Financing the Sustainable Economy
January 2000
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special report fuel cells
Financing the Hydrogen Economy
Unlike their counterparts in the Internet sector, environmental and clean technology startups are slow to go public and often wait three to six years to get serious attention from earnest buyers. Among the challenges are nascent technologies, competition from hyper-growth stocks and uncertainty in the public policy arena.
Fuel cell companies, however, are eschewing tradition. Proving their capital-raising mettle, they are attracting record amounts of capital. That's not surprising, say analysts, given the market potential for zero-emission technology. According to Allied Business Intelligence (Oyster Bay, Ny), the market for fuel cells is expected to skyrocket from $40 million in 1999 to over $10 billion in 2010.
Already, plans are underway to convert a country, Iceland, to a hydrogen economy - a global laboratory for hydrogen run cars, buses and ships as well as the export of hydrogen energy. Activity is frenetic on the domestic front as well. "So far, seven methane steam reforming plants have been built in the United States for the express purpose of producing hydrogen," says Steve Oshinsky, Managing Director, RAM Capital Management (Boca Raton, Fl), a venture capital firm that in part targets fuel cell-related companies. ramcapitalmanagement.com
Bullish on fuel cells, Oshinsky estimates that the broader-based hydrogen energy infrastructure, worth $2 billion today, will surpass $1 trillion over the next decade. "The growth of the fuel cell industry is anticipated to be as great as the growth of the PC," postulates Oshinksy. The buildout of hydrogen fueling stations, for instance, will have to take place on a wide-scale basis to fuel hydrogen-run cars.
The largest applications for fuel cells will be in transportation and stationary power. But new markets are opening all the time. Additional applications recently demonstrated range from fuel cell-powered telecommunications satellites to road signs.
Moreover, fuel cell technology has hit the all-important triple bottom line with investors. First, the technology has an underlying social benefit. The most obvious benefit of fuel cells is their ability to generate clean energy. Unlike fossil fuels, fuel cells do not actually burn fuel and, therefore, do not create combustion-related pollution byproducts such as nitrogen, sulfur oxides or greenhouse gases. In short, they are a near-zero or zero-emissions technology.
Second, there is a regulatory imperative for the market to embrace the technology. The auto manufacturing and energy sectors, in particular, are making large investments to meet looming compliance targets for stricter emissions requirements. In California, for instance, 10% of cars manufactured will have to meet lower emission requirements by 2003. And those cars will be built in 2002.
Finally, the economics are sound. Strong interest from strategic investors is enabling startups to rely less on riskier capital raising paths such as high-yield bonds and highly leveraged balance sheets. Instead, they are sourcing strategic partners who can offer buildout capital, product testing and market penetration.
Not surprisingly, the bright investment picture is attracting a good deal of capital. "Fuel cell-related technologies are exciting for venture capitalists. There is good steady deal flow and success stories," says Nicholas Parker, a Managing Director (Private Equity) of SAM Sustainability Group, a Zurich-based investment advisory firm that focuses on investments that meet social, ecological and economic benefits. Further several companies have already gone public, notes Parker.
Indeed, in the last two years, fuel cell companies such as DCH Technology, FuelCell Energy and, more recently, Plug Power, have all fed at the trough of the public markets (see Plug Power). And, according to industry insiders, more are planning to go public in 2000.
What's more, the deal pipe going forward will be well stoked. Not unlike the Internet model, the fuel cell industry is expected to have many offshoots that will, in turn, spawn new businesses of their own. Take industry leader Ballard Power Systems (Vancouver, Bc), for instance. "We are seeing a concentration of know-how and support building off of the growth pole of Ballard," says SAM's Parker who estimates that more than a dozen companies are coming up on the Canadian West coast alone.
One of the most notable is Burnaby, Bc-based Xantrex Technologies headed by former Ballard CFO Mossadiq Umedaly. The company makes converters that switch DC power to AC, and vice versa. The market for the converters includes motor homes, recreational vehicles and trucking fleets. The company, which will supply Ballard, has just closed a $50 million private placement.
But fuel cell companies are also attracting unprecedented attention from strategic investors, particularly from its largest benefactors, the auto and energy industries. All tallied, large auto manufacturers such as Daimler-Chrysler, Ford, GM and Toyota have invested in excess of $1 billion in fuel cell technology in an effort to replace the internal combustion engine with a cleaner and more efficient technology. And auto manufacturers now estimate that commercial sales of fuel cell powered automobiles are now only three to five years off.
However, in order to enable wide-scale commercialization, manufacturing and installation costs need to come down. Building the hydrogen infrastructure will make a big difference, says Julie Fox Gorte, Environmental Analyst with the Calvert Group, who notes such efforts as a Midwestern utility which is installing fuel cell powered backup systems for 3,500 households. "It will liberate the market for fuel cells in other areas such as transportation and cars," adds Gorte whose funds include fuel cell holdings Proton Energy and Zero Emissions Technology.
Sustainable Asset Management, which is also making major bets in the hydrogen infrastructure sphere, agrees. "Fuel cells still have to be supplied with methane. It doesn't matter which fuel cell wins the game," says SAM's Parker. Instead, Parker sees opportunity in fuel cell infrastructure plays such as Proton Energy (Rocky Hill, Ct).
Proton Energy is one of several first movers making advances in hydrogen storage. Emerging technologies such as Proton's PEM electrolyzers are considered the "missing link" in transforming intermittent renewable energy into power on demand. The electrolyzers convert electricity generated from renewable sources into hydrogen that can then be stored in tanks and used to meet both on- and off-peak power demand. The development of low-cost and efficient storage alternatives will play a key role in the broad-based commercialization of both fuel cell technology and renewable energy sources.
Another interesting play will be portable power, says RAM Capital's Oshinsky. "It is going to be implemented in the economy far sooner than automobiles or homes." With the move towards distributed generation, an increase in natural disasters, and the stress on the nation's grid system, as evidenced by the blackouts this summer in the Northeast and Midwest, Oshinsky predicts that the residential market will turn to 1 - 3 kW fuel cells for backup power. copower.com
Here, Oshinsky likes DCH Technology (Valencia, Ca.). With a market capitalization of $17 million compared to its peers such as Ballard at just under $2 billion and Plug Power at $800 million, Oshinsky sees DCH as significantly undervalued by the marketplace. DCH is scheduled to deliver its first 3 kW fuel cell to NorthWest Power Systems by the end of 1999.
dcht.com
No doubt, building the hydrogen economy will be a cash-hungry business. Fortunately, this is one technology that seems adept at attracting capital even in the tender seed stages.
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