Fuel cell fatigue

Friday, May 27, 2005 Updated at 8:45 AM EDT

Globe and Mail Update

VANCOUVER — British Columbia investors have a new disease called FCF, or fuel cell fatigue. The mantra that "commercialization is around the corner" is now a negative for investors who supported the Canadian fuel cell industry based in the province.

Investors are pinching their noses and holding their breath, while the federal government has raised -- slightly -- the amount of research funds available to the industry through a number of programs. Some of the reasons for the private capital crunch are emotional. It's natural: There has been a lot of disappointment over the years. The rest involves the short-term focus of financial markets and risk aversion. After pumping so much money into the sector, investors have realized no financial return of late, and determined that the area poses too much risk.

What's worse is that the fuel cell sector in Canada -- including giants like Ballard Power Systems Inc. -- is starting to run out of the operating and research monies that it accumulated during the heady heydays of the tech boom. But the sums needed to get over the finish line with a viable fuel cell vehicle on the market are still huge, estimated to be in the billions. Part of the reason for the big dollar figure is that the burn rate for research and development in this sector in Canada is pegged at more than $300-million a year.

The key question amid all the loss involves where the B.C. industry is going to access the funds needed to bring a viable and affordable fuel cell vehicle to the highways. It is a particularly pressing concern with oil hovering at $50 a barrel and alternative energy sources seen as an important hope for the future.

While domestic investors aren't keen on the B.C. fuel cell industry, the rest of the world is interested and moving forward. Companies in Japan, South Korea and the United States are doing business or liaising with local firms. Indeed, Ballard announced yesterday that it will receive $30-million (U.S.) from Japanese partner Ebara Corp. to help finance co-generation fuel cell stack and system technology.

China has also been talking to a few B.C. companies and representatives of the Canadian fuel cell sector because it may be in a position to take advantage of fuel cells in a way that other, more developed, countries can't. China has a limited transportation infrastructure of highways and gas stations, and is also dealing with serious environmental and air quality issues. So, it may be easier and more logical for China to bypass the traditional fuel transmission route and leapfrog into a system based on hydrogen fuel cells. This is analogous to how some developing countries have skipped traditional wireline telephone systems and moved directly into cellphones and wireless.

The United States has a similar problem to China. It sees hydrogen fuel cells as a way to help it solve a major economic challenge -- but one that is more related to security concerns surrounding energy than infrastructure and environmental issues. Indeed, the United States has determined its largest user of oil is the transportation sector and as a result has committed $1.2-billion in research money to get commercial hydrogen fuel cell vehicles on the road by 2015. While that timeline may be optimistic, it provides a second funding stream for B.C. fuel cell companies with U.S. units. Not only is there money for fuel cell development in the United States, the funds are easier to access because they are largely available in one location. In Canada, the fuel cell industry must target 32 different government pots for research funds.

Given the funding labyrinth, B.C.'s fuel cell industry has been trying to find ways to sweeten the deal for equity investment.

One of those options involves "flow-through shares," which are used in the mining, oil and gas, and wind energy industries to stimulate capital market interest. The flow-through share option would allow investment bankers to raise funds for a fee by selling fuel cell stocks that come with special tax incentives for investors. Unfortunately, the Canadian government hasn't been too keen on this option.

But even as the sector struggles for money, the technology is inching forward. The new plan for the commercialization of fuel cells is projected to include a tiered development from micro fuel cells for computer batteries to portable fuel cells, small fuel cells and then transportation cells for vehicles.

And with public markets pretty well closed to fuel cells, B.C. players need to focus on creating a demand pull. Yes, there are still cost issues and technological barriers -- but none have the ability to be a deal breaker. Remember, it took 20 years to develop gas turbine technology.