Looking for Fuel Cell Technology's Future.
As of Oct. 1, the 52-week high on the stock of Plug Power Inc., perhaps the highest-profile fuel cell company of the last few years, was 39.125 per share. The price-per-share on Oct. 1? $9.50. Assumedly, the plummeting stock was the result of the shareholder lawsuits against the company following a combination of heavy insider trading and announcements of delayed product launches. But Plug Power isn't the only fuel cell company whose stock has sunk. Some recent price histories for other fuel cell stocks:
- H Power Corp.'s 52-week high: $34.50; its Oct. 1 closing price: $3.10
- FuelCell Energy Inc.'s 52-week high: $54.375; its Oct. 1 closing price: $15.62
By definition, fuel cell stocks fall in the technology sector. Therefore, such is the plight of a technology stock, an observer from outside the industry might say. But fuel cells have nothing to do with the Internet, nor do fuel cell companies sell their wares to other technology companies. So what gives? Has the fuel cell lost its luster for good?
That might depend on how you define luster. There is no question that past hoopla over fuel cells when looking at the near-term was overblown. Power technology stocks, in fact, also are down in general. Anyone who three or five years ago was expecting at least some of his or her next-door neighbors to be owning a fuel cell generator by now is certainly disappointed.
But those people apparently did not consider that most products take time to truly penetrate a market. The most common lexicon dominating the fuel cell discussions these days are words such as "niche," "creeping," and "special need." In order for any mass market to develop, consultants and fuel cell company executives alike say, a product has to start small, take root, and then blossom. Consumer electronics, for example, typically start out as high-end products, with a small percentage of the population making purchases, allowing prices to be driven down gradually. And so it will go with fuel cells.
"I think the reason why most companies in this space have their stock price down right now is obviously that it's taken longer to commercialize the technology than people had originally hoped," says Paul McNeill, vice president, business development at H Power. "I do believe that fuel cells [are] going to be a huge industry in the course of the century. It's taking a little bit longer to get this product out to market than people had hoped."
In this ? That is suggesting a much longer-term commitment than most any investor is willing to wait. McNeill, though, is not saying that fuel cells won't make inroads in the near-term. He is only suggesting that the proliferation of fuel cell usage will be a gradual phenomenon-a concept that the markets apparently didn't consider when, say, Plug Power's stock was approaching $50 per share.
Fuel cells are going to start contributing to power needs almost immediately, experts say, but that contribution will start in little ways. Today fuel cell companies look to exploit niche markets in an effort at making them profitable as soon as possible and carrying them through the near-term and beyond. Like Internet stocks, fuel cell stocks perhaps were artificially inflated at one time; yet, unlike their Internet counterparts, fuel cell companies are looking to start small, seeking out niche needs of the energy industry.
Ironically, though, part of the reason for the deflation of the fuel cell stocks may, in fact, have something to do with the Internet bust, and it's not just because of fuel cells' perception as a technology product. According to Dennis Kramer, manager in the Andersen National Energy Consulting Practice, it was a matter of an entire potential market segment simply evaporating, or, at least, shrinking dramatically. Fuel cells partly rode the wave of the Internet boom because technology companies, the assumption went, had an unprecedented need for clean, reliable power.
"[Fuel cell companies] got wrapped up in [the Internet stock surge] because obviously, fuel cells can be used as a high reliability source of energy for server farms or high tech centers," Kramer points out. "And I think that that carried over a little bit, with the euphoria of the Internet society, how and what would be the next tier of companies that would be used to support that. Well, power is their big critical item. Fuel cells would be a logical place to look."
And don't forget the hoopla created when a big-name company starts touting fuel cells, or when-seemingly light years ago-a certain famous software pioneer made a fuel cell investment. "I think that it was a little euphoric in the past," says Kramer. "You had some big-name companies getting involved putting a lot of money into it [like] the automotives. You also had some of the millionaires putting money into these different systems. With the money Bill Gates puts into Avista Labs, for example, suddenly Avista shoots up because people think that Bill Gates has some special knowledge here.
"There has always been a long-term progression of improvements in fuel cell technology, but the pricing and the value of the shares of the public companies and also the private companies hasn't really tracked. It's been up when there's been new technology, and it's collapsed when they haven't met the goals and the stated achievements that they say they are going to get in two years or five years."
The technology sector might have deflated significantly, but hope remains that electricity-sensitive industries will turn to fuel cells for clean, reliable power. The difference between now and 18 months ago, though, is that this "clean power" market is looked upon as something of a special needs, or niche market, as opposed to a gigantic one. (Fuel cell companies may always have looked at it as a niche, but investors apparently did not.)
"[I]n the US ... the niches are going to be those consumers that have a high reliability requirement ... . They're the ones I think that are going to be the key," says Kramer. Never mind the server farms and other Internet companies. There are other industries that are clamoring for good, clean power. In addition to your "traditional" high-tech companies, says Kramer, electricity-sensitive electronics have become a part of even the most basic factory production processes.
"There's also a creeping use of programmable logic controllers, sensitive equipment that is very integral to a production facility, such as making concrete, such as making plastic bags, that is utilizing this improved technology for the control systems," he says. "Those systems also have a high, high need for good, clean, reliable power. ... So you may see a market start to emerge for the same need for high quality, high reliability power, but maybe in a different environment than we'd originally thought of, such as an office building with a lot of Internet servers or something of that nature. I think you're going to see a creeping of that need. It's already started to some degree, but I think you're going to see it continue. It's not going to shut down or slow down."
Edward Petrie, program manager for distributed power and renewables at ABB Corporate Research, agrees that it's all about niche markets. In fact, he says, not only will fuel cells as a whole seek out special needs markets, various technologies within the fuel cell arena will have to vie for specific niches. "Even if you look at just fuel cells as a subset of distributed generation, within fuel cells, there are four or five-there's solid oxide, PEM [proton-exchange membrane], phosphoric acid-that are commercially available or nearly commercially available," he says.
"The question is, which one of these is suitable for the particular application." ()
The very reason for all the past bullishness on fuel cell companies, suggests Petrie, partially has to do with this issue of niche vs. huge market opportunity. In the past, investors looked at fuel cells-and all distributed generation, really-as one, single market segment. The assumption was, whoever is able to tap into that one, huge market would stand to make a lot of money. "It's just going to be a lot of niche markets and niche technologies for a while, and I think the expectations over the last year, two years, has been we sort of grouped all those niches together and said, 'This is a giant market for somebody.' I don't think so," he says.
Another area that could be well served by the fuel cell, experts say, is the market that perhaps is not even served by the local utility. H Power is one company that is going after that market segment. The company has allied with Energy Co-Opportunity Inc. (ECO), which represents a collection of rural cooperatives, to penetrate the rural market. "They [ECO] are our sales channel to that particular market sector," says McNeill.
H Power's strategy is in keeping with Petrie's opinion of where fuel cells can work in the immediate future. For the near-term, "I see perhaps remote applications where there is no grid, or where the marginal cost of extending the [transmission and distribution] infrastructure will support the cost of the fuel cell," he says.
Last spring H Power and ECO took their go-rural philosophy to California for obvious reasons. In May they announced a marketing effort in California for residential fuel cells, appointing Altair Energy LLC, which provides San Diego customers with solar solutions, as their non-exclusive distributor for Southern California.
Which leads us to the next market niche. The Great Western Energy Scare of the last year sent politicians and regulators scrambling to come up with solutions to the region's electricity needs, and the fuel cell still stands poised to reap some of the benefits. FuelCell Energy Inc. and other companies are licking their chops at an initiative headed by S. David Freeman, Gov. Gray Davis's senior energy advisor who is now running the California Power Authority, to buy 20 megawatts (MW) of fuel cell energy by September 2002, 50 MW by 2003, and 300 MW by 2004. The initiative is not a done deal-only a draft request for bid has been issued-but the fact that Freeman is behind the effort, some say, gives it credence. No one is holding their breath, but FuelCell Energy, which has submitted its draft comments to the draft request for bid, remains hopeful.
What would that initiative do for the industry? "If it happens, it is a very big jumpstart for the industry," says Jerry Leitman, president and chief executive officer of FuelCell Energy. Leitman's company may be more excited than most at the prospect of so many fuel cell megawatts up for grabs because FuelCell Energy believes that it will be the first company out with a "megawatt-sized" fuel cell plant. The company believes that it will be about a year or two ahead of Westinghouse in that endeavor.
Is It Ready Yet?
As H Power's McNeill suggested, delays of product launches have dogged the technology industries somewhat, and when someone doesn't follow through on a promise, it's not quite as exciting (or maybe even believable) when the time draws near for the new launch dates. Perhaps such is the case with the fuel cell industry. Product launches are right around the corner, but the buzz is not what it used to be.
But there is no question that the companies are getting closer. Several companies intend to be rolling out products between now and the end of 2002, starting with a product that does not impact the energy industry per se. Not surprisingly, the first products to be available are the smallest. Ballard Power Systems teamed with Coleman Powermate to create a portable generator in the 1-kilowatt range; that product, which at press time had yet to be assigned a name, is to be available by year-end.
The Ballard-Coleman product launch may seem irrelevant to the energy industry, but it is at least a symbolic beginning for fuel cell products, and larger products are following right on its heels. In addition to campers, small commercial users as well will soon have the option of purchasing fuel cell units for their generation needs. FuelCell Energy's plan calls for the company to start taking orders for their 250-kilowatt (kW) offering by the end of the year. That product soon will be augmented to 300-kW in its next-generation incarnation, and the company also will be unveiling a 1.5-MW plant, followed by a 3-MW plant. H Power, meanwhile, also is operating within the same timeframe for its residential product release, maintaining its stance that it plans to be in commercial production to the early adopter market for residential fuel cells some time in the latter part of 2002. Other companies generally cited as being close to bringing mass-produced products to market include Plug Power and International Fuel Cells, a unit of United Technologies Corp.
Price Too Prohibitive?
Hoopla gone or not, no one is denying that the fuel cell has its obstacles. The most obvious is the cost. Can it compete with central station power dollar-for-dollar? No, say the experts, and that's why the fuel cell market is a niche market, at least in the near-term. "The main issue is the price," says Eric Prouty, principal at investment bank Adams, Harkness & Hill. "It's got to drop, just as everything has done in the past, from consumer electronics to cars."
A Look at Fuel Cell Technology
All fuel cell technologies are not alike, and the maturation trajectory varies from technology to technology. Many experts agree that the technologies that may hit the market first, because of their generally lower-temperature (and thereby less efficient) properties, will soon be surpassed by their higher-temperature counterparts-and by the present day "dark horse" companies investing in them.
Alkaline Fuel Cell-uses a potassium hydroxide electrolyte and operates at 400 degrees Fahrenheit. Alkaline fuel cells have the highest electrical efficiency (70%), and are utilized by NASA in the space shuttle programs. However, the systems are too costly for commercial use.
Proton Exchange Membrane Fuel Cell (PEM)-uses a polymer membrane electrolyte and operates at approximately 200 degrees Fahrenheit. The output can range from watts to hundreds of kilowatts. The lower temperature coupled with the target capacity make PEM fuel cells suitable for residential or automotive applications, and PEM technology is utilized by Ballard Power Systems for automotive applications and by H Power, Plug Power and others targeting the residential market.
Phosphoric Acid Fuel Cell-uses a phosphoric acid electrolyte and operates at a temperature of 400 degrees Fahrenheit. This type of fuel cell was the first commercialized for stationary power generation, and its output may range from 50 kW to 20 megawatts. Because of its flexibility, potential applications of the phosphoric fuel cell include hotels, hospitals, airport terminals and even locomotives and buses. The International Fuel Cell unit of United Technologies markets systems using the phosphoric acid technology.
Molten Carbonate Fuel Cell-uses a potassium/lithium carbonate electrolyte and operates at approximately 1200 degrees Fahrenheit. Molten carbonate fuel cells have electrical efficiencies of 50-55% and upwards of 70-80% when configured as cogeneration with heat recovery. The technology is well suited to megawatt-size applications (commercial buildings and institutions, for example). The leading developer of the molten carbonate technology is FuelCell Energy.
Solid Oxide Fuel Cell-uses a zirconium dioxide ceramic electrolyte, allowing the highest operating temperature of all types (1800 degrees Fahrenheit). Its electrical efficiency rivals that of the molten carbonate fuel cell, but the ceramic material required for the process tends to be costly.
Other fuel cell technologies that utilize the PEM membrane under development include the Direct Methanol Fuel Cell, which eliminates the need for a reformer by deriving hydrogen straight from liquid methanol; and the Regenerative Fuel Cell, which electrolyses water into hydrogen and oxygen, reverses the reaction to create electricity and water, and recycles the water byproduct, thereby looping (or regenerating) the process.
Don't forget, says Prouty, that fuel cells sometimes are competing directly against other distributed generation products, and manufacturers have been working to improve those products as well, driving down costs and making them more efficient and cleaner. The fuel cell industry, he says, is competing against a moving target. "[Fuel cells] will have to be manufactured inexpensively [to be able to] compete against the incumbent technology. We think that that's the biggest risk and the biggest hurdle for fuel cells, is really the incumbent technology. The diesel and gas turbine guys have not been sitting on their hands either."
In order to become a mass market, Prouty concludes, fuel cell technology is going to have to replace incumbent technologies. But note: The key term is mass market. Don't forget the near-term strategy for the industry: to exploit the niche markets. FuelCell Energy CEO Leitman suggests that many of those markets currently are not being served at all by any incumbent technology. Leitman says that, for one, fuel cells can help utilities save money in transmission and distribution costs by serving load pockets and for grid support. If a utility can avoid having to put up a new wire, it will. "There's really not a market that's served today by our megawatt class fuel cells," he says, pointing out that environmental regulations in many areas prevent the installment of, say, a Caterpillar diesel generator for such purposes.
Leitman even contests the assumption that fuel cells currently cannot compete with central power stations on a level economic playing field. He cites his own company's experience as an example. "In Connecticut we have two different facilities. ... We've got about a 1-MW load and a 1.5-MW load. We're paying Connecticut Light & Power 11 cents a kilowatt-hour. At 50 MW a year production capacity, if we sell that many in a 12-month period, our capital costs will be such that at $4 gas, we're generating in the 8 to 9 cents per kilowatt-hour range."
The key assumption to remember, he says is that right now at least, fuel cells are not out to compete with wholesale power prices but with retail prices. "Now, that's not going to compete against 4- or 5-cent generation, but we're not competing with that. This initial group of products are what I would call retail products. We're competing against the retail price of electricity. The Danbury, [Conn., where FuelCell Energy is based] hospital pays 11 cents per kilowatt-hour. Whether half of that's generation and half of that's transmission and distribution doesn't matter to them; that's how much they pay, versus me putting a unit on site that ends up, at $4 gas, costing 8 or 9 cents a kilowatt-hour. So you're not competing against that 500-MW combined-cycle gas turbine plant sitting miles away."
There is a reason that Leitman mentioned the Danbury, Conn., hospital. Medical centers are one of the primary marketing targets of the company, partially because hospitals conceivably could use the waste heat from the fuel cells. The kilowatt-hour price certainly won't be competitive anywhere in the country, Leitman says, but in the West and Northeast, at least, FuelCell Energy thinks it has a winner.
Market Help from Overseas
For the near-term, the primary goal of fuel cell companies, other than simply to get their products ready for launch, is to create markets for them and generate revenue streams as soon as possible. That is at least partially why seemingly every fuel cell company has either created an overseas subsidiary or partnered with a foreign company to make inroads into distant markets. H Power in September joined with Matsui & Co., Japan's largest general trading company, to form H Power Japan, which initially will conduct a nine-month feasibility study relating to the sale and distribution of H Power's fuel cell products in Japan and potentially to other countries. The feasibility study will include evaluating marketing strategies and business plans, developing an operating plan, and building a maintenance and monitoring network. Matsui also has purchased an undisclosed number of H Power's shares on the open market.
Plug Power, meanwhile, has signed development, supply and distribution agreements for a combined heat and power system with German company Vaillant, GmbH, and also has a Dutch affiliate, Plug Power Holland, established in February 2000 as the first European presence for the company. FuelCell Energy also has a European partner: DaimlerChrylser's MTU Friedrichshafen unit, which initially made an 81/2 percent investment in the company. In Asia, the company has partnered with Marubeni Corp., one of Japan's leading general trading houses. Marubeni, in addition to signing a strategic alliance agreement with FuelCell Energy, has invested $10 million in the company.
Why all the overseas interest? For one, when company executives look to Europe, they see green-not only in terms of dollar signs, but also in terms of a strong environmental awareness. Because of its green tendencies, some experts say that, for the near-term, Europe is even more of a viable market for fuel cells than is the United States.
"I think there needs to be a distinction between U.S. vs. the world," says Kramer. "We tend to think in niche technologies as it being very parochial in the U.S., but there is a fair amount of interest in this in Europe. I think the worldwide market is going to grow, and I think it's a big number. ... [Europe] is a little bit different in the fact that there you have a huge green push."
As an example of Europe's interest in all things green, Leitman cites legislation pending in Germany under which customers owning combined heat and power plant fuel cells would be subsidized as much as 5 Euro-cents per kilowatt-hour for up to 10 years. Is Europe even riper for market exploitation than the United States? "Without a doubt," says Prouty.
Judging from companies' Asian investments, Japan also is an attractive prospect, but the reasons behind its viability may be slightly different from Europe's. Prouty says that the reason is more economically driven. Everything costs a lot in Japan, we all know, and that includes energy. "The economics are a lot better," in Japan than in Europe and the United States, Prouty points out.
The advent of the fuel cell age may be closer than it was during the days of the tech stock boom, and while consultants and companies alike remain excited about the technologies' prospects, there is no question that risk remains high. In that sense, we are no further along the maturation trajectory than we were 18 months ago. "These are [still] development stage companies," Petrie reminds us. "It's very uncertain when these markets are going to mature. These are development stage companies with a high degree of risk involved in any of them. We think it's an incredibly exciting area. We think it is on the cusp of coming out of the lab and into the commercial market, but timing is very uncertain as to when that's going to happen, and there are a lot of hurdles that fuel cells do have to overcome before they can become truly commercial."
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