This article is the fifth in a series on the future of the electric vehicle (NYSE:EV) industry. Past articles include:
- Not your Father's Gas Station: The Future of Electric Vehicle Charging
- Beyond Range Anxiety: The EV's Next Challenge
- Power Surge: Will The EV Revolution Overwhelm The Grid?
- Solar-Powered Electric Vehicles: Panacea or Hype?
Investors must be pragmatic when making decisions about which technology to back. The pragmatic investor understands the battle for market dominance is as much a race as it is a beauty contest. The further a leading technology gets ahead of its challenger, the "prettier" the challenger must be to unseat it. This is why a good enough product that delivers on its promise now often beats a better product that will deliver in the next five to ten years.
Today, many investors see the Battery Electric Vehicle (BEV) locked in a battle for the future with the Fuel Cell Electric Vehicle (FCEV). With a massive head start in sales thanks to manufacturers like Tesla Motors (NASDAQ:TSLA), Nissan (OTCPK:NSANY), and General Motors (NYSE:GM) and supporting infrastructure plays like Chargepoint, NRG Energy (NYSE:NRG) and Car Charging Group (OTCPK:CCGI), the pressure is on the FCEV to deliver a substantial competitive advantage. With each BEV sold, the pressure grows.
Competitive advantage implies two things: First, being competitive implies that parity will not cut it. Second, an advantage is not really an advantage unless it is meaningful enough in the eyes of the mass market consumer to make a difference. Had the FCEV been ready for prime time a few years ago, we might have had a "Battle Royale" of competing standards on our hands. With sales of BEVs taking off in the U.S., there is just too much parity and too little competitive advantage for the FCEV to pose a serious threat to the BEV.
A Massive Head Start
The only FCEV player to even barely get out of the prototype stage in the U.S. market today is Honda (NYSE:HMC), which according to a recent USA Today article has a mere 25 FCX Claritys on the road being leased exclusively by customers in California. Considering that the BEV debuted with 19 vehicles on U.S. roads In December 2010, the BEV has almost a three year head start on the FCEV. Daimler (OTCPK:DDAIF), maker of the Mercedes Benz B-Class F-Cell (which exists only as a demonstration model) says it could take until 2017 (page 4) to produce an affordable mass market FCEV, underscoring just how difficult it is to make the FCEV a viable mainstream consumer product. According to sales figures provided by the Electric Drive Transportation Association in the link above, 55,695 BEVs were sold in the U.S. as of August 2013. Given the BEVs head start, the FCEV is going to have to prove to be substantially better to have a chance at displacing it.
Even more problematic is the infinitesimally small and exorbitantly expensive infrastructure of public hydrogen fueling stations. According to the U.S. Department of Energy Alternative Fuels Data Center, there are just 10 public hydrogen fueling stations in the entire U.S., compared to well over 6,000 public electric charging stations. Nine of those stations are in California supporting Honda's 25 FCX Claritys. In the Event Report from the Hydrogen + Fuel Cells 2013 conference linked above (page 5), the California Fuel Cell Partnership said it can expand that number to more than 25 by the end of 2014 if all goes to plan. This less-than-breathtaking speed of expansion owes to that fact that these stations cost a whopping $1 million each according the USA Today article linked above. That's down from $4 million, suggesting that a lot of efficiency has already been wrung out of the technology. In contrast, the most expensive EV charging stations being built right now are the Tesla level 3 Supercharger stations, which cost about one-fourth of that. Car Charging Group will outfit property owners with as many level 2 EV charging stations as they need for no upfront cost and will even share charging revenue. The property owner just pays for service and maintenance.
Reality Versus Romance
The FCEV has been highly romanticized. It is touted as a miracle cure for both the energy crisis and global warming. Proponents claim it is "powered by the most abundant element in the world" (hydrogen) and that its "only emission is water." In truth, only the later statement is correct while the former is very misleading.
It is true that hydrogen is the most abundant element in the world. 71% of the Earth's surface is water, which of course is two parts hydrogen, one part oxygen. Therein, however, is the problem: Hydrogen only exists in nature as a part of larger molecules. Before it can be used as a fuel, the molecule it is a part of must be "cracked apart," which requires a significant amount of energy. The liquid hydrogen dispensed at the handful of hydrogen stations in the U.S. today is made by reforming natural gas ((CH4)), which like crude oil is a fossil fuel in finite supply. Hydrogen can be obtained through electrolysis, which separates hydrogen from water by passing an electrical current through it. Like the FCEV itself, however, more research is still needed to make this process economically feasible.
Regardless of whether or not electrolysis ever becomes practical on a large scale, the well-to-wheels emissions of the FCEV cannot match that of the BEV. One need not produce a detailed mathematical proof to show why this is true. Just consider the process: Step one; energy must be drawn from the power grid to separate hydrogen from its host molecule. Step two; hydrogen must be compressed into liquid form so it can be dispensed from a pump (requiring more power). Step three; liquid hydrogen must be trucked to the fueling station (adding emissions). The BEV charging process is much simpler, resulting in remarkably low well-to-wheels emissions as detailed earlier in this series: Energy is drawn by an EV charger from the power grid and plugged directly into the BEV.
No Magic Bullet
Once the hype of hydrogen power is stripped away, it is hard to see what the FCEV could offer that would make it a far superior alternative to the BEV. Ignoring the fact that hydrogen fueling stations are far too expensive to start sprouting on every corner, the fact that the experience is as convenient as a gas station doesn't hold a candle to the convenience of charging an EV, as detailed in the first article in this series. Though much has been made of the 240 mile range of the Honda Clarity FCX, the Tesla Model S, when equipped with an 85 kW motor has a 265 mile range. With many of the world's major automobile manufacturers working hard to crack Tesla's DNA, the one real advantage the FCEV had over the BEV is fading fast.
Die-hard FCEV enthusiasts will look at the nearly three year lead the BEV has and with a flourish of Apollo moon mission exuberance exclaim that nothing is impossible. As an investor, one should never be too sure of what cannot be done. The point is, even if the FCEV can clear all the hurdles to commercial viability, it will at best be an also-ran in the race for the future of the EV. With no meaningful competitive advantage over the BEV, pragmatic investors should not assume consumers will drop the BEV for something that is different but no better.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Market Exclusive is a team of analysts and writers. This article was written by Carlos Uribe, one of our Group contributors. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.