Fuel Cells: Investing Essentials

Here's what you need to know when considering fuel cells as an investment.

Aug 7, 2014 at 12:00AM

"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.

The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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