How Soon Fuel Cells?

By Eric Roston

Scientists have tinkered with them for longer than Strom Thurmond has paced the Senate floor. They can mitigate the uncertainties of oil prices on one hand and the threat of climate change on the other. They will be clean and quiet and cheap and won't take up much space in the backyard or basement or wherever you care to put a refrigerator-size box that isn't a refrigerator but can keep one cold. They will bring light to America's moonlit homesteads, pollutionless cars to its highways and stealth weed whackers to its suburbs. They are hydrogen-powered fuel cells, coming soon to an industry near you.

At least that's the hope of investors who have lobbed the first of potentially billions of dollars at a simple chemical principle that an obscure British scientist named William Grove discovered in 1839: when hydrogen and oxygen molecules combine to form water, heat and electricity are produced. Tapping that energy, by binding individual cells into what is known as a "stack," could mean efficient, continuous and clean electricity for everything from long-lasting cell-phone batteries to industrial power generators. And although fuel cells have generated buzz at least since astronauts took a prototype into space on Gemini 5 in 1965, it is only in recent years that a technology suitable for commercially viable hydrogen power has emerged: proton-exchange membrane fuel cells.

"That's one of the misconceptions of this business," says Paul Lancaster, vice president for finance at Ballard Power Systems in Vancouver, Canada. "They've had a phenomenally rapid development. People overpromised them" before a consumer-compatible technology emerged. Ballard (2000 revenues: $41 million), partly owned by Daimler-Chrysler and Ford, is the leader in automotive fuel-cell development.

The technology works, but now the race is on to develop products and bring down costs to levels competitive with all things fossil fuel. "We're trying to do in a 10-year period what it took the internal-combustion engine 100 years to do," says Byron McCormick, director of General Motors' Global Alternative Propulsion Center. For GM and the other leading car manufacturers, it will take investments of hundreds of millions of dollars each to introduce mass-market hydrogen cars by 2010. The target: reduce costs of a fuel-cell engine to $50 per kW for a 70-to-80-kW engine, or about $3,500, the average cost of an internal-combustion engine. (GM's early prototypes stand at 10 times that per kW target.) Toyota Motors will reportedly roll out a fuel-cell car "on a limited basis" in Japan by 2003. No word yet on the cost.

Several companies preparing to market stationary units for home use are shooting for a price of $1,000 to $1,500 per kW, but expect a multiple of that price initially. Meanwhile, Calpine builds natural gas plants for about $500 per kW. The cost to actually run fuel cells will depend largely on the price of natural gas--the fuel from which hydrogen is generally extracted--but eventually could compete with grid electricity costs, which the Energy Department forecasts at 6.2[cents] per kW by 2005. Hydrogen pioneers could initially pay what amounts to 25[cents] to 30[cents] per kW--expensive, perhaps, but for some an improvement over no power at all. Last week GM joined the stationary chase, announcing a fuel-cell generator that pairs advances in two areas: a more efficient fuel-cell stack based on its HydroGen1 vehicle, and a processing technology adapted from an engine prototype that uses gasoline as a source for hydrogen.

Among the most immediate beneficiaries of fuel-cell technology will be homeowners like Timothy Moore, a retired policeman who last spring moved with his wife Patricia and two children from Los Angeles to Cedaredge, Colo. (pop. 2,000). Their new home will be a two-story log house with all the conveniences of the Internet age on 40 pristine acres.

To power his new home, not yet built, Moore thought he would have to dig nearly $20,000 from his pocket and mounds of dirt from his yard so that he could bury half a mile of wire from the local electricity grid and then place a transformer on his property. But he won't have to, largely because his timing is good. H Power, a Clifton, N.J., company that is currently beta testing residential fuel cells, has an $81 million deal with Energy Co-Opportunity (E.C.O.), an organization of rural utilities, to unveil its 4.5-kW fuel-cell generator in homes near the grid's outer limits. Not only does Moore expect it to be a cheaper, more convenient and more efficient power system than conventional electricity, but its by-product--170[degree] water--will reduce the burden on his water heater. Initial interest in Cedaredge and its neighboring towns is so great that Paul Bony, marketing manager of the Delta-Montrose Electrical Association, an E.C.O. utility, has had to turn away prospective hydrogen pioneers from informational meetings. "We're hoping this fuel cell becomes the magic bullet," Bony says. "It'll change the way we think about the grid."

This approach is called distributed power generation. We, or our fuel cells, become the grid, each fuel-cell-powered home connected to others, the power being pooled where needed. And the huge cost of transmitting energy through a centralized grid disappears. But don't fire your local utility just yet. America will not hop, skip and jolt to distributed power generation as it did from mainframes to distributed computing in the '80s. Particularly if the White House gets its way. Each coal- and gas-fired power plant that gets built will siphon off demand for the new technology. "[Stationary] fuel cells are going to find niche markets," says Steven Taub of Cambridge Energy Research Associates. "We don't see them undermining existing utility systems."

That is, once you can buy fuel cells, which aren't yet generally available. That has put undue pressure on new companies such as H Power or Plug Power of Latham, N.Y., valued last week at $260 million and $640 million, respectively, to get something on the market to keep antsy investors happy, a task that is proving increasingly difficult. Since a mid-May renaissance upon the release of the White House energy policy, these stocks have tumbled into a coal mine, each losing more than 60% of its value. "I think of them not as businesses but options on businesses," says Hugh Holman, an analyst at CIBC. "There's nothing there today, no profits. But options have value."

Even if a broad U.S. market for stationary fuel cells doesn't materialize, the companies expect to find takers in Japan and Europe. And the worldwide market for clean energy surged last month when 178 countries--conspicuously absent of U.S. participation--took the Kyoto treaty on climate change a step closer to reality.

Thomas Edison embraced distributed generation and installed some of his early direct-current generators in New York City households--too bad one of them blew up at a Vanderbilt mansion--only to see them eclipsed by alternating-current centralized power in the early 20th century. And although the light bulb that went off in Edison's head will soon shine on their front porch, it's still too early to ask the Moores if they will leave it on for the rest of us.