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October 25th, 2012

Fuel Cells

by Andrew Price, President & COO

I am always looking for ways to stay current on the most recent energy technology developments. CES has been involved with several Fuel Cell projects recently, and I was fortunate to be able to participate in a Fuel Cell workshop on October 18th at the University of Southern Maine. The workshop was hosted by the Hydrogen Energy Center in conjunction with the University of Maine System. Speakers joined by video link from around the country and included: United Technologies Corp. (UTC), Harriman Associates, Fuel Cell Energy, General Motors, and the University of Maine.

Fuel cells have been around for more than 100 years but were first commercialized by NASA for use in their Apollo space craft in the 1960s. Fuel cells convert chemical energy from a fuel – such as natural gas - into electricity, heat and water. They can be used by consumers “behind the utility meter” to generate both electricity and heat for a building in a combined heat and power application. Fuel cells are promoted as "clean" energy but generally not "renewable" energy, because they use natural gas or hydrogen produced from natural gas and have associated emissions of carbon dioxide.

Unfortunately, economic application of fuel cell technology is still heavily dependent on both state and federal incentives. For this reason fuel cell usage is concentrated in a few states with the highest incentives. Fuel cell capital costs are very high relative to other technologies. Fuel Cells can cost in the range of $6,000 per kW to $10,000 per kW of installed capacity. Compare this to $500 to $2,000 per kW of capacity for a traditional reciprocating engine configured for cogeneration.

At the federal level, the Emergency Economic Stabilization Act of 2008 included an investment tax credit equal to the lower of 30% of the cost or $3,000 per kW. To qualify, a fuel cell must be installed before January 1, 2017. An additional credit is available for combined-heat and power equipment up to 10% of the equipment cost. Of course, only entities with a tax liability can take advantage of these federal incentives. This forces many non-profit organizations to utilize 3rd party service providers who own and operate the fuel cell for the period of time necessary to fully monetize the tax credit. This can be inefficient if the 3rd party provider has a higher cost of capital than the host customer or is subject to other taxes (local sales taxes) that the host customer would not have been. 

At the state level, Connecticut and California have among the best incentives. Connecticut is home to Fuel Cell Energy, based in Danbury, and UTC Power, a division of United Technologies based in South Windsor. Connecticut has more than two dozen fuel cells in operation currently. The recent launch of a Low Emission Renewable Energy Credit (LREC) program, discussed in a previous blog, looks poised to dramatically increase this number in the next several years. Connecticut also has local natural gas and electric company distribution tariffs that benefit fuel cells. Certain local delivery costs, for example, are forgiven for all natural gas used in a fuel cell. In addition, any backward looking demand ratchet is eliminated on the local electric company delivery tariffs. 

In California, fuel cell manufacturer Bloom Energy has received a lot of national attention and has some very high profile clients including Adobe, Google, and Ebay. Fuel cell deployment in California was spurred by state incentives as high as $2,500 per kW for fuel cells fueled by natural gas and $4,500 per kW for fuel cells fueled by “renewable” biogas. Combined with federal tax credits, the total incentive level in Californian topped $8,000 per kW for a period of time. Earlier this month, AT&T announced that it was doubling a previously announced purchase of Bloom Box fuel cells to 17.1 MW at 28 sites in California and Connecticut.

UTC, which has been building fuel cells since the 1960s for the likes of NASA, recently roiled the industry by indicating that it may consider selling its fuel cell division. As UTC evaluates the future of UTC Power it has stopped leasing fuel cells directly, requiring customers to purchase them outright or lease through a 3rd party service provider. The stakes are high for Connecticut which has perhaps the largest fuel cell supply chain in the world.

CES has helped clients perform due diligence on fuel cell projects. Monetizing all of the available state and federal incentives can require careful planning and, often, non-standard power purchase agreements or service contracts with 3rd parties. Fully utilizing both the heat and power that is produced can also be critically important to achieving financial goals. Given the complexity of these deals and the number of moving pieces involved with modeling the available incentives and avoided costs, it makes sense for most buyers to retain an impartial and expert energy advisor to help guide them through the process.

 (Tags: Fuel Cell, United Technologies, UTC Power, Fuel Cell Energy, Bloom Box, Connecticut, California)

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