Residential Fuel Cells: Investing in the Heating Premium

Plug Power’s Home Energy Station III has a futuristic veneer to it. Under development with Honda, the natural gas fueled system will not only provide heat and power to your home but it also produces hydrogen to power up your fuel cell car. The Latham, New York fuel cell maker and Japanese automaker signed an agreement this week to co-operate on the fourth generation of their residential fuel cell.

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Plug Power is the latest fuel cell company to seek greener markets in Japan. Ballard Power has successfully established itself as the market leader for residential cogeneration fuel cells in Japan, selling 300 units in 2005. Ebara Ballard, a joint alliance between Ballard and Ebara Corp of Japan, supplies its proton exchange membrane (PEMFC) fuel cells to the Tokyo Gas company, which sells the 1kw combined heat and power fuel cell systems to Japanese homeowners for $5,000. Fuel cells are cost competitive in Japan due to high electricity grid prices and generous government subsidies.

Residential fuel cells have helped Ballard, the world’s leading fuel cell company, restore its sheen, as it seeks new revenue streams while it continues to develop fuel cells for the automotive market, a market 10 to 15 years away from wide-scale commercialization. The stock has steadily ascended to its 52-week high in 2006.

The enabler of the early commercial adoption of Ballard’s natural gas fueled residential fuel cells is the heating premium. Combined heat and power (CHP) systems achieve higher efficiencies through the simultaneous production of power and heat, achieving lower overall operating costs than standalone power generators. Further economies are realized when opportunistic or biofuels can be used. Thus, fuel cell CHP systems also are finding an early market in wastewater applications where they are running off methane and water. The development of next generation systems that also produce hydrogen will provide a real cost contender to incumbent CHP technologies, such as gas engines and microturbines.

“It will be quite awhile before residential fuel cells will have a market in North America,” says Stuart Bush, an associate in the energy technology research group at RBC Capital Markets. California is likely to be the first US market targeted by residential fuel cells, he says. “It has the highest electricity prices in the nation and is one of the most progressive in developing subsidies for energy.”

Across the pond, however, where grid electricity prices are even higher, the European market is getting ready to install residential fuel cells. This week, UK-based Ceres Power announced that it will sell its residential fuel cells through British Gas. The dominant gas provider in the UK has access to 15 million households or two thirds of the market.

Bob Flint, commercial director for Ceres Power says it comes down to a nuclear versus renewables debate in the United Kingdom. With the UK’s fleet of nuclear plants reaching its end of life and the price of natural gas imports high, renewables is prevailing. “The idea of distributed generation that would use existing infrastructure but not require substantial new build of power generation is attractive and defrays some of the investment that utilities and governments will have to make,” says Flint.

Ceres expects trial units of its solid oxide fuel cells to start powering and heating homes in 2007 and 2008. The cost of a Ceres combined heat and power (CHP) generator will be competitive with existing boiler technology, selling at 2,000 to 3,000 pounds sterling. While the pricing point is on the high end, a Ceres spokesperson says home users will save 400 to 500 pounds a year, realizing a quick return on their investment. Ceres stock also is on an upward trajectory in 2006, reaching all-time highs.

Dr. Atul Kumar, research scientist and author of the Houston Advanced Research Center’s (HARC) Fuel Cell Industry Assessment Report expects to see a number of pre-commercialization and commercialization developments in the fuel cell market in 2006. The biggest hurdle will continue to be driving costs down. He expects these technologies to fall more in line with fossil fuels within five to 10 years. However, costs are falling more rapidly than many analysts predicted. Dr. Kumar notes that PEM fuel cells, the technology used in Plug Power’s UPS system, are selling for $3,000 per kW today, two to three times less than three years ago. “We have seen a tremendous improvement in terms of performance and costs coming down, and reliability improving,’ he says.

In the interim, fuel cells will continue to find niche markets in uninterrupted power supply applications, such as cellular towers. Plug Power sold 300 units into the telecommunications market in 2005 and is projecting another 500 to 750 of its 5kW units to sell in 2006. Another attractive early market is forklift applications. Nuvera Fuel Cells, a maker of PEM fuel cells, has partnered with lead acid battery maker FIAMM Spa to market a hybrid zero emission power pack to power forklifts. Fuel cells will make their way into automobiles before 2015, in non-primary power applications, including air conditioning and auxiliary power.

High energy prices will continue to help push the early adoption of fuel cells. The higher the natural gas prices, the more attractive economics of CHP systems are. Both Ballard and Ceres have plans to use a similar marketing strategy, strategic alliances with dominant gas and electricity suppliers, to expand their residential fuel cells into other geographic markets. Flint expects Ceres’ fuel cells to expand into other early CHP adopter markets, including Japan, the Netherlands and Germany.

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