Tesla's Fuel Cell Threat

| About: Tesla, Inc. (TSLA)
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Fuel cells could be the death of Tesla, even if fuel cell cars aren't as good.

It's the cost of the car, not just the cost of the cells that matters.

Tesla's Giga Factory tells the story, and investors should pay very special attention.

Recent advances in fuel cells are a threat to long-range battery electric cars, and particularly to Tesla (NASDAQ:TSLA). If fuel cells turn out to be a less costly way for automakers to build efficient, clean, long-range cars, then fuel cells cars will disrupt BEVs before BEVs disrupt the ICE car business and Tesla will be "road kill". Tesla shorts will laugh all the way to the bank, and Tesla longs will end up older, wiser and poorer. This could happen. Or not.

There has been a lot of talk about fuel cells. Several large automakers are thinking of using fuel cells instead of large Tesla style batteries to power electric cars. BMW (BAMXY), Honda (NYSE:HMC), Hyundai (OTCPK:HYMPY), General Motors (NYSE:GM), and even Toyota (NYSE:TM) are looking at fuel cells with a view to building cheaper, lighter, faster-to-refuel electric vehicles. Toyota's decision to focus on fuel cell hybrids is particularly troubling because Toyota is an early Tesla investor and even purchased Tesla batteries / drivetrains for their RAV4ev. While Mr. Musk has evaluated fuel cell technology as emanating from bovine backsides, a more sober assessment may be of interest to investors at this point. Let's begin with what a fuel cell car is and how it compares with a long range BEV.

A "fuel cell car" is really a hybrid car, where the ICE is replaced with a hydrogen-to-electricity conversion system - the fuel cell. Like an ICE based hybrid, fuel cell cars also have a small battery that stores regenerated electricity when the car slows down and provides supplementary power during acceleration. The small battery is necessary because fuel cells can only convert hydrogen into electricity. Fuel cells cannot convert electricity from regenerative braking back into hydrogen.

The conventional battery in a fuel cell car needs to be bigger than the battery in an ICE hybrid. Fuel cells respond to changing load more slowly than an ICE and fuel cells must heat up (to about 80C) before they can deliver full power, so the battery must operate the car for longer periods. Toyota's recently announced fuel cell car has a 21 kWh battery - roughly half the size of the battery in the all electric RAV4ev.

Comparing Batteries to Fuel Cells - What Matters?

Fuel cells are a terrible technical solution compared to a simple, large battery for building an electric car. Fuel cells are complicated. Fuel cells require expensive Platinum for catalyst layers. High pressure (10,000 psi!) hydrogen storage tanks are expensive and potentially very dangerous. Refueling stations are few, very costly, difficult to maintain and potentially explosive. Distribution of high pressure hydrogen by dedicated pipelines or fleets of specialized fuel trucks will be problematic. Hydrogen fuel costs, and will continue to cost, more than electricity - very much more than electricity if it is made using electricity.

No thoughtful engineer sees fuel cells as the simplest, most direct, most reliable, "best" solution in comparison to the large battery electric car. And what engineers think in this regard doesn't matter. At all.

What does matter is whether fuel cells will allow car makers to make more money making cars than they can using batteries. Period. Complexity of fuel cells will not deter car manufacturers who already build high pressure fuel injection systems, computer controlled piston engines and emission control systems that already use platinum catalysts. All of the problems of making and distributing hydrogen are not problems for car makers. Oil companies have sufficient motivation to do whatever it takes to defend the "gas station" model for fueling cars, and oil companies have access to whatever amounts of money it may take to roll out hydrogen fueling infrastructure.

If hydrogen costs the consumer more than electricity, or if the consumer can't get their hydrogen fuel from solar panels on their garage, well too bad for consumers. The simple fact is that the low cost of electric fuel has not driven consumers to BEVs so far, and there is little indication that fuel cost savings are going to drive BEV sales into the millions any time soon.

So, if fuel cell complexity, platinum use, hydrogen availability, cost and distribution don't matter, what characteristic of fuel cells makes them more attractive and batteries less attractive for powering electric cars? The simple answer is weight. If the drivetrain weighs less, the entire car will weigh less, and because of the "knock-on" effect, any weight savings in the drivetrain gets multiplied. At the end of the day, a lighter car costs less to make. This is what matters. Toyota's view is nicely presented here.

Comparison of Fuel Cell and Battery Drivetrains

Both fuel cell and battery electric cars have a motor and inverter that propel the car and capture kinetic energy on braking. The size, weight and cost of these components will be essentially the same for either drivetrain approach. The energy storage component - the fuel cell and small battery or the large battery - is where the weight difference comes in.

Battery weight is of course a very important factor in electric vehicle design. Tesla's Model S is several hundred pounds heavier than the ICE sport sedans against which it competes. But, battery specific energy (Wh/kg) is improving, and the weight of electric car batteries will go down over time. In fact, improvements in Li-ion battery specific energy will be the key to making electric cars disruptive to the ICE car business.

The question is whether the fuel cell solution will be lighter than the battery solution in the future. Improved batteries will make both the fuel cell solution and the big battery solutions lighter, but this will have a greater impact on the big battery approach because the battery in the fuel cell solution is much smaller. The issue hinges on what the fuel cell system - the cell stack, hydrogen storage tanks, plumbing, pumps... - will weigh as this technology continues to develop.

To understand why many car makers are interested in fuel cells, I built a model that compares the weight of fuel cell and battery energy storage components for a future electric car roughly the size of Tesla's proposed Gen III. Specifically, I compared a 50 kWh battery pack with a fuel cell system delivering 30 kW and storing 4 kg of hydrogen. More detail about this model later.

An Interesting Result

The following chart shows quite an interesting result. Using battery cells storing 250 - 260 Wh/kg, the big battery weighs more than the fuel cell plus small battery by 80 kg. This is where the storage component of a Tesla Gen III size car would be today using the battery technology in the current Model S. Remember too that this weight penalty will be multiplied by the knock-on effect so the difference in vehicle weight would likely be 120 kg or more in favor of the fuel cell solution. This is precisely the kind of difference between fuel cells and batteries that car makers understand and that can drive their decision process. And this is exactly the difference that could see fuel cells make roadkill out of Tesla and their shareholders.

Comparison of storage component weights

But look at the chart again. If better, higher specific energy batteries become available, the tables are turned. For battery specific energy higher than 400 Wh/kg the battery only approach has the weight advantage. This is a very important result with possibly good, possibly scary implications for Tesla investors. And, it all ties back to Tesla's Giga Factory.

At least two companies have demonstrated advanced Li-ion batteries based on anode and cathode materials developed at Argonne National Labs. These advanced Li-ion batteries have the high specific energy needed to give the BEV approach the advantage. Envia demonstrated a 400 Wh/kg cell and CALiB demonstrated a 525 Wh/kg cell. Either of these cell chemistries (or more probably a similar proprietary Panasonic chemistry) would make BEVs and Tesla winners and leave fuel cells lying in the ditch.

What is troubling however is that there is no indication Tesla plans to use anything other than the current Panasonic NCA chemistry at the Giga Factory. Not only have Tesla and Panasonic been silent on any new cell chemistry, the delays in announcing a detailed Gen III design and the delays in the Giga Factory itself suggest that Tesla and Panasonic are waiting while a new battery chemistry is in manufacturing development. Research is of course unpredictable. Laying out eureka moments on your business plan timeline can be problematic. In this case however, there is a lot riding on the result. It appears Tesla and Panasonic may be behind their plan and we are hearing nothing. This could spell trouble for Tesla investors.

Or, it might not. Historically Mr. Musk and Tesla have promised more, sooner than they have actually delivered, but in the end they have delivered a lot. A lot of technology, a lot of product and a whole lot of profits for investors. Maybe things will turn out alright this time, too. Investors should pay very careful attention to what is happening to / with the Giga Factory because this time might be different for Tesla investors.

About the Model

In choosing model parameters, I attempted to "guess", based on published data for existing fuel cell components, what parameters engineers are likely aiming for in future fuel cell systems. It should be appreciated that both batteries and fuel cells are subject to improvement over time and that this kind of modeling is an imperfect process. The following chart illustrates my fuel cell system weight estimates.

Fuel cell weight estimates.

Both the large battery and the fuel cell plus small battery solutions were assumed to use cells with the same specific energy. The pack structural weight was taken as 60% of the weight of the cells within the pack. For the battery only case, is was assumed that 40% of the pack structural weight offsets body structure.

Conclusion and Final Thoughts

I have written about Tesla and their electric car technology on several past occasions, often arguing that Tesla has made the correct technical choices and that they hold a smart, technical advantage over their competitors. I believe these same arguments hold today and continue to believe Tesla is technically at the forefront of electric car technology. But, this may not matter so much in the end as Tesla investors hope.

Just as we have seen momentum drive Tesla's valuation to levels beyond what even their CEO thinks reasonable, there are considerations beyond pure technical excellence that may drive the car industry to adopt fuel cells over pure BEVs. With continuing delays in both Tesla's Gen III car and their Giga Factory, with no indication from Tesla or Panasonic of a more advanced cell chemistry, Tesla is looking like a riskier bet than it did just a few months ago.

I am not currently invested in Tesla and have not been for some time. I am however following developments at Tesla closely, particularly with regard to their Giga Factory and details of their Gen III car, looking for indications that a new, higher performance battery will come out of their collaboration with Panasonic. If this issue is resolved positively, Tesla will look like a much surer thing and a very good investment.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in TSLA over the next 72 hours. 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.