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June 6th, 2014

Fuel Cell Fizzle

by Andrew Price, President & COO

Once highflying fuel cell companies are now struggling. About 24 months ago I was evaluating fuel cell projects for clients in Maine and Connecticut. (Link to my October 2012 on fuel cells here.) Maine did not subsidize fuel cells enough to make the project economically viable, but the state of Connecticut has some of the best incentives for fuel cells in the US. With state and federal incentives, my modeling indicated that the Connecticut project could be a winner. Despite the generous incentives, the margins were still relatively small and a significant risk was introduced mid-negotiation when the technology being evaluated, the UTC Power PureCell 400, was sold by industrial conglomerate United Technologies (UTC). UTC sold its fuel cell manufacturing operations in South Windsor Connecticut to a much smaller company called ClearEdge Power in December 2012. The risk of proceeding with the fuel cell project, given the unexpected change in ownership, was deemed too great. The client replaced fuel cells with a small cogeneration plant utilizing reciprocating engines. When ClearEdge Power filed for bankruptcy on May 1st of this year it was clear that the correct decision had been made. Given the chapter 11 filing from ClearEdge, what are near term prospects for fuel cells?

Fuel cells convert a fuel, such as natural gas, into electricity using a chemical reaction instead of a more traditional combustion process. Although it can vary by fuel cell type and manufacturer, using natural gas results in local CO2e emissions of about 1,000 lbs per MWh generated. Emissions can be cut roughly in half if 100% of the waste heat associated with the chemical reaction can be used.

Fuel cells have been around since the 1800s but ClearEdge entered the picture in 2003. ClearEdge raised over $100 million from venture capital firms to develop its proton exchange membrane fuel cells. The California (formerly Oregon) based company targeted small consumers with products ranging from 5 kW to 200 kW. The acquisition of UTC’s fuel cell assets looked to be a major step forward for young ClearEdge. UTC had been building fuel cells for close to four decades and had invested hundreds of millions in the technology. The UTC phosphoric acid fuel cell technology was packaged into 400 kW units, giving ClearEdge reach into larger size clients. Despite the boost associated with the larger units and technology developed by highly respected UTC, ClearEdge ran out of cash and lost the confidence of its financial backers.

Fuel Cell Energy, Plug Power, Bloom Energy and Ballard Power are other names in the fuel cell space. Most, if not all, have never turned a profit. Bloom Energy alone has raised around $1 billion in venture capital to fund its growth over the past decade. Despite the long history of losses, fuel cell stocks went on a tear earlier this year. Plug Power jumped from $0.26 to almost $12 per share. Fuel Cell energy increased from about $1 to almost $5 per share. Ballard Power leapt from $1.25 to $8.38 per share. Bloom Energy is not publicly traded but is rumored to be targeting an IPO in the near future. Although stock prices have retreated from the highs seen earlier this year, they remain at nosebleed levels considering past performance. Is ClearEdge an anomaly or the proverbial canary in the coal mine? Are fuel cell companies closer to achieving profitability? Time will tell. I certainly hope to have the opportunity to work on financially successful fuel cell projects in the near future. At the moment, however, I am not buying stock.

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