The Little Secret That Fuel Cell Companies Don't Want You to Know

For decades, there has been a exhaustive search for the best technologies to wean us off our dependence on hydrocarbon fuels such as oil and gas. Those sources may be abundant and cheap today, but they still remain a finite source. One technology that has been touted as an energy alternative are fuel cells, and fuel cell companies like Ballard Power Systems (NASDAQ: BLDP  ) and Fuel Cell Energy (NASDAQ: FCEL  ) have been touting their benefits over the old guard of natural gas and coal generators.

Here's the problem, fuel cells are not the hydrocarbon option as you might think. Let's take a look at what why calling fuel cells an alternative energy solution is a little misleading.

A Fuel Cell power generation facility. Source: Fuel Cell Energy.

The promise and the prospects
Fuel cells work like batteries in the sense that they use chemical reactions to produce electricity. The difference between a battery and a fuel cell, though, is that a fuel cell can be charged with hydrogen gas instantly. Hydrogen reacts with oxygen in the fuel cell to produce water and electricity.

On the surface, fuel cells sound like a slam dunk as an alternative to both batteries and combustion engines: There is no combustion so there are much less carbon emissions than other generation methods, produces water as a byproduct, has a much faster recharge time than batteries, and theoretically a hydrogen-powered fuel cell can store eight times the energy than a lithium ion battery of the same size. 

With selling points like that, you can see why companies like Ballard and Fuel Cell Energy have spent decades trying to develop this technology into a commercially viable product, and it is also why they are slowly -- very slowly -- starting to see commercial results that look more like a business than a research facility. Both companies as well as Power Plug (NASDAQ: PLUG  ) -- a company that specializes in manufacturing drop-in fuel cell systems to replace lead-acid batteries -- have all seen sales grow at a compounded annual rate greater than 16% in the past five years, and all three expect to reach EBITDA breakeven for the first time ever in 2014. 

A fuel cell's true fuel: Natural gas
Hydrogen is one of the most abundant elements on the earth, and it's a prominent gas in the upper levels of our atmosphere. However, the only way that we have been able to get enough hydrogen gas for commercial purposes is through a process known as steam reformation. This process combines methane gas and steam at a certain pressure and temperature range to create pure hydrogen gas and carbon dioxide. So even though a fuel cell system like Plug Power's may only use hydrogen as a fuel, it still requires the consumption of natural gas to make it possible.

Why this matters is that it makes it very difficult for fuel cells to differentiate themselves from other power generating options that also consume natural gas. Fuel cells may have a slightly higher electricity generation efficiency and buyers can still get a hefty tax credit, but feedstock costs for fuel cells that directly consume natural gas -- like those manufactured by Fuel Cell Energy and some of Ballard Power Systems products -- will be on par with that of high-efficiency natural gas turbines, and the rest that use hydrogen gas directly could actually see higher feedstock costs because of the weak hydrogen production capacity in the U.S. 

In order for fuel cells to truly be competitive, then companies will need bring down costs quickly. In December 2016, the tax credit that fuel cells currently enjoy is expected to retire, and unless it is extended, fuel cells will face some stiff competition in the remote and emergency backup power markets. Currently, Fuel Cell Energy's product costs about $2,250 per kilowatt of installed capacity. This is a huge improvement over the past 10 years, when product costs for the same product were closer to $10,000 per kilowatt installed. Still, Fuel Cell Energy will need to reduce its costs by at least another 20% before it can be cost comparable to one of its most direct competitors, Capstone Turbine (NASDAQ: CPST  ) . 

What a Fool believes
Fuel cells are not an alternative energy solution -- it still uses the same natural gas that many other power-generating options use today. Unless there are some significant changes to carbon emissions regulations or a continuation of fuel cell tax credits, it will be very difficult for fuel cells to compete on the open market in any power generation market. Some niche markets will exist such as Plug Power's battery replacements for material handling equipment such as forklifts and potentially in electric hybrid delivery trucks, but fuel cells will struggle to gain market share as long as the costs are still high.  

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Read/Post Comments (24) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 20, 2014, at 1:31 PM, tonyaa wrote:

    so why don't rate capstone a BUY ?

    have u listened to the last CC ?

    have u seen the last 4 press releases?

    cpst is about to become ebita profitable this qtr and net profitable by yr end

    margins r improving bigtime(over 20% last qtr) and expected to reach over 30% later this yr

    they r cashflow positive with over $30mil in cash right now

    its time u did your "HOMEWORK" like cramer always says and take a FRESH LOOK AT CPST

  • Report this Comment On March 20, 2014, at 1:33 PM, caliwoah wrote:

    Fair points across the board regarding fuel cell tech. BUT! what publicly acclaimed, tested and working fuel sources are all of these pesimists refering too? Why would honda, hyundai, toyota all resort to fuel cell technology instead of all these secret more effiecient sources? Why is tesla holding on for dear life when it comes to range issues... what a joke it would be if decided to incoroprate fuel cell tech into thier religiously acclaimed battery only vehichles?? My point is, just becuase the company has dumped thier money into research and development does notnmean they are worthless. Fuel cell tech may not be the primary source of energy for our future but it will definatly be a major player... if it isnt already! What will the pesimists rely on? Batteries?? Petrolium?? I think its time investors stop listening to the butt hurt speculators and start looking outside the box. Hydrogen fuel is enevitable, its up to you where youd like to board the train.

  • Report this Comment On March 20, 2014, at 1:39 PM, otto156 wrote:

    o.k that`s all is not new , everybody knows that , but if this is a big problem why are companies like posco and nrg working together with fcel ??

  • Report this Comment On March 20, 2014, at 2:44 PM, fountiand wrote:

    While today's hydrogen is made from natural gas as it is currently the cheapest way manufacture it, the natural gas boom will end soon enough and another means to generate cheap reliable mobile power will be needed. Hydrogen can be manufactured in many other ways from an array of renewable sources. This is our future and the ground breaking work of companies like BLDP and PLUG to create viable alternative ways of generating electrical power WILL BE the future. The economics of hydrogen are being turned around by these innovative companies who will be profitable in 2014. I'm glad to be long on these companies and our country's future free from foreign and domestic hydrocarbons.

  • Report this Comment On March 20, 2014, at 3:13 PM, otto156 wrote:

    and always I read comments like those here and the daily Cramers "knowledge" 12 times per day in my brain comes a question . an the question is (you can read it there ,( http://investors.morningstar.com/ownership/shareholders-majo...

    why posco hold 30million stocks and blackstone 10million ? , because it`s a nonsense company or they are stupids ? why have nrg and posco joint ventures with fcel ?

    And a different between fcel systems and other gas burning systems is that the fcel system doesn`t burn the gas , so that`s why there is no flame what means there is no co2 output.

    there are many advantages in that technologie , except the acquisition costs .

  • Report this Comment On March 20, 2014, at 4:55 PM, Lemmi wrote:

    Mr Tyler Crowe, your article is misleading and at least uncomplete. The true story is the making of a hydrogen energy cycle.

    Hydrogen made by fuel cells (f.e. HYGS) powered by wind or sun electricity.

    The hydrogen can be stored and distributed by existing infrastructure (see Natural gas pipelines)

    Companies like PLUG, FCEL, BLDP, HYGS can power all kind of mobile and immobile installations by fuel cells using that hydrogen, converting It again info electricity.

    In that way, i understand your comparison of a battery and fuel cells

    Fuel cells can use indeed natural gas, but also bios-gas, and in the very near future (even today, see HYGS and E-ON Germany, very large plant operational) 'green' hydrogen

  • Report this Comment On March 20, 2014, at 7:27 PM, VesTex wrote:

    What about the new swiss-roll design from MVTG that doesn't require hydrogen? It'll be cheaper and lighter and won't have an internal membrane or require platinum.

  • Report this Comment On March 20, 2014, at 7:52 PM, otto156 wrote:

    and I read nearly the same "report" last year .

  • Report this Comment On March 20, 2014, at 8:31 PM, Bonzoe wrote:

    Ok, methane is abundant, naturally replenishing byproduct of many things. I.e. Landfills! We don't even need to drill for it or harm the environment. What is the downside? Really ?

  • Report this Comment On March 20, 2014, at 11:19 PM, Triller wrote:

    The primary issue here with regard to Fuel Cells, is that they reduce harmful hydrocarbon exhaust and cuts down on the poisonous gases we are ingesting via Jets, trains, power station, cars, trucks, just about everything. So anything that does help to reduce those pathogens from polluting our lungs, water, air and just about everything in our fragile atmosphere is going to be a necessary evil. If Fuel Cells promise to put a dent in the pollution we all enjoy day after day, month after month etc..is worth the extra money it takes to make them reality. Mass production will reduce the cost of running these things by between 70 - 80%. Greenland has geothermal energy, more than they will ever need. They can make hydrogen and QTWW can provide the canisters to transfer that fuel to the energy plants. How much would you pay for your children to breathe clean air, drink clean water, enjoy the ocean and wildlife within and around it? The scientists here can expound on this.

  • Report this Comment On March 21, 2014, at 1:17 AM, Pagapa wrote:

    You fail to mention two methods of producing hydrogen that have reached the commercialization stage:

    1. The use of electrolysis to split water into hydrogen and oxygen. The process requires electricity but HYGS is currently performing on contracts where the electricity used for electrolysis is "clean" (solar or wind) so the resulting hydrogen is considered 100% renewable.

    2. Hydrogen produced using from biogas (waste water treatment facilities or landfills) using a molten carbonate fuel cell. (See: http://www.apep.uci.edu/3/research/partnership_TRI-GEN.aspx) Air Products and FCEL have such a system in place at the Orange County Waste Water Treatment Center.

    Also, it's worth mentioning that California -- the only state that is actively working on deploying the infrastructure to supply hydrogen for fuel cell cars has passed a law requiring at least 33% of the hydrogen sold in the state to be 100% renewable, which means that is (1) produced from a renewable feedstock and (2) a carbon-neutral source of electricity is used for production.

    Some day, it will be feasible for every state to that 100% of the hydrogen sold for vehicles must meet that definition. Unfortunately, we're not at that point yet either technologically or politically. Until we are, I'd rather pass on a world to my kids where we've moved from using 100% dirty, non-renewable fuel to 33% clean, renewable fuel and have a plan in place for getting to 50%, then 75%, then 100%.

  • Report this Comment On March 21, 2014, at 10:51 AM, Teacherman1 wrote:

    Glad I own CPST in the $0.80 range, but I also own FCEL and BLDP at less than $1.00 each.

    It's called "getting ahead of the curve".

    Will keep an eye out for any other new and potentially valuable "green" companies.

    CDTI, OPTT, etc.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On March 21, 2014, at 5:32 PM, Dandro wrote:

    HyperSolar may break (or, at least diminish) that natural gas requirement.

    While it may be too early to invest in HYSR, it is worth taking a look at what they are trying to do. If they are successful, hydrogen will become a lot cheaper and easier to obtain.

  • Report this Comment On March 21, 2014, at 7:05 PM, cmalek wrote:

    The dirty little secret of hydrogen is that it takes more energy to produce one gallon of hydrogen than we can get out of that gallon by burning it.

    "This process (steam reformation) combines methane gas and steam at a certain pressure and temperature range to create pure hydrogen gas and carbon dioxide."

    What happens to the carbon dioxide that is created during steam reformation? Isn't carbon dioxide a greenhouse gas whose generation we are supposed to be curtailing drastically?

  • Report this Comment On March 21, 2014, at 7:07 PM, HvyOnEzFool wrote:

    C’mon man, you can do better than that?

    It’s really hard to hear you “status quo" guardians when you only give one side of an argument. Say, call me on your land-line rotary phone when you have a moment or “send-mail” me from your home office mainframe. I'm really interested in hearing more of your biased argument.

    Or

    How about digging deeper to show the other side of the fuel cell debate - you know the pros.

    Here, let me help:

    1) Landfill toxic cleanup and use landfill gases

    2) Bio-gas (Like the one in California whereby fuel cells provide power to dairy farmers)

    3) More efficient use of natural gas (Like what you mention except less natural gas needed to produce more energy)

    4) Coal synthesis (Snygas) - reducing / ultimately eliminating the need to burn coal for power

    5) Distributed & sustainable power sources – fewer blackouts-reducing the drain of a failing power grid

    6) Becoming more energy dependent – negate the need to fight wars for natural resources

  • Report this Comment On March 21, 2014, at 10:07 PM, jvgfool wrote:

    Did you address the carbon issue? Wouldn't fuel cells create energy without creating carbon since H2O is the by product?

  • Report this Comment On March 22, 2014, at 11:39 PM, jaketen2001 wrote:

    Dear Fool,

    Capstone and MW power applications are two entirely different things. If you are talking about MW power generation, fuel cells may indeed be able to compete against existing turbine technology because fuel cells need no water. Turbines need tons and tons. Water supplies are a huge issue. You should read up on it.

  • Report this Comment On March 22, 2014, at 11:41 PM, jaketen2001 wrote:

    and if you will notice, none of the fuel cell companies hold themselves out to be alternative energy companies--they are selling their products as pure cash props.

  • Report this Comment On March 23, 2014, at 12:09 AM, SuntanIronMan wrote:

    @cmalek

    "What happens to the carbon dioxide that is created during steam reformation? Isn't carbon dioxide a greenhouse gas whose generation we are supposed to be curtailing drastically?"

    It may sound counter intuitive, but burning methane to create carbon dioxide actually benefits the environment (well, compared to allowing the methane into the atmosphere).

    Methane is a far worse greenhouse gas than carbon dioxide. So if you can capture and convert methane (from landfills, lets's say) instead of allowing it to naturally escape into the atmosphere, that's actually a good thing. Still produces a harmful greenhouse gas, but a much less harmful greenhouse gas. Not a perfect solution, but better than the alternative.

  • Report this Comment On March 23, 2014, at 9:20 AM, otto156 wrote:

    @cmalek

    you can produce hydrogen with other methods than you describe , you can use biomass , for example , also is hydrogen an byproduct in many chemical processes , but unused til yet . just with what cames out in plants around colonge would be enough to fuel 40000 cars a hole live long . at the end it`s just a question of organisation an the will to do it .

  • Report this Comment On March 24, 2014, at 9:17 AM, MNDLBRT wrote:

    There are technical hurdles, especially the life of the guts of the fuel cell. At FCEL, who use molten carbonate, not PEM membranes, the lifetime is increasing, and the costs are coming down. SOFC development continues in national labs and various companies, where the technical hurdle is again lifetime, especially at higher, more thermodynamically efficient temperatures.

    So much commentary on fuel cells ignores the fundamental scientific advantages, practical engineering difficulties & incremental improvements. The advantage is efficiency, which increases as the fuel cell temperature increases and when use is made of the hot exhaust. Combustion is required in a modern power plant where the engineering refinement has brought efficiency about as far as it can go without some game changing high temperature ceramic or other turbines that do not exist. The difficulties for fuel cell is stack lifetime, and these are improving rapidly at the present. It looks like the best fuel cells will make unsubsidized economic sense in a large amount of applications within 3 years, & if the do that is only the tip of a very large iceberg.

    One can follow FCEL to judge the grid parity. They have a plant producing 70 mW per year and can get that to 100 mW. They have a significant partnership with POSCO who is building a 200 mW production plant for the Korean market, which will take over a year to be on line. Somewhere before the reach 300 mW per year, FCEL should reach unsubsidized grid parity with positive free cash flow, and if they do, then the industry becomes investable. They have a full scale running facility for customers to see working technology, so expect sales to hit 100 mW rapidly as selling without that facility in the past would be much harder. (If they do not rapidly hit 100 mW, then there could be reason to sell, or not buy, the stock.)

    In the end, molten carbonate, and later SOFC's promise to be implemented because they can be located anywhere and burn less fuel per kilowatt, especially taking grid losses into account, than a modern steam turbine power plant. PEM fuel cells have a much more questionable future, there are temperature limitations to PEM cells, and many competitors can rapidly enter if a profitable market for them were to show up. They are popular because they are easier to develop.

  • Report this Comment On March 24, 2014, at 9:55 PM, drl9801 wrote:

    If you read more on fuel cells and really understand how they work then maybe these companies would be a buy. Fuel cells don't just run off of natural gas so that is a bust. Fuel cells run on just about every kind of gas, even ethanol and will most likely run on water in the future. That is what makes them unique. I've been fallowing this technology for a long time and fuel cells are working, and if you can combine them with the capstone turbine industry then you will have one clean energy resource along with solar . Oil and gas will still help with heating and running huge machinery ; but that will all end in the next 20-30 yrs. I sold all of my oil and gas companies stocks for clean energy ones. This move was for my kids and grandkids. We have the technology now , so lets use it and the technology will even get better as the years pass by.

  • Report this Comment On April 05, 2014, at 10:47 AM, MarkGunnar wrote:

    Video below of what is happening in California at municipal wastewater treatment plants using fuel cell technology to produce 3 value streams of electricity, hydrogen and heat all from a human waste! This is pretty impressive in my opinion for hydro-refueling infrastructure.

    "New fuel cell sewage gas station in Orange County, CA may be world's first"

    http://abclocal.go.com/kabc/story?section=news/local/orange_...

    "It is here today and it is deployable today," said Tom Mutchler of Air Products and Chemicals Inc., a sponsor and developer of the project.

    2.8MW fuel cell using biogas now operating; Largest PPA of its kind in North America

    http://www.fuelcelltoday.com/news-events/news-archive/2012/o...

    Microsoft Backs Away From Grid

    http://blogs.wsj.com/cio/2012/11/20/microsoft-backs-away-slo...

    also...

    Video:

    DFC ERG Nat Gas / Fuel Cell Hybrid / Enbridge - Fuel Cell Energy

    http://enbridge.rawintegrated.com/hybrid/hybrid_complete.htm...

  • Report this Comment On September 27, 2014, at 3:55 PM, HersheyBee wrote:

    Stop with the natural gas red herring....crack the hydrogen at major ocean depth, collect it at that pressure, move it to the surface and distribute it....any questions??

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