A new fuel cell technology from a privately held company called Redox Power Systems LLC could make the future a lot brighter for natural gas producers like Chesapeake Energy (NYSE:CHK), Devon Energy (NYSE:DVN), and EOG Resources (NYSE:EOG). The same technology could spell big trouble for solar panel companies such as SolarCity (SCTY).
Redox recently unveiled a new natural gas-powered fuel cell system it calls the Cube, or the Power SERG 2-80. The Daily Tech blog reported that the Cube could be the first fuel system that could cost less than a traditional generator. The Cube, which uses solid oxide fuel technology developed by University of Maryland Professor Eric Waschman, is smaller and more efficient than the best known electric fuel cell on the market, Bloom Energy's Energy Server, or Bloombox.
Better Than Bloom
The Cube is one-tenth the size of the Energy Server. A Redox promotional video shows a four-foot tall, 750-pound Cube that is about three-feet wide (the size of the average household refrigerator). In the video, Redox Chief Technology Officer Bryan Blackburn claimed that the Cube could generate up to 25 watts of electricity or enough juice to power a mini mall. A comparably powerful Bloom Energy Server is about the size of a delivery van.
The Cube is supposed to be more efficient than Bloom's technology. According to Daily Tech, Redox's fuel cells have a 70% efficiency rate producing electricity and an 80% efficiency rate producing electricity and heat. That means they convert 70% to 80% of the natural gas they consume into usable energy.
Redox's claims haven't been proven yet, but Microsoft Corp (NASDAQ:MSFT) is putting them to the test. Daily Tech reported that the software giant has received a $5 million grant from the U.S. Department of Energy to test Redox's fuel cells in its data centers. The potential consequences of a successful Redox fuel cell test for natural gas producers and solar panel companies are pretty obvious here.
Good News for Natural Gas Producers
The revenues for U.S. natural gas producers have been rising substantially for the past few years without the widespread use of new technologies like fuel cells. Chesapeake reported a TTM revenue of $19.61 billion on June 30, 2014, a $5 billion increase from June 30, when it reported a figure of $14.61 billion. Devon Energy reported a TTM revenue figure of $13.57 billion on June 30, 2014, a $4.07 billion increase from June 2013, when it reported a figure of $9.504 billion. EOG Resources reported a TTM figure of $15.56 billion on June 30, 2014, a $2.4 billion increase from June 2013, when it reported $13.16 billion.
The widespread adoption of something like the Cube as either an alternative or a backup to the electric grid would obviously boost the demand for natural gas. Natural gas is the obvious fuel for such a device because it is widely used and the distribution system already exists. Since it is smaller and lighter than the Bloom Server, the Cube could be more quickly adopted. Blackburn even claimed that Cubes could be mounted on the roofs of buildings as power sources for cell phone towers.
A smaller-sized Cube for residential use could also be easily developed. A cube would only need to produce around 5 kilowatts of electricity for home use, so it would be conceivably smaller. Since it can also produce heat, the Cube could be used for heating or water heating as well as electricity generation.
There are, of course, many things we don't know about the Cube, including its cost and the cost of operation. We don't know how much natural gas the device will actually use either.
The Threat to Solar City
Yet if Redox's claims about its technology are true, it is a threat to the best known grid backup or alternative system on the market: SolarCity's solar electric systems. Since the Cube runs off natural gas, it can run 24 hours a day, seven days a week; SolarCity's panels only operate when the sun is out.
More importantly, the Cube could generate a lot more energy than solar panels with a lot less space. A typical Solar City home system generates around 3 kilowatts of electricity; a refrigerator-sized Cube supposedly generates 25 kilowatts of electricity. That means the Cube's energy density is about five times that of SolarCity's device.
If such a device hits the market, it could cause real trouble for SolarCity, a company that's on pretty shaky ground. On June 30 SolarCity reported a free cash flow of -$302.27 million. In June 2013 Solar City reported a free cash flow figure of -$85.53 million. That means SolarCity's negative free cash flow has more than tripled in a year.
To be fair, SolarCity's revenues have increased by nearly $100 million in the past year. In June 2013 SolarCity reported a TTM revenue figure of $123.43 million; by June 2014 that figure had increased to $220.78 million. SolarCity's revenue is growing, but its negative free cash flow still exceeds its revenues.
The problem a technological development like Redox's fuel cells presents for SolarCity is obvious. SolarCity's business model was based on the presumption that solar panels are the best technology for small-scale electricity generation for grid backup or a grid alternative. What happens if Redox's fuel cells turn out to be a better technology?
It looks like the contrarian argument that natural gas is the fuel of the future might just pay off. Technological progress seems to be on the side of fuel cells rather than solar panels, with some interesting consequences for a wide variety of stocks.
Disclosure: The author is long CHK.
Additional disclosure: The author is long another fuel cell company called Plug Power (PLUG)