Fuel Cell Stock Investors: Don't Bet the Farm on Biogas

Source: FuelCell Energy.

The world of fuel cells has been abuzz lately, and rightly so. After years and years of losses piling up, this innovative technology is starting to break through with some commercial success. There are still some significant barriers to entry, but one trend that has many fuel cell fans optimistic is the use of biogas as a cheap fuel. While this is a great plan for fuel cell stocks like FuelCell Energy (NASDAQ: FCEL  ) and Ballard Power Systems (NASDAQ: BLDP  ) to take advantage of what was once considered a waste product, it may not be the massive growth catalyst many hope for. Let's take a look at why. 

A boom from biogas?
Fuel cells, just like every other technological innovation in the energy space, have taken years to develop into a product that can compete against traditional power generation techniques on a cost per unit of energy produced. Even today, the average cost of a fuel cell is still much higher than other sources on a levelized cost of energy, which is a metric that estimates the cost of electricity from a given source based on its up-front capital costs and operating costs.

Source: OpenEI.org.

The biggest reason for this is because the capital costs to install them are so high. When compared to its most direct competition, natural gas fired turbines, FuelCell Energy estimates its cells have an up-front cost of about $3,000 per kW, almost triple the average up-front cost for a natural gas turbine. So how can fuel cells compete with these other systems? They need to beat them on the operational cost side, and that is where biogas comes in.

Boston's Municipal Wastewater Treatment Plant with biogas reactors. Source: Magnus Manke via Wikimedia Commons.

Biogas is methane gas, just like the natural gas that we drill for. The only difference is the source. Biogas comes from the decomposition of human and animal waste from wastewater treatment plants, landfills, farms, etc. For years, biogas was either let off into the atmosphere or piped to a central location and flared off. Recently, though, many have found this to be an extremely cheap source of natural gas. So companies like FuelCell and Ballard have been developing ways for their products to run on biogas to take advantage of the cheap feedstock. 

It works, it monetizes a previously thrown away source of energy, and it increases our share of energy that is domestically sourced. It's a win-win across the board.

The challenges
As much promise biogas holds for fuel cells, there are a couple of hurdles that could prevent it from becoming universally adopted. 

  • Not all sources are economically feasible. If we were able to utilize every molecule of biogas that is technically recoverable, we could produce about 9.3 trillion cubic feet of gas per year, enough to displace over 30% of U.S. natural gas production. However, there is a distinction between what is technically recoverable and economically feasible. Some sources simply are too small to be monetizeable using fuel cells or gas turbines. According to the American Gas Foundation, the total amount of biogas that is marketable is somewhere in the range of 1.0-2.5 trillion cubic feet per year. 
     
  • The economic feasibility of biogas for fuel cells is even smaller. According to FuelCell Energy, its cells need 300-500 cubic feet per minute of biogas that has a methane content of at least 60% to be productive. This would limit fuel cells to large landfills and wastewater treatment facilities or farms equivalent to having 3,000 head of cattle or more. For places where that isn't possible, biogas can be blended with natural gas to make up the difference, but that increases the operational costs of the system.
     
  • There's nothing stopping other natural gas consumers from taking advantage of biogas. Even when we consider the limitations for fuel cells, it is still a decent sized market. FuelCell estimates the potential market for biogas fuels to be $4 billion, but it's not going to be the only ones vying to use this fuel. A perfect example of this are Waste Management (NYSE: WM  ) and Capstone Turbine (NASDAQ: CPST  ) , both of whom already have alternative methods for utilizing biogas. Waste Management has been converting much of its trucks to run on compressed natural gas, most of which comes from its landfills. Waste Management CEO David Steiner estimates that over 90% of the company's new disposal truck purchases will run on compressed natural gas. Capstone, on the other hand, has made its own push to supply landfills and wastewater treatment plants with gas fired turbines. It has a slight advantage over fuel cells because recovered gas does not require as much treatment to remove hydrogen sulfide and can run on a wider range of methane concentrations. Also, since it produces electricity from what is considered a renewable source, electricity generated from these turbines can earn a user renewable fuel credits just like a fuel cell does. 

What a Fool believes
Don't get me wrong: Using biogas as a feedstock for fuel cells or anything else is a magnificent idea and we should utilize it as much as possible. Fuel cells will definitely play into that market, but they will not be the only ones. As manufacturers of fuel cells, both FuelCell Energy and Ballard, will face the same competition in this market as it does using traditional natural gas. The larger goal for both of these companies should remain to bring down the levelized cost of energy for these systems across the board. By doing so, not only will they be able to capture a larger share of the biogas market, but it will enable them to compete in the even larger natural gas market as well.

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Comments from our Foolish Readers

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 31, 2014, at 5:05 PM, daginva2 wrote:

    1) Fuelcell Energy says their LCOE on $6/mmbtu NG is about 13 cents, not the 30-75 cents you show on your graph.

    2) Fuel cells are much cleaner than competing methods of converting chemical energy into electrical energy. For example, in Southern California, the SCAQMD gives many fuel cells emission permit exemptions; Something they do not do for microturbines or reciprocating engine generators. In fact, a number of wastewater management facilities there that had been running reciprocating engine generators on their anaerobic digester gas have been told their permits will not be renewed, and are struggling to figure out how to comply with tighter emission restrictions. One of the solutions they are looking at is following the several districts that have installed the Fuelcell Energy DFC products.

  • Report this Comment On April 02, 2014, at 9:31 PM, MarkGunnar wrote:

    Why not bet the farm on Biogas? Its a waste product being turned into money...

    also... have a look at these links...

    Publication Date: Monday, March 24, 2014

    Publication: The Wall Street Journal

    Village Farms International, Inc., In Collaboration with Quadrogen Power Systems, Inc. and Fuel Cell Energy, Inc.

    Announces the First Ever $7.5 Million Quad-Genergation Energy Project.

    http://www.villagefarms.com/AboutVillageFarms/NewsAndPress/A...

    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...

  • Report this Comment On April 02, 2014, at 9:41 PM, MarkGunnar wrote:

    Here is another article...

    Human waste turned to power, money at Inland Empire Plant

    http://www.dailybulletin.com/environment-and-nature/20140207...

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