How Can the Fuel Cell Industry be Revitalized?
By Mike Thiessen - August 12, 2013 | Tickers: BLDP, FCEL, TSLA | 0 Comments
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rising clean energy demand worldwide coupled with falling costs, government incentives and technological improvements have all contributed to the resurgence of interest and money flow in the fuel cell industry. Key players Fuel Cell Energy (NASDAQ: FCEL) and Ballard Power Systems (NASDAQ: BLDP) have seen their stock prices rise over 35% and 190% year to date, respectively. To be fair, these stocks are down over 90% from their split adjust all time highs seen in 2000-2001, when Fuel Cell Energy traded at $168 the day before its second stock split and Ballad Power Systems reached a split adjusted highs of $65 in 2001.
Fuel cells oxidize hydrogen to release electrons that are converted into electricity, discharging only water and heat - literally, zero emissions. Fuel cell applications fall into three categories of power generation: portable (personal electronics, auxiliary power units), stationary (prime and backup power systems, combined heat and power systems) and transport (cars, ships, aircrafts, utility vehicles and machinery). There are four categories of energy classes segmenting the various application power needs. The mega-watt class utilizes molten carbonite fuel cells (MCFC) suited for 300KW to 2.8MW systems applicable to utilities and universities with industrial baseloads. The major players in this class are FCEL and Bloom Energy (privately held).
The sub megawatt class includes systems up to 200 KW applicable to commercial buildings utilizing solid oxide fuel cells (SOFC) or up to 400 KW with phosphoric acid fuel cells (PAFC). The micro CHP (combined heating and power) serves residential and small commercial building applications with less than 10 KW utilizing polymer electrolyte membrane (PEM) and SOFC technology. The mobile class utilizes SOFC and PEM technology for transportation and portable applications using less than 10KW. Ballard Power Systems privately held ClearEdge Power and Plug Power are the standouts in these two classes.
TSLA Brings Spotlight on Transportation
The recent parabolic rise in shares of Tesla Motors (NASDAQ: TSLA) has attracted major media coverage as their Model S was awarded the 2013 MotorTrend Car of the Year and a rare 99 out of 100 rating from Consumer Reports. TSLA has brought the spotlight on clean, renewable energy in the transportation sector as they bring electric vehicles to the mainstream. TSLA utilizes lithium ion battery technology. The Tesla Model S vehicle contains over 7,000 lithium ion batteries. Tesla’s outspoken CEO Elon Musk is no advocate for fuel cell powered vehicles, calling them “fool cells,” due to the lack of re-fueling station infrastructure, fuel stack costs and portability of hydrogen. However, BMW, Ford, Daimler, Mercedes and Volkswagon are all developing hydrogen fuel cell vehicles. Toyota plans to release their fuel cell model to compete with the Tesla Model S in 2015 as costs have dropped from $1 million for a prototype vehicle in 2001 to a projected $50,000 by rollout in 2015.
Infrastructure Issues
The lack of hydrogen-fueling infrastructure is the major hurdle affecting demand. According to the California Fuel Cell Partnership (CAFCP), California plans to have 37 public fueling stations and a network of 68 total stations by 2015. By 2020, California should have the established infrastructure in place to support one million zero emission vehicles. By 2025, estimates place 1.5 million zero-emission vehicles on the roads due to the expanding market. The pre-commercial phase is 2012-2014 with early commercial roll-out planned for 2015-2017. This is assuming that funding remains stable.
Plug Power has established a niche market with their GenDrive fuel cell units for materials handling vehicles (forklifts), while Ballard Power Systems has shifted their transportation focus towards public transportation with buses, as mainstream consumer viability and demand is still questionable. Plug Power’s core product, GenDrive fuel cell units, are powered by Ballard Power’s fuel cell stacks. Early on, Ballard produced 80% of all fuel cells for the transportation market, but has shifted its focus towards fuel cell powered bus fleets worldwide.
Stationary Power Generation
The stationary power generation is where the bulk of growth currently exits. Pike Research estimates worldwide stationary fuel cell revenues to reach $9 billion and up to 4.5 GW installs by 2017. The major players in this category are Fuel Cell Energy and privately held Bloom Energy.
Fuel Cell Energy had a strong second quarter 2013, with a 75% year over year increase in revenues, declining operating losses and improving margins as yearly run rate increased to 70 MW, up from 56 MW in Q1. Q2 ended $428 million in total backlog versus just $181.4 million in the prior year quarter. FCEL is on track to complete installs for a 14.9 MW Bridgeport fuel cell park (the largest in North America) and the 59 MW fuel cell park in South Korea by POSCO Energy (which owns 16% of Fuel Cell Energy) to deliver full power by the end of 2013 to early 2014. The company closed out the second quarter with $71.1 million in total cash. On June 25,2013, the company raised $36 million (after fees) from a debt offering 8% on subordinated notes expiring June 2018 with a $1.55 common share conversion option. The company projects profitability upon exceeding the 80 MW run rate.
Bloom Energy, based out of Sunnyvale, CA, was brought into the spotlight in 2010 from a 60 Minutes segment. It has raised $1.1 billion in venture capital funding since inception. Bloom boxes generate 100-200KW. Their client list includes major players like Google, Apple, Ebay, FedEx and Adobe. Verizon contracted with Bloom Energy recently for fuel cells for its data centers in California. In the summer 2011 financing round, Bloom was valued at $2.7 billion pre-money. In an investor update, Bloom Energy revealed that Q3 2012 revenues were over $100 million with $32 million in losses, 26% quarter over quarter revenue increase and $133 million in cash. The CEO stated their margins were improving and profitability would be established in 2013.
The Industry Catalysts for Investors
Profitability: Currently, no fuel cell manufacturer has reached profitability. However, the race is narrowing as Fuel Cell Energy may be just a quarter or two away. Ballard Power has seen strong growth in telecom backup power systems with their methanol fueled ElectraGen fuel cells. Bloom Energy claims to be close to profitability in 2013. The various factors that will influence the race include:
Decling natural gas prices: Every $2/mmBlu drop in natural gas prices bring down fuel cell energy costs by $.01/kWh. At $5/mmBlu, the cost is $.135/kWh and with federal and state incentives drop prices down to $.10/kWh. Natural gas is trading around $3.57/mmBlu. As natural gas prices continue to drop and pipeline infrastructure continues to expand, stationary fuel cell power generation becomes more accessible as they run on standard pipeline natural gas. This segment directly piggybacks on the penetration of natural gas into more demographics. In Japan, Tokyo Gas Company has collaborated with Panasonic to sell and install Ene-Farm fuel cells that extract hydrogen directly from the natural gas lines that feed into every Japanese home. Natural gas companies are strong beneficiaries of fuel cell deployments.
Increased Production Volume: Volume rises as the scale of projects continue to increase. FCEL projects positive EBITDA at 80 MW yearly output and net income positive at 80-90 MW. At 210 MW, annual production drives unsubsidized levels of cost to grid parity.
Improved Technology: Cheaper alternative materials to platinum and palladium will extend fuel cell longevity and improve efficiency and continue to drive down costs. Innovative new materials using doped (iodine and chlorine) graphene platelets and carbon-iron-cobalt catalysts have demonstrated increased efficiency at much cheaper costs.
Industry Consolidation: Sector consolidation has allowed fuel cell companies to expand product lines and market reach while scaling down costs. Fuel Cell Energy acquired Versa Power Systems to further expand into Europe and add solid oxide fuel cell technology to their arsenal. Ballard Power acquired IdaTech’s assets composed of its methanol fuel cell backup power product lines and existing customers, which include AXIS (Indonesia), Telcel (Mexico) and Vodacom (South Africa). ClearEdge Power closed their acquisition of UTC Power in February 2013. Once fuel cell manufacturers reach sustained profitability, they become takeover targets similar to biotech companies that are able to monetize their pipeline drugs.
Bloom Energy IPO: Speculation over when Bloom Energy would proceed with an IPO has been going on for years. However, with Bloom projecting profitability in 2013 and the success of Solar City IPO (Nasdaq:SCTV), Scott Sandell, general partner of private equity firm and Bloom investor New Energy Associates, told Reuters that a listing is being teed up for late 2013 or early 2014.
If this turns out to be true, it would bring a jolt of money flow and interest into the fuel cell sector, complete with much media coverage. The speculative money will flow into existing publicly traded fuel cell companies as sympathy bets leading up to the IPO.
Renewing Confidence in the Fuel Cell Industry
The fuel cell industry has historically over promised and under delivered to the disappointment of investors for over a decade. The sector peaked in 2000 and has fallen dramatically out of favor. Investors have chased other renewable clean energy technologies (solar, ethanol, bio-fuel, wind power and oceanic) in similar fashion. Lately solar has seen a resurgence of money flow as costs have fallen off dramatically as demand stabilized. Could fuel cells re-emerge as a viable and sustained growth industry?
While the consumer transportation segment may be years out from deployment, the tipping point for the stationary power generation segment draws closer. Investors willing to brush off the demons of old may be able to get back in on a ground floor opportunity as order backlogs grow for leaders like Fuel Cell Energy and Ballard Power Systems as they gain more consumer acceptance, wider commercial market penetration coupled with stronger cost controls and improving margins.
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