On June 4, a Mercedes A-class subcompact dubbed NECAR-5 pulled up to Capitol Hill. The unassuming, stubby vehicle, which had just completed the first-ever cross-country journey by a hydrogen-fuel-cell-powered vehicle, got the royal treatment. Flashbulbs popped, and Daimler Chrysler executives beamed. Politicians waxed on about the importance of cutting dependence on foreign oil. The news made headlines on all the major wire services, plus a number of newspapers.
Much less hoopla surrounded a fuel-cell installation that same day in Yellowstone National Forest. U.S. park rangers flipped the switch on a 4.5-kilowatt fuel-cell generator built by HPower (HPOW ) in Clifton, N.J. The system will help power ticket kiosks, lights, and other office needs at the park's West Entrance.
HPower's product will work alongside the existing electrical grid and has the modest aim of providing clean, reliable power to this relatively remote part of Montana. What's more, the HPower generator is already in commercial production, with an assembly line ramping up. That makes it much further along than DaimlerChrysler, which plans a limited public release of fuel-cell cars in 2004.
SEXY LONG SHOT.
The two events serve as a metaphor for the fuel-cell industry today. Automotive applications have PR appeal, for sure. But freeways full of fuel-cell-powered cars could be a decade away. Meanwhile, fuel-cell companies selling generators for niche applications in telecommunications or remote locations are starting to generate real revenues from the technology.
"I honestly think the last application that's likely to see fuel cells make a meaningful contribution is the automotive sector," says David Kurzman, a vice-president at investment bank H.C. Wainwright. "Unfortunately, that's considered the sexiest application by Wall Street and investors."
For now, the fuel-cell market remains small, with less than $100 million in sales per year, according to Kurzman. And how quickly it will grow in the next few years remains unclear. For those reasons, Kurzman and most of the fuel-cell companies themselves believe the immediate opportunity lies in niche markets.
NO MOVING PARTS.
Although fuel cells are an emerging technology, the concept behind them has existed since the 19th century. These ecologically sound power producers create electricity and heat by altering the configuration of pure hydrogen and oxygen molecules. After exposure to a catalyst, hydrogen molecules split to produce positively charged ions and negatively charged electrons. The electrons are routed through a series of channels called an anode, where they provide an electrical charge. Then, negatively charged oxygen molecules pull charged hydrogen ions and electrons through a porous membrane, creating water.
The result of the whole process is heat, electricity, and water, with little or no pollution. There are no moving parts, either -- no loss of efficiency because of the friction generated by internal combustion engines.
Supplying fuel for these cells remains problematic, however. True, oxygen comes from air. Hydrogen can come from a number of sources, including compressed gas in cylinders, hydrocarbons such as methanol, propane, or natural gas, or specialized mixtures that hold hydrogen with chemical bonds.
Fuel cells that use hydrogen compressed gas are markedly more efficient than those that use hydrogen derived from hydrocarbons. But purified hydrogen in gaseous form requires more space to store than liquid hydrocarbons. And there's always the specter of the hydrogen-powered Hindenburg dirigible, which went up in flames in 1937 -- even though fuel-cell companies claim that the gas is safer than gasoline under normal circumstances. Still, that's not the best image for consumers contemplating purified hydrogen under their hood.
Using hydrogen derived from hydrocarbons or other sources has other drawbacks. This requires devices called reformers that perform the additional step of stripping hydrogen from other substances -- and they can add significant weight and size to a standard fuel cell. "While hydrogen fuel itself may be cheaper [than gasoline], it has to go through a reformer to become hydrogen. The issue is that reformers are not terribly reliable and are somewhat expensive," says Paul McNeill, vice-president for business development at HPower.
Everyone agrees that, for the most part, fuel cells at present can't compete with standard hydrocarbons on a pure cost basis. Depending on the specific system, hydrogen-powered fuel cells for residential or commercial uses can cost 50% more per kilowatt of power than running a diesel generator. In part, that reflects a lack of economies of scale. But it's also due to the difficulties involved in creating hydrogen.
Good news is ahead, however: Unlike the relatively mature internal combustion technologies, fuel cells are improving in efficiency by about 30% a year, according to McNeill. "It's moving so fast," says Joseph Cargnelli, the vice-president for technology at Toronto fuel-cell concern Hydrogenics (HYGS ). "A fuel-cell engine that we developed a year ago is outdated today due to new materials, more power density, and more robust construction."
At present, much of the commercial activity is concentrated in early adopters and rural electric cooperatives. But that could change quickly, as the telecom industry warms up to fuel cells to power remote generators. The attraction? Fuel cells can run far longer than diesel generators before they require maintenance, says McNeill. For cell-tower locations in hard-to-reach areas that require backup generators, the lower maintenance requirement can more than make up for higher raw power-generation costs.
Hydrogenics is currently teaming with General Motors (GM ) to build a pilot fuel-cell installation for cellular towers in California for the country's sixth-largest wireless carrier, Nextel (NXTL ). And McNeill says HPower got lots of interest from phone companies when it demonstrated its product at a recent trade show.
DESTINY, NOT ALCHEMY.
This niche demand, however, might not be enough to shore up floundering fuel-cell shares. HPower shares sit in the $1 range, well off ther 52-week high of about $10. Hydrogenics trades at just below $5, about 50% off its 52-week high. According to Kurzman, many of the fuel-cell pure plays will need to go back to the well for cash infusions in the next few years. The sour equities market could hurt them at that point -- and give an edge to bigger businesses such as GE (GE ), which is rolling out a new fuel-cell technology sometime later this year.
That said, fuel cells are looking a lot more like destiny than alchemy these days. The pace of innovation has stepped up, and many companies are now on the verge of debuting first-generation commercial products. The political impetus has never been stronger, as the U.S. continues to struggle against political exposure to Mideast oil producers and as states adopt alternative power subsidies and tax credits in an attempt to compensate for maxed-out utilities.
In what may be a sign of the times, the country's largest diesel-generator maker, Caterpillar (CAT ), signed a deal in late April with Danbury (Conn.)-based FuelCell Energy (FCEL ) to jointly produce fuel-cell generator systems. That's quite a statement from a company that books about $2 billion in diesel generator sales each year. It's also a good omen for an industry that has remained painfully nascent for what seems like far too long.