First, let me say that I like fuel cells a lot. I spent a considerable amount of time following the space in the early 2000’s. Many colleagues I know and respect are involved in the fuel cell arena. It’s an electricity generation technology that is uncommonly elegant and promising.
But “promising” is one of the most maddening words to those of us with commercial urgency. “Promising” is nice, but “successful” is much better. And, success in the marketplace is dictated by overall cost-effectiveness to a customer: reliability, performance, maintenance, usability, flexibility, and — most importantly — price.
For certain niches, fuel cells offer distinctive advantages that lead to economic superiority over alternatives. The problem for the fuel cell industry has been that, to date, these niches generally have been very small, with correspondingly low volumes. Thus, most fuel cell companies do not generate sizable revenues, and since the cost of fuel cell development programs is typically very high, most fuel cell companies remain unprofitable.
This phenomenon is profiled well in “Year-End Reflections on the Fuel Cell Industry in 2010”, written a few months ago by Eric Wesoff on Greentech Media. On the whole, it’s not a pretty picture. As a result, the fuel cell sector — the subject of significant buzz in the early 2000’s in the wake of lucrative IPOs — is now somewhat on the ropes in a defensive posture.
At last month’s Ohio Fuel Cell Symposium convened annually by the Ohio Fuel Cell Coalition, Ruth Cox of the Fuel Cell and Hydrogen Energy Association noted that Federal funding of fuel cell R&D programs is under attack. In the wake of this, Senators Sherrod Brown (D-OH) and Lindsay Graham (R-SC) — South Carolina being another state with considerable fuel cell activity — sent a letter to Energy Secretary Steven Chu urging the Department of Energy to maintain support for fuel cell development efforts.
At the recent Michigan Growth Capital Symposium, Reidar Langmo of the cleantech venture capital firm Novus Energy Partners explicitly identified fuel cell technologies as off-limits for investment consideration. After funding a number of companies a decade ago, only to see their valuations wither away due to recurrent shortfalls in technical progress and commercial sales, most venture capitalists are strongly averse to fuel cells these days.
In a recent private conversation, an executive at one of the major automotive manufacturers admitted that they had pretty much ceased its work on fuel cells, focusing now instead on vehicle electrification. With some exceptions, such as United Technologies (NYSE: UTX) or Rolls-Royce (LSE: RR), I think most big corporations have significantly reduced or entirely shut down their fuel cell initiatives.
The challenge for fuel cell technologies is achieving economies of scale, which goes hand-in-hand with mass production, which goes hand-in-hand with large markets enabling standardization and consequent low-cost supply chains and manufacturing processes. Unfortunately, the various niches that fuel cells have begun to penetrate don’t offer that kind of scale-up potential, which means that fuel cells are by-and-large still in the “valley-of-death” phase of technology innovation, as originally coined by Geoffrey Moore in his seminal Crossing the Chasm.
Bloom Energy has made a lot of press by selling 200 of its fuel cell systems to various customers, but for fuel cell economics to make a serious move down the cost curve eanbling the technology to really fulfill on its promise in the real-world, order volumes will need to be at least one and preferably two orders of magnitude greater.
This doesn’t mean all hope is lost for fuel cells in ever becoming the revolutionary disruptive technology for the electric power sector that has long been touted. It could simply mean that the stories of success-in-the-wings are off the radar screens of most observers.
For instance, Technology Management Inc. (TMI) has quietly been working with Lockheed Martin (NYSE: LMT) to commercialize a solid oxide fuel cell system for small-scale distributed generation using a wide-variety of fuels with a standard product package applicable for large global markets. TMI is often overlooked among the universe of fuel cell companies, in large part because it’s been operating primarily in stealth mode. A lot of steps remain on the path to profitability, but if TMI can navigate them successfully, it is the kind of venture that can not only hit it big, but play a key role in redeeming the place of fuel cells in the hearts of investors.
Only time will tell. Alas, for many companies in the fuel cell arena, time is a luxury that is expensive. The clock is ticking and the dollars are dwindling. There are three sources of cash for any company — grants, investments (equity or debt), or revenues — and with the spigots tightening for the first two, the third source becomes all the more important.