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<title>Five Fuel Cell Myths</title>
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<td width="75%" valign="top"><p ALIGN="left"><b><big><big><big><strong>Five Fuel Cell
Myths</strong></big></big></big></b></p>
<font SIZE="2"><p></font><font size="4"><font face="Arial"><strong>BY<br>
GERRY RUNTE<br>
DIRECTOR, EASTERN REGIONAL OFFICE, M-C POWER CORPORATION</strong></font><br>
<small>(<em>originally published by PMA OnLine Magazine: 07/98</em>)</small></p>
</font><p> </p>
<p><font face="Arial">Over the last year or two there has been considerable media coverage
of fuel cells. Although not yet a part of common vernacular, the financial community is
certainly beginning to take notice. One need only look at the stellar rise of Ballard
stock or articles in the <i>New York Times</i> for evidence. Such tides do indeed raise
most boats, but they also cause old nuggets of conventional wisdom about fuel cells to
rise and float about the surface as well. Many of these old saws regarding stationary fuel
cell technologies were never accurate- some are now totally obsolete. </font></p>
<p><font face="Arial">It’s time to debunk a number of these myths. My favorite five
are:</font></p>
<blockquote>
<i><p><strong><font face="Arial">1. The primary metric for fuel cell economics is
capital cost and $1,500/kW is the magic barrier to entry. </font></strong></i></p>
</blockquote>
<p><font face="Arial"><strong>False.</strong> This one was probably never accurate and
must have evolved from the time when fuel cells were viewed as small power plants and
compared with multi-megawatt central generation options (see Myth #5). The reality is that
capital cost – while important – becomes one of several economic factors that
must be considered. The key metric for most fuel cell customers is the total cost of
electricity and/or the total value of the energy received and its qualities, not capital
cost.</font></p>
<p><font face="Arial">Quantifying "value received" is not simple and would be
worthy of future articles – calculating the cost of electricity is pretty
straightforward. The primary ingredients are capital cost, stack replacement costs,
O&M, and efficiency/fuel cost.</font></p>
<p><font face="Arial">Consider the following graphic:</font></p>
<p><img src="../images/runte.gif" alt="wpe4.jpg (15805 bytes)" WIDTH="567" HEIGHT="404"></p>
<p><font face="Arial">If you were a customer seeking a mostly base-loaded source of
electricity and were insecure about your long term fuel cost, which option would you pick?
Would it be based upon capital cost? Would a price point of $1,500/kW provide the magic
solution? It depends upon why you want local electricity in the first place and what your
fuel supply costs and options might be. </font></p>
<p><font face="Arial">The cost of electricity generated by fuel cells is far more
susceptible to unanticipated costs of installation, operation and maintenance, because of
their small size. This issue is related to the discussion in Myth 4, below.</font></p>
<p><font face="Arial">Of course, you might be interested in an emergency backup or
operation during peak periods. The fuel cells, at any capital costs might not be the best
solution, but the microturbine could be ideal, even at the added expense. Or the product
characteristics of lower efficiency fuel cells are a better match for your needs.
Customers will choose the best technology and providers will offer a portfolio of options.
Which leads me into the next myth.</font></p>
<blockquote>
<i><p><strong><font face="Arial">2. Distributed generation technologies are in a
competition with one another. </font></strong></i></p>
</blockquote>
<p><font face="Arial">The corollaries to this myth are "Microturbines are ahead of
fuel cells;" or "Fuel Cell Company X is in a horse race with Fuel Cell Company
Y." </font></p>
<p><font face="Arial">Each technology has its own unique set of characteristics, and each
fuel cell company has its own unique set of product characteristics. Consider the
microturbine example illustrated above. </font></p>
<p><font face="Arial">This diversity of attributes of different products will allow
customers to tailor their purchases to their own needs. What is your maximum desired (or
allowable) emissions profile? What about the ability (or desire) to utilize waste heat.
High temperature technologies might offer ideal product configurations, lower temperature
technologies might not. Or multifuel capability? Some technologies can operate under more
adverse fuel quality circumstances than others, utilizing waste gases from industrial and
biological processes. These fuel cell products are able to clean their fuel far more
economically than some others and will find their own market niches. </font></p>
<p><font face="Arial">If the customer is an energy service provider, that company will
have to offer a broad portfolio of options in the new marketplace. Their product mix will
include pricing products based solely on commodity deliveries, and high margin service
options such as CHP and "premium power." </font></p>
<p><font face="Arial">Ultimately, there certainly will be some overlap of markets,
particularly in the commercial and industrial sectors. And it is fair to say that we are
all in competition for continued investments. But each fuel cell technology, after careful
analysis, will be found to appeal to its own unique and significant market segments.</font></p>
<blockquote>
<i><p><strong><font face="Arial">3. "Fuel Cells R Us" is way ahead of all
other fuel cell technologies in offering commercial products.</font></strong></i></p>
</blockquote>
<p><font face="Arial">While enormous progress has been made by all the fuel cell
developers, and while most companies, including mine, are very confident about meeting
commercialization objectives, none of us are truly commercial today. We all face our own
challenges to achieve our goals for mass produced, economic and unsubsidized products. </font></p>
<p><font face="Arial">Given the discussion of Myth #2, the fact that one developer
projects readiness for the open market in 2000, but another not until 2002 or 2003 is
relatively irrelevant. In this context, we are all quite similar in our states of
development.</font></p>
<i><blockquote>
<p><strong><font face="Arial">4. Electric utilities are the primary customers of the
fuel cell business.</i> </font></strong></p>
</blockquote>
<p><font face="Arial">I offer academic and anecdotal evidence to counter this myth. James
Utterback’s <i>Mastering the Dynamics of Innovation</i> – a book well worth
reading by anyone who finds this myth discussion interesting – presents a number of
case studies of "technological discontinuities" and their effect on established
businesses. Eutterback argues that established businesses use one of three
"piecemeal" approaches to cope with the introduction of a technological
discontinuity, and usually fail. These include "diversified portfolios of R&D
projects and technologies," ranking investments by virtue of their predictable
return, without consideration to long term effects and the competency of the firm to
handle the technology. Another common approach is to acquire new technologies through
mergers, acquisitions, alliances and joint ventures. These relationships usually result in
culture clashes of the highest order, undermining the chances of the technology to
succeed. Finally, some firms use a "dual strategy" – attempting to meld the
existing business with an emerging new technology from within the organization, resulting
in turf battles "as partisans of different strategies compete for power and scarce
resources." Utterback cites Richard Foster’s <i>Innovation: The Attacker’s
Advantage </i>to show "the disturbing regularity with which industrial leaders follow
their core technologies into obsolescence and obscurity."</font></p>
<p><font face="Arial">These observations should ring true with those who have attempted
innovation from inside or, sometimes, outside the utility sector. Scratch the surface of
most utilities, regardless of their public posture embracing change, deregulation and
customer choice, and you’ll find the thriving spirit of a regulated monopoly longing
to continue the days of adequate, relatively low risk return on infrastructure investment
and wistfully hoping for just such a future. The problem, however, is not simply the
inability of the management culture to cope with the risk burden and entrepreneurial
actions required of unregulated distributed energy markets, but the inertia and cost
inherent in utilities. Earlier in my career I was participated in a project where a fuel
cell was installed at a customer’s property. We sought to do the entire installation
and operation as "in-house" as possible, using the same personnel who construct
and maintain substations. It was a beautiful installation and met all internal codes and
standards, but it cost nearly as much as the fuel cell. We learned that a fuel cell is not
just a piece of infrastructure and that cost effective installation and operation is not
an existing core competence. Utility labor, work practices, cost accounting and culture
will ultimately kill the economic potential of distributed energy within utilities. This
is a business for entrepreneurs who are not risk averse.</font></p>
<p><font face="Arial">Yes, a handful of utilities have invested in fuel cells – and
are learning or will learn similar lessons. Some will find that the energy service
business is fundamentally incompatible with their firm’s explicit or implicit
corporate strategy. Some of the regulated wires companies who are permitted to do so will
deploy fuel cells as part of their infrastructure. A few of the unregulated subsidiaries
of current utilities will learn and succeed, but over the long term the dominant customer
base will be the evolved energy service companies and other energy service businesses that
have not as yet been created (i.e., mini district heating companies). </font></p>
<blockquote>
<i><p><strong><font face="Arial">5. Fuel cells are just another form of
cogeneration/fuel cells are just small generators. </font></strong></i></p>
</blockquote>
<p><font face="Arial">Even though this myth might be viewed as corollaries to Myths #1 and
#4, it is worth its own separate discussion. Call it semantics, but this perspective of
"fuel cells as generation" tends to put very narrow blinders on your view of the
future for fuel cells and their markets. Using this terminology makes it easier to look at
the future of fuel cells and distributed energy technologies in the obsolete context of
large, vertically integrated, centrally generating electric utility systems. It is
precisely this kind of thinking that has led to the primacy of capital costs in some
economic evaluations of fuel cell systems or in the assumption that fuel cells are simply
combustionless cogenerators and compete in those markets with other cogen technologies.</font></p>
<p> </p>
<p><font face="Arial">Fuel cells are vehicles to obtain electricity locally, tailored to
the need of customers and configured in a system that provides that electricity in the
right context- with high quality, or with fuel flexibility, or with process heat for
chilling or industrial processes, or to utilize waste gases or to avoid environmental
damage or provide rural electrification. These are not commodity based considerations
(although there will come a time that some fuel cell technologies, will, indeed become
commodities – perhaps ‘appliances’ is a better term). </font></p>
<p><font face="Arial">Inappropriate terminology conveys inappropriate reasoning and often
leads to inappropriate conclusions. Be careful out there!</font></p>
<p><font face="Arial">There’s a <strong>sixth myth</strong> that I urge you to check
our for yourselves, which is: <strong><i>Each fuel cell technology has a fatal flaw such
that none of the technologies will ever become commercial.</i> </strong> You’ve
heard the summary judgments. Just fill in the blanks: The ________fuel cell technology
will never be commercial because of a problem with ___________. I suggest you contact any
of the major developers, or better yet, visit them, and ask them about their
"problem" point blank. You might be surprised by the answer.</font></p>
<p><font face="Arial">So the next time fuel cells as an energy option comes up within your
organization, whether the discussion relates to investment, strategy, product portfolio,
public policy, the broad topic of evolving energy markets, or even market assessments
within fuel cell development companies, remember to Question Authority. We are in the
midst of a huge technological discontinuity. To paraphrase Mr. Utterback, don’t be
caught with one foot on either side of the chasm, or worse, stranded on the wrong side.</font></p>
<hr>
<p><font SIZE="2">Gerry Runte is <strong>Director, Eastern Regional Office</strong>, M-C
Power Corporation, a world leader in the development of molten carbonate fuel cell
technology. Gerry has been associated with the electric energy industry for 21 years and
fuel cells since 1991. He is a board member of the U.S. Fuel Cell Council and the Fuel
Cell Power Association. M-C Power Corporation, 57 Summit Avenue, Chatham, NJ 07928,
(973) 701-7001 (voice), (973) 701-7002 (fax) e-mail: <a href="mailto:[email protected]">[email protected]</a></font></td>
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