Delbert,
You and I clearly look at this business differently. I agree with you that there will be niche applications for the Microgen. I disagree, however, that those niche markets will be sufficient to justify an investment at these lofty levels, but that is what makes this stuff so interesting to discuss, and I do enjoy the dialogue. Some facts and some comments in my opinion.
I don't believe that PLUG's unit emits any NOx.
PLUG doesn't publish this data, which I find surprising because it is such a selling point, in my opinion. Fuel Cell Energy does list the NOx for their direct conversion fuel cell (oxidizes methane directly, hence no gas reformer) and produces NOx = 0.45 ppm. Very low, but really not any better than NOx = 1.5 ppm now available from natural gas turbines.
Does the gas turbine, that you mention, have conversion efficiencies of 38%?
I could not find any data on this particular turbine, but this clean combustion technology works on virtually all makes, models and sizes of natural gas turbines. New natural gas turbines are reaching amazing efficiencies. GE's newest achieves about 60% efficiency. fe.doe.gov In a way, though, this is comparing apples and oranges as certainly neither this, nor probably any natural gas turbine, will be used widely for home use. Capstone Turbines makes microturbines that could compete in this space, but I think anyone thinking along these lines would probably buy a fuel cell instead. Of interest, people got excited when they found out Bill Gates acquired 5% of AVA recently. He has held a 5% stake in Capstone Turbines for a couple years.
There will be plenty of buyers out there.
This is where I have a problem with all the hype about Plug Power. The technology is intriguing. Many people will find it useful and will purchase the product. The problem is with how the investment community has valued this technology. Let's take a look at this on a grander scale. Forget about how cool the technology is, but instead, let's look at this from an economic standpoint.
Recent market cap valuation of PLUG = $ 6 billion
To figure valuation of this company five years out (five years ought to be enough to penetrate the market with a product coming online in 2001. Besides, if we have to discount more than five years we lose more confidence in the prediction) with a moderate-high degree of risk of succeding in their business plan, I will figure a 30% per year discount on earnings in 2005. That would put the value of PLUG in 2005 at $22 billion (if PLUG is only going to be worth $10 billion in 2005 it is hardly worth investing in). Let's give PLUG a P/E of 50 on earnings in 2005. That means after-tax earnings in 2005 must be about $440 million to justify a current market cap of $ 6 billion.
Tax rate of 39% on corporate earnings means pre-tax earnings must be $720 million. So, how many residential Microgen fuel cells can Plug Power sell? Assume each unit costs $8,500 and requires, let's say, $500 for installation. Let's leave out yearly maintenance and major overhauls at 4-5 years. After production costs, SG@A and the cut for the distributors, I will assume PLUG makes $1,000 per unit. Just a guess and likely to go up over time as costs come down. If these assumptions were correct, then PLUG must sell 720,000 of these units each year by 2005 to be worth what it is valued at today. Keep in mind they will not be the only ones selling fuel cells to residential customers.
Sure, many wealthy people who are afflicted with unreliable connections to the electric grid will opt to put one of these units at their house. I just don't think hundreds of thousands will.
I think it is interesting to look at the economies on an even larger scale to see if this would make sense for more people, other than those in rural areas or those who want the luxury of having power those few days a year when problems develop. You mention the efficiencies of fuel cells. But you have not discussed efficiencies from a capital investment standpoint. The Microgen puts out about 7 kw of power. Even if you only need one kw of power at any given moment, you still have the capital investment in the gas reformer, fuel cell stack, etc to handle 7kw. And this 7kw capability has an initial capital cost to the user of about $8,500 + $ 500 (install) + ?tax = $9,500 on average, I guess. How much of this cost is per kw depends upon how much electricity the user actually needs. At best the capital cost is $9,500 / 7kw = $1,350 per kw, but that will be the case only a limited amount of the time. There will be times when the unit is producing no electricity or only one or two kw.
How about an electric utility? One MW is enough power to supply about 1,000 homes. Current cost to build a natural gas turbine power plant is about $300-400 per kw. You can supply 10,000 homes with $3,000,000-$4,000,000 in capital costs for the power plant. The efficiency comes because you never need 7 kw generating capacity per household because there is never a time when everyone is running their home and business at full throttle. (Don't forget, power plants cover businesses, too. When the business is using electricity, the home is using less.) If you wanted to put Microgen's at each of these 10,000 homes it would come at a capital cost of $9,500 * 10,000 = $95 million. That is a staggering difference. Even if people can save small amounts on their electric bills, it does not make sense yet for a mass movement over to residential fuel cells. It will remain a luxury device for the wealthy until costs come way down. Unless there will be a mass movement to the Microgen in the foreseeable future, the current valuation is just not justified.
Erik (IMHO) |
