Fuel Cells Get Financial Boost from U.S. Government

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=09=09 Subject: Fuel Cells Get Financial Boost from U.S. Government

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SCIENTECH IssueAlert, October 18, 2000
Fuel Cells Get Financial Boost from U.S. Government
By: Will McNamara, Director, Electric Industry Analysis
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The Department of Energy will have more than $100 million for fuel cell=20
related programs in the new fiscal year, $10 million above the president's=
=20
request. The money is contained in the Interior Appropriation bill that=20
President Clinton signed last week. The House and Senate jointly agreed=20
upon $52.7 million for stationary fuel cells, $10 million more than=20
requested,=20
and approved the full request of $41.5 million for transportation fuel=20
cell research and $5.5 million for buildings.

ANALYSIS: This government funding, which is surprisingly higher than=20
expected,=20
should give a much-needed boost to the slow-moving development of fuel=20
cells. Although generally considered the favorite of low / zero emission=20
energy solutions, fuel cells are still about two to three years away from=
=20
being commercially viable in retail markets. (Phosphoric acid fuel cells,=
=20
developed by ONSI, a division of United Technologies, are presently availab=
le=20
in a limited capacity). The technology has been in existence ever since=20
batteries were discovered 160 years ago, but the high cost of producing=20
them has precluded suppliers from making fuel cells readily available to=20
the general public. Automotive giants like DaimlerChrysler and Ford Motor=
=20
Co. have continued to explore the use of fuel cells in automobiles, and=20
Texaco, Inc. agreed in May to invest $67.2 million in Energy Conversion=20
Devices, a 40-year-old fuel cell and alternative energy development firm.=
=20
Yet, this financial support for the DOE's exploration of fuel cells signals=
=20
significant support from the federal government. In addition, warnings=20
about the high cost of oil and natural gas, and the reports of low supplies=
=20
of energy in states across the country, continue to scare energy end-users=
=20
and may be spurring a renewed interest in distributed generation options.

Here's how fuel cells work. They use an electrochemical reaction, as oppose=
d=20
to traditional combustion, to generate electricity. In other words, fuel=20
cells allow hydrogen-rich fuels to react chemically with air, without=20
burning,=20
producing as a byproduct DC electricity, water and heat. In addition, fuel=
=20
cells dramatically lower the level of pollutants that are emitted into=20
the environment. Test models of fuel cells presently convert methanol,=20
gasoline and natural gas to produce hydrogen fuel. It's easiest to think=20
of a fuel cell as a battery, but one that does not run down or need=20
recharging=20
(although it will need replacing about every five years). A fuel cell will=
=20
produce energy in the form of DC electricity and heat as long as fuel is=20
supplied. As an added advantage, fuel cells can be controlled remotely=20
by computer and run rather quietly. This is perhaps the primary incentive=
=20
for end-users that would be interested in fuel cell technology. Especially=
=20
for facilities like hospitals, the attributes of low noise and near-zero=20
pollution are very appealing.

Currently, fuel cells are being tested and developed by laboratories and=20
think tanks around the world, hoping to make this low-polluting form of=20
generation available for widespread use by 2002 or 2003. Under the DOE=20
grant, money provided for stationary fuel cells will fund research and=20
development to reduce costs and improve performance. It is hoped that this=
=20
will lead to market-ready fuel cell power systems within three years. In=20
addition, the funding allocates $41.5 million to transportation fuel cell=
=20
research such as integrating fuel cell stacks with fuel processors and=20
balance-of-plant technologies for testing. This program also will examine=
=20
the technology barriers to fuel-flexible systems for automobile application=
s.=20
The $5.5 million reserved for buildings will go toward developing a prototy=
pe=20
fuel processor, completing the design competition for a 50kW co-generator=
=20
for buildings, and other research and development.

Deregulation has cast light on alternative forms of power supply. As=20
customers=20
possibly decide to use on-site generation as opposed to power delivered=20
across a transmission grid, this dramatically alters the traditional busine=
ss=20
of most energy companies. Large commercial and industrial customers that=20
suddenly opt for fuel cell solutions to their energy needs would have=20
dramatic=20
financial impact on their incumbent energy provider. As a result, many=20
electric utilities and energy providers are investing in fuel cells as=20
a hedge against a possible shrinkage within their own supply businesses.=20
Southern Company is a good example. Just this month, Southern joined Alabam=
a=20
Municipal Electric Authority, Mercedes-Benz U.S. International, Inc., and=
=20
FuelCell Energy in a partnership to "drive a growing interest in fuel cell=
=20
technology." Specifically, Southern is providing funding for a fuel cell=20
plant to be located in the service territory of Alabama Power, a Southern=
=20
subsidiary. The plant will convert pipeline natural gas into electricity=20
at a reported efficiency of about 50 percent, compared with 33 percent=20
for conventional generation, which will feed the power distribution system=
=20
of Mercedes-Benz.

Another example is Enron, which just two weeks ago entered into an alliance=
=20
with FuelCell Energy, Inc., to develop and market FuelCell Energy's Direct=
=20
FuelCell products, focusing on state renewable and energy conservation=20
programs. As part of the partnership, Enron is investing about $5 million=
=20
in the common stock of FuelCell Energy. In its announcement of the=20
partnership,=20
Enron stated that "the transaction enables us to reach the developing marke=
ts=20
for clean energy and renewable energy, which may be served through=20
distributed=20
generation products, such as fuel cells."

These are just two examples of many energy companies that are devoting=20
money to fuel cells and other forms of distributed generation. Some state=
=20
regulatory commissions have debated whether or not to allow utilities to=20
own their own distributed generation equipment technologies. As a result,=
=20
we are seeing a trend of utilities investing in companies that are already=
=20
developing distributed generation solutions, instead of doing it themselves=
.

The investment appears to be a smart one. According to Stephens, Inc.,=20
an investment banking firm, common industry projections put the potential=
=20
for the automotive fuel cell market at $50 billion annually by 2020 and=20
as high as $100 billion (cumulative) for the stationary power markets withi=
n=20
10 years. The increase is due in large part to the growth of Internet-based=
=20
industry and the need for mission-critical systems at dot-com operations.=
=20
Microturbines=01*small generators that can produce enough power for a small=
=20
business=01*have beaten fuel cells to market and are currently manufactured=
=20
by the likes of Capstone, Caterpillar and Solar Turbines. Microturbines=20
reportedly could be potentially superior to fuel cells with regard to low=
=20
emissions. Many energy companies and power marketers such as Williams,=20
Alliant Energy and American Energy Savings have made announcements just=20
within the last month that they will market microturbines to customers.=20
Yet, the distributed generation market should become much tighter once=20
fuel cells become commercially available, something that this hefty new=20
grant from the U.S. government should push forward.=20

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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
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