Why You Need To Look At Fuel Cells Again

by: Mitch Vine

Many green energy investors will still have painful memories of earlier investment disasters in the fuel cell sector. Sky high expectations and valuations led to some spectacular disappointments and losses. To a great extent we were well ahead of ourselves. Early expectations and hype got out of hand (sounds like electric cars?).

We believe that widespread use of fuel cells for transportation is decades away, however (and please keep your expectations in check), fuel cells as a technology for stationary applications are starting to mature and make sense in niche applications. These niches will make even more sense over time. Having said that, there are still significant challenges to widespread adoption of stationary fuel cells (some mentioned below).

This article is an introduction to the subject of stationary fuel cells, and will use FuelCELL Energy (NASDAQ:FCEL) and their particular brand of fuel cell technology to focus the discussion. We plan to continue researching and following the players in this industry, and progress on the technology and the business health of the sector.

The Company

FCEL was founded in Connecticut in 1969. The core fuel cell products (“Direct FuelCell®” or “DFC® Power Plants”) offer stationary power generation for customers.

The company’s vision is: “to provide ultra-clean, highly efficient, reliable distributed generation baseload power at a cost per kilowatt hour that is less than the cost of grid-delivered electricity. Our power plants provide electricity that is priced competitively to grid-delivered electricity in certain high cost regions of the world.”

The Technology

FCEL fuel cells provide continuous power to on-site customers and grid-support applications. They can operate on a variety of hydrocarbon fuels, including natural gas, renewable biogas, propane, methanol, coal gas, and coal mine methane.

Fuel cells are considered by most to be a new technology (even though they have been around since the 1800s), but as a potential tool for cleaner energy sources, it is attracting incentive funding from several governments.

There are many different types of fuel cells. For purposes of this article we will focus on the Carbonate type made by FCEL. You can read a summary of more types of fuel cells from the US Department of Energy here.

Potential Benefits

Carbonate fuel cells claim some significant potential benefits.

  • They can provide 24x7 power in off-grid locations.
  • Their power is continuous (not depending on sources that disappear like solar and wind)
  • They can provide electricity that is priced competitively to grid-delivered electricity in certain high cost regions of the world.
  • Generates lower CO2 emissions and other pollutants than some other on-site power sources
  • Uses less fuel per kWH than some other on-site power sources
  • No need for long distance transmission lines (and the electricity lost in transmission)
  • They can be fueled by renewable fuels such as bio-waste
  • Waste heat can be recovered and used on-site

It isn’t within the scope of this article to evaluate these claims in any detail. We accept them as generally valid, however they must be viewed with a view to the other side of the equation: high capital costs, availability of appropriate fuel, local fuel costs, implementation complexities, operating costs, and the competitive alternatives available locally. For example, we are pretty sure that most places that have piped in natural gas also have fairly economical grid power available.


The capacity of FCEL’s products (350 kW-2.4 MW) make them appropriate for localized power requirements. They are small enough to be placed near the end user and large enough for commercial/industrial applications.

Organizations wanting to create “green power” (or look like they care), have been installing fuel cells to help meet their power needs.

The wastewater treatment market is an important target for FCEL. The fuel cells operate on the renewable biogas (methane) produced by the wastewater treatment process and their byproduct heat is used in the treatment process, the efficiency of these installations can be as much as 90 percent. As of the end of the last Fiscal year, there were 21 MW of FCEL Power Plants installed or in backlog for municipal water treatment / biogas applications.

Other potential verticals are colleges and universities, food and beverage processing, hospitals and prisons, hospitality, manufacturing and utilities.

Industries that produce biomaterial as a by-product, and can use the waste heat from the fuel cell process are particularly interesting. In addition to wastewater, a brewery is another example of an organization that produces waste methane gas as a by-product.

Utility or RPS

DFC power plants can be used for utility grid-support due to their distributed generation attributes. A utility can site the power plant near where power is needed, connecting to the existing transmission grid. By producing power locally in the distribution system, fuel cells can ease grid constraints and also help to enable the smart grid by producing power at the point of use. South Korea has adopted this utility-model and in 2010, a large California utility purchased two DFC power plants.

Distributors of natural gas, such as Enbridge Inc. (NYSE:ENB) have been experimenting with FCEL product. Enbridge installed a 2.2 MW unit at their headquarters, and FCEL has a contract to put 18.8 MW of power plans at four natural gas distribution stations in Connecticut.

Impact of Governments

Governments around the world are providing incentives for research and for production capacity for green energy sources. Directly or indirectly much of FCEL’s revenue is coming as result of government funding and policy. In the U.S., the federal investment tax credit (ITC) is available for fuel cells in an amount up to $3,000 per kW or 30 percent, whichever is less. Recipients can choose a tax credit or a grant, with the tax credit option expiring December 31, 2016. FCEL reports in the SEC filing, There are currently 27 states and the District of Columbia, that have instituted RPS mandates and 5 states that have adopted non-binding renewable energy goals. These markets represent an estimated 76,750 MW by 2025.

Of particular interest to FCEL is South Korea. The Ministry of Knowledge Economy designated fuel cells as a key economic driver for the country. The country’s clean energy program requires lean electricity to be directed first to the utility grid, encouraging the deployment of MW-class systems. A large part of FCEL’s recent sales, and backlog are focused on the South Korean opportunity.


Other Fuel Cell Designs

FCEL believes they are the only domestic company engaged in significant manufacturing and commercialization of stationary carbonate fuel cells. Emerging fuel cell technologies (and companies developing them) include PEM fuel cells Ballard Power Systems, Inc. (NASDAQ:BLDP); United Technologies Corp. (NYSE:UTX) or UTC Power; and Plug Power (NASDAQ:PLUG)], phosphoric acid fuel cells (UTC Power and Samsung Everland) and solid oxide fuel cells (Siemens Westinghouse Electric Company, General Electric (NYSE:GE), Delphi ( DPGYF.PK), Rolls Royce, Bloom Energy, and Acumentrics). There are other potential carbonate fuel cell competitors internationally. In Europe, Ansaldo Fuel Cells in Italy is actively engaged in carbonate fuel cell development and is a potential competitor. Fuji Electric has been involved with both PEM and phosphoric acid fuel cells. In Korea, Doosan Corporation is engaged in carbonate fuel cell development.

Comparing Molten Carbonate fuel cells to other kinds of fuel cells, the US Department of Energy lists these advantages and disadvantage here (pdf).


  • High efficiency
  • Fuel Flexibility
  • Can use a variety of catalysts
  • Suitable for CHP


  • Higher temperature corrosion and breakdown of cell components
  • Long start up time
  • Low power density

Other On-Site Power Sources

For local industrial applications traditional competition comes from fossil fuel driven mechanical engines, or gas turbines.

The Electric Grid

FCEL competes against the electric grid with utilities that generate power in large central-generation locations and then use transmission lines to transport the electricity to the point of use.

Fuel Cell Technology Challenges

The US Department of Energy summarizing the challenges with fuel cells. See the full text here.

“Cost and durability are the major challenges to fuel cell commercialization. However, hurdles vary according to the application in which the technology is employed. Size, weight, and thermal and water management are barriers to the commercialization of fuel cell technology.”

Specifically to carbonate fuel cells, the US. Department of Energy has this to say:

“Molten carbonate fuel cells (MCFCs) are currently being developed for natural gas and coal-based power plants for electrical utility, industrial, and military applications. MCFCs are high-temperature fuel cells that use an electrolyte composed of a molten carbonate salt mixture suspended in a porous, chemically inert ceramic lithium aluminum oxide (LiAlO2) matrix. Because they operate at extremely high temperatures of 650°C (roughly 1,200°F) and above, non-precious metals can be used as catalysts at the anode and cathode, reducing costs.

Improved efficiency is another reason MCFCs offer significant cost reductions over phosphoric acid fuel cells (PAFCs). Molten carbonate fuel cells, when coupled with a turbine, can reach efficiencies approaching 65%, considerably higher than the 37%–42% efficiencies of a phosphoric acid fuel cell plant. When the waste heat is captured and used, overall fuel efficiencies can be as high as 85%.

Unlike alkaline, phosphoric acid, and polymer electrolyte membrane fuel cells, MCFCs do not require an external reformer to convert more energy-dense fuels to hydrogen. Due to the high temperatures at which MCFCs operate, these fuels are converted to hydrogen within the fuel cell itself by a process called internal reforming, which also reduces cost.

Molten carbonate fuel cells are not prone to carbon monoxide or carbon dioxide "poisoning" —they can even use carbon oxides as fuel—making them more attractive for fueling with gases made from coal. Because they are more resistant to impurities than other fuel cell types, scientists believe that they could even be capable of internal reforming of coal, assuming they can be made resistant to impurities such as sulfur and particulates that result from converting coal, a dirtier fossil fuel source than many others, into hydrogen.

The primary disadvantage of current MCFC technology is durability. The high temperatures at which these cells operate and the corrosive electrolyte used accelerate component breakdown and corrosion, decreasing cell life. Scientists are currently exploring corrosion-resistant materials for components as well as fuel cell designs that increase cell life without decreasing performance.”

The National Fuel Cell Research Center of the University of California has this to say about the challenges:

“Cost Reduction

The high capital cost for fuel cells is by far the largest factor contributing to the limited market penetration of fuel cell technology. In order for fuel cells to compete realistically with contemporary power generation technology, they must become more competitive from the standpoint of both capital and installed cost (the cost per kilowatt required to purchase and install a power system).

In the stationary power market, fuel cells could become competitive if they reach an installed cost of $1,500 or less per kilowatt. Currently, the cost is in the $4,000+ range per kilowatt.

Cost Control at FCEL

As capital cost is identified as one of the primary challenges to fuel cells, the comments by FCEL on this subject (from their SEC filings) are interesting:

Cost reductions are essential for us to more fully penetrate the market for our fuel cell products and attain profitability. Cost reductions will also reduce or eliminate the need for incentive funding programs which currently allow us to price our products to compete with grid-delivered power and other distributed generation technologies.”

“To date, our cost reduction program has successfully reduced the unit cost of our megawatt-class products by more than 60 percent. Increased volume enables several areas of continued cost reduction, including expansion of our global sourcing program, larger volume purchases, more competition among our suppliers, increased utilization of our factory capacity, and increased productivity and automation in our facilities and supply chain. As a result of product cost reductions, we believe sales volume of 75 MW to 125 MW will drive the Company to profitability with the lower end of the range reflecting a sales mix oriented towards complete power plants and the upper end of the range oriented towards fuel cell components.”

“Since 2003, we have made significant progress in reducing the total life cycle costs (manufactured cost and service costs) of our power plants primarily through value engineering our products, manufacturing process improvements, technology improvements, and global sourcing. 2010 was the first full year of production of our lower-cost, higher-output DFC1500 and DFC3000 models incorporating 350 kW stacks, an increase from the prior 300 kW stacks. By producing more power in a power plant, additional revenue can be attained without a commensurate increase in production costs. As a result our products are gross margin profitable on a per unit basis.“

Corrosion and Breakdown of Components (due to high temperature operation)

These are FCEL comments from the same sec filings regarding stack life: “We are also developing and expect to bring to market products with a stack life longer than five-years. Extending stack life increases the sales value of the product and reduces service costs.”

FCEL Strategy

FCEL's stated business strategy is to expand its leadership position in key markets, build renewable portfolio standards markets and continue to reduce the cost of products. It believes a production mix more heavily weighted with MW-class products is the fastest path to achieve profitability.

R & D

In addition to commercial products, FCEL plans continue to develop carbonate fuel cells, planar solid oxide fuel cell (“SOFC”) technology and other fuel cell technology.

The DFC Power Plants are protected by 61 U.S. and 66 international patents. As of its last 10-K the company had 30 U.S. and 130 international patents under application.

FCEL as an Investment

This is part 1 of a multi part series. In this article we’ve discussed some of the benefits, opportunities and challenges in offering stationary fuel cells. In the next article we will analyze FCEL’s recent performance, and discuss the company as an investment. We'll also delve deeper into claimed advantages, and examine the weaknesses.

Learn Enough to be Dangerous

Fuel cells may be a bust in the transportation sector, but they look like they make sense in a growing number of stationary applications.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.