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FuelCellStocks.Com Fuel Cells News January 1, 2006 FuelCell Energy thinks the time is right for fuel cells Source: The Journal Steven P. Eschbach believes the perfect convergence of economic and cultural forces is about to put FuelCell Energy Inc. on the path to profitability. The company has begun commercializing its power plants at a time when high oil and natural gas prices are persuading policy makers and the public that it's time to get serious about alternative sources of energy, he said. Eschbach, who is Danbury, Conn.-based FuelCell's director of investor relations, is encouraged by Congress' decision to provide generous tax credits for developers and building owners who buy fuel cells. The tax credits of up to $1,000 per kilowatt are in the energy bill President Bush signed in August. State governments have also gotten into the act. Twenty states, including New York, and Washington, D.C., have adopted standards calling for electric utilities to increase the amount of renewable energy in their supply. Engineers and other experts at FuelCell Energy have spent years looking for ways to reduce the cost of making the company's power plants so that the plants can compete on price with other energy sources. Nearly all of the 50 power plants the company has installed to date at hotels, hospitals, universities and other sites were purchased with the help of government subsidies. White Plains-based Starwood Hotels and Resorts Worldwide Inc., for instance, used a $920,000 grant from the New York State Energy Research and Development Authority to pay for the 45-ton fuel cell plant that provides energy for its Sheraton New York Hotel & Towers, a luxury hotel in midtown Manhattan. "The strategy is to continue to reduce product costs and improve availability," Eschbach said. The company targets customers in regions where electricity costs are high, such as the Northeast, California and Japan. It also looks for markets with strict environmental regulations and that have subsidies available. It has placed fuel cells at Yale University, a brewery outside Tokyo, a U.S. Coast Guard station on Cape Cod and a prison in California. A fuel cell uses hydrogen and oxygen to create electricity through an electrochemical process. They produce less greenhouse gas than fossil fuels, making them environmentally friendly. Fuel cells produce water and heat as byproducts. Those who are bullish on fuel cells foresee the day when they will replace internal combustion engines in autos — though FuelCell Energy makes fuel cells for buildings, not vehicles. FuelCell Energy's DirectFuel Cells pull hydrogen from fuels such as natural gas and wastewater treatment plants. The company boasts that its products are particularly efficient in their fuel use and are non-polluting. According to the U.S. Department of Energy, British scientist Sir William Robert Grove, dubbed the "Father of the Fuel Cell," invented the first fuel cell in 1839. The first fuel cell car was not built until 1970. Several car makers, including General Motors Corp. and Toyota Motor Corp., have prototype fuel cell cars. But while the company believes it is has a business that could soon turn lucrative, investors have not shared that confidence. The company's shares closed at $8.47 Friday, down 14.44 percent on the year. The stock is down $1.43 since the start of last year and down a dizzying 83.6 percent from the $51.50 level it hit in October 2000, when an energy crisis in California made people think alternative energy sources were about to become more popular. The company lost $68.19 million, or $1.54 a share, in the fiscal year that ended in October, continuing a string of annual losses that began in 1998. Net sales dropped from $31.4 million to $30.4 million. The company hailed its success in cutting the costs of its products and in making them more reliable. It knocked the cost of a new power plant it hopes to produce this year down 30 percent to $4,300 a kilowatt. The company reduced the cost of another sub-megawatt unit to $4,600 a kilowatt by eliminating a blower, piping and insulation and using thin-walled tubing to replace other heavy piping. David Smith, an analyst who follows FuelCell Energy for Citigroup Global Markets Inc. in New York, said in a recent research note that he was "skeptical of FuelCell Energy's outlook" since the company loses money each time it sells a fuel cell. He also said the market was slow to embrace the DirectFuel Cell system. Smith said the company will not have positive gross margins for several years or until it makes and sells 50 megawatts annually. Even winning a bid to supply 10 megawatts to the Long Island Power Authority might carry a downside for FuelCell Energy, Smith said. The job would cost the company a minimum of $50 million to $75 million to complete and would probably force the company to seek further equity financing, he said. The company recently filed a notice saying it might sell $150 million worth or debt securities or stock, an option Smith said will be necessary if the company wins the Long Island bid. Eschbach said the company has made major strides in knocking costs out of its fuel cells by using less expensive materials where it can — substituting plastic piping for stainless steel, for instance. The company has also changed the design of its 250-kilowatt power plant to cut the cost by 25 percent. "It's called value engineering," he said. "What you're doing is you're examining the product from top to bottom, from beginning to end, and looking at ways you can reduce product costs." He said he believes the company needs to sell 30 to 50 mega-watts a year to have break-even gross margins. The company's manufacturing plant in Torrington, Conn., about 50 miles from the Danbury offices, has the capacity to produce 50 megawatts but now produces only about 6 megawatts. "We have plans to bid on tens of megawatts" in the next year, he said. Increased production would bring many benefits, he said. Since the company would need larger quantities of materials it would tap global markets for those materials, possibly getting lower prices. The company would have to build 80 to 100 megawatts a year to show an actual profit, he said. Expert opinion on when there will be enough demand for fuel cells to make them a big money maker is diverse. Nabil Nasr, director of the Center for Integrated Manufacturing Studies at Rochester Institute of Technology, said some believe that in five years fuel cells will be commercially viable, but others think it could take 15 years or more. "Unless we can bring the cost down and increase reliability, we will not have the demand needed to drive high volume," he said. Robert Savinell, dean of the school of engineering at Case Western Reserve University in Cleveland, said he believes that within five years there will be a significant market for stationary fuel cells, or fuel cells that go in buildings as opposed to vehicles. Fuel cells that pull hydrogen from natural gas are particularly efficient, he said. That helps offset the disadvantage of relying on a commodity with a volatile price, he said. "Natural gas prices are up but on the other hand it's a very simple technology that can take the hydrogen off the natural gas and be able to take every molecule of natural gas and convert it with very great efficiency into electricity," he said.
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