Fuel Cells: White Knight for Natural Gas?

Fortnightly Magazine - March 15 2000

New technologies cloud the future for the traditional electric utility, but offer hope to the gas industry in boosting residential demand.

Investors apparently were paying attention in January when a Web-based analyst predicted Plug Power's stocks could gain 10,000 percent or more by 2010. Before month's end, the fuel cell manufacturer, which doesn't expect to turn a profit before 2004, saw a ninefold increase from the $16 closing day share price at its October initial public offering. That month Avista Corp. saw a sizable jump in its stock performance when Microsoft chairman Bill Gates took a 5.1 percent stake in the utility holding company. Analysts linked the investment to interest in Avista's fuel cell unit, Avista Labs.

The story has been much the same for any company doing work in fuel cells. Do the facts justify the hype?

Market potential is all over the board. Just one fuel cell design - a 200-kilowatt power plant from ONSI Corp., a United Technologies Corp. subsidiary - has reached commercialization. Nearly 200 of the units have been installed worldwide, but at about $4,000 per kilowatt, price remains a big drawback. On the residential side, EPRI has identified at least 10 fuel cell manufacturers positioned to field test products by next year. Vehicle applications could be deployed in the 2003-2005 time frame, according to EPRI. Batteries and standby power represent yet another fuel cell application. The National Fuel Cell Research Center predicts annual revenues will exceed $10 billion by 2010.

Despite potential risk, many Fortune 500 companies have invested substantial sums in fuel cell technology, including General Electric, DuPont, Honeywell and Westinghouse. Energy companies are following suit: DTE Energy, Sempra Energy, IDACORP Inc., KeySpan Energy and NiSource, to name a few.

"Some [energy companies] are taking a wait-and-see attitude," says Dan Rastler, area manager of distributed resource technologies at EPRI. "Others are really taking a serious look at it and coming to us for information to help them develop their strategies. ¼ As companies start developing their retail strategies, they're trying to understand if this is an option to include in their portfolio as they look at developing a retail service option."

But fuel cells and other distributed generation technologies have long been viewed as a threat to conventional generation. Some compare the advent of DG to the emergence of the personal computer, suggesting that on-site power eventually will replace the grid just as surely as PCs have eclipsed the mainframe. Although deregulation has prompted many energy companies to see DG as an opportunity rather than a threat, the fuel cell technology developed to advance electric generation ironically may hold the most promise for the residential natural gas market.

What are the implications of fuel cells for natural gas and electricity? Can issues of grid access and interconnection be resolved such that the tremendous investment in R&D pays off? More importantly, can customers be sold on the shift to on-site power and the attendant fuel considerations and up-front cost?

Salvation for Gas? It's an "Absolute Maybe"

Fuel cells run on hydrogen (or some hydrogen-rich fuel such as methanol), producing power with water as a waste product and only a trace of hydrocarbon emissions. Success depends in part on a stable fuel supply and a delivery infrastructure.

Already hydrogen does fuel some industrial applications of DG, and its use may increase. "Down the road, there's a belief in a hydrogen economy where hydrogen would be an energy source more on par with natural gas," says Bill Liss, team leader-energy conversion at GRI. But that's 30 to 50 years off, adds Liss.

Natural gas, however, offers a ready delivery system to serve the emerging technology. Along with propane for rural and other remote applications, it is widely recognized as the practical choice for fuel cells in stationary power generation. Yet, notes Kevin Krist, principal technology manager of combustion and energy service at the GRI, "in both of those cases, the methanol and hydrogen would probably be made from natural gas."

In fact, natural gas seems particularly well suited to power residential fuel cells. In this respect fuel cells represent a major opportunity for the gas industry. According to the American Gas Foundation, new gas technologies such as natural gas fuel cells and microturbines may increase consumption of the commodity almost 60 percent over 1998 levels by 2020.

"Residential growth has essentially been stagnant since the mid-'70s," says Mark Krebs, director of market planning at Laclede Gas Co. Krebs explains that with insufficient volume, overhead costs increase and gas companies are forced to raise rates, which then hinders their competitiveness.

"Do residential fuel cells give us a light at the end of the tunnel?" Krebs asks. "An absolute maybe."

Adopted widely as the primary generation source in homes, fuel cells, in effect, would more evenly distribute natural gas flows throughout the year. No longer would residential gas flows peak in the winter, dropping off to nil in the summer, says Rhett Ross, director of development at Breakthrough Technologies Institute. The organization directs Fuel Cells 2000, a nonprofit initiative supporting the commercialization of fuel cells.

Ross explains, "Whether it is winter or summer, whether the winter is mild or severe, the natural gas companies can better forecast their loads, and they will be moving on an annualized basis rather than a seasonal basis."

But to some, the scenario sounds a little too good to be true.

"Regardless of the fuel cell, you're going to need something to convert natural gas to hydrogen," notes Krebs. "That technology is pretty iffy."

He adds, "I think, realistically, things are so dismal that there are a lot of people who have an 'any port in the storm' mentality. We, as an industry, have to make sure that we focus our efforts on our best shots."

Even if the technology does increase gas use in homes, it will take time for markets to mature.

"If fuel cells are widely adopted by residents, then it would solve [declining growth in that sector]," says Steven Taub, associate director for North American Electric Power at Cambridge Energy Research Associates. "But I wouldn't expect it to happen overnight. It's going to take a long time."

Residential adoption won't happen until the technology has advanced enough to be hassle-free, adds Ken Hall, manager of distribution activity at Edison Electric Institute.

"The last thing you want is to be watching the big game on Sunday and your energy source runs out of fuel." Hall says residential customers will demand that the technology provide electricity as seamlessly as the grid now provides it.

New Jersey Resources Corp. is looking beyond these technological questions. It sees in fuel cells and other distributed generation a means for increasing its gas throughput.

"It started with our view of the changes that are going on in the industry now," recalls Laurence M. Downes, NJR's chairman and CEO. The company viewed electric deregulation as an opportunity to expand beyond its primary business in natural gas distribution.

Speaking specifically about deregulation in New Jersey, Downes notes, "I think we have to be realistic in understanding there's a certain limitation in terms of the amount of savings that will be generated by the simple bundling and rebundling of the current model." In that context, he says, "Things like distributed generation begin to make more sense."

Downes says his company became aware of Plug Power and its residential fuel cells about two years ago. For NJR's strategy and customer base, which is 90 percent residential, the concept made sense for three reasons, says Downes: Plug Power provides an electric product for homeowners, reduces price volatility, and allows more efficient use of the company's gas infrastructure with no significant new capital investment.

On the commercial side, NJR made an equity investment in Capstone Turbine Corp., a manufacturer of microturbines.

"We want to get as many choices to the table here as possible, because from New Jersey Natural Gas' perspective, this helps our throughput without a significant amount of new capital investment," says Downes. "Most of our load is winter heating, and this is an opportunity for us to improve our load factor behind our citygate."

But Downes is quick to note that NJR does not view DG as a replacement for the electric company. "The grid is not going away," he asserts. "It's a complement and I think it's another choice for customers."

For Electricity, A Cost-Value Proposition

For the electric business, fuel cells and other distributed generation pose more uncertainty.

"We're at a threshold of an exciting era, but we aren't quite sure which way the era's going to go yet," says Chuck Linderman, director of energy supply policy at EEI.

Linderman concedes that the PC-mainframe battle is "probably a relevant analogy" for power production and distributed generation. But he shares the view of most experts that DG will complement, rather than replace the grid. Says Linderman, "It's going to depend on individual cost cases."

In other words, for large industrial facilities in regions where grid power is relatively expensive, DG technologies may make economic sense. Fuel cells also are being used where clean, reliable power is important, such as at call centers or other computer-intensive businesses.

For the energy company, fuel cells represent an option for better serving customers with special needs, less need to invest in transmission lines for remote service areas, and a way to increase power capacity without investing in additional infrastructure.

Combination gas and electric utilities stand to benefit from increased gas throughput.

"For combination companies, it's a different way to move gas through the electric system and increase the throughput on the distribution business," says Linderman. "For our members that own pipelines, it probably means greater throughput on the pipelines as well."

Fuel cells also offer big opportunities for deregulated, wires-only companies and electric service providers that serve many customers in remote locations.

As Fred D. Hafer, chairman, president and CEO of GPU Inc. explains, the technology is a good fit with a wires-only strategy. "It opens up a potential line of business, which is not here today, and which fits nicely into the strategy that we have carved out for ourselves."

GPU in 1996 joined Ballard Power Systems, a leading developer of fuel cell technology for transportation, to form Ballard Generation Systems. BGS plans to commercialize fuel cells for residential and commercial applications.

As part of GPU's plan to increase delivery and related businesses, Hafer says, "We have recently purchased a construction company, for example, that services regulated utilities as well as commercial installation, does in-plant wiring for new facilities, builds utility lines, etc." That business, he says, "would be a perfect vehicle to pick up the fuel cell industry and either get engaged in the installation, maintenance of fuel cells, or maybe in the fuel cell sale from the outset."

As Bill Miller, president of International Fuel Cells, explains, the energy company has a natural interest in promoting fuel cells because the technology will help it better serve its customers. IFC, like ONSI, is a subsidiary of United Technologies Corp.

"We're providing more reliable power and cleaner technology," says Miller. "The benefit to the utility is that it provides better electricity than they're providing today. It's in everyone's best interest to provide that better reliability and cleaner source of power."

Energy companies tend to lower their resistance to new technology as these benefits become more apparent, according to Miller. "Utilities in the past have felt somewhat threatened by some of these new technologies," he says. "However, and importantly, I think electric utilities are starting to see that these technologies may actually help them, and are starting to work more closely with and in partnership with some of these alternate energy sources."

But the incumbent electric utilities must not be left out in the cold with regard to DG, says Linderman. "One of the key challenges that the incumbent electric generation industry faces are the states that would exclude the incumbent from participating in this market."

The incumbents, he notes, can bring expertise in deploying the new technologies. "The electric industry needs to participate to bring its credibility as a provider of electric service to residential and commercial customers." That, says Linderman, will help the DG market expand.

For Northern States Power, which serves several regulated markets in the Midwest where electricity is relatively inexpensive, DG may provide niche opportunities.

"The issue of fuel cells is not just their operability and their maintenance issues and so forth, but to a very large degree, their cost," says Denise Zurn, technology planning consultant at NSP. "So fuel cells, as they hit the marketplace, are viewed as fitting into a niche where you really have a very particular customer need, and they're willing to pay a higher cost to have that need met."

Still others suggest that for the incumbent electric utilities to benefit from distributed generation, they must own it.

"To say that it's going to be a boon for electric utilities, I think, would be wrong," says Krebs of Laclede Gas. Ultimately, he explains, it's who owns the DG that's important. "Traditionally, it's a threat, the way PCs threatened mainframes. But thinking beyond that, [electric companies] think, 'well, we'll mitigate the threat if we own it.'"

Regardless of how individual energy companies choose to fit fuel cells into their business strategies or leave them out entirely, experts say DG won't dent existing generation needs anytime soon.

Says GPU's Hafer, "It's a very attractive way to meet future load growth, and to perhaps eliminate the need for certain types of peaking capacity. But I don't think it has the prospect of eliminating or offsetting any of the existing generation capacity, at least not in the next several lifetimes."

Instead, "what you'll see is a natural shift," says Breakthrough Technologies' Ross. "Since you're adding generation as you go along, that removes the need to add new, big base station generation plants. It also allows you to start retiring some of your older plants that are more expensive to run."

Adds Ross, "You're not going to see an immediate death knell; you're going to see a shift in the way the companies utilize the technology." And that shifting will take time.

Electric companies are a resourceful lot, as many fuel cell experts note, and they'll find ways of participating if and when the technology takes off.

Says Chris Forbes, manager of solid oxide fuel cell development at Siemens Westinghouse, "If fuel cells can get to be commercially viable, [the energy companies] know they're going to benefit somehow, whether in maintenance of the units, distributing them - really, anything goes."

Storage and Cogeneration: Another Twist on Who Wins

Fuel cells offer other opportunities in capture and use of waste heat and reverse operation to store electricity, much in the manner of a traditional pumped storage project.

For example, as Krebs notes, fuel cells may be run in reverse to convert electricity into hydrogen. "The implications are that gas and electricity will compete on a time-of-use basis," he says. "It really comes down to natural gas vs. coal."

Krebs explains that an electric generator could dump off-peak, coal-generated electricity into the fuel cell at night to generate hydrogen and compress it into storage for use the next day.

"That's pretty cheap energy to make hydrogen with to power your fuel cell," he says. "If you made your hydrogen via 'dump' electricity at night and it's there in storage waiting for you the next morning, then that's potentially a cheaper form of hydrogen than [you'd get from] splitting natural gas into hydrogen. So it really is a time-of-use issue."

The application holds big potential for combination electric-gas companies, says Krebs. "Then they've got the technology to make the electricity and they've got the fuel cells as well. And possibly they've got a way to dump and store off-peak coal and nuclear power too. So it could look pretty good for electric utilities." The gas-only company, by comparison, would be limited to profiting from the fuel supply alone on a time-of-use basis, he points out.

Cogeneration applications also increase the value of fuel cells. In fact, capturing and using the heat output could double the efficiency of a fuel cell, according to Ross:

"Fuel cells, depending on the size of the building and the type of technology, can produce more than enough heat energy to be used [1] in the winter to heat the building, [2] throughout the year to heat the hot water used inside ¼ and [3] maybe, if it's an industrial building, in the industrial process." Furthermore, new air conditioning systems based on absorption chilling can be powered with a fuel cell's heat exhaust.

"So now you can use the heat output from a fuel cell year-round," says Ross. "That's very important because otherwise, in the summertime, you'd have to just dump that heat out and your annual efficiency would drop."

While industrial and commercial fuel cell owners could retrofit a fuel cell for cogen pretty easily, residential owners wouldn't be expected to have that level of expertise.

"On the residential level, at least in the U.S., you won't see that level of sophistication until big manufacturers like Carrier and Trane start to manufacture combined systems with air conditioning and the fuel cell in one piece," explains Ross. "We won't see that until the second or third generation of fuel cells."

In Europe and Japan, however, such technology is being developed now, because residential models in those countries lend themselves to connection with a fuel cell. Says Ross, "Plug Power and Ballard plan to offer a complete model for those respective markets from Day 1. It may be five, seven or 10 years before residential fuel cells are configured that way for use here in the United States."

Again, even if fuel cells reduce overall gas throughput in homes, their year-round use would be expected to benefit the natural gas distributor. And, Ross says, it would open up a new market for gas: the all-electric home typically found in warm regions such as South Florida, New Mexico and Southern California.

Too Much Risk? Big Players Don't Think So

Almost anyone doing work in fuel cell development is working with or looking for partners - whether for investment, for technology expertise, or for distribution channels.

"About every fuel cell company I know is either seeking a partner, has a partner, or would like to have one," says Bob Rose, executive director of the U.S. Fuel Cell Council.

"It's relatively unusual for a company to go from soup to nuts on its own," says Rose. "A company like United Technologies might be able to do it, but that's only because it has Carrier in-house, whereas a company like Plug Power needs a GE Fuel Cell Systems in order to get access to not just the GE badge, but also the market that GE already sells into."

Private-public partnerships have led the development of fuel cells at least since the days when International Fuel Cells first worked with NASA to supply electricity to the manned space missions. Today nearly $1 billion is spent annually in worldwide R&D for fuel cells, according to a recent report from AdvanceTech Monitor. Of that funding, much of it by government agencies in the United States, Europe and Japan, 80 percent is directed at the development of fuel cells for transportation. Experts say that once technological advances and economies of scale driven by the transportation sector can produce a reliable fuel cell in the range of $50 per kilowatt, the technology will be transferred to power generation. Early adoption of fuel cells for power generation in Europe and Asia also might make their cost more competitive in the United States.

"It's very clear there's been a history of private-public partnerships," says GRI's Liss. But Liss points to the recent involvement in fuel cell partnerships by electric companies as a big indicator of change.

"In the past there's been some opposition from electric utilities from smaller power systems as a competitive threat," notes Liss. "The fact that more and more electric utilities are becoming investors and believers in the opportunity for distributed generation, including fuel cells, is interesting from a partnership standpoint and interesting from a standpoint of possibly having a better climate for the introduction of these products."

Besides the big investment dollars involved, obstacles that remain before fuel cells can be commercialized also represent risk. For instance, price per kilowatt, interconnection to the grid, product performance and safety issues, customer acceptance and competing technologies - including cheap grid power - often are cited as impediments and threats to the widespread adoption of fuel cells.

"The risks are significant both from a technical and a product development and commercialization perspective," says Liss.

Yet it's worth noting that many "conservative" Fortune 500 companies have done the research and are pursuing the fuel cell market, whether as fuel cell manufacturers, materials and components suppliers, or distributors. Cost, product performance and the other concerns will be resolved in due time, they say.

"We're investing very substantial amounts of money in the technology," says IFC's Miller. "I don't know what the risks [would be]; we're providing more reliable power and cleaner technology."

Miller admits, however, "There are a lot of competing technologies for the distributed power market." Microturbines hold promise, he says, but fuel cells in the long run will be the winning DG technology. In addition to offering high efficiency and a design with no moving parts, says Miller, the cost of fuel cells will drop significantly. "There is a very sharp slope here in the cost per kilowatt in terms of it coming down."

Miller compares IFC's older, alkaline technology fuel cell used in the space program, which cost $600,000 per kilowatt, to ONSI's phosphoric acid power plant, which today costs $4,000 per kilowatt. For proton exchange membrane (PEM) fuel cells, the technology du jour for residential and transportation applications, he adds, the "ultimate target is to get to $50 per kilowatt by 2010."

He concludes, "You can see if you use that slope that we are going to get competitive with the grid and microturbines very quickly."

DuPont serves most of the major PEM fuel cell manufacturers with its Nafion membrane, described by Paul Tangeman, manager-alternative energy, as "the heart of the proton exchange membrane fuel cell."

Says Tangeman, "We have been involved in serving the developmental aspects of the industry for many, many years, and providing the Nafion membrane to those people who are developing the fuel cell, downstream components and stacks, systems and so on."

(Nafion is an ion-containing perfluorinated polymer.)

Incumbent technologies including conventional generation do threaten fuel cells, says Tangeman. "But fuel cells have so much going for them in the long run in terms of energy efficiency and so on that they will be a winner, I think."

DuPont sees a potential total market for fuel cells that's anywhere from $10 billion to $40 billion. While the range is difficult to pin down with precision, Tangeman jokes, "It will be, as we say, either huge or large."

GE Power Systems estimates a somewhat smaller potential market of $14 billion for all of distributed generation. With Plug Power as a 25 percent investor, GE Power Systems formed GE MicroGen Inc. last year to market, sell, install and service Plug Power's fuel cells.

"We don't view [fuel cell business] as exposing GE to a significant amount of risk," says Barry Glickman, president of GE MicroGen. He explains that to complete its product portfolio of power generation offerings from central generation down to the residential range, GE in 1998 began an intensive investigation of DG in the capacity range of less than 50 megawatts. The company launched a global search for the most promising fuel cell technology and developer.

"We narrowed down the universe of fuel cell technologies to proton exchange membrane, and then we investigated literally dozens of potential developers of that technology and finally [chose] Plug Power in early 1999," recalls Glickman. "So in terms of managing the risk, the decision to settle on Plug Power was the product of a year worth of technical evaluation."

GE MicroGen is working with well-placed local partners to demonstrate the benefits of fuel cells to small end-users.

"From a GE MicroGen partnering standpoint, we're really looking for partners that bring access to residential and small commercial customers, a local sales presence, [and] a local service infrastructure." In addition to New Jersey Energy Resources, GE MicroGen has partnered with energy companies including KeySpan Energy and Flint Energies.

The key, says Glickman, will be in the way the technology is presented to customers. "As we've approached fuel cells our working mantra is 'This will be successful if it is sold and used and perceived as an appliance,'" he notes. "If it's perceived as a generator, we will have missed the boat."

Overseas markets, particularly developing countries, may represent the biggest piece of the pie for fuel cell companies. Says Ross, "There is not a manufacturer of any type of [fuel cell] technology, whether it be power generation or otherwise, that is not looking at China, India and Asia. Africa, you can throw in there, but Africa has a lot of problems that need to be resolved."

In China, India and other parts of Asia and the Middle East, people are eager for the conveniences of the West - all of it dependent on power. "They're just astronomical markets and everybody is after them," according to Ross.

Energy companies investing in fuel cells say the risk involved is far outweighed by the potential payoffs.

"You know, [distributed generation] is not a bet-your-company proposition," says Downes of New Jersey Resources. "This is a sensible extension of our strategy that has worked very well over the last five or so years."

Setting the Rules: A Role for Regulators?

Fuel cells present the same sort of challenges with regard to grid access that most DG technologies face. They include the need to set rates that cover legitimate costs yet don't discourage DG, standardize safe interconnection to the grid, and resolve the complicated matter of net metering. In fact, state commissions in California, Texas and New York have held hearings in recent months for input on the matters. Until they are settled, say advocates of DG, the technology won't stand a chance of success.

"If we have fees that are structured in such a way that kills deals, then that's going to be a very real barrier, much more of a barrier than any other cost," says Sarah McKinley, executive director of the Distributed Power Coalition of America.

"Clearly there are some people in the distributed resources community who would accuse some utilities of trying to price distributed resources out of the market," says EEI's Linderman. "We certainly don't recommend that. We recognize that there's a technology evolution taking place here and that the way in which you price needs to be thought about.

"But likewise, there are costs that have been incurred by the industry to support various customers. Those costs legitimately incurred under state regulation need to be recovered," maintains Linderman.

McKinley agrees. "How we structure rates to be fair and yet not allow DG to be squashed in the market is very difficult [to] answer." She adds, "The $64,000 question is how do we do that. I don't have a pat answer; I'm not sure that anybody does."

The National Association of Regulatory Utility Commissioners and its committee on energy resources and the environment is examining these issues, according to committee chair Bob Anderson.

"If customers want to install fuel cells, they should be able to do that," says Anderson, a commissioner at Montana Public Service Commission. "But that puts a burden on regulators to create regulation that facilitates the process." One way NARUC may be able to help, he says, is by creating model rules.

"Part of the problem, maybe, is that this is fairly new technology, and to change rate structures and things to encourage [distributed resources] takes time," says EEI's Hall. "So in a lot of cases, the utilities [and] the PUCs really don't know where to go and how to structure these new rates yet."

Interconnection is an important issue. The ability of fuel cells and other DG to be connected to the grid is a big attraction, in no small part because of the potential for the DG owner to sell excess capacity back to the grid. Whether that sell-back, or "net metering," should be allowed is a matter of great controversy. Large-capacity fuel cells may even play a role in commercial electric markets, competing with grid power.

"[Fuel cell owners would] be in the position to make the economic decision of selling power onto the grid or not, or using it themselves or cutting back on their use," says Hafer. "All of that will have the benefit for the consumer of holding prices down for the commodity."

How large can a unit get and still qualify as "distributed"?

"We've seen some distributed resource advocates who say that a 50-MW [unit] is a distributed unit. Generally we believe that's nonsense," says Linderman. "I mean, a 50-MW unit is bigger than the load that some municipal utilities in this country have their own generators for."

Instead, Linderman says, "We tend to agree with the California Alliance for Distributed Energy Resources that different sizes constitute and stimulate different cost causations."

All of these issues will be resolved in time, according to EPRI's Rastler. "They might involve stranded cost issues, backup charges, the wires charge that's required to back the systems up - these are issues that will be evolving," he says. "As the rules and games start to come forward, they will be resolved in the next year or so."

Should the installation of DG be encouraged through state regulation?

Commissioner Anderson says many regulators think it should. "It's consistent with the trend toward customer choice."

In line with the provisions of the New Jersey electric deregulation law, that state's commissioners took a cautious approach to encouraging distributed generation.

According to Herb Tate, president of the New Jersey Board of Public Utilities, commissioners established three mechanisms as incentives for distributed generation: the bypass of stranded cost, net metering, and funding for renewable projects including certain DG installations. Net metering is capped at $2 million and stranded cost is eroded by a little more than 8 percent.

Adds Tate, "To balance this, we allowed utilities full 100 percent stranded cost recovery, plus stranded cost securitization of up to 75 percent of that stranded cost. We also had no mandatory divestiture [of generation assets], absent a market power issue."

But while most recognize that regulation will be needed to resolve at least some of these issues, EEI has urged regulators to neither discourage nor promote DG. In comments filed in December with the Illinois Commerce Commission in tandem with the ICC's work in establishing DG policy, EEI stated, "Since the objective of restructuring is enhanced efficiency and lower prices that naturally result from competitive markets, the Commission should not take any action that could alter the market's natural development."

Says Hall, "If [distributed power is] developed and it's used, that's good. If it's not, well then, that's OK."

Timing is Everything

As GRI's Liss notes, investor interest in fuel cell companies has been remarkable.

"When you can take 100- to 150-year-old companies like Sempra and Detroit Edison, and within a period of six months get a new activity like this - a greater market capitalization - really, it's phenomenal."

So is getting into the fuel cell business to generate investor interest a good strategy for energy companies?

"I think you saw why they should [consider it] in the last three or four weeks on Wall Street," says Linderman.

Liss agrees. "I think it's potentially a good reason, but it's clearly got to be associated with the high level of risk." While the market potential is great, he says, "I think anyone who believes the prospects of getting near-term commercial impact in this market taking off are probably being a little overoptimistic."

"Certainly it's got everyone's attention," notes GPU's Hafer. He says all energy companies are looking for ways to improve their appeal to investors, "because almost all of the utility companies are looking at stock prices which are today near, if not an all-time low, certainly their low for the last year or so."

But that's not a good enough reason to get into the business, he says. "You'd have to get involved because you're committed."

The decision should really be based on your customer base, notes Downes of New Jersey Resources. "It begins with your own customers and whether it makes sense from their perspective, because all of this - the acceptance of the product which is ultimately going to drive the valuations that you see right now - that's only going to be realized if your customers accept the product and use it."

Of course, early investors in the technology are hoping the risk pays off in market advantages.

"Investing early obviously brings about risk, but also greater upside," says Liss. "In some cases you find these companies making investments because with it comes the right for market distribution and other things."

Timing may be important for manufacturers too, as competing technologies such as microturbines advance.

According to Rose of the U.S. Fuel Cell Council, "There's no question that the fuel cell industry feels pressure to produce products that are commercially ready in all senses of the word - not just in operating, but do they have a manual, can somebody fix them, all those kinds of things."

For special applications, fuel cells may have no competitor, says Rose. In the broader market, however, competitors include both conventional generation and other DG, perhaps in hybrid form.

Still, he says, "I don't think a lot of the fuel cell companies are looking in their rearview mirror. They're looking more for partnerships and for opportunities."

Regina R. Johnson is managing editor of Public Utilities Fortnightly.

Fuel Cells: A Technology Primer
Fuel cells are by no means a new breakthrough; the principle behind the technology was discovered in 1839. But their use in generating electricity began in the 1960s, when NASA began using fuel cells in the space program. The operating technology has continued to evolve since then.

Components and Types. Fuel cells generate electricity through the chemical reaction between hydrogen (or a hydrogen-rich fuel such as natural gas, methanol, propane, diesel or even biomass) and air. Their design generally consists of a fuel electrode (the anode) and an oxidant electrode (cathode) separated by an ion-conducting electrolyte material. When fueled with pure hydrogen, the preferred feedstock, heat and water are the only byproducts. Any hydrogen-rich fuel will do, however. Even when fueled with fossil fuels, fuel cells provide highly efficient, quiet generation with ultra-low pollution emissions.

For distributed generation, four main categories of fuel cells are being developed, as distinguished by the choice of electrolyte:

* PAFC. Phosphoric acid fuel cells,
* MCFC. Molten carbonate fuel cells,
* SOFC. Solid oxide fuel cells, and
* PEM. Proton exchange membrane fuel cells.

Cost and Efficiency. The PAFC is the only technology that has been commercialized to date, in a power plant application. According to the U.S. Department of Defense, which supports a great deal of fuel cell research, the PAFC operates at a fairly low temperature of 375 degrees F, with 40 percent to 50 percent efficiency. As with all fuel cell technologies, efficiency increases dramatically when the waste heat is used.

The MCFC, says the DoD, is expected to be more efficient and perhaps less expensive than PAFC technology. It operates at about 1,200 degrees F, with efficiency of 50 percent to 60 percent. It has potential primarily for large power generation.

Experts say that as compared with MCFC, SOFC technologies appear to be less expensive, less complex, more efficient, and capable of producing higher-grade useful heat. Their operating temperature is very high, about 1,830 degrees F, with about 50 percent efficiency.

PEM development is receiving the greatest amount of funding, with applications in transportation and power generation. PEMs are relatively simple, compact and operate at low temperatures. Recent advances may make it the least expensive of the technologies. - R.R.J.

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