What are Fuel Cells?

A fuel cell is an electrochemical energy conversation device. It converts hydrogen and oxygen into water, producing electricity and heat in the process.

Fuel cells are silent, efficient, compact (see note) and can be used for many different power applications. There are many different types of fuel cells and each has its optimal uses.

Note: to illustrate, a fuel cell device the size of a small piece of luggage could power a car.

How do they work?

A fuel cell (like a battery) has a positive and a negative side.

Hydrogen is put into the negative side (anode) creating direct current. Oxygen is put into the positive side (cathode) conducting electrons, from the negative side and combining them with the hydrogen ions and oxygen to form pure water.

This is why everyone is so excited about fuel cells.you can get pollution free electricity by combining the most abundant element in the universe (hydrogen) with ordinary air (oxygen) and the only other byproduct is 100% pure water.

Types and Uses of Fuel Cells

The type of electrolyte they utilize usually classifies fuel cells. Some types of fuel cells show promise for use in larger stationary power generation and others may be useful for small portable application or for powering cars. There are 6 main types of fuel cells:

• Alkaline
  One of the oldest designs. It was used in the U.S. space program since the 1960´s. It is very expensive and can only use pure hydrogen and oxygen. It is unlikely to be commercialized.
   
• Direct Methanol
  These cells run on methanol (a liquid fuel that has similar properties to gasoline) without the need for a device (a reformer) that converts various hydrocarbon fuels (natural gas, propane) into hydrogen for use in the fuel cell.
   
• Molten Carbonate
  These cells operate at high temperature (1,100 degrees F) and are best suited for a large stationary power application (a building or a power plant). Because of their high operating temperature they also produce steam that can be used for heating.
   
• Phosphoric Acid
  The most commercially advance fuel cell. They generally run on natural gas or propane and are best for small stationary power applications. There are several hundred applications of this type of fuel cell in operation around the world.
   
• Proton Exchange Membrane
  This fuel cell is getting the most attention in the press. It operates at relatively low temperatures (176 degrees F) and, as a result, can start up quickly. This makes it the leading candidate to replace the internal combustion engine and ideal for other applications that requires some degree of portability.
   
• Solid Oxide
  These cells operate at very high temperature (1,800 degrees F) and are best suited for a large stationary power application (a building or a power plant). Because of their high operating temperature they also produce steam that can be used for heating and which also increases overall system efficiency.

Next Steps for Fuel Cells

The main problem with current fuel cells is that they are more expensive than traditional fossil fuels. However, many are far into the last stages of pre-commercial development and with some technical improvements and economy´s of scale in manufacturing, I am sure that they will drop in price and become cost effective.

I expect that we will see the first fuel cell powered cars emerging in late 2004 and early 2005. There will be a number of other issues that must be addressed as developments progress. For example, is the car quick and easy to refuel, can it travel far enough between refueling, will it be easy to maintain, etc.

In general, I do not think that there are any significant ”technical” breakthroughs needed to make fuel cells take their place as one of the key elements in the world´s future Hydrogen Economy. It will certainly be a very interesting and profitable area for investors as we get closer and closer to full-scale commercialization.

Promise and Timing

The biggest investment opportunity over the next 20 years will be in the transition to the hydrogen economy with all its components, fuel cells being one of the KEY ones. The fuel cell industry is in its early stages and now is an ideal time to start to get familiar with it.

We will be developing at section for stocks to watch in the sector to be posted at www.investorideas.com.

To review: A fuel cell is an electrochemical energy conversation device. It converts hydrogen and oxygen into water, producing electricity and heat in the process.

The real key to understanding where the fuel cell fits in is to first understand where the hydrogen will come from and how it will be extracted.

Energy Storage

The number one problem with energy is: how to store it for when it is needed.

Currently we receive our power from large power plants that are always running, so there is always electricity available in your home when you plug something into the wall. The majority of these power plants are fueled by coal and natural gas so in effect, the energy is stored in the coal or natural gas until it is burned to create electricity. The problem is that we will run out of coal, natural gas and oil (or for environmental reasons be unable to use more) and we will need to have another source of ”energy storage”.

It is my opinion that this next global source of energy storage will be hydrogen.

Two Key Problems with Hydrogen - Availability and Storage

• Availability:
  even though hydrogen is the most abundant element in the universe it is NOT readily available. Hydrogen exists as part of something else (water, natural gas, methanol etc.) as a result it must be extracted from these other substances and that requires energy. Here in lies the dilemma. If we use fossil fuels (oil, natural gas, propane, methanol etc.) for that energy we are NOT really addressing the problem. We are still burning fossil fuels and delaying the transition to the hydrogen economy. The OPTIMAL solution is for the energy needed to extract hydrogen to come from a renewable source of energy (wind or solar).
   
• Storage:
  the second problem is once we have the hydrogen, how to you store it until you need it to generate power? In some form of solid storage, a liquid or a compressed gas? This will be another whole subset of investment opportunities relating to the hydrogen economy.

Timing

The industry is in its early stages now, I don´t think anyone needs to rush out and buy fuel cell stocks tomorrow. However, I think this is the ideal time to start a ”watch list”. This list will consist of companies that you keep an eye on and be ready to buy the appropriate ones when the timing is right and they are mature enough to be stable investments.

There are a number of things that I think the potential investor should keep in mind and be aware of before and when creating their ”watch list”.

1. The fuel cell industry is just starting and not all the current companies are going to survive. Some will survive and perhaps become market leaders, but others will fall by the wayside.
2. It is important to understand the ”likely” order in which fuel cell applications will become commercial (see below - Likely Order of Commercialization). This should be very helpful in timing when a company is emerging as a potential investment.
3. The cost of fuel cells must come down considerably (2 to 4 fold) for fuel cells to be used throughout the economy. A number of technical developments must occur and the industry must scale up production in order to get the cost benefits from mass production.
4. Even though many fuel cell related stocks are down 70 to 90 percent from their peak in early 2000 they still have fairly large market caps. And many of them have no earnings.
5. Look for the companies that have at least enough cash on hand to get them through 2 to 3 years of operations without running out of money. At this stage of development, this is a critical screen that MUST BE passed. Compare their quarterly burn rate with cash plus short term investments to determine how many quarters of cash they have on hand.

Likely Order of Commercialization:

1. Micro applications
   Many of these applications for fuel cells are cost effective now. Batteries are VERY expensive and many applications of fuel cells are cheaper now. Some examples that you will be seeing this year and next year are: Cell phones, Laptop Computers, PDA´s etc. these applications will give devices approximately 10 times greater time between ”charges”. You will probably ”re-charge” your fuel cell with a little portable direct methanol cell (similar to the old fountain pen ink cartridges).
    
2. Portable applications
   Applications will be portable generators for emergency uses or remote locations. For example, Coleman is currently selling a small portable unit (1 kilowatt) that runs on special hydrogen cylinders in which the hydrogen is stored in solid form or on direct hydrogen gas.
    
3. Stationary Power for special high value uses
   Applications where the need for uninterrupted power is GREATER than any extra cost associated with fuel cells. For example, if a large computer data center lost power (even for a few seconds) that could result in a loss of millions of dollars. Fuel cells are very reliable (more reliable than the current electricity grid) and will be used as backup to make sure that power is never lost.
    
4. Stationary Power
   As the price of fuel cells comes down they will begin powering whole buildings and also providing heat for heating and air conditioning. These will most likely be the kind of fuel cells that also give off a lot of heat. These are much more efficient (at this application) because a building can use that extra heat, whereas a car or a laptop cannot.
    
5. Transportation
   The most well known area of fuel cells, thanks to the press and President Bush. But in my opinion, it will be the LAST area to be commercialized. There are a number of problems that must be solved involving a way to store the hydrogen effectively (weight, space and safety) to fit in an automobile that are not factors in a building or home. In addition, there is a lack of a nationwide (or local) hydrogen infrastructure i.e. hydrogen (gas stations) stations where people can stop and get their vehicles fueled.

Bottom Line - Fuel Cells are coming and they will be everywhere

Fuel cells will be one of the key components in the hydrogen economy. They will replace the internal combustion engine and will convert the new main store of energy (hydrogen) to power when it is needed. They will be everywhere throughout the economy, they will power cities, buildings, homes, portable computers, cell phones, vending machines and vehicles of every type.

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