Fuel Cell Forecast

Fuel Cell Forecast

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Thursday, October 23, 2008

Alternative energy providers say they will deliver bigger and better projects now that Congress has provided their respective industries with key tax breaks -- but tough economic times might stand in their way.

Among the winners of the bill that passed in early October are fuel cell makers, who say that the tenuous nature of tax law had left them in a continuous state of limbo. But with the expansion of the tax credits, they are now in a position to not just close pending deals but to also recruit new players that include utilities. While the subsidies are intended to increase the sales of those stationary fuel cells, the industry will now have to contend with a serious credit crunch.

The new law sets the federal investment tax credit for fuel cells through 2016. It also increases the benefit from $1,000 per kilowatt to $3,000 per kilowatt or 30 percent of the capital cost, whichever is less. Furthermore, utilities are now entitled to receive the tax credit when they purchase such technologies -- a major development as power companies were once considered obstacles to such expansion, arguing that fuel cells interfere with their own electricity sales.

Consider a 1 megawatt fuel cell project that may cost $5 million: Under the old law, the credit or buy down totaled about $1 million. With the new provisions, that amount is lifted to about $1.5 million.

"The price-learning curve since the mid 1990s has been slow," says Sam Logan, president of Logan Energy in the Atlanta area. "But it has moved in the right direction. As we get more cost effective, it stimulates markets and stimulates us as developers to pursue the market. As a result, volumes will increase year-over-year. And as greater modernization and automation in the plants become part of this learning curve, that will add to the momentum. The tax credits are very influential in stoking this process."

The two most progressive regions of the country have been in California and the Northeast, both which have governing bodies that have enacted laws favorable to not only fuel cell development but also green energy expansion. The new law extends that reach and encourages others to participate, say fuel cell makers.

According to the U.S. Fuel Cell C ouncil, global sales for all types of fuel cells were reported to be up by 10 percent and had reached $387 million in 2006, the latest year for which such information is available. Spending on research is also up 4 percent to $829 million. Its base case assumption is that stationary fuel cells would be used to generate electricity and will supply 1 percent of the energy consumed in this country in 2020. That will grow to 5 percent in 2035 and 10 percent in 2050.

Financial Turmoil

Unlike power sources that use fossil fuels, the by-products from a hydrogen-based fuel cell are heat and water, according to web-based descriptions. Such a fuel cell converts hydrogen and oxygen into water, and in the process it produces electricity. Fuel cells are quiet, efficient and pollution-free.

They have an electrical efficiency rate of 47 percent compared to 30-35 percent for legacy combustion systems, says FuelCell Energy. In combined heat and power applications, where the heat is captured and used, the result is an overall energy efficiency of up to 80 percent, it adds.

Fuel cells that run on hydrogen have the potential over time to capture market share from stationary power generation. At present, though, those technologies have a small place in the electric power sector and are primarily used by those businesses such as hospitals that can ill-afford even a momentary loss of power. Distributed generation, which can run on an array of fuel sources, generally has bigger applications and may be used as the primary power source for a business complex spread across a campus.

The delay with unveiling fuel cells on a massive scale is both technological and economic. Right now, hydrogen is produced mainly from natural gas using steam reformation. That method does nothing to limit reliance on fossil fuels or the infrastructure that must carry them. Green energy, meanwhile, could create the electricity to produce hydrogen but it may not be as reliable or cost effective. Ultimately, fuel cell advocates say that the conversion process can and should be carbon neutral.

Those immediate hurdles coupled with the current financial turmoil may deter investors. According to David Redstone, who publishes a web-based fuel cell newsletter, the technology needs to reach economies of scale to achieve cost reductions. "It's hard to imagine that people will run out and do big energy projects when the economy is in the middle of an apocalypse. Credit is non-existent. A large fuel cell project is still considered risky when compared to traditional natural gas cogeneration."

In a placid economy, markets could expect greater investment in emerging technologies, Redstone says. For its part, the fuel cell industry remains hopeful, saying that the technologies to deliver electricity in cleaner and more efficient ways exist today. It just needs to be nurtured, mass-produced and commercialized.

And that's where passage of the investment tax credit comes into play. "Long-term tax credits are an essential component of fuel cell commercialization," says Robert Rose, executive director of the U.S. Fuel Cell Council. "Credits will also accelerate fuel cell deployment, thus helping to assure that the benefits of fuel cells are fully realized."

By offsetting the cost of fuel cell ownership and providing tax certainty, fuel cell makers are hopeful sales will rise. Today's economic climate may dampen spirits, but the current dread will eventually give way to clearer forecasts.