pricing action illustrates investors, sometimes, like newer, pure-play investments in new technology. That might not be the best strategy with commercial transportation. “I feel good that we are an incumbent,” says Davis. “Commercial-duty cycles are tough and we know them.” That gives Cummins a design, relationship and service advantage over start-up players.

Time will tell if startups can displace incumbents and how big hydrogen becomes for Cummins, Nikola and the world.

Write to Al Root at [email protected]