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4 Lessons For Fuel Cell Makers, Amidst the Bloom Boom

Bloom Energy’s gala unveiling last month has given the fuel cell industry more attention than it’s gotten since former President George W. Bush named it as the technology to replace the internal combustion engine for American cars . . . back in 2003. The way those plans fizzled in the intervening years, however, should give the industry pause as it contemplates Bloom’s latest recast of fuel cells as the next big thing — this time to replace dirty grid electricity with clean power at comparable costs.

That’s not to downplay the potential for Bloom and others on the cutting edge of fuel cell development to change things. But there’s a long road that’s already been littered with a variety of lessons from fuel cell pioneers including UTC Power, Ballard Power Systems (s BLPD):, Plug Power (s PLUG), FuelCell Energy (s FCE), and many, many others. Here are some of the key lessons to be learned from the experience of fuel cell makers, past, present and future.

1) Bringing down costs takes time — sometimes a lot of time. The science behind fuel cells — combining hydrogen and oxygen to create electricity and water — was first discovered in 1838, and General Electric (s GE) helped design the first working fuel cell for NASA in the 1950s. One of the first companies to mass-manufacture a stationary fuel cell was UTC Power, a subsidiary of United Technologies (s UTX), which now makes all of NASA’s fuel cells, as well as many of the stationary fuel cells out in the world today. UTC Power has a deal to supply 4.8 MW of fuel cells for the New York Power Authority, and recent deals include one with California’s St. Helena Hospital, the U.K. agency that manages the London Underground, Whole Foods and other supermarket clients.

“They definitely have a product out there,” said Sam Jaffe, fuel cell analyst with IDC Energy Insights, “but it’s expensive.” According to the Electric Power Research Institute, capital costs for stationary fuel cells have been stuck at the $4,000 per kilowatt and up range for phosphoric acid fuel cells such as those that UTC builds, as well as for molten carbonate fuel cells built by such companies as FuelCell Energy. The Solid State Energy Conversion Alliance, a Department of Energy and industry collaborative group, predicts fuel cells will need to cost $700 per kilowatt to compete with the grid without subsidies.

Bloom Energy, on the other hand, makes a solid oxide fuel cell, which offers great promise in reducing the cost of fuel cells. They don’t use expensive platinum, as do other forms of fuel cells, and their higher efficiency in converting fuel to electricity could provide for a faster payback on the investment required. Bloom claims that its technology breakthroughs will allow it to generate electricity for 8 to 10 cents per kilowatt-hour, after federal and California state incentives are taken into account. Still, Bloom’s current price of $700,000 to $800,000 per 100-kilowatt “Energy Server,” or $7,000 to $8,000 per kilowatt, are still 10 times higher than the no-subsidies, grid-parity prices put forth by the SSECA.

These are the kind of numbers that make industry watchers leery of getting too excited about Bloom representing a disruption to the energy industry equivalent to the impact that Google (s GOOG) had on Internet commerce. The track record of pure-play, publicly traded fuel cell companies offers some sobering data. FuelCell Energy, which has fuel cells in 55 installations around the world, reported a loss of $72.5 million on revenues of $80 million in 2009.

2) Reliability is critical, and takes a long time to prove. It’s a truism in the utility industry that generation equipment needs to work at 99.99-percent reliability, and last for a long time — 10 years is a good figure to aim for.

But as EPRI’s Dan Rastler pointed out in a recent research paper, solid oxide fuel cells have “very little proven track record on performance, durability and life.” Because of the high temperatures they operate at, the fuel cell stacks have to be replaced about every five years or so, and those replacement costs are generally added into the capital cost of the project or covered in service agreements. FuelCell Energy’s molten carbonate fuel cells, which also operate at high temperatures, saw some early reliability issues along these lines as well, Jaffe said.

K.R. Sridhar, Bloom’s founder and CEO, said the company has come up with “hot swappable” technology that allows fuel cell stacks to be replaced while the fuel cell remains running. Competitors remain skeptical. UTC told the New York Times that it has worked for 30 years on solid oxide cells, but that “Nobody has been able to resolve the reliability problem.” As EPRI points out, the list of companies working on solid-oxide fuel cells is long — among them Delphi, Mitsubishi, Kyocera, General Electric and Honda — yet the list of commercially available products is short.

3). Find the markets that can pay today. Ballard Power Systems is one of the first companies to commercialize proton exchange membrane (PEM) fuel cells, the technology most often cited in relation to fuel cells for vehicles. But after decades of working in that field, Ballard sold off its automotive line of business in 2007 to Daimler and Ford Motor Co., and is now concentrating on buses and other larger vehicles.

That move highlights the disappointment in vaunted calls for 100,000 hydrogen cars to hit the road by 2010, as set forth in the 2005 Energy Policy Act. In May 2009, Energy Secretary Steven Chu announced that DOE would no longer fund research into fuel cells for cars, saying that a hydrogen car economy wasn’t likely in the next 20 years.

But while the “hydrogen highway” may be back on the shelf gathering dust, the hydrogen warehouse is not. Along its long road, Ballard calved several spinoffs, including General Hydrogen, which was formed to seek out opportunities in using fuel cells for forklifts. That company, in turn, was purchased for $10 million in 2007 by New York-based Plug Power Inc., which had also bought fuel cell competitor Cellex Power Products for $45 million a few months earlier.

Those moves by Plug Power were themselves part of the company’s refocusing from less successful markets. Formed in 1997 as a spinoff of DTE Energy, the parent company of Michigan utility Detroit Edison, Plug Power went public in 1999 with a promise similar to that Bloom is offering — natural gas-fueled fuel cells for the small business and residential market — along with a partnership with General Electric. But its hydrogen-fed stationary fuel cells have lagged behind expectations, despite customers that include Whole Foods and Coca-Cola Bottling Co., and the company has moved out of that market, said Katrina Fritz Intwala, Plug Power’s vice president of external and government relations.

“We did not see the market traction in backup power to sustain the business,” she said. Powering forklifts, on the other hand, has been a growth market for Plug Power. Unlike cars and trucks, forklifts work in a limited area and are refueled at central stations. Fuel cells are replacing forklift diesel engines, with emissions that are unpleasant in closed spaces, or lead-acid batteries, which require long-term charging and extra batteries on hand. That makes hydrogen refueling a cost-effective option, unlike the extremely challenging task of replacing the nation’s gas stations with hydrogen stations.

As for Plug Power’s stationary fuel cells, it has refocused on small units to back up remote cellular base stations powered by diesel engines — a market that’s also being pursued by several fuel cell startups. Where might larger-scale stationary fuel cells find their niche markets? FuelCell Energy has identified a sweet spot in cogeneration systems within natural gas pressure reducing stations, as well as biogas-generating wastewater treatment plants and food processors. Bloom Energy’s early client list, which includes Google and eBay, has led to speculation that they’re targeting the data center market.

4) Build with openness to the future, both in technology and in business models. One of the persistent rumors surrounding Bloom (see Greentech Media and Bloomberg) is that it is considering a power purchase agreement model to get its units into the field. Much like PPAs for solar and wind power, Bloom could hold onto its own fuel cells and sign long-term contracts to sell the power to customers that deploy them on site. Moving to a PPA model could avoid some of the problems of convincing customers to buy a product that doesn’t have a long track record of proven reliability in the field. That could work both for commercial and industrial customers like those Bloom has already announced, as well as for partnerships with utilities.

Utility customers are definitely on Bloom’s radar. As Doerr told CBS’s 60 Minutes, “The utility companies will see this as a solution” — though he went on to say that he saw utilities buying Bloom’s fuel cells, rather than signing contracts for the power they produce. But with established competitors like GE and Mitsubishi developing their own fuel cells with their much deeper pockets, Bloom might have to come up with a PPA-type model to compete for utility buyers.

While Bloom hasn’t discussed the potential for a PPA business model, it has laid out a promise for future technology to solve one of the electricity industry’s biggest problems — energy storage. Sridhar made a point during the Feb. 25 press event to mention that Bloom’s fuel cell could be adapted to run its process in reverse — use electricity to convert water to oxygen and hydrogen, and then store that hydrogen for later use as a fuel. Just when and how Bloom intended to make this function available, however, he wasn’t willing to say — sensible, since that process would require very cheap electricity to make economical.

9 Responses to “4 Lessons For Fuel Cell Makers, Amidst the Bloom Boom”

  1. At the end of the day these speculator seem to write these artical with the assumsion that fossil fuel prices are not going to go up. Just wait and see in the next ten years the boom crunch scenario as demand increases prices increase credit becomes scarce and crash. We cannot produce much more oil than we are now. Oil is going to peak soon. For the sceptics just look at the facts. We may as well start taking on some of the burden of higher enery cost now so we dont suffer greater ramification in the future. The sooner we stop looking at a quick profit rather than do what we all know is right the better. These artical dont help

  2. Please comment-
    Are there readers here that recommend Ballard??????????
    Do you believe the company will be successful and why[or why not]???

    I bought 3000 shares over a year ago but as many know Ballard has been either stagnant or consolidating[which is it?].
    Should I sell my shares or stick with Ballard?