Energy
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11/04/2013 @ 8:44AM |143 views
Has The Time Finally Arrived For Fuel Cells? Some Private Investors Are Beginning To Think So
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Bridgeport Plant - Image: Fuel Cell Today
Investors with long memories will recall the enormous buzz around fuel cells in the late 1990s in early 2000s. Plug Power and Ballard reached vertiginous market caps. The fuel cell was the technology that was going to change the energy world. President George W. Bush called it the technology that would replace Detroit’s internal combustion engine. None of that has yet transpired. Shareholders in those companies suffered a bloodletting, and the fuel cell is still a curiosity for most people. But for those looking closely, there is finally some good news. The fuel cell is slowly finding established niches, gaining a foothold, and there is talk of long-term grid parity absent subsidies.
There are a number of reasons for this.
1) costs have continued to fall as technologies improve. This is particularly the case where fuel cells are used in combined heat and power applications and one can get total efficiencies in the 90% range.
2) natural gas prices in the U.S. have fallen, reflecting abundant availability and offering a cheaper underlying fuel supply.
3) fuel cells offer the promise of something that has been in short supply for many Americans lately: a reliable and consistent source of electricity (the few installations in the Northeast with fuel cells fared well after Hurricane Sandy).
4) fuel cells can be located close to consumers, with a very limited environmental footprint and relatively minimal space requirements.
5) scale drives volume, which lowers prices dramatically. Between scale and efficiency gains, costs have fallen four-fold in the last decade.
To learn more about recent fuel cell developments, I interviewed FuelCell Energy’s President and CEO Chip Bottone. Located in Danbury, Connecticut, the company operates power plants in 50 locations across the globe, and is producing 70 MW of product annually, with installations in nine countries and activity in Asia and Europe. According to the most recent earnings call, FuelCell Energy has an installed base and backlog exceeding 300 MW. It also recently opened a manufacturing facility in Germany, with another coming on line in South Korea that is being built by its local partner, POSCO Energy.
Bottone was candid about the industry’s past mistakes. “Besides Ballard, there were others with high valuations at the time and some things didn’t develop as fast as they’d like.” He noted that the industry has continued to develop slowly, with some consolidation as recent as last year, but Bottone noted “2013 was quite a bit different. We did see a lot more recognition that the kind of things we are doing can really add value, not just economic but also offsetting infrastructure costs.”
Global trends have helped fuel cells along recently. “We have a world with a lot of things going on. Denuclearization is creating electricity supply issues in some countries. There’s a debate about solar. Throughout all that discussion, I think our timing is good to come up with cost-competitive clean infrastructure plays, which is what FuelCell Energy does.”
FuelCell Energy distinguishes itself from other competitors in the space in that it builds larger, utility-scale facilities that typically fall anywhere between 1 and 60 megawatts. Bottone comments,
In South Korea, we are just completing a 60 MW plant as part of a portfolio of distributed generation. In North America, we are building a 15 MW plant for Dominion that is going to feed into ISO-New England on a remediated site in Bridgeport, Connecticut. That was done with private capital. Our strategy is to build bigger and bigger plants to meet the power generation challenges and attract private capital at the same time.
FuelCell is banking on the premise that the company can play a role in assisting industrial customers, governments and utility companies with infrastructure improvements, utilizing private capital. This use of private money could prove to be significant in a world where utilities have fallen behind on grid investments, and assets have depreciated more quickly than they are being replaced.
In its 2011 Report, “Failure to Act,” The American Society of Civil Engineers (ASCE) highlighted the startling fact that the U.S. power network of 5,800 major power plants and 450,000 miles of high voltage transmission lines is aging rapidly. Fully 70% of U.S. transmission lines and power transformers are over 25 years old, while 60% of our circuit breakers exceed 30 years in age. ASCE points to an estimated investment gap of $107 billion by 2020. Clearly, it will be hard to raise that capital. Privately funded infrastructure projects may provide a small but important part of the overall solution, particularly distributed power generation such as fuel cells that produce power close to the end user, reducing or avoiding the need for transmission lines.
Bottone notes that this willingness of private capital to step up is relatively recent, and that the company has privately funded projects with Pacific Gas & Electric, Southern California Edison, and Dominion. “That’s a completely different story than I would have told you two years ago.”
What changed?
I think there’s a different expectation today around energy, I think people in the past said, ‘I can depend on the utilities to deliver power anywhere I need it,’ and now they say, ‘this is an essential element I am not willing to compromise.’ Then, as costs came down, all of a sudden we were attracting financing. Two years ago money went to wind and solar, but not to fuel cells. That’s changing.
The key to FuelCell’s change in fortune has also come about as a result of the increase in project-based financing. Just a few years ago, the cost of capital for wind and solar was relatively low but according to Bottone fuel cell projects could not attract capital for less than 15 %. Since then “we’ve seen things come down to a 10 or 11% unlevered return expectation, which allows for a lot of projects to be developed.” FuelCell Energy also handles the operating responsibility for delivering the combined heat and power product, which further de-risks the projects for the investor.
While these projects are not in the billions of dollars, they don’t run cheap, either. “A 1.5 MW project is a $6 or 7 million total installed cost. What we are seeing is demand for financed or leased solutions, which is why the financing is so important. Bridgeport is give or take a $60 million project.”
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(contributor_data.name)!?html Peter Kelly-Detwiler Contributor
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I'm a co-founder of NorthBridge Energy Partners, LLC., a consulting firm that helps companies connect assets to power grids. I'm also a former Senior VP of Energy Technology Services for Constellation NewEnergy, Inc., and have 20+ years of experience in the energy industry. I've written for the Boston Business Journal, Mass High Tech and several other online industry publications. I have a B.A. from Williams College and a Masters from Tufts University’s Fletcher School.
The author is a Forbes contributor. The opinions expressed are those of the writer.
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