Fast growing hydrogen stock Ceres Power (CWR:AIM) has gone a long way to fulfilling its potential after inking a deal with German giant Bosch that analysts have called its ‘biggest milestone to date’.

Ceres Power has seen its shares jump 295% this year as investors bet on hydrogen fuel cells playing a key role in decarbonising the global economy.

The company makes a solid oxide fuel cell known as ‘SteelCell’ which can run on hydrogen. Fuel cells work like batteries but don’t run down or need recharging, and work by converting the chemical energy of a fuel (often hydrogen) and an oxidizing agent (often oxygen) into electricity.

Manufacturer Bosch plans to spend several hundred million euros to make fuel cells with technology from Ceres Power, and is preparing to start volume production of the Ceres-powered fuel cell systems in 2024, aiming to achieve initial annual production of around 200MW – equivalent to supplying around 400,000 people with electricity in their homes.

It comes after Ceres signed a deal with South Korean conglomerate Doosan in October worth £36 million to the company over three years, with an additional £7 million contingent on performance, ahead of longer-term royalties on the sale of fuel cell stacks.

The Bosch deal is worth around £23 million in licensing fees to Ceres between 2021 and 2023, of which £6 million is conditional on meeting targets. Ceres reported revenue of £19.9 million in the year to 30 June.

Analysts are very excited about the potential beyond 2023. Once the 200MW of capacity is operational in 2024 and Bosch is making and selling the systems, Ceres will begin generating royalty revenues.

Berenberg estimates these could be £30 to £100 per kilowatt, meaning at 100% capacity utilisation Ceres could generate between £6 million and £20 million in annual revenues from this 200MW of capacity. With royalty revenues around 80% gross margin, or possibly even higher, Berenberg also expects a material step-up in profitability, all else being equal.

From the point of view of Ceres’ clients like Bosch, analysts at Liberum said one of the reasons their enthusiasm for fuel cells has increased over the last year is the demise in diesel car sales.

Bosch generates a significant proportion of its revenues from diesel technology, but Liberum says the diesel share of new car sales in Europe’s four biggest car markets has plummeted to an average 24%, half the level of five years ago, and highlights that last month sales of electric vehicles in the UK were 13% higher than diesel sales at 18,000 units.

Shares in other hydrogen stocks ITM Power (ITM:AIM) and AFC Energy (AFC:AIM) have also been in demand in 2020, rising 495% and 126% respectively year to date.

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