"There's a lot of hype surrounding them, mostly around cars, PDAs and notebooks," says Samir Bhavnani, a senior analyst at consulting firm Current Analysis Inc. in Reston, Va. "But the reality of it is if you look at what these guys do when they come up with a design, it will be a couple of years before you see this widely available. This stuff takes time."
Nonetheless, the interest in fuel cells is high and progress is being made. "Everyone is racing toward this market," says Rodrigo Prudencio, a principal at energy cleantech venture firm Nth Power in San Francisco. Much of the focus among VCs, entrepreneurs and energy and nonenergy corporations alike is on fuel cells, or various devices that employ electrochemical reactions to create power exceeding the life span of conventional batteries.
| Commercializing fuel cell technology for automobiles faces key challenges: |
| Cost A fuel cell system needs to cost $30 per kilowatt for the technology to compete with conventional internal combustion engines, which average about $25 to $35 per kW. |
| Reliability Fuel cells must achieve the same level of durability and reliability as car engines, which translates into a usage lifespan of 5,000 hours, or the equivalent of 150,000 miles, as well as the ability to function in extreme conditions. |
| Size To meet a car's packaging requirements, fuel cells and their components and major subsystems, such as fuel processors and sensors, must become smaller and lighter. |
| Heat The low operating temperature of the Polymer Electrolyte Membrane, or PEM, cells commonly used in vehicle engines limits their potential for other uses, such as industrial power generation. |
| Source: U.S. Department of Energy |
Some fuel cell technologies, such as those for stationary power, are now available for some uses. Backup power and microdevices are close behind, with transportation applications much further down the road. Here's the state of play:
The most promising company among the large-scale stationary and baseload power players may be FuelCell Energy Inc. of Danbury, Conn. It has developed carbonate fuel cells and electrochemical engines that generate electricity without combustion. Nasdaq-listed FuelCell Energy's Direct FuelCell doesn't need an external hydrogen supply and can be fed fuel directly without an external reactor. The equipment can be fired up with biogas, coal gas, coal mine methane, diesel, methanol, natural gas or propane.
FuelCell operates more than 20 power plants for customers in the U.S., Europe and Japan, including the Los Angeles Department of Water and Power, the El Estero Wastewater Treatment Facility in Santa Barbara, Calif., and Seiko Epson Corp. and Kirin Brewery Co. Ltd. manufacturing plants in Asia.
In addition, FuelCell and Alliance Power Inc. of Denver recently signed a deal with Starwood Hotels & Resorts Worldwide Inc. to provide the 1,044-room Sheraton San Diego Hotel & Marina with one megawatt of fuel cell-generated baseload power (about a quarter of its needs) beginning in the fourth quarter — becoming the fourth hotel using the technology. FuelCell will also soon provide a 250-kilowatt fuel cell power plant for the Pepperidge Farm Inc. bakery in Bloomfield, Conn.
Still, FuelCell Energy is losing money, though less and less each year. "They had a record year of orders last year, and we're anticipating another record year of order flow this year," says Jaret Carson, an analyst at RBC Capital Markets in Austin. "While they're not making money, their gross margin is becoming less negative. They have clearly distanced themselves from the pack as the world leader in large-scale stationary fuel cells."
Part of the problem with fuel cells in general is that they often aren't cost-competitive. In the case of FuelCell, the company's Direct FuelCell costs 15 to 20 cents per kilowatt-hour to operate, whereas the national average price for electricity is more like 9 cents. So even though fuel cells produce their electricity with much lower pollution, customers don't really want to pay higher prices unless governments provide tax incentives. (California, however, has higher energy prices overall, so FuelCell Energy can offer Starwood competitive rates.)
FuelCell is partnering with titans such as Caterpillar Inc., ChevronTexaco Corp. and Marubeni Corp. to develop their products. But it has major competition, including Dow Chemical Co. and General Motors Corp., which are working together to power a plant using fuel cells; United Technologies Corp., which is providing a fuel cell to the National Aeronautics and Space Administration; and General Electric Co., which acquired fuel cell technology from Honeywell International Inc. in 2001.
Then there's Nasdaq-listed Plug Power Inc., which has targeted the telecommunications industry, though with less success than FuelCell Energy in the power arena. Money-losing Plug Power posted some good news this year, however, when it signed a distribution agreement with Tyco International Ltd., which will market Plug Power's fuel cell system to the wireless telecommunications market. "The agreement is a powerful endorsement of Tyco's belief that fuel cells can play a major role in communications backup systems today," Citigroup Global Markets Inc. analyst David Smith wrote in a recent report. "We continue to believe Plug Power is making the right steps to commercial markets and first-mover advantage."
There has also been progress on backup power fuel cell applications. One of the most promising is from IdaTech LLC of St. Bend, Ore., a subsidiary of publicly held IdaCorp Inc. that has developed multifuel processors and fuel cell systems for stable and portable electric generation. This spring it unveiled two of its new commercially available products at trade shows in Germany: a 20-pound methanol-water-fueled power fuel cell system that can provide 250-watt alternating current and direct current and a hydrogen-fueled backup power system for telecom systems it developed with Rittal Corp. of Springfield, Ohio.
ReliOn Inc. of Spokane, Wash., is chasing other backup power arenas. The venture-backed company, financed by several venture firms including Chrysalix Energy LP, which boasts limited partners including Boeing Co., Mitsubishi Corp. and the hydrogen power unit of Royal Dutch/Shell Group, has developed modular, cartridge-based, proton exchange membrane fuel cell technology for emergency and backup power requirements, uninterruptible power supplies and digital power needs from 500 watts to 5 kilowatts.
ReliOn claims to have more than 200 fuel cells installed in more than 80 locations in the U.S. and abroad and counts among its customers major telecom providers, UPS providers, government communication sites, utilities and railroad suppliers. "ReliOn seems to be getting some early order flow," RBC's Carson says.
In November, ReliOn received $25 million in second-round venture capital financing in an up round from mainstream firm Oak Investment Partners LP along with existing investors Enterprise Partners Venture Capital, Chrysalix Energy, Wall Street Technology Partners LP, Buerk Dale Victor LLC and Avista Corp. It eventually plans an initial public offering, though that could be a couple of years down the road.
Laptops and cell phones are the next frontier, since many of the batteries don't have the shelf life most users demand. South Korea's Samsung Group and Toshiba Corp. of Japan have developed fuel cell prototypes for laptops, but they aren't expected to hit the market before next year.
Not to be outdone, Dow Chemical hooked up with Nasdaq-listed Millennium Cell Inc. of Eatontown, N.J., to develop over the next three years small fuel cells to be used in powering portable electronics for consumers and the military. Dow will receive 3% of Millennium's equity in the form of preferred shares, but under the accord it may pay $5 million in exchange for 20% of the company.
Elsewhere, IBM Corp. and Sanyo Electric Co. Ltd. in April announced they have developed a hybrid battery that uses both a fuel cell and a lithium-ion battery that can power a ThinkPad for eight hours. "There are a number of vendors developing fuel cell battery prototypes for PCs and mobile devices, but the combination of IBM's first-class ThinkPad notebooks and Sanyo's leadership position in the technology will accelerate research and development in the field," boasts Peter Hortensius, VP of IBM's PC division, which has been acquired by China's Lenovo Group Ltd.
Competing against the big players are smaller companies such as PolyFuel Inc. of Mountain View, Calif., which was spun out of SRI International in 1999. It has developed a hydrocarbon-based membrane technology — versus the former fluorocarbon-based technology — for fuel cells that can deliver clean, long-running and cost-effective portable power for laptops, cell phones and PDAs.
In October, PolyFuel announced it had developed a hydrogen-based polymer membrane that could make hydrogen fuel cell-powered automobiles a commercial reality much sooner (versus currently used perfluorinated membranes, which are more expensive, have to operate at such low temperatures that standard radiators cannot be used and have inadequate lifetimes). In July, PolyFuel closed on $18 million in venture capital funding led by CDP Capital and including Vancouver-based Ventures West Management Inc., Chrysalix Energy, Intel Capital, Mayfield and Technology Partners.
"We believe PolyFuel has the potential to be a dominant player in this multibillion-dollar industry," David Berkowitz, a senior VP of Ventures West, a prominent investor in the fuel cell sector, said at the time.
Analysts agree. "They have a number of agreements with the Japanese players and are probably the one to watch on the private side," Carson says.
But Bhavnani notes that fuel cells for mobile computing and telecommunications still have plenty of kinks to be worked out. The biggest: fuel cells don't need to be recharged, but they do have to be refueled.
Worse, the fuel for some of the leading fuel cell technologies, methanol, is banned on airplanes. "So if you thought you could use your notebook on a transatlantic flight from Los Angeles to London, you won't be allowed to," Bhavnani says. "That's a big concern, and security is getting tighter, not looser. Don't wait to buy a laptop for fuel cells. It's not six months down the road but rather 24 or 36 months."
Auto fuel cells are even further off. Canada's Ballard Power Systems Inc. is considered the leader in the field, developing a fuel stack and electric drive for fuel cell-powered vehicles for Ford Motor Co. and DaimlerChrysler AG.
The automakers are also pursuing hydrogen fuel technologies. In March, General Motors Corp. signed an $88 million deal with the U.S. Department of Energy to build a fleet of 40 hydrogen fuel cell vehicles and further develop the technology. Shell Hydrogen said it would support GM by setting up five hydrogen fueling stations in Washington, D.C., New York, California and Michigan, where they will operate. Last month, too, Ford announced it delivered its first fuel cell vehicles in Canada, where the government has invested $4.5 million in the Vancouver Fuel Cell Vehicle Program project, with Ballard providing the fuel cell engine.
All these investments look promising, but Carson tempers excitement with caution. "The reality is costs are still an issue," he says. "Lifetime and durability are still an issue. On-board hydrogen storage is another issue."
Still, even Carson is optimistic. "There are long-term fundamental drivers that ensure the technology is going to play an ever-increasing role. Interest will only increase."
"There's a lot of hype surrounding them, mostly around cars, PDAs and notebooks," says Samir Bhavnani, a senior analyst at consulting firm Current Analysis Inc. in Reston, Va. "But the reality of it is if you look at what these guys do when they come up with a design, it will be a couple of years before you see this widely available. This stuff takes time."
Nonetheless, the interest in fuel cells is high and progress is being made. "Everyone is racing toward this market," says Rodrigo Prudencio, a principal at energy cleantech venture firm Nth Power in San Francisco. Much of the focus among VCs, entrepreneurs and energy and nonenergy corporations alike is on fuel cells, or various devices that employ electrochemical reactions to create power exceeding the life span of conventional batteries.
| Commercializing fuel cell technology for automobiles faces key challenges: |
| Cost A fuel cell system needs to cost $30 per kilowatt for the technology to compete with conventional internal combustion engines, which average about $25 to $35 per kW. |
| Reliability Fuel cells must achieve the same level of durability and reliability as car engines, which translates into a usage lifespan of 5,000 hours, or the equivalent of 150,000 miles, as well as the ability to function in extreme conditions. |
| Size To meet a car's packaging requirements, fuel cells and their components and major subsystems, such as fuel processors and sensors, must become smaller and lighter. |
| Heat The low operating temperature of the Polymer Electrolyte Membrane, or PEM, cells commonly used in vehicle engines limits their potential for other uses, such as industrial power generation. |
| Source: U.S. Department of Energy |
Some fuel cell technologies, such as those for stationary power, are now available for some uses. Backup power and microdevices are close behind, with transportation applications much further down the road. Here's the state of play:
The most promising company among the large-scale stationary and baseload power players may be FuelCell Energy Inc. of Danbury, Conn. It has developed carbonate fuel cells and electrochemical engines that generate electricity without combustion. Nasdaq-listed FuelCell Energy's Direct FuelCell doesn't need an external hydrogen supply and can be fed fuel directly without an external reactor. The equipment can be fired up with biogas, coal gas, coal mine methane, diesel, methanol, natural gas or propane.
FuelCell operates more than 20 power plants for customers in the U.S., Europe and Japan, including the Los Angeles Department of Water and Power, the El Estero Wastewater Treatment Facility in Santa Barbara, Calif., and Seiko Epson Corp. and Kirin Brewery Co. Ltd. manufacturing plants in Asia.
In addition, FuelCell and Alliance Power Inc. of Denver recently signed a deal with Starwood Hotels & Resorts Worldwide Inc. to provide the 1,044-room Sheraton San Diego Hotel & Marina with one megawatt of fuel cell-generated baseload power (about a quarter of its needs) beginning in the fourth quarter — becoming the fourth hotel using the technology. FuelCell will also soon provide a 250-kilowatt fuel cell power plant for the Pepperidge Farm Inc. bakery in Bloomfield, Conn.
Still, FuelCell Energy is losing money, though less and less each year. "They had a record year of orders last year, and we're anticipating another record year of order flow this year," says Jaret Carson, an analyst at RBC Capital Markets in Austin. "While they're not making money, their gross margin is becoming less negative. They have clearly distanced themselves from the pack as the world leader in large-scale stationary fuel cells."
Part of the problem with fuel cells in general is that they often aren't cost-competitive. In the case of FuelCell, the company's Direct FuelCell costs 15 to 20 cents per kilowatt-hour to operate, whereas the national average price for electricity is more like 9 cents. So even though fuel cells produce their electricity with much lower pollution, customers don't really want to pay higher prices unless governments provide tax incentives. (California, however, has higher energy prices overall, so FuelCell Energy can offer Starwood competitive rates.)
FuelCell is partnering with titans such as Caterpillar Inc., ChevronTexaco Corp. and Marubeni Corp. to develop their products. But it has major competition, including Dow Chemical Co. and General Motors Corp., which are working together to power a plant using fuel cells; United Technologies Corp., which is providing a fuel cell to the National Aeronautics and Space Administration; and General Electric Co., which acquired fuel cell technology from Honeywell International Inc. in 2001.
Then there's Nasdaq-listed Plug Power Inc., which has targeted the telecommunications industry, though with less success than FuelCell Energy in the power arena. Money-losing Plug Power posted some good news this year, however, when it signed a distribution agreement with Tyco International Ltd., which will market Plug Power's fuel cell system to the wireless telecommunications market. "The agreement is a powerful endorsement of Tyco's belief that fuel cells can play a major role in communications backup systems today," Citigroup Global Markets Inc. analyst David Smith wrote in a recent report. "We continue to believe Plug Power is making the right steps to commercial markets and first-mover advantage."
There has also been progress on backup power fuel cell applications. One of the most promising is from IdaTech LLC of St. Bend, Ore., a subsidiary of publicly held IdaCorp Inc. that has developed multifuel processors and fuel cell systems for stable and portable electric generation. This spring it unveiled two of its new commercially available products at trade shows in Germany: a 20-pound methanol-water-fueled power fuel cell system that can provide 250-watt alternating current and direct current and a hydrogen-fueled backup power system for telecom systems it developed with Rittal Corp. of Springfield, Ohio.
ReliOn Inc. of Spokane, Wash., is chasing other backup power arenas. The venture-backed company, financed by several venture firms including Chrysalix Energy LP, which boasts limited partners including Boeing Co., Mitsubishi Corp. and the hydrogen power unit of Royal Dutch/Shell Group, has developed modular, cartridge-based, proton exchange membrane fuel cell technology for emergency and backup power requirements, uninterruptible power supplies and digital power needs from 500 watts to 5 kilowatts.
ReliOn claims to have more than 200 fuel cells installed in more than 80 locations in the U.S. and abroad and counts among its customers major telecom providers, UPS providers, government communication sites, utilities and railroad suppliers. "ReliOn seems to be getting some early order flow," RBC's Carson says.
In November, ReliOn received $25 million in second-round venture capital financing in an up round from mainstream firm Oak Investment Partners LP along with existing investors Enterprise Partners Venture Capital, Chrysalix Energy, Wall Street Technology Partners LP, Buerk Dale Victor LLC and Avista Corp. It eventually plans an initial public offering, though that could be a couple of years down the road.
Laptops and cell phones are the next frontier, since many of the batteries don't have the shelf life most users demand. South Korea's Samsung Group and Toshiba Corp. of Japan have developed fuel cell prototypes for laptops, but they aren't expected to hit the market before next year.
Not to be outdone, Dow Chemical hooked up with Nasdaq-listed Millennium Cell Inc. of Eatontown, N.J., to develop over the next three years small fuel cells to be used in powering portable electronics for consumers and the military. Dow will receive 3% of Millennium's equity in the form of preferred shares, but under the accord it may pay $5 million in exchange for 20% of the company.
Elsewhere, IBM Corp. and Sanyo Electric Co. Ltd. in April announced they have developed a hybrid battery that uses both a fuel cell and a lithium-ion battery that can power a ThinkPad for eight hours. "There are a number of vendors developing fuel cell battery prototypes for PCs and mobile devices, but the combination of IBM's first-class ThinkPad notebooks and Sanyo's leadership position in the technology will accelerate research and development in the field," boasts Peter Hortensius, VP of IBM's PC division, which has been acquired by China's Lenovo Group Ltd.
Competing against the big players are smaller companies such as PolyFuel Inc. of Mountain View, Calif., which was spun out of SRI International in 1999. It has developed a hydrocarbon-based membrane technology — versus the former fluorocarbon-based technology — for fuel cells that can deliver clean, long-running and cost-effective portable power for laptops, cell phones and PDAs.
In October, PolyFuel announced it had developed a hydrogen-based polymer membrane that could make hydrogen fuel cell-powered automobiles a commercial reality much sooner (versus currently used perfluorinated membranes, which are more expensive, have to operate at such low temperatures that standard radiators cannot be used and have inadequate lifetimes). In July, PolyFuel closed on $18 million in venture capital funding led by CDP Capital and including Vancouver-based Ventures West Management Inc., Chrysalix Energy, Intel Capital, Mayfield and Technology Partners.
"We believe PolyFuel has the potential to be a dominant player in this multibillion-dollar industry," David Berkowitz, a senior VP of Ventures West, a prominent investor in the fuel cell sector, said at the time.
Analysts agree. "They have a number of agreements with the Japanese players and are probably the one to watch on the private side," Carson says.
But Bhavnani notes that fuel cells for mobile computing and telecommunications still have plenty of kinks to be worked out. The biggest: fuel cells don't need to be recharged, but they do have to be refueled.
Worse, the fuel for some of the leading fuel cell technologies, methanol, is banned on airplanes. "So if you thought you could use your notebook on a transatlantic flight from Los Angeles to London, you won't be allowed to," Bhavnani says. "That's a big concern, and security is getting tighter, not looser. Don't wait to buy a laptop for fuel cells. It's not six months down the road but rather 24 or 36 months."
Auto fuel cells are even further off. Canada's Ballard Power Systems Inc. is considered the leader in the field, developing a fuel stack and electric drive for fuel cell-powered vehicles for Ford Motor Co. and DaimlerChrysler AG.
The automakers are also pursuing hydrogen fuel technologies. In March, General Motors Corp. signed an $88 million deal with the U.S. Department of Energy to build a fleet of 40 hydrogen fuel cell vehicles and further develop the technology. Shell Hydrogen said it would support GM by setting up five hydrogen fueling stations in Washington, D.C., New York, California and Michigan, where they will operate. Last month, too, Ford announced it delivered its first fuel cell vehicles in Canada, where the government has invested $4.5 million in the Vancouver Fuel Cell Vehicle Program project, with Ballard providing the fuel cell engine.
All these investments look promising, but Carson tempers excitement with caution. "The reality is costs are still an issue," he says. "Lifetime and durability are still an issue. On-board hydrogen storage is another issue."
Still, even Carson is optimistic. "There are long-term fundamental drivers that ensure the technology is going to play an ever-increasing role. Interest will only increase."