"The waiting is the hardest part."
--Tom Petty and the Heartbreakers

I'm sure Tom Petty didn't write "The Waiting" to describe what it's like to invest in fuel-cell companies ... but it sure feels like it. While fuel cells have received lots of attention, many of the companies working on this revolutionary technology have been around for decades. The concept of fuel cells has been around even longer. It's been a slow process to bring this technology into the mainstream, but there are signs that it's making some small headway into specialty applications.


Diagram of a fuel cell. Photo source: Sakurambo via commons.wikimedia.org

Let's take a deeper look at fuel cells, why they could be a compelling investment, what's preventing them from being the solution to our energy needs, and what investors should look for in this space going forward. 

What are fuel cells?

The easiest way to understand a fuel cell and how it works is to think of a rechargeable battery. Instead of plugging the fuel cell into an electric source, though, all you need to do is add hydrogen and oxygen gas. A fuel cell is able to create a chemical reaction that causes these gasses to release energy -- electricity in this case -- and form water.

This allows fuel cells to work as an energy storage device and/or as a power-generation method. There are several different types of fuel cells and a select group of fuel-cell types are emerging for commercial use. 

  • Proton exchange membrane fuel cells have been most effective for smaller-scale operations. This types keep operating temperatures lower and allow for fast start-up times. So far, proton exchange membrane cells are being targeted for battery replacements and automotive use.
  • Molten carbonate fuel cells have found a small niche in the power generation space. They don't use the expensive materials needed as reaction catalysts, but run at high temperatures and take a long time to start up. Molten carbonate is best used for constant power generation or combined heat and power
  • Solid oxide fuel cells exhibit the same characteristics as molten carbonate cells, but they have a higher energy density and are more efficient. These are also best used for constant power generation and combined heat and power.  

    A fuel cell used for power generation. Photo credit: FuelCell Energy

Fuel cells are a compelling energy solution for two reasons. The first is energy storage. Think about the hour or so needed to recharge a battery, depending on its size. Advancements in hydrogen fuel-cell technology have increased the energy density of cells to the point that they are approaching competitiveness with lithium ion batteries similar in size to those used in electric vehicles. Unlike a large battery, a hydrogen fuel cell can be recharged in minutes, much like filling a gasoline tank. Also, a cell's byproduct is water instead of exhaust like a traditional combustion engine. 

The second unique ability of fuel cells is on the energy generation side. The technology has been developed such that certain cells can use simple fossil fuels, such as natural gas, instead of needing to manufacture hydrogen gas and then feeding it into the fuel cell. This is a method for consuming natural gas without combustion. It still gives off carbon dioxide as part of the process, but the amount is less than if natural gas is consumed in a combustion engine. 


The first fuel cell design, circa 1839. Image Source: U.S. Department of Energy

What is the history of fuel cells?

Want to know something crazy? Fuel cells have been around longer than oil and gas drilling. The first fuel cell was actually developed in the 1830s, while the first commercial oil well was dug in 1859. Let's just say that the oil and gas industry has done a little better since then. 

There are several reasons why fuel cells have struggled to take hold in their 175 years in existence. According to the U.S. Department of Energy, the biggest issues are the higher up-front costs than a traditional combustion engine and the durability and reliability of the cell. 

The ability to manufacture hydrogen gas has also been a technical and economical challenge for many years. The most common form of producing the gas is known as steam reformation, which converts methane and other small hydrocarbon molecules to hydrogen. Some would argue that it's easier and less costly to directly use that gas in a combustion engine rather than reform it and then employ it in a fuel cell. Other methods are being developed, such as using solar energy to split water molecules into hydrogen and oxygen gas, but they're still a long way off. On top of all that, there are also hydrogen gas transportation and infrastructure hurdles to overcome before fuel cells can be adopted on a mass scale. 

How many fuel cell companies are there?

There are roughly one dozen companies working in the industry, all of which are very small when compared to other energy sectors. Almost all of the companies working on fuel cells have been at it for years, relying mostly on research grants to fund their operations. Today, though, technological advancements have made fuel cells competitive in certain niche markets; this is starting to drive sales at the few fuel-cell manufacturers out there. Combined annual sales for fuel cells broke more than $1 billion for the very first time in 2013, mostly driven by FuelCell Energy and privately held Bloom Energy.

Why invest in fuel cells?

An investment in a fuel cell company is a bet that it will deliver a viable power generation and storage system as we try to reduce our carbon footprint. Fuel cells will become more attractive as new rules on fuel efficiency for vehicles and carbon emissions from power generation sources take hold. To be that leading option, though, fuel cells will need to overcome the technological and logistical issues mentioned above.

Most of the activity in fuel cells is centered around those dozen or so small players worldwide, but major manufacturers such as General Electric have been researching them for quite some time and are starting to consider manufacturing their own cells. The key for any fuel cell company's success will be threefold: It will have to reduce the cost of a system such that it can be cost competitive with other power storage and generation methods; increase sales to a broader market than the current niches in which they reside; and improve margins on sales in order to turn a profit.

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

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