Making A Case For Rapid Growth Of Fuel Cells

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 |  Includes: BLDP, FCEL, HYGS, PLUG, SYY, WMT
by: Mitch Vine

The Industrial Truck Association (ITA) represents (since 1917) the manufacturers of lift trucks and their suppliers who do business in Canada, the United States or Mexico. The association polled its membership in 2010 and concluded that “fuel cells will be in high use in just a few years.” Most members felt that lift trucks will be a significant percentage of shipments (estimates ranged from 11-50%) by the year 2015.

Why the strong opinion? Three reasons: 1.The technology is already being used today by some of the biggest names in the distribution centre world. 2.The business case is strong already and will get stronger in coming years as fuel cell costs are still coming down. 3.The technology helps reduce greenhouse gas emissions.

It is estimated that there are 1 million fork lift trucks in operation in North America, with the ITA reporting another 104,000 sold in 2010.

Companies like Wal-Mart (NYSE:WMT), Sysco (NYSE:SYY), and BMW have huge distribution centers with 30, 100 or even 300 lift trucks in operation. These indoor trucks, typically powered by lead acid batteries, are targets for fuel cells.

In this article we will take a look at the business case for fuel cells. In one example, Wal-Mart estimated that the “use of hydrogen fuel cell technology will deliver $2.0 million in operating cost savings over seven years and will reduce Greenhouse Gas emissions by 530 tonnes on CO2 per year."

We have a more detailed business case based on the products produced by Plug Power (NASDAQ:PLUG). The example is for distribution center planning to replace the batteries on a fleet of 100 trucks. The more trucks in a warehouse, the faster the payback, which is why Plug focuses its efforts on operations that have at least 30 trucks. In this scenario the warehouse uses a combination of Class 1, Class 2, and Class 3 trucks. Note the trucks themselves do not have to be replaced, as the fuel cells installs in the same place where the batteries would have been located.

Summarizing the results – the operation would save $2+ million dollars over a ten year period by using fuel cells. This works out to a payback period of 1.6 years, or an IRR (internal rate of return of 52%. How did we get there?

The scenario - we compare the capital cost of 100 lift trucks with batteries compared to 100 lift trucks with fuel cells. Note we assume this is a replacement so the very significant cost of building a charging room is ignored. In a new installation the avoidance of building a charging room would be a large saving of cost and space.

The capital cost of batteries versus fuel cells versus batteries work out to be relatively similar partly because the batteries have to be replaced after five or six years.

The big differences are in labour savings. Battery power lift trucks slow down during a shift which means less work gets done. After five or six hours of continuous use the batteries are often swapped out for fresh ones. This takes 10 or 20 minutes of downtime. Compare this to fuel cells that run at 100% output for the entire shift, and can be refueled in 2 minutes. Also, in fuel cell based operations no charging room staff is required.

100 Trucks

20 Class 1, 20 Class 2, 60 Class 3

Click to enlarge

A few key points to note. The fuel cell case is $ 2+ million better than the battery case. Over ten years the operating costs far outweigh capital costs of equipment, and even through fuel cell hydrogen costs more than electricity charging, the fuel cells scenario saves many labor dollars.

An even stronger case for fuel cells is the Greenfield case because an operations centre can be built without the initial cost of a battery charging room. Longer term we believe the costs of the fuel cell solution will come down faster than the battery case because fuel cell technology is still young and costs are still coming down fairly rapidly, whereas the battery solution is quite mature, and it doesn’t appear as if any new battery technologies are practical in this application.

With a good business case, plus the greenhouse gas avoidance gas benefits of fuel cells, one might ask why all the big distribution centers have not switched to fuel cells? We believe the answer is simply that there hasn’t been enough time for buyers to get comfortable with fuel cells. As mentioned at the start of this article, the members of the Industrial Trucking Association believe that a significant number of sales in North American will convert to fuel cells by 2015. With some of the largest operators already using the Plug solution, they are now in a position to cookie cutter the solution into more centers. In 2011, with more than 50 companies already using the technology, the level of familiarity and comfort is increasing

The number of units shipped by Plug Power has more than doubled each year for the last three years and is on track to more than double again this year. A fifth doubling of shipping volumes is likely again in 2012. This is also good news for Ballard Power (NASDAQ:BLDP) which supplies fuel cell stacks to Plug, and could be good news for other fuel cell makers like Bloom, Hydrogenics (NASDAQ:HYGS) and Fuel Cell Energy (NASDAQ:FCEL). Some visible success in the fuel cell sector should be beneficial for all other players.

These higher volumes are catching the attention of the gas shipping companies, who finally have a good market and a reason for building out hydrogen shipping infrastructure. A European gas company is expected to help Plug introduce their line across Europe in 2012.

Disclosure: I am long PLUG.