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Questioning Nikola’s Business Model Assumptions (NASDAQ:VTIQ)

This article will focus on Nikola’s proposed hydrogen fuel cell electric (FCEV) business model, as this is where the headline Anheuser-Busch (BUD) order is directed, and appears to be a significant driver for the proposed reverse merger and public offering. Company references are based on the Prospectus & Investor Presentation dated March 2, 2020, along with the Proxy Statement dated May 8, 2020.

Truck Lease Economics

Nikola assumes the materials to construct an FCEV Class 8 truck with up to 700 miles of range can be had for $173,624.

As for range, 700 miles from 80 kg of hydrogen fuel on-board will be difficult to achieve. To illustrate, competing Toyota/Kenworth FCEV Class 8 trucks now being deployed in California with UPS and others are reportedly providing about a 300-mile range with 60 kg of hydrogen storage on-board. And this is mature technology out of Toyota (TM) – which leads the FCEV industry with nearly three decades of development under its belt and is already scaling up production. Contrast this with Nikola, who is reliant on third parties for its FCEV technology and won’t be producing these trucks for another three years. Thus, a more realistic assumption would be a 400-mile range by loading 25% more fuel onboard vis-a-vis the Toyota/Kenworth trucks.

As for truck build costs, as so few FCEV trucks have been built yet, Argonne National Laboratory indicates it is appropriate to consider experience with similar weight class FCEV buses as a surrogate. In this light, a new 350-bar FCEV transit bus currently costs $768,000, according to Sunline Transit, the largest North American operator of HD FCEV vehicles. This reflects cost reductions from circa $2.4 million per vehicle ten years ago as technology has advanced and more FCEV buses have been placed into service. Nevertheless, heavy-duty (HD) fuel cell systems remain expensive, as evidenced by the ten Toyota/Kenworth trucks being deployed in California having been budgeted at $3 million each for design, build, and support.

The Nikola $173,624 cost assumption is also difficult to justify when adding up core components which make up the truck.

Starting with cost of the chassis, one useful reference is the popular Peterbilt 389 truck, which is produced in high volume and can be ordered as a “glider” (no engine or transmission) for $126,000. Given this, it would be reasonable for Nikola/Iveco to assume its truck chassis, including advanced autopilot and other features, would require circa $100,000 before adding fuel storage cylinders, the fuel cell stack, motive/regen batteries, and electric motors.

Fuel storage is another core component of FCEV trucks. Hydrogen compressed to 700 bar requires approximately 25 water liters of tank space per kg of stored energy. So, the Nikola fuel storage system will require a total of 2,000 water liter volume worth of packaged cylinders on each truck. This looks very much like 175 diesel gallon equivalent storage systems commonly produced by Agility Fuel Systems, Momentum, and Trevor Milton’s prior employer Worthington Industries, among others. These suppliers provide three or more large cylinders behind the cab and/or on the side rail for use in compressed natural gas (CNG) Class 8 truck applications under competitive, reasonably high-volume OEM upfit programs. Unpublished quantity pricing starts at $45,000 for these gaseous fuel CNG storage systems. As an analogue this is a low figure, however, in that CNG fuel utilizes 250 bar cylinders, whereas hydrogen requires much thicker-walled pressure vessel construction rated to 700 bar. With the added carbon fiber and upgraded valves, tubing and fittings Nikola has a long road ahead to bring fuel storage costs under $45,000 in production quantities.

This leaves Nikola with about $29,000 remaining in the budget for the fuel cell stack, regenerative batteries, and electric motors. This would be difficult to achieve given that Sunline Transit, not long ago, budgeted $686,00 for one fuel cell stack and power distribution system alone.

H2 Station Rollout

As to the refueling side of the business model, Station Capex at $16 million to produce 8,000 kg/day appears to be well below current H2 station build costs. For example, Sunline’s just-built 900 kg/day station – at less than 1/8th the H2 production capacity and provided from Nikola’s supplier NEL – required $8.7 million (ref. Advanced Clean Tech News @ 38 min).

Sunline hydrogen station build

Also, two stations being built for the California “Shore to Store” hydrogen truck project to fuel but 10 trucks are also budgeted at $9.25 million each. As Nikola’s model requires enough H2 fuel generation to fill 210 trucks, a budget of $16 million seems unjustifiably low in comparison.

The business model also factors in a cost of $2.47 per kg of compressed hydrogen dispensed. The model further states that this fuel will be derived from electrolyzing hydrogen out of water by means of renewable electricity. It will be challenging for Nikola to achieve this low cost of fuel. The average cost of hydrogen has been recently reported as $7.25/kg at Sunline Transit using a natural gas reformer, $7.03/kg at AC Transit using a combination of liquid hydrogen delivery with water electrolysis, and $5.27/kg using liquid hydrogen delivery at Stark Area Transit, to name a few of the yet-experimental HD FCEV fleets in operation today.

One plausible way to reach $2.47/kg might be by way of using fossil natural gas as feedstock with grid electricity for processing (SMR). But electrolysis by way of solar panels at the refueling station, as depicted in Nikola’s station renderings, will certainly fall short. According to the prospectus, eight NEL electrolyzers at each station will require up to 17 megawatts of energy. To put this into perspective, a 10-megawatt solar facility in sunny Kingman Arizona takes up over 70 acres. Perhaps wind power can provide some renewable energy over the grid to these stations, as also depicted in the prospectus, but the low figure of 3 cents per kWh as the model projects is also highly unlikely to be achieved. This is because Nikola’s plan of leveling out demand to off-peak hours along with voluntary power disruption is not as simple as it appears. Storage and dispensing of gaseous Hydrogen and/or CNG is a rather inefficient process requiring high-horsepower compressors to start at any hour of the day to ensure a complete fill when the trucks arrive.

Given the above, Nikola trucks will be necessarily be filling with reformed natural gas to achieve the modeled fuel cost: compressed off a mostly fossil fuel-powered grid, and might as well be utilizing mature natural gas CNG truck technologies to achieve a similar carbon footprint.

Final Thoughts

Weaning the transportation sector off of diesel and on to clean renewables is a noble initiative. But at this stage, profitable FCEV economics haven’t been proven. Prior to closing on the proposed merger, the company should, at a minimum:

  • Run a fully loaded FCEV truck out of fuel on typical terrain to demonstrate how far it really travels;
  • Publish and justify the truck’s costed bill of materials; and
  • Break down the costs to produce 1 kg of hydrogen via electrolysis with renewable power.

Disclosure: I am/we are short VTIQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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