We've got an age-old problem here in the Rule Breaker Port. We have $44,000 burning a hole in our pocket and we don't know what to spend it on. I myself would prefer that we find a new stock, a fresh Breaker, rather than invest it in one that we have already found, because I think that the hunt is half the fun. The years of appreciation afterward are the gravy on the hasenpfeffer.

So, to paraphrase Elmer Fudd, "Be vewy, vewy quiet. I'm hunting Wule Bweakews!"

What better place to start looking for a new Breaker than the list of candidates compiled by the participants in the recent Rule Breaker seminar? The teams sifted through the most compelling emerging industries and came up with 66 companies that they felt had the right stuff to qualify for Breakerhood.

The top stock by far, attracting a vote from 78% of the teams, was Ballard Power Systems (Nasdaq: BLDP). Farther down the list, Plug Power (Nasdaq: PLUG) made a respectable showing with six votes. These two companies are the leaders in proton exchange membrane (PEM) fuel cell technology.

The Industry

Fuel cells generate electricity by breaking hydrogen into its component protons and electrons. The electrons are conducted as electricity, while the protons are whisked away by the oxygen in the air and produce water, the only by-product.

That's clean. It's also quiet, efficient, and free of vibrations and moving parts, making them easy to maintain. PEM fuel cells use platinum as a catalyst, operate at room temperature, and start up in one to three seconds. NASA space vehicles and U.S. Navy submarines have used them for many years because of their efficiency. Fuel cell-driven buses are even being tested in some U.S. cities right now.

Sounds great, no? Now if they could just get one of those things into my car! The technology has been around for 100 years and has long been in use, so what's holding it back?

The Prospects

General Motors (NYSE: GM) and Toyota (NYSE: TM), working in partnership, have developed a mock-up prototype of a fuel cell car. Honda (NYSE: HMC) has been working on one, too. Both are behind Ballard Power, however. This is where Ballard Power begins to look like it can best satisfy the first Rule Breaker criterion:

Top dog and first-mover in an important, emerging industry.

Through the California Fuel Cell Partnership -- which includes Ford (NYSE: F), DaimlerChrysler (NYSE: DCX), Nissan (Nasdaq: NSANY), Honda, and Volkswagen -- Ballard has supplied cells for functioning prototypes for years. DaimlerChrysler has produced four generations of its NECAR, and a fifth is due out soon. In January, Ford introduced the TH!NK FC5, powered by Ballard's latest, the Mark 900 automotive fuel stack that kicks out 75 kilowatts of power (about 100 horsepower), about 35% more than the previous version. Ford also displayed a fuel cell-powered concept sport utility vehicle (the P2000 SUV) at the 1999 auto show.

Ballard has taken the top position in the automotive sector of the fuel cell industry through the California partnership. California is key, since it legislated in 1990 that 10% of a manufacturer's new vehicle sales in the state must be Zero-Emission Vehicles (ZEVs) by 2003. That's zero emission -- no tailpipe, no onboard emissions control system, no emissions from gasoline refining. This requirement is driving a lot of the innovation that's going on in the industry.

That target was re-evaluated in 1998. Now it's required that 4% of the vehicles for sale be ZEVs, and another 6% must be Low-Emission Vehicles (LEVs). In 2004, 4% of actual sales must be ZEVs and 6% LEVs. This arrangement comes as a concession to auto makers in response to their good-faith effort to bring ZEVs to market.

The distinction between LEVs and ZEVs is important because current fuel cell car prototypes aren't ZEVs. Fuel cells run best and cleanest on pure hydrogen. Even if pressurized to 5000 pounds per square inch, supplying a car with enough gaseous hydrogen to travel 200-250 miles, would require more than 26 gallons of hydrogen. That's about twice as big as current fuel tanks to travel two-thirds the distance. It's fine for a bus to have that tank size and range since it has the room and returns to base frequently. It's a lot more inconvenient for a car.

Ford's TH!NK and Daimler's NECAR 4 use a fuel processor to extract hydrogen from methanol. Their models can travel about 300 miles before refueling. This method produces few particulates and no carbon monoxide, but it does generate carbon dioxide at the rate of a standard internal combustion engine. It's an improvement on the ICE and would pass the LEV requirement, but it doesn't satisfy ZEV.

If 10% of the market should turn to fuel cells by 2010, let alone 2004, it would certainly qualify as "an important, emerging industry," and Ballard, as top dog, would definitely prosper. The Midwestern pragmatist in me, however, has to ask, "Can it actually be done?"

I know my opinion. I'll give it to you in Part II tomorrow night -- same Fool time, same Fool channel. In the meantime, we'd love to have your opinion on the question. Just drop by the Rule Breaker Companies discussion board and answer this poll:

Do you think that fuel cell cars are in our future?

  1. No, they will never reach 10% of the U.S. market.
  2. Yes, but they will not reach 10% of the market for at least 25 years.
  3. Yes, they will reach 10% of the market in 10 years.
  4. Yes, they will reach 10% of the market in 5 years.
  5. It's all going to be solar cars, baby!

-- Brian Lund, as TMF Tardior as he wants to be.