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Analyzing the Energy Sector: Fuel Cells
2005 December 17
© 2005, Libertiny Financial LLC
Energy for our homes, along with food, drinking water, sanitation, and transportation, are arguably the fundamental requirements for our daily lives. They're the areas that we typically take for granted. That is, until they either fail to perform or there is a large price increase.
The energy sector includes businesses that produce electricity, gasoline, fuel oil, and natural gas amongst other sources of power for our homes, businesses and transportation. Digging down into the process chain that is typically used to create electricity for example, we find that the U.S. burns coal, uses natural gas, nuclear, solar, wind, hydro, fuel cells, and sometimes even oil and gasoline combustion.
History
Since the first OPEC problems in the 1970's U.S. businesses and research institutes have worked to build an energy infrastructure for homes, businesses, and transportation that's less reliant on foreign oil. We also recognized that the burning of coal, the major source of electricity1 in the U.S., released harmful byproducts into our atmosphere.
Although hydro, natural gas and nuclear generated electricity have been around for some time, we added wind generators, solar cells, and fuel cells to the mix and called them "alternative energy."
Success?
Have we successfully curtailed our use of coal and offset our use of imported oil? The answer is "no."
The "acid test" for new or re-engineered technologies is when they become simple and economical to use for everyday people. Today, there's still nothing easier to use or less expensive than plugging your refrigerator into an electric outlet or filling up your car with gasoline.
Fuel Cells
During the last five years, there's been a tremendous amount of research by both the electricity producing and the transportation industries into fuel cells. At it's simplest level, a fuel cell converts hydrogen into electricity through a chemical reaction.
Although fuel cells have gained a significant amount of press for powering future automobiles, this is the least likely short- or mid-term success story. Why? The infrastructure to pump hydrogen into our cars is not available and will cost billions to construct2. It’s well-to-wheel power efficiency is only 10% compared to 30% for current hybrid technology (gasoline engine/battery). And the industry secret: Although hydrogen is one of the most plentiful elements on Earth, it's not available in a "free-state." This means that energy needs to be used to separate hydrogen for gasses and liquids that contain it. At present, the most common processes for separating hydrogen from water ("reforming" and "electrolysis") can emit carbon dioxide either as a direct byproduct of the process or indirectly since the energy used for the process is frequently provided by a coal -burning power plant.
The Future
Does fuel cell technology have a future? When portable or permanent self-contained power plants are available for business and home use, then there will be money to be made.
The risks are high from a technology and financial perspective. Safety, convenience, and ease-of-use issues need to be addressed. And the total cost to generate power must be on par with current technology.
For example, fuel cell technology will be available this year to power your home as an emergency power backup system-a prelude to a full home power system.
Comparison
Let's compare the present costs to power your home by three competing technologies3. The accompanying analysis (chart) of a typical 2,000 square foot home in Michigan assumes that all of your electric equipment (fridge, stove, lights, etc.) will run on an average of 1,300 watts of power. The electricity source needs to also be able to supply peak power loads of 2,500 watts.
[note: see graphics]
Sample Companies
Two businesses that participate in this industry are Ballard Power Systems [Nasdaq BLDP. Closed 12 June 2003:$13.821] and Fuelcell Energy [Nasdaq: FCEL. Closed 12 June 2003: $8.41]. Please note that I’m not suggesting that you purchase or sell these stocks, this is simply an example.
Using the same analysis that we used in the March 2003 newsletter for IBM and HP and we find that both Ballard and Fuelcell are very high risk businesses from a shareholder perspective. Annual earnings per share have been negative for the last 4 years and are projected to remain negative during 2003 and 20044. Of these two companies, Ballard is the stronger due in part to its commercialization of portable electrical power supplies for businesses and homes through its acquisition of the Coleman product line and brand name4. Furthermore, DaimlerChrylser and Ford continue to pump millions in to Ballard through equity investments, leaving Ballard with virtually no debt4.
Technology, finance, and politics remain high hurtles to surmount by the fuel-cell sub-sector. Ballard appears on a better footing to succeed when compared to Fuelcell, but investments in this sector should be done with the knowledge that you may loose all of your funds. This is one sub sector for the level 5 risk takers (On a scale of 1 to 5 with 5 being the highest risk).
1”Position Statement to the U.S. Department of Energy.” American Society of Mechanical Engineers, 5 April 2002.
2”Hydrogen Fuel May Be Clean; Getting It Here Looks Messy.” Wall Street Journal, 7 March 2003.
3Information includes estimates and data supplied by the listed manufacturers.
4These calculations are for the most recent fiscal year as reported by ValueLine.
Note 1: The companies engaged in the technology industry are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance is no guarantee of future results and there is no assurance that the objectives will be met.
Note 2: Additional information is available upon request.
Note 3: Libertiny Financial LLC and it’s employees may hold shares and may be directors of the companies listed.
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