Hydrogen Refueling Station Infrastructure Market Opportunity For FuelCell Energy

| About: FuelCell Energy, (FCEL)


Onsite distributed hydrogen production systems could potentially accelerate the mass rollout of hydrogen refueling stations for hydrogen-powered fuel cell vehicles (FCV).

Tri-generation technology is the key for station operators to survive the initial lean years by capitalizing on multiple revenue streams to improve overall economics while FCV sales ramp up.

Flexibility with regards to fuel type inputs and variable product outputs allows operators to maximize value in their specific market demographics.

Most of the current revenue and media emphasis on FuelCell Energy (NASDAQ:FCEL) is attributed to their utility-scale fuel cell power plants that are measured in output of megawatts. Fuel cells were created with the goal of supplying emissions free power and never intended to produce purified hydrogen, which is the input requirement for a traditional hydrogen based fuel cell. One unique attribute of FCEL Direct FuelCell (DFC) technology is the ability to internally reform a fuel source without requiring an external reformer. In other words, a wide variety of fuels such as natural gas or propane can be provided directly into the fuel cell which gets converted into hydrogen before it is transformed into power. FCEL has developed a process to produce extra hydrogen over and above the amount required for generating electricity, which then gets purified and compressed for later usage.

This discovery might not mean anything to some people but the implications could dramatically solve one of the biggest hurdles preventing the mass adoption of hydrogen-powered fuel cell vehicles and that is lack of a nationwide hydrogen fueling station infrastructure. Presently, several regions with either high environmental legislation or densely populated have spearheaded the construction of a network of hydrogen fuel stations. There were 85 hydrogen refueling stations in USA in 2010 with the majority of them centered in California. Some of these stations utilize another technology known as electrolysis that takes electricity to extract the hydrogen out of water.

What is interesting about FCEL's DFC technology are the features known as co-generation and tri-generation. An example of co-generation in their bread and butter power plants is the creation of both usable electricity and heat. In the context of this article, co-generation would focus on producing electricity and hydrogen, and tri-generation would also include the third element of heat. Each of these outputs provide a valuable revenue stream and could also be used to power the electrical and heating requirements of the facility housing the plant.

Presently, Hyundai is the first car manufacturer to offer an FCV for sale in California in 2014. Toyota and Honda recently announced firm plans to begin selling an FCV in 2015. And it is inevitable other companies will follow in their footsteps in subsequent years.

Despite government subsidies and incentives to encourage businesses to construct a hydrogen fueling station, the economics of running the operation would realistically be quite dismal especially if there might be only several thousands of FCVs in use during the first several years. Thus, the stations utilizing electrolysis to generate only hydrogen from electricity would likely incur heavy losses with infrequent and limited fueling transactions. However, the stations that have tri-generation technology will immediately have a means to recoup capital investment beyond fill ups by FCV. Tri-generation stations can produce electricity, heat, and hydrogen and sell power to the grid or heat for industrial usage. This is critical to enabling a station operator to financially survive the initial lean years while FCV sales ramp up materially.

As mentioned earlier, DFC technology can utilize a variety of fuel inputs including the pursuit of completely green technology applications such as biogas or landfill waste gas. FCEL has been operating a 250 kW pilot plant for about three years in Fountain Valley, California that runs off biogas that is the byproduct of the Orange County Wastewater Treatment Plant. Normally, this unwanted "waste" gas is flared off by burning it up but now there exists a means of using the biogas to create power, heat, and about 100 Kg of hydrogen daily.

In April 2014 construction started on a new $7.5M 300 kW pilot plant based near the Vancouver, B.C. (Canada) area that will utilize a nearby landfill waste gas to create four valuable outputs of power, heat, hydrogen, and carbon dioxide (i.e. Quad-generation). The heat and carbon dioxide gets used to help grow crops for the greenhouse operation of Village Farms and excess electricity and hydrogen will be sold for commercial use. Landfill waste methane gas contains some impurities such as sulphur and it requires biogas clean-up technology offered by Quadrogen, one of the JV-partners in this green initiative, before it can be used as fuel input for the FCEL plant. This quad-generation plant is scheduled to be commissioned in early Q2-2015 and is considered to be a game changer in the existing arena for the renewable landfill gas market.

A value added feature is the flexibility to control the quantity of each product output. If for example, the local utility has reached capacity at peak hours of operation, then one could maximize the generation of electricity to sell to the grid at optimal prices, then later scale down the generation of power and ramp up heat output during the cold nights, and/or switch back to hydrogen production. This allows each operator to maximize the supply-demand of each commodity to the strength of their local markets.

FCEL had received a $2.8M grant in spring 2014 to develop a DFC-H2 tri-generation plant outfitted for natural gas fuel input at its Torrington, Connecticut manufacturing facility. It is scheduled to be operational by the end of 2014 and is capable of producing 135 Kg of hydrogen daily. This plant will showcase the technology to interested industry parties. The potential market for DFC-H2 tri-generation power plants is estimated to be $1.6 billion in the USA alone.


FCEL DFC technology operates independent of hydrogen due to its ability to use a wide variety of fuel inputs. It can create multiple product and revenue streams including hydrogen to eliminate costly and inefficient conventional transportation processes. Variable output process flexibility allows operators to improve overall economics of running a hydrogen refueling station by capitalizing on downtime. The many listed benefits along with satisfactory results from the long-term pilot plant to date create a compelling case for FCEL to potentially capture significant market share in the infrastructure build out of a nation-wide hydrogen refueling network. California alone will develop up to 46 hydrogen refueling stations in the state over the next four years.

Disclosure: The author is long FCEL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.