What's the Future of Fuel Cells? Let's Debate

Fuel cells have been one of the hottest investments on the market in 2014, but there's debate about what the future of fuel cells looks like. Will small emerging companies like Plug Power (NASDAQ: PLUG  ) and Ballard Power Systems (NASDAQ: BLDP  ) be able to grow adoption in forklifts and small vehicles? Will big automakers like Honda and and Hyundai continue to invest in fuel cells for the masses? Will FuelCell Energy (NASDAQ: FCEL  ) be able to grow the hydrogen backup power market? And where is all of this hydrogen going to come from?

To discuss the potential of this new market, fellow Fools Travis Hoium and Tyler Crowe debated their thoughts on the potential for fuel cells and where they think the market is headed.

Travis's take
Let's start this debate with a simple explanation of what a fuel cell is. At its core, a fuel cell is an electrochemical energy conversion device, which basically means it uses a chemical reaction to convert hydrogen and oxygen into water. This reaction gives off an electron, or electricity.

This reaction is similar to a battery but instead of the system being contained and the battery running out of chemicals when it goes dead, a fuel cell can constantly be refueled and producing electricity. The system is also cleaner and more efficient than a combustion engine, which is why companies are exploring fuel cells for automobiles.

But before we go out and call fuel cells the future, there are some other factors to consider. First, hydrogen needs to be manufactured somehow and a vast majority of hydrogen is produced from natural gas, making it susceptible to price swings as well as giving off greenhouse gasses. The electricity from a fuel cell also needs to be stored somewhere, which usually means that a fuel cell vehicle has a large battery as well as a fuel cell.

So, where are fuel cells competitive today? I'll focus on one of the biggest market where fuel cells are gaining traction: Forklifts, highlighted by Plug Power's 1,738 unit sale to Wal-Mart earlier this year. Wal-Mart's distribution centers currently use standard battery-powered forklifts, and the conversion to fuel cells and hydrogen means the elimination of battery change outs as well as the battery charging room. Typically, in factories or distribution centers, the battery is physically changed out for a freshly charged one since forklifts run 24/7. Hydrogen just requires a fill up, just like a car.  

There are a few other natural markets for fuel cells, like airport vehicles, or really any small vehicle network that's used constantly in a relatively small space. Once you leave those parameters, the fuel cell market starts to face challenges.

If fuel cells were going to grow beyond contained vehicle systems, we would have to assume a huge increase in infrastructure spending, which is only profitable if the vehicles who demand the fuel are on the road. It's a chicken and egg conundrum that faces challenges, particularly from electric vehicles.

The problem Honda, Hyundai, and Toyota will face versus electric vehicles is the ease of charging. A charger can be installed for less than $1,000 in your home, and there are tens of thousands of public charging points versus a grand total of five in the U.S. as of March 27, 2012.

The hydrogen station map of the United states is sparse to say the least. Source: U.S. Energy Information Administration.

To think that hydrogen will leapfrog electric vehicles for consumers, you would have to assume that battery technology won't improve beyond a limit of a 250-300 mile range. I'm not betting against that range jumping to 500 miles or more in the next five years and charging times falling. If that happens, fuel cells have no chance to compete in consumer vehicles because they'll be more complex (remember, they have a battery, too), more costly to run, and have less accessible infrastructure.

So, how big is the potential market for Plug Power, Ballard Power Systems, and FuelCell Energy? I think it will be contained to vehicles like forklifts and airport vehicles, which severely constricts the market opportunity. Depending on the year, 800,000 to 1 million lift trucks are sold around the world, and if fuel cells could capture 10% of that market, it would be a huge win.

Fuel cells have the potential to grow from a small base, but the upside potential is in the tens of thousands of units annually, not the millions, in my opinion.

Tyler's take
I think it's difficult to call this a debate, because I generally agree with just about everything Travis is saying about the market for hydrogen powered fuel cells. I think the aspect missing from this debate so far, though, is the other addressable markets out there for fuel cells that both Ballard and FuelCell Energy are looking to capture: backup and emergency power, and combined heat and power.

Unlike the fuel cells used in Plug Power's systems, both Ballard and FuelCell manufacture cells that do not require fueling from hydrogen gas. Instead, they convert methane gas into hydrogen gas without combustion. There are some ancillary benefits to this tech, such as being hydrogen fueling stations, but more importantly is that they can consume a fuel that has a much more robust infrastructure: natural gas. FuelCell Energy operates exclusively in this sector with no hydrogen gas fueled cells, and Ballard has both the hydrogen gas based and methane based cells.

In fact, methane based cells have a much larger addressable market than the materials handling market today. To get a clearer picture of this, let's look at Plug Power and Ballard Power Systems. Plug Power is by far the leader in developing fuel cell systems for the materials handling market, but for the past several years, Plug Power hasn't manufactured fuel cells. Rather, they build the system that makes a fuel cell stack compatible with forklifts to replace the existing batteries, and have had an exclusive supplier agreement with Ballard to manufacture the actual fuel cells. So, every sale Plug Power has made, it's a sale for Ballard as well. But, the fuel cells Ballard supplies to Plug represented only 10.6% of Ballard's total sales in 2013.

The reason Ballard has limited interest and FuelCell is completely avoiding the materials handling market is because it is so small. Ballard openly admits that the entire North American materials handling market is less than 1/5 of the backup power market for just the telecom industry alone. With combined heat and power, fuel cells could capture a market around $10-$12 billion.

Then again, this market isn't without its challenges, either. Even forgetting for a moment that Ballard's proton exchange membrane fuel cells require platinum & palladium -- two of the most rare and expensive elements on the planet -- these fuel cells need to basically compete with any other stationary power system that can run on natural gas. Today, fuel cells cost at least 20% more on a per kilowatt installed basis than other options such as natural gas turbines.

That is the rub with fuel cell companies. Aside from having the word "fuel cell" in the business description, all three have very little in common. The market Plug Power wants to capture with material handling and potentially some fleet based vehicles is the smallest one, which is fine because it's a pretty small company and has room to grow. The other markets that both Ballard and FuelCell are looking at, though, could be pretty big.

Travis's rebuttal
There's no doubt the potential addressable market for backup power is huge, but as Tyler alluded to, it faces similar challenges to more widespread vehicle adoption. The first challenge is that fuel cells are really just a different way to turn natural gas into energy. If there's no cost advantage, why would a large percentage of industrial sites that need backup choose fuel cells over natural gas turbine backup?

The greater challenge long term is that new technology that will provide cleaner, lower cost, and more reliable backup in the future. Solar energy providers are already testing battery backup systems, powered by solar energy, and the cost for both solar installations and batteries are falling rapidly. For something like the telecom industry, solar with battery storage is a great alternative backup source and can even provide energy when batteries are fully charged.

Bottom line, if FuelCell Energy and Ballard Power Systems can't make money today, how will they make money as alternative energy sources rapidly cut costs and prove to be better alternatives? I hear a lot of words like "potential" when discussing fuel cells, but that's all investors are buying in these stocks today. It'll have a place in niche markets like materials handling, but when we start talking about billion-dollar markets, I have one thought: prove it.

Tyler's rebuttal and conclusion
I'm not completely sold on the idea that any of these companies will actually be able to capture all of this potential market, or even a large fraction of it, either. This is quite possibly one of the most challenging times for new energy concepts to enter the market. Between natural gas being relatively cheap and the cost for wind and solar on a steady decline, the path forward for fuel cells will certainly be a challenging one.

The most critical thing I'm going to be watching for companies like FuelCell Energy and Ballard is cost per kilowatt installed metric. As long as that installation cost premium is there, I can't see fuel cells making lots of headways beyond 2016, when the 30% fuel cell tax credit expires. To be fair to these companies, though, the price per kW installed is 75% less than what it was 10 years ago.

Overall, I guess you could say I'm rather ambivalent to their prospects. I'm not ready to write them off yet because the technology is still developing and costs are coming down, but I do want to see some more tangible results before considering fuel cells as a viable option for our energy needs.

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Read/Post Comments (13) | Recommend This Article (8)

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 April 30, 2014, at 11:52 AM, md982735 wrote:

    Ok, so there can be advances in batteries that will extend their life to allow 500 miles between recharcing. Why can't their be continuous advances in fue cell technology that make the batter useless?

    You can't say one industry will have strides that make another one useless. The other holds true for the fuel cell industry as they continue to lower production costs etc. I think its called competition and its what this country use to thrive on.

  • Report this Comment On April 30, 2014, at 11:54 AM, md982735 wrote:

    I'm sorry, I didn't hear a debate. I see the word 'rebutal' but without a 'rebutal'. A debate should take place between two people with opposing views. Sorry fellas, but you started out with an agenda and just hugged each other along the way.

  • Report this Comment On April 30, 2014, at 12:13 PM, Harveyeducateya wrote:

    It's irresponsible in the first paragraph to lump Fuel Cell Energy (FCEL) in with the hydrogen forklift and car fuel cell companies. How can the author even ask if FCEL can figure out the Hydrogen supply question? They don't use Hydrogen and offer a precious-metal-free Molten cell. They operate on cheap and abundant natural gas. Their unique position in the Asian market w/ POSCO and now Europe has allowed them scalable cost reduction and these progressive countries are paving the way to adoption of Fuel Cells. With exception to some back-up power contracts in the U.S the real story is overseas in Korea and Europe and note ties to U.S tax incentives. PLUG and Ballard are completely different business models and PLUG in particular has a limited market. The bottom line is revenue is increasing and cost are coming down thanks to foreign adoption.

  • Report this Comment On April 30, 2014, at 12:29 PM, speculawyer wrote:

    Fuel cells are great for certain niche applications. But they are not going to become the mainstream automobile . . . too expensive, no natural source of hydrogen, no fueling infrastructure, it is much more expensive than electric cars, pressurized hydrogen is dangerous, etc.

  • Report this Comment On April 30, 2014, at 12:34 PM, md982735 wrote:

    I just wish the people that write this stuff actually understood the technology they are telling you cant' be viable. When you start with an agenda and then try and build facts to support it, you get lots of holes.

  • Report this Comment On April 30, 2014, at 12:35 PM, md982735 wrote:

    Speculawyer, is stationary power generation that can supply power to over 10,000 homes niche?

  • Report this Comment On April 30, 2014, at 12:37 PM, CL7277 wrote:

    Please do a LOT more homework before you make larger fools of yourselves. For starters, please be aware of the vast differences between the types of fuel-cells and their applications. Secondly, please know and apply the difference between back-up and base-load energy generation. Among many other facts that are missing in this so-called debate is the basic understanding of existing fossil-fuel consumption and pollution versus the virtually clean environmental conversion of those fuels to provide electrical energy with heating and air-conditioning benefits at substantially higher lever of efficiency -both in terms of fuel consumption and siting expense.

  • Report this Comment On April 30, 2014, at 1:14 PM, MarkGunnar wrote:

    Just out this year...

    Hyundai "Tuscon" Fuel Cell Vehicle

    $499 per month w/ Free Fuel & Free Maintenance from Hyundai!!! (pure water for exhaust)

    https://www.hyundaiusa.com/tucsonfuelcell/

    also...

    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...

    Construction of world's largest fuel cell power plant. (in South Korea? with USA developed fuel cell technology??)

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

    and....

    Video:

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

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

  • Report this Comment On April 30, 2014, at 1:21 PM, daginva2 wrote:

    I think CL7277's observations bear repeating.

    1) Fuelcell Energy's MCFC technology and Ballard/Plug's PEMFC technology are similar in name only. It would be like saying concrete and steel are in the same industry because they both use heat to make construction materials. Both Ballard and Fuelcell Energy make devices the convert natural gas to electricity. The comparison ends there.

    2) Comparing fuel cells to gas turbines on price per kW alone, completely ignoring the differences in efficiency, emissions, and noise is pointless. Fuelcell Energy's DFC product is so clean the exhaust of an early test unit at L.A. Harbor was found to be cleaner than the ambient air. Because of that, you can install one in So. Cal. without an emissions permit. Not true for a microturbine. I stood next to an operating DFC300 in central Calif. talking to the FCEL technician. We had to raise our voices just a touch to be heard over the air-conditioner cooling the electronic controls. That was the loudest part.

  • Report this Comment On April 30, 2014, at 4:25 PM, MarkGunnar wrote:

    ballardWith key partnerships, cost improvements and a rich intellectual property ownership, Ballard Power (TSX:BLD, NASDAQ:BLDP) is building momentum in the fuel cell sector, says Byron Capital analyst Dev Bhangui.

    On Monday, Ballard reported its Q1, 2014 results. The company lost $3.8-million on revenue of $14.0-million, a 13% lift from last year’s first quarter.

    CEO John Sheridan talked about the company’s performance.

    “Our Q1 results reflect continued improvement in key metrics, consistent with our business outlook and full-year guidance for 2014,” he said. “Top line revenue grew 13% year-over-year and, on the bottom line, we achieved a 23% reduction in cash operating costs and a 60% improvement in Adjusted EBITDA. We also strengthened our liquidity position, ending Q1 with cash reserves of $41.6 million, due primarily to the exercise of warrants related to our 2013 equity financings.”

    Bhangui, commenting on the selloff that followed what was perceived to be a soft quarter for Ballard, says that response was simply short-sighted. “We believe this judgment to be in error, superficial, myopic, not accounting for what is yet to come in the next three quarters,” he said.

    Bhangui says there are significant drivers in all the segments of Ballard’s business for the rest of 2014 and beyond. He believes that the company’s telecom backup power business will deliver a run-rate of $10-$11-milion by the second half of the year, and that this high-margin revenue will be a “pillar of future revenue growth…”. He also notes that the launch of fuel cell cars from several manufacturers are imminent. on top of that, the Byron Capital analyst says opportunities for Ballard to monetize its intellectual property were vastly increased with the recent acquisition of United Technologies. “Ballard is now the IP elephant in the room,” says Bhangui.

    In a research update to client this morning, B

  • Report this Comment On April 30, 2014, at 7:48 PM, erzal1971 wrote:

    Street Kids,

    1. I just wish you back to university and do Master program, for you to know how to write an articles about debating.

    2. I just wish you did thorough study on technology that you want to call the debate since i would able to see cut and paste in your writing.

    3. Please do homework.

    Hope you will come with better articles

  • Report this Comment On April 30, 2014, at 11:22 PM, ICanFool wrote:

    can we say "Travis Hoium and Tyler Crowe" are "Hum and Bug " Humbug... Total idiots... don't deserve to be Fools. They give a bad name to Motley Fools with their idiocity..

    The first paragraph itself shows their utter ignorance. Teach them how to ggogle and Read, for God sake. These HumBugs give a bad name to Americans... that american cannot do due diligence to find the truth about the upcoming technologies.

    May be this will be the last articel writeen on Motley Fools behalf, I will ever read.

  • Report this Comment On May 01, 2014, at 7:18 AM, svenhh60 wrote:

    the fc will have a breakthrough in a big way...its just starting that fc-product is enterting the markets...worldwide...I am in fc since the year 2000 and brought fc-companies together; that was way too early but now - 2014 - its becoming real....the Hydrogen Society of Hamburg has its 25th anniversary this year

    www.h2hamburg.de

    ...there will be h2-stations all over...LINDE and Air Liquide already have stations developed...for small quantities of cars and more...in Japan 200 h2-stations are build already until the end of 2015; to produce green-hydrogen via wind and solar is the future to store the hydrogen; also to use it as chemical-product, to put it into the gas-system (power to gas); you will see the fc and hydrogen all over...in ships, trucks, busses, cars, heating/energy at home. Its save even in a car...when there is a crash...in miliseconds hydrogen dissapears as water (much saver than gasoline which is burning).

    and its not true ref. Platin and Paladium = enough around and not so much needed anymore = in every catalyst you have platinium and you can recycle it about 100 %.....also there is research for metal-hybrids as magnesium...I just visited a research-institute demonstrating the latest developments....

    Ballard is a key as they have/own key-patents which will have a value in some years - big time....we are at the begining...don´t miss the boat....it just left the harbour......Ballard should trade at US $ 10 - 30 in 2 - 3 years....

    and; the battery is an add-on, i.e. for storing some energy created by the fy/hydrogen....but the TESLA of the world will have problems, so my view. And: to produce a battery is very negative for the envirionment.....and many more negative arguments, i.e. energy in the winter via battery takes also energy - with a fc this heating is "for free" as an extra :o)

    ...a product I learned some days ago from: a device for energy for handy loading in 3 minutes......with hydrogen and a mini-fc.....(about 250 mio peopel don´t have access to a grid)....

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