Tech Check
March 29, 2000
Snapshot: ?Energy Tech Part II: Fired Up About Fuel Cells.? Having set records for traffic last Wednesday, we?ll take another look at this exploding group which may change the way we fuel our cars and homes. Ballard Power Systems (BLDP) is scheduled and Hugh Holman, Energy Technology Analyst at CIBC World Markets, returns to review types of fuel cells, industry drivers, and trends and what to watch the rest of the year.
TIM: Thanks for joining us. Tim Quast here on Informed Investors Radio Tech Check, our weekly look at the tech sector. Our co-host Steve Chanecka who is ordinarily here is out ill and I?m in Boston. Nevertheless we have a fascinating show on tap, our second look at energy technology, Part II, as it were. Last week we chatted with Hugh Holman from CIBC World Markets, one of the few analysts who focuses specifically on this area and clearly it?s an area of incredible interest and much development. We also chatted with Gary Mittleman, CEO of Plug Power (PLUG), and we?ll look at the other key player today in that space which is Ballard Power Systems, at least the key proton exchange membrane fuel cell maker, Ballard Power Systems (BLDP) out of our neighbor to the north, Canada, on the western side. So we?re going to do that today. Thanks to all of you, too, who have sent questions. We just literally had a mass of them, hundreds of questions about this area and we can?t possibly address them all but we?ll sure do our best to thoroughly canvass this area. We did not spend a lot of time last show looking at the differences between the solid oxide fuel cell and the protein exchange membrane fuel cell and we certainly want to do that today and will do so shortly. If you?re wondering what these terms that may seem like they?re part of a foreign language mean, proton exchange membrane and single oxide fuel cell, what all that means, this is the budding development of alternatives to the internal combustion engine in one sense and perhaps to the standard grid system for delivery of power on the other and certainly an area where the major automobile companies have directed resources and attention. We?re going to look pretty hard at this area again. We?ll do it again by beginning with the analyst?s perspective. Hugh Holman at CIBC World Markets joins us for Part II and much has happened, too, since we chatted. Thanks, Hugh, for being back.
HUGH: I?m pleased to be back.
TIM: Let?s get back to the whole energy technology area. For those who maybe weren?t here last time, let?s give them a kind of a capsule, what we?re talking about. What is this area of coverage that you focus on and that you call energy technology?
HUGH: Well, it really starts with the de-regulation and restructuring of the power industry which we?re about halfway through that process in the United States and it?s a process that the European Union has also agreed to and is beginning in Europe. What we?re doing is introducing competitive forces to the power business. In the old world, the old economy, you bought power from your local monopoly utility and that was it. It was kind of like the black AT&T rotary phone that you used to have in your house. When you break the monopolies apart and allow competition in the market place, you get all kinds of interesting innovations and new technologies emerging. You only have to look at what has happened to the telecom sector to begin to envision what may happen in the power business. One of the things that a lot of people think may happen is we enable people to generate their own electricity that you and I in our homes may have our own power generation capability be it from fuel cells, from solar power-so there?s just a whole bunch of things that I think are going to break loose here and that?s what I?m focused on. I?m trying to identify the most promising investment opportunities that result from this de-regulation and restructuring of the power industry.
TIM: How far are we into-maybe there?s a better way to phrase this?.When will we see commercialization of these products and perhaps widespread use? Are we talking about 5-10 years? What?s the time frame?
HUGH: It depends on the market that they?re targeting. Right now, the critical thing here, Tim, the absolutely critical thing is price transparency. You have to as a consumer, you have to know how much you?re paying for what you?re getting and right now in the retail market we don?t have price transparency, i.e., you and I as consumers don?t really pay for the electricity that we consume at the moment we consume it. We pay an average cost. It?s very much sort of smoothed out, a smooth price as opposed to one that jumps around where we see significant volatility. In the wholesale market, there is price transparency and so marketers of power are now being exposed to big price spikes. You?re seeing new capacity going in, you?re seeing new transmission lines being considered, ways of improving power quality at the grid level, so already we?re seeing technologies emerge to address those bigger issues at the wholesale level. Right now 24 states have either passed legislation restructuring their power industry or have issued regulatory orders which achieve the same thing and the rest of the states are all considering it. So we?re about halfway through the process in terms of the state by state de-regulation. And as I say, we are reaching commercialization phases in some of the markets. For the residential stuff, the fuel cells at the residential level, I don?t think we?re going to see that really explode for 3-5 years. I would put it in the 3-5 year time frame because it will be at that point that you and I as individual consumers really begin to feel in our pocketbook the effect of buying power for example at that peak hours when it?s very, very expensive. And that?s obviously-when we get hit with that bill, that?s when we start to say hey, wait a minute! Maybe I want to unplug here. Maybe I need to generate my own power.
TIM: Right, right. A slightly tangential thought here, but your point leads into this, Hugh. Several of the listeners last week talked about the difference between your time frame vis-a-viz what Gary Mittleman at Plug Power (PLUG) seemed to indicate where they believe that they will be shipping commercialized products by the latter part of 2001. Is there truly a contradiction here or do we just need to understand the frame work?
HUGH: No, I don?t think there?s a contradiction. I know Gary?s business plan quite well. The volume shipments really begin further down the road. And, yes, they will lock down the design of a commercial product. Yes, they will begin manufacturing and distributing a commercial product but not in the hundreds of thousands of units. And that will come, as I say, more in the 3-5 year time frame on down the road.
TIM: Makes sense. Let?s jump to a macro-economic question, I guess it would be. Let?s talk about the PEMs versus the-I don?t know how you say the acronym-but the solid oxide fuel cells. Can you give us a kind of an overview-what the similarities and differences are?
HUGH: I would be glad to do that. There really are four kinds of fuel cell technologies that have been developed. I?m going to focus just on three of them that I think analysts and those who pay attention to this generally recognize as being the three technologies that will shape the real commercial use of fuel cells. The first of these is called molten carbonate. Molten carbonate is a high temperature fuel cell. It is very close to commercialization. It is an ideal type of unit where you can use the heat that is generated by the fuel cell. For example, it would be perfect for a university complex, a hospital complex, a mall, where you have heating needs in addition to needs for electricity. So that?s a type of fuel cell that will not be used in a residential application but rather in a commercial and industrial application in sizes of 250 kilowatts and up, maybe even as high as 30 or 40 megawatts.
Moving to the next technology, and as I say, molten carbonate is really, we?re there, in essence. There are these fuel cells out there running right now. The proton exchange membrane, PEM, is the second and that is being considered for the residential and even smaller micro, micro uses. It is a low temperature fuel cell and therefore more suitable for home applications and very small scale applications. It can be used in a larger application but the sweet spot for PEM really is residential use, and that?s Plug Power (PLUG), and H Power (private company owned by Sofinov, Singapore Technologies and DQE), and several other companies and the automotive use including Ballard (BLDP). Ballard is the leader there.
The third technology, the solid oxide technology, is considered to be sort of the next generation down the road and the time frame that DOE, Department of Energy, talks about in terms of that technology would be maybe 5-10 years down the road.
TIM: Interesting. A question that arises and I?ll throw it at you from a listener, Steve Skemp, in Bethesda, Maryland, asks-Ballard (BLDP) and Plug Power (PLUG) has dominated the news recently in the fuel cell sector but are these stocks representative of the areas where we?re most likely to see commercial success in the future? How about smaller PEM fuel cells? And you alluded to this, Hugh, that are designed to save power portable consumer electronics such as cell phones and computer laptops and what have you. Is that on the horizon?
HUGH: It certainly is. I mean it is something that the makers of portable laptop computers have struggled with the balance between the power demand of the computer versus their ability to supply for long periods of time that power. Everybody wants more powerful machines. More powerful machines use more electricity. Therefore, you?ve got this dilemma and you?re trying to optimize between the power of the computer and the amount of space and weight devoted to battery storage which is what we typically use for our laptops. So the PEM fuel cell may be a viable alternative to the battery packs that we now use in our laptops and a number of firms have looked at and are developing prototypes of fuel cells that could be used in those kinds of applications. There are issues there. Whether PEM fuel cells run on hydrogen. Are we going to carry little bottles of hydrogen, compressed hydrogen around with us or what will the FAA think about that on airplanes? There are issues. This is a broader issue and this is something that I believe you?re going to be talking to Ballard (BLDP) later in the show?
TIM: We are. Paul Lancaster is going to be on.
HUGH: Excellent. I think one of the things you?ll want to talk about here broadly is the hydrogen infrastructure. What if we do go to a world in which we have PEM fuel cells in cars? How are they to be fueled? Are there going to be reformers incorporated to the design that takes gasoline, methane, whatever, and convert it into the hydrogen that the PEM fuel cell needs to run or are we going to go to a storage economy in which just as you might get a tank of liquid propane you get a tank of hydrogen or you fill your hydrogen storage tank in your car. Those are interesting questions and clearly they are critical path to the commercialization success of the PEM fuel cell.
TIM: To return to this issue that I?m sure dominates a lot of discussion and I?ve seen it here where there?s a fanatical-perhaps I should rephrase that-but a devoted following behind the single oxide fuel cells. You make the point that these that support that model would make. And that is that solid oxide fuel doesn?t require the massive expenditure on a hydrogen infrastructure-or hydrogen-based infrastructure. How should we look at that?
HUGH: Well, that?s positive and that also is true of the molten carbonate fuel cells. These fuel cells operate at higher temperatures than the PEM fuel cell and because of that you can use natural gas in them directly and the heat and the catalyst in the fuel cell in effect converts the natural gas into the fuel that the fuel cell needs-the hydrogen. So you skip the necessity of having a reformer at the front end of-an external reformer as it?s called-at the front end of the fuel cell. You have in effect an internal reformer so that?s a positive. And one that may prove a critical positive in terms of those two technologies. Just one comment on-you mentioned the fanaticism-generally there is a fanaticism here. I think people are really fascinated by these emerging technologies whether it?s because they have an environmental agenda because remember these are very clean non-polluting sources of electricity. Many people come to them because of the environmental agenda. I think a lot of the investors have focused in particular on the environmental benefits of these technologies.
TIM: Let?s talk a bit about Ballard (BLDP), if we can, just to get your perspective. How?s Ballard positioned and what?s your overall view of the company?
HUGH: Well, they were the first to the market, to the equity market. They have the largest market capitalization of many of these emerging energy technology companies. They have historically positioned themselves as being the leading player in the automotive sector. They have very strong relationships-DaimlerChrysler AG (DAJ) in particular-as an investor. And they really have poured a very significant amount of money and scientific talent into advancing the PEM technology for automotive use. I would say clearly regarded worldwide as the leader in that sector. But they also are looking at the stationary market. They have a unit that is-a subsidiary unit-that is developing at 250 kilowatt unit which could be used in a stationary application. Again, a commercial or industrial type of application so I would say they are pretty broadly attacking the applications of the PEM technology.
TIM: We?re just almost out of time. It?s hard to believe. We haven?t even-again-this is such a huge subject and all-absorbing-it?s really difficult to cover.
HUGH: Yes. It is. It?s a huge industry. It is probably arguably the largest industry in the world-the power industry. And it really hasn?t done much technologically in many years so there?s just an enormous backlog, I think, of innovative ideas waiting in the wings to be commercialized.
TIM: And I know I?m stretching it just a hair but to wrap up-if it can be done in 30 seconds-what companies should we keep our eyes on?
HUGH: Well, we have covered a bundle of these in the past. Really about a half dozen or more that investors probably want to be looking at-American Superconductor, AstroPower (APWR), certainly Plug Power (PLUG), Ballard (BLDP), Mechanical Technology (MKTY) which owns 32% of Plug Power. There?s a last one I would mention-another portfolio investment of Mechanical Technology-a company called SatCon (SATC) and I?m leaving some out but there are between 5 and 10 companies that are publicly traded today that really are sort of a core to this power technology thesis.
TIM: Well, Hugh, thanks once again. We?re just really indebted to you for spending now two good chunks of time with us to provide excellent insight on this area.
HUGH: It?s a pleasure and I?m sure we?ll be back.
TIM: I hope so. We?ll definitely do this again if you?re up for it. We?ll give it a break for a bit but I?d love to have you back and take a look at how things are progressing.
HUGH: Sounds great!
TIM: Hugh Holman, analyst at CIBC World Markets and we?ve got to take a break. After we return, we?ll chat with Paul Lancaster from Ballard Power Systems (BLDP). Stay right here.
(Commercial break)
TIM: Welcome back. Tim Quast here on Tech Check. Thanks for joining us today as we take our second look at the energy technology arena. Lot?s going on in this space and much to talk about. Again, we couldn?t cover it all with Hugh Holman and so we?ll have to do it again. We had a chance to look at one of the key players last week-Plug Power (PLUG)-that?s in the proton exchange membrane area and now we?ll do it with really the leader in this area. For those of you who follow this area you know the name Ballard Power Systems (BLDP), one of the key focal points of both technological progress, I think, and focal point for drivers from the automobile industry because of the array of partnerships that they have in this area. Paul Lancaster, VP of Finance, joins us. Paul, great to have you on. Thanks for making time for us today.
PAUL: It?s good to be here.
TIM: Give us a quick capsule, Paul, on exactly what Ballard (BLDP) does and what it?s focused on.
PAUL: Okay. As Hugh mentioned earlier, we?re obviously focused on proton exchange membrane fuel cell development and commercialization. But what Hugh has talked about a lot-and it?s a common misconception-is that we?re only focused on the automotive sector and our business plan is much broader than that. Hugh talked a little bit about that but obviously we?re involved in stationary power. But our business is really to go and drive PEM fuel cells across all of the markets where they work. Now the reason that we?re focused on the automotive market is because that?s truly where you can do the technology driver. To meet the requirements to replace the internal combustion engine in an automobile, that?s the toughest for any application for PEM fuel cells from a performance, from a reliability, and most importantly from a cost perspective. So if you meet the requirements for the automotive sector, then it?s very easy to meet the requirements for every other sector that we are looking at. So, yes, we are looking at stationary power, both 250 kilowatt products like Hugh talked about but also residential products. We have a program for a product for residences in Japan because of the unique aspects of the Japanese market. It makes economic sense there. We?re also developing portable power plants-if you will, the replacement to the Honda generator and in fact, that will be our first product. That will be in the market next year.
TIM: Is that right? Many of our listeners understand how these work but for those who don?t, can you give us a quick technical description of what a proton exchange membrane fuel cell does, how it works?
PAUL: Okay. In very simple terms. Proton exchange membrane takes hydrogen as a fuel and you can obtain hydrogen from a variety of fuels-either directly or from a hydrocarbon fuel-if you?re going to take it from a hydrocarbon fuel, you need to process that hydrocarbon fuel and that is remove the hydrogen from the hydrocarbon fuel, make it available for the fuel cell. Inside the fuel cell itself, the hydrogen atom ionizes. By that I mean the electron and the proton separate. The proton can travel through a plastic membrane. That?s why our fuel cells are called proton membrane exchange fuel cells. The electron can?t. So the electron has to flow through an external circuit and a flow of electrons is electricity. The electron and the proton meet up on the other side of the membrane where we have air that has oxygen in it. The proton and electron combine with the oxygen from the air and form water, pure drinkable water, and a little bit of heat.
TIM: Let?s switch our attention if we can briefly to the stock. Ballard (BLDP)?s stock. Obviously this group has been very strong-a little pull-back lately-but certainly very strong. What?s behind the surge? Is it just anticipation of what?s coming? What?s your perspective on that?
PAUL: Well, I believe that people looking at the way we generate power today aren?t satisfied with that. It?s been well recognized the limitations of conventional ways of generating power, either mode of power in cars and trucks or electricity in stationary power plants. And that?s because we?re using combustion-based technologies to deliver that power. And combustion-based technologies are not only polluting but they are inefficient. And so globally there?s an increasing awareness that these technologies aren?t suitable, aren?t sustainable. So there?s a desire for a new technology, something that?s better. And while fuel cells have been around for a long time in aerospace applications, and their benefits, their advantages have been widely recognized, they haven?t really been considered as practical for day-to-day commercial applications until recently. And I think what we?re seeing is while the market has a demand that?s there for a new power generation source it?s only recently that it?s been recognized that fuel cells are not only a better power source but they?re coming into the market place in everyday commercial applications a lot sooner than most people had realized.
TIM: Speaking of that commercialization, what are the potential drivers behind-I use the term growth-realizing that you?re working toward commercialization. What are the drivers behind your growth so to speak right now?
PAUL: Well, there?s a number of things and the key thing and there is starting to be more looking at developing fuel cells but the key thing to remember in looking at any company that is developing any power generation technology is that you?re really competing against conventional technology and the bar, so to speak, for conventional technology is very high. Conventional technology has had a long period of development. It is very reliable. It is robust. It works. So for a new technology to come into the market place you have to at least meet the standards-at least meet that bar. You know when you start your car in the morning, you expect it to start. It?s not a surprise when it does. I heard you mention earlier your computer system went down. Well we would not accept power generation technology to fail the way we accept software and computer hardware to fail.
TIM: So true.
PAUL: So this takes a long time to develop and prove and engineer out all of the failure modes out of this technology before it becomes suitable for commercial introduction for the market place. Now the key way to do that-and the stage that Ballard (BLDP) is at-you don?t do it in the lab. You do technology development in your lab and you can drive technology a long way forward in a lab but to actually develop commercial products you have to go into field trials. You have to go through the steps of field trials. You have to put the product in the hands of third parties who use it in everyday settings. They have to apply to it commercial expectations although they recognize it?s a prototype product and in doing so they?ll break the product. And by them breaking it you will find the failure modes which you can then take back into your own development program and engineer out of the product. And you do this through generational shifts. That?s the stage we?re at. We?re doing that with our buses. In fact, as you know we just finished the trial in Chicago and the result of that was a next generation bus engine that?s dramatically simpler, 50% lighter by weight, instead of 12 electric motors a single electric motor. Now these are the types of step changes in development that you can?t do in the lab, but by field trials you can do. Now, it takes time to do field trials. It takes time to do product development and you have to go through these successive generations of field testing in order to bring a commercial product into the market. That?s why this takes so long. Probably longer than most people recognize.
TIM: Before the break here, let?s turn back to the cells themselves and do a quick comparison, if a quick comparison could be done, between proton exchange membranes, single oxide fuel cells. Glenn Rambach, one of our listeners that just sent a question in from Reno, said how about phosphoric fuel cells and alkaline fuel cells? Are you able to give us a quick, simple look at pros and cons of these different types?
PAUL: Sure, I?ll do a it as fast as I can and I?m sure every listener?.when you said people become a little fanatic about it, I think that?s a little bit true. People tend to think that there?s a silver bullet among technologies sometime and they forget that this is a very large market and even with combustion engines there are different types of combustion engines that are out there for different market applications. So different fuel cells all have different product attributes that make them better or worse suited to different applications. So just to sort of start from the top, alkaline fuel cells-they use a liquid alkaline electrolyte. They are used in the space shuttle today. That?s what provides the power for the space shuttle. They really are not suitable for commercialization on earth-based applications because CO2, even the CO2 in the air around us contaminates the electrolytes. Phosphoric acid, probably the fuel cell that has been most developed for stationary power applications, there?s a number of pre-commercial units in the field. They have shown good reliability. Where they have had some trouble is really in bringing the cost down and I think that?s partly because of the nature of having a liquid electrolyte in their power plant. Phosphoric acid, again, really is designed for sort of mid-sized under a megawatt but more than 200 kilowatt-type power plant applications. It was mentioned molten carbonate uses a liquid molten salt as the electrolyte, operates very hot but very efficiently, and as a result is really suitable for larger applications, really base load applications or applications where you want process steam in a co-gen-type application where process steam is important. So we?re really talking about larger industrial applications. They don?t cycle well. In fact, all of the hot fuel cells don?t cycle very well. They take a long period of time to heat up and they don?t respond rapidly to changes in demand load. Solid oxide-it uses a ceramic coated with an oxide as the electrolyte. Again, runs very hot so it?s good in base load applications for stationary power, applications where you need process steam. There?s some talk about using them as an APU or an auxiliary power unit on board trucks and that might be an application that might work as long as they?re not turned off again because they don?t respond well to changes in demand and because they take a long time to heat up. It?s the nature of all of the hotter fuel cells. PEM fuel cells are not as efficient as the hotter fuel cells but they more than make up for it in fact through the fact that they respond very rapidly to changes in demand load. They start up virtually instantly even at room temperature, or even subzero temperatures so they have applications in smaller stationary. Ballard (BLDP) focuses at the under one megawatt mark. Certainly transportation applications, portable applications, and there?s a variant of PEM fuel cells called the direct methanol fuel cell where you actually inject methanol directly into the fuel cell instead of hydrogen and the methanol breaks down right at the membrane level and that has some interesting applications, especially in smaller applications. The battery replacement type market.
TIM: A hot-button issue here is pollutants coming out of primarily the hot versus the PEM type of fuel cells. Can you talk about that issue a little bit?
PAUL: Really all the fuel cells are very clean and that?s because they?re electrochemical by nature. They are electrochemical devices so even the hot fuel cells are operating at temperatures far lower than a combustion engine or a gas turbine. So they?re all much cleaner. The key thing is that depending on where you get your fuel really determines to a large extent the environmental benefit of fuel cells or frankly any power generation technology. If you generate or use a hydrocarbon fuel you?re going to produce CO2. It doesn?t matter what technology you use. But the key thing is that if your technology is more efficient than alternatives you?re going to produce less CO2 to the get the same amount of work. And fuel cells generally are two to three times more efficient than conventional ways of generating power. Certainly PEM fuel cells are that when compared to gasoline engine in automobiles that we use today.
TIM: Let?s talk about that a little bit too. Let?s take cost. How would a fuel cell powered automobile compare to conventionally powered automobiles in terms of cost?
PAUL: Well, for you to buy it, it?s not going to cost any more. It?s been well recognized that people don?t buy new technologies at a significant premium unless they offer significant advantages to them and consumers don?t buy vehicles on a life cycle basis so saying they get better economy or they?re going to be more reliable or there will be lower maintenance costs isn?t a big selling point. Even being a much cleaner vehicle, you know people will feel good about it as long as they don?t pay anymore but they won?t pay a significant premium. The key thing is, and this is what all of our development programs at Ballard (BLDP) are focused at, is that we have to be able to deliver a fuel-cell powered automobile that costs the same as a combustion engine powered automobile but is a better vehicle. Yes, it?s cleaner, yes, it?s more efficient, yes, it?s more reliable. It?s lower maintenance, no more oil changes. It?s a vibration-free quieter vehicle so it has better ride comfort. It has better performance because of the high torque characteristics that electric vehicles all have and from a design point of view for an automaker, ... cont' |
