NISTIR 7161
The Role of the U.S.  National Innovation System in the Development of the  PEM Stationary Fuel Cell

V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells

Technologies often face obstacles in moving from the lab to the marketplace. At its inception in the late 19 th century, the electric industry was not particularly efficient. However, the incumbent technology, kerosene oil for lighting, was even more inefficient. As more uses of electricity were developed, economies of scale in production emerged and the price of electricity dropped. The average capacity of generation units rose from 80 MW in 1920 to 600 MW in 1960, and to 1 400 MW in 1980. Electric industry production began on a more or less equal footing with the incumbent technology, and only through growth in scale was it able to achieve technical and price dominance. In contrast, the computers of the 1950s competed against only rudimentary technologies such as the abacus or crude mechanical adding machines. Therefore, due to clear technological dominance, computers faced fewer obstacles in gaining marketplace acceptance.

The path from lab to marketplace for fuel cells is likely to be more arduous than those followed by either of these technologies. Fuel cells may not benefit from virtuous cycles enjoyed by electricity and computers. For electricity, it was a matter of initial adoption activity. Once electrification took hold, inventions run on electricity emerged in the marketplace, and the demand for electricity rose. This justified building larger electric plants, which produced cheaper electricity, which in turn made electricity an increasingly viable source of power. In computing, Moore 's Law drove the whole process. As computers became faster and cheaper, more applications could be "computerized," which led to increased demand for computers.

Fuel cells face a rather difficult challenge as they enter the marketplace, since they appear to offer only a novel way of producing electricity and face stiff competition from an efficient technology that continues to receive a tremendous amount of investment. Therefore, fuel cells must overcome a much higher set of marketplace hurdles than either electricity or computers in order to gain commercial acceptance.

likelihood of commercial success and those areas that might help or hinder their ultimate acceptance in the commercial marketplace.

Figure 6 presents a schematic of the forces driving the innovation and adoption of stationary PEM fuel cells. The incentive for firms to dedicate resources to R&D of stationary fuel cells is affected by a variety of factors. These include the degree of difficulty of the research problem, the likelihood of commercial success, government policy, rivalry among PEM fuel cell developers, competition with alternative technologies for distributed generation of electricity-including other fuel cell technologies-competition with large-scale electricity generators, the availability of key resources, and the economic power of key resource providers.

Figure 6 - Forces driving stationary fuel cell innovation and adoption.

Fuel cell companies face serious hurdles in attempting to achieve commercial success in the market. The following subsections present an overview of financial findings regarding fuel cell companies, followed by a brief discussion of five areas affecting the commercialization of fuel cells-platinum, hydrogen, consumer issues, target markets, and alternative energy forces. The discussion concludes with an outlook for the future.

Table 7 shows the gross revenues of U.S. and Canadian fuel cell companies for the years 2001 and 2002. Table 8 shows the amount of R&D expenditures, net assets, and net cash flow for the same years. Total revenues rose from $128 million to $218 million-an impressive 60 % increase. However, as table 8 shows, the total R&D expenditures for 2002 for those same companies totaled $260 million, or almost $40 million more than their total revenue. A positive trend is suggested by the fact that the ratio of R&D expenditures to gross revenues dropped considerably, decreasing from 1.7 in 2001 to 1.18 in 2002.

Fuel cell companies continue to rely heavily on government and industry research contracts for a significant proportion of their total revenues. The percentage of gross revenues from contract research, as opposed to product sales, increased from 35 % to 43 % between 2001 and 2002. 1

As table 8 shows, total assets decreased $195 million from 2001 levels. The cause was a swing in net cash flow from a surplus of $215 million in 2001 to a deficit of $121 million in 2002. The largest contributor to the switch in net cash flow was the dismal equity environment for speculative capital in 2002, as shown in table 9.

One issue surrounding the commercial viability of fuel cells is their reliance upon precious metals as a catalyst. Borgwardt finds this to be a critical obstacle. Comparing projections of future platinum supply based on past trends to the amount of platinum required to replace the current U.S. automotive fleet with fuel cell-powered vehicles, the author concludes that "fuel cells alone cannot adequately address the issues facing the current U.S. system of road transport." 3

There are several factors that suggest this view may be overly pessimistic. First, as Borgwardt notes, the historical trend is declining global prices and increasing global annual output of platinum ore. Second, compared to known global reserves of 47 500 tons of platinum, fuel cells currently use about 25 g. 4 Taken together, these facts suggest that the long-term elasticity of supply may be sufficient to meet future demands as fuel cells experience commercial success. Other tempering factors are based on current research efforts to decrease the usage of platinum in each fuel cell and examine alternative catalysts. There has been remarkable recent success in the first area, with a 100-fold decrease in the usage of platinum. This decrease has in turn helped to reduce the cost of platinum in a PEM fuel cell used to power an automobile from $30 000 to around $150.

DOE industry consultants have recently found that, although large fuel cell demand may drive higher platinum prices in the short run due to a lack of short-term supply, the price will likely return to its long-term mean as more mines come into operation. These short-term price spikes may result from either short-term real supply rigidities or hold-up issues resulting from South Africa 's near-monopoly position in known platinum reserves. 5

While changes to the regulation of utilities have contributed to the viability of the distributed generation business model, there are a number of customer-driven factors affecting this transition. Consumer demand for greener technologies and technologies that increase national energy security are not accompanied by actual willingness to pay for increased costs of energy produced with these technologies. If a public consensus were to develop that the benefits of accelerating the use of fuel cells are significantly large, then it might be appropriate to consider public policies of tax credits or other incentives to encourage the rapid adoption of fuel cell technology.

Several demand-pull factors affect the potential commercial success of PEM fuel cells in residential applications. For example, fuel cells must meet residential electrical and thermal loads; their reliability must be equal to or better than grid-connected service; the volume and footprint of fuel cells and reformers must match current heating, ventilation, and air conditioning systems; they must comply with current building and product codes; and they must have low noise levels. Critical to providing electricity cost competitive with the grid is the achievement of total fuel cell system cost well below $1 000 per kilowatt with reliable, inexpensive operation over the 20-year life that consumers expect from stationary energy appliances.

The residential consumer is Plug Power's eventual target market. To promote customer collaboration, Plug has 130 systems installed in the field in demonstration programs. To penetrate the market rapidly and obtain an advantage over competitors, Plug Power has pursued a series of joint ventures and agreements with partner companies.

A huge hurdle for a small technology company is how to sell the product once it is developed. Plug Power has addressed this challenge by partnering with GE's Power Division, a leading maker of turbines and power plants for the central utility business. GE's MicroGen unit became the exclusive licensee of Plug Power PEM fuel cells below 35 kW in most of the United States. 8 The addition of a large manufacturer of household energy appliances to distribute and service the residential fuel cells was a huge step forward for Plug Power. Both brand recognition and the fleet of GE technicians to service products after the sale will greatly accelerate market acceptance and reduce the time to commercialization. Subsidiary distribution deals are now being pursued with local utilities. For example, GE MicroGen has signed an agreement with NJR Energy Holdings Corp. of Wall, New Jersey , and Flint Energies of Warner Robins, Georgia, to be the first two distributors for GE MicroGen's line of residential and small commercial-sized fuel cell systems. 9 In addition to these distribution channels, DTE retains marketing rights to sell the Plug Power units in several Midwestern states. Timing these agreements before commercial release of a product also allows for additional field testing of pre-commercial units, again accelerating the time to market for a tested, robust product for residential use.

On the technical side, Plug Power has sought to leverage its PEM technology with complementary systems. The German-based Celanese, the supplier of the high-temperature membranes used in Plug's first ATP project, subsequently signed an agreement to develop a high-temperature membrane electrode unit exclusively for Plug Power's stationary applications. 10 The unit consists of membranes, electrodes, and gas diffusion layers and forms the heart of the fuel cell stack. It is also the key to increasing operating temperatures. Higher temperature stacks operating in the 150 °C range, up from 90 °C, ensure more reliable, carbon monoxide-tolerant operation, allow for better cogeneration efficiencies for heating air and water, and reduce the complexity and cost of the fuel processor due to the removal of the final carbon monoxide clean-up steps. An April 2000 agreement with Vaillant, also based in Germany , will capitalize on these higher temperatures by integrating a combination furnace and hot water heater. PEM fuel cells produce electricity at approximately 35 % efficiency, with the other 65 % of the energy in the fuel exiting as heat or exhaust gas. The addition of a cogeneration unit can capture the heat energy that would otherwise be wasted and raise the overall energy efficiency to as much as 85 % to 95 % by utilizing this excess heat. The efficiency gains through cogeneration offer environmental benefits amounting to an estimated halving of home and office energy costs.

Plug Power has also signed an agreement with Advanced Energy Systems to develop power conditioning equipment for its fuel cells. The partnership gives Plug Power a 28 % stake in Advanced Energy Systems and provides the right to self-manufacture or outsource the power electronics production. 11 Power conditioning is important for fuel cells because they produce low-voltage DC, which must be inverted to AC for home and office use. The goal of the agreement is to provide quicker product development for specific Plug Power fuel cell needs.

Fuel cells share a common set of benefits with all distributed generation technologies. These include the avoidance of electric transmission losses and the need for a grid, investment in new distribution capacity, and the avoidance of the financial risks associated with investment in large central generating facilities. Swisher notes that fuel cells also have a number of advantages relative to green and traditional distributed generation technologies. 14 Photovoltaic generation has capacity costs comparable to pilot study-produced fuel cells, yet produces electricity during fewer hours per year and has lower peak load availability. While wind turbines may have lower costs than fuel cells, they face siting constraints. These constraints arise either due to their negative visual impact, noise, or a lack of wind resources. Wind turbines' viability as a distributed generation option is limited by these factors, and it therefore fails to avoid distribution costs.

Traditional distributed generation approaches such as reciprocating engines, small turbines, and micro-turbines have lower costs than fuel cells. These approaches are currently used primarily as backup power. As primary power sources, however, they will likely face regulatory constraints on environmental, safety, and land use grounds. These technologies are cousins to that used in aircraft propulsion engines and would likely face difficulties with building codes and noise restrictions. Further, such projects would likely face utility regulations from which they have been insulated as backup-only power sources. Swisher believes that even gas turbines will face significant air quality difficulties under the existing Clean Air Act. Further, few alternative fuel cell technologies are as well suited for residential applications. Of competing technologies, only PEM and alkaline fuel cells operate at ambient temperatures. This allows the rapid start-up demanded in residential and automotive applications. PEM fuel cells currently enjoy significant advantages relative to alkaline-based systems in terms of reliability.

7. Outlook

The regulatory environment is promoting the development of a distributed energy strategy, which has taken on added import due to heightened security concerns. The significant advantages of fuel cells over both renewable and nonrenewable energy sources have led The Economist to note that "it is clear that the electricity industry will be turned on its head by fuel cell 'micro power' units that are about to come on the market." 15 It is also apparent to The Economist that the PEM fuel cell is "the most promising type" of fuel cell for automotive and residential applications.

Companies that work with public sector agencies can undertake riskier research agendas encompassing a broader scope. The Plug Power example described in this report illustrates how companies can leverage technical achievement through public-private partnership agreements.

____________________
1PricewaterhouseCoopers (2003), p. 4.

2PricewaterhouseCoopers (2003), p. 6.

3Borgwardt (2001).

4Ibid.

5Carlson (2003).

6Lovins (2003).

7Lovins and Williams (1999).

8DTE has the rights to sell in the Midwest .

9PRNewswire, GE press release, December 1, 1999 .

10PRNewswire, Plug Power press release, April 18, 2000 .

11PRNewswire, Plug Power press release, March 16, 2000 .

12PRNewswire, Plug Power press release, June 6, 2000 .

13Swisher (2002).

14The Economist (2001).

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Date created: March 29, 2005
Last updated: August 3, 2005

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