A Clean Technology Powers Up

Fuel cells could be a major source of electricity by 2010

If the lights of New York ever go dark again, as they did in the great Northeast blackout of 1977, the huge Nasdaq sign in Times Square will continue to flash its colorful symbols. It will pull that off thanks to a pair of fuel cells from United Technologies Corp. that were installed earlier this year in the Conde Nast Building at 4 Times Square. Together, the cells generate 400 kilowatts of electricity--enough to power 100 residential homes. While this output will pare the building's electricity bill only a little, it's plenty to keep the elevators running and the outside signs gleaming in an emergency.

Businesses are starting to snap up fuel cells because they can provide supplemental power almost anywhere, even in a high-rise office building. Instead of using combustion to produce electricity, they squeeze juice from a chemical reaction between hydrogen and oxygen in the air, with heat and hot water being the main byproducts. This century-old technology has been slow to deliver on its promise. But with big-volume applications on the horizon, investors are pumping money into a growing cadre of fuel-cell companies.

Powering the Nasdaq sign with fuel-cell energy is only fitting. Among the stocks glimmering on the Nasdaq recently are two fuel-cell companies, Ballard Power Systems Inc. and Plug Power Inc. Earlier this year, shares of Vancouver-based Ballard tripled, to more than 100, then drifted down into the 70s. Plug Power, after going public last October at 15, soared as high as 140 before sinking back into the 60s.

Neither company expects to turn a profit before 2003. And with fuel-cell technology still being fine-tuned, commercial products won't appear before late 2001. But that hasn't dampened the appetites of investors, who are also piling into other fuel-cell players, such as Impco Technologies and Energy Conversion Devices. Two more newcomers, H Power and Avista Labs, are planning initial public offerings. "Commercial fuel cells have always been seen as on the fringe--decades away," says Paul Lancaster, vice-president of Ballard, in Burnaby, B.C. "Now, people recognize that they're close to entering the market."

The change in mind-set started at the Detroit Auto Show in January. General Motors, Ford, DaimlerChrysler, Honda, Toyota, and other carmakers either showed or talked about souped-up electric cars using fuel cells instead of batteries that will hit the road in 2003 or 2004. General Motors Corp. boasted that its Precept, a five-seat concept car unveiled at the show, could deliver a range of 500 miles between refuelings and a top speed of 120 mph.

Fuel-cell cars look so good that Ford Motor Co. Chairman William Clay Ford Jr. forecast they could eventually nail the coffin lid on gasoline and diesel engines. He didn't say when, and nobody believes it will happen soon. But if fuel-cell progress continues at its present clip, analysts say the last car-engine factory might close around mid-century.

The week after the auto show ended in mid-January, investors learned that Microsoft Corp. Chairman William H. Gates III had quietly accumulated over a 5% stake in Avista Corp., the Spokane (Wash.) utility parent of Avista Labs. Avista Labs is developing a fuel-cell power plant for homes. It packs enough punch--4 kilowatts--to provide all the electricity a home needs. Once Gates opened the gate, investors flooded in. In two days, Avista's stock jumped to 62, a gain of 90%.

Indeed, throughout the past year, news flash after news flash has kept fuel cells in the spotlight. The U.S. Army plans to install hundreds of fuel-cell generators at military bases. And instead of building two new nuclear power plants, Japan wants to produce 2.2 million kw with fuel cells by 2010. It has already ordered residential-size units for testing from IdaCorp's Northwest Power Systems unit in Bend, Ore. The Bonneville Power Administration is also buying 110 of these units for testing in Pacific Northwest homes.

Interest in fuel cells is soaring because the technology "represents a real breakthrough," says Daniel M. Rastler, manager of distributed-power research at Electric Power Research Institute in Palo Alto, Calif. Old-line industry giants are buying into fuel cell pioneers. Michigan's biggest utility, DTE Energy Co., owns a third of Plug Power. Its subsidiary, Detroit Edison, will test Plug Power fuel cells in 19 homes this year and expects to be selling them in volume by 2004. KeySpan Technologies Inc., a subsidiary of utility giant KeySpan Corp. in Hicksville, N.Y., has ordered 30 Plug Power units for home testing from GE MicroGen Inc., a unit of GE Power Systems, which has a stake in Plug Power.

Factories are also getting in on the fuel-cell frenzy. With backing from Atlanta's Southern Co. and the Alabama Municipal Electric Authority in Montgomery, Ala., FuelCell Energy Inc. in Danbury, Conn., is installing a $2 million, 250-kw generator at the Tuscaloosa assembly plant of Mercedes-Benz U.S. International Inc. A similar fuel-cell system will soon provide power for the town of Bielefeld, Germany. It's being built by DaimlerChrysler subsidiary MTU Friedrichshafen, which has licensed FuelCell Energy's technology.

Despite all this activity, fuel cells aren't quite ready for mass markets. For one thing, units for homes and cars still cost way too much. That's why all the residential testing is being subsidized by companies. When Avista Labs and Plug Power begin selling home units next year--through Black & Veitch and GE Power, respectively--they'll probably run close to $10,000 apiece. And the companies will lose money on every sale. "GE and Plug Power have already committed to deep forward pricing, and we'll have to match that," says Avista Labs President Kim D. Zentz. She says Avista is ready to eat "several million" in losses to stay in the game. Zentz doesn't see home fuel cells taking off until mid-decade, when prices could dip below $5,000.

A major reason for today's steep costs is that "fuel cells have never been made in high volume," says Ballard's Lancaster. So Ballard has spent a bundle developing volume-production processes. It has had some heavyweight help: Both DaimlerChrysler and Ford are major investors. But the effort could pay off big if it enables the company to cut the cost of its 80-kw fuel cell for cars enough to compete with the $3,500 tab for a gasoline engine.

That's a tall order, though. Analysts figure that proton-exchange membrane fuel cells--the type Ballard makes and the main contender for home units--cost more than $2,000 per kw to build. Ballard will need to slash costs down to the $50-per-kw range to win Detroit's pocketbooks. But it has a powerful incentive to do so--the 52 million or so cars that are built worldwide each year. "At $3,500 per engine, that's a potential market of $180-plus billion every year," notes Lancaster. "That's equal to all the other fuel-cell markets combined." The company plans to work up to volume production of 300,000 fuel cells annually by around 2005. It will start with portable fuel-cell generators for construction sites next year and add transit-bus engines in 2002, then small numbers of fuel cells for cars in 2003.

Cars may be the lodestone, but makers of home and commercial fuel cells can point to some gee-whiz numbers of their own. Over the next 20 years, the electric industry figures it will need to add about 10 trillion kilowatt-hours of new capacity worldwide. If fuel-cell costs drop to $500 per kw, as expected after 2005, they could be competitive with coal- and gas-fueled generators. And given their environmental benefits, fuel cells should grab enough business to keep everyone busy--from the companies that make home units to those that produce big multimegawatt power plants.

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