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	"IssueAlert" <IssueAlert@scientech.com>
	10/18/2000 05:56 AM
		 
		 To: 
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		 Subject: Fuel Cells Get Financial Boost from U.S. Government

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SCIENTECH IssueAlert, October 18, 2000
Fuel Cells Get Financial Boost from U.S. Government
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

The Department of Energy will have more than $100 million for fuel cell 
related programs in the new fiscal year, $10 million above the president's 
request. The money is contained in the Interior Appropriation bill that 
President Clinton signed last week. The House and Senate jointly agreed 
upon $52.7 million for stationary fuel cells, $10 million more than 
requested, 
and approved the full request of $41.5 million for transportation fuel 
cell research and $5.5 million for buildings.

ANALYSIS: This government funding, which is surprisingly higher than 
expected, 
should give a much-needed boost to the slow-moving development of fuel 
cells. Although generally considered the favorite of low / zero emission 
energy solutions, fuel cells are still about two to three years away from 
being commercially viable in retail markets. (Phosphoric acid fuel cells, 
developed by ONSI, a division of United Technologies, are presently available 
in a limited capacity). The technology has been in existence ever since 
batteries were discovered 160 years ago, but the high cost of producing 
them has precluded suppliers from making fuel cells readily available to 
the general public. Automotive giants like DaimlerChrysler and Ford Motor 
Co. have continued to explore the use of fuel cells in automobiles, and 
Texaco, Inc. agreed in May to invest $67.2 million in Energy Conversion 
Devices, a 40-year-old fuel cell and alternative energy development firm. 
Yet, this financial support for the DOE's exploration of fuel cells signals 
significant support from the federal government. In addition, warnings 
about the high cost of oil and natural gas, and the reports of low supplies 
of energy in states across the country, continue to scare energy end-users 
and may be spurring a renewed interest in distributed generation options.

Here's how fuel cells work. They use an electrochemical reaction, as opposed 
to traditional combustion, to generate electricity. In other words, fuel 
cells allow hydrogen-rich fuels to react chemically with air, without 
burning, 
producing as a byproduct DC electricity, water and heat. In addition, fuel 
cells dramatically lower the level of pollutants that are emitted into 
the environment. Test models of fuel cells presently convert methanol, 
gasoline and natural gas to produce hydrogen fuel. It's easiest to think 
of a fuel cell as a battery, but one that does not run down or need 
recharging 
(although it will need replacing about every five years). A fuel cell will 
produce energy in the form of DC electricity and heat as long as fuel is 
supplied. As an added advantage, fuel cells can be controlled remotely 
by computer and run rather quietly. This is perhaps the primary incentive 
for end-users that would be interested in fuel cell technology. Especially 
for facilities like hospitals, the attributes of low noise and near-zero 
pollution are very appealing.

Currently, fuel cells are being tested and developed by laboratories and 
think tanks around the world, hoping to make this low-polluting form of 
generation available for widespread use by 2002 or 2003. Under the DOE 
grant, money provided for stationary fuel cells will fund research and 
development to reduce costs and improve performance. It is hoped that this 
will lead to market-ready fuel cell power systems within three years. In 
addition, the funding allocates $41.5 million to transportation fuel cell 
research such as integrating fuel cell stacks with fuel processors and 
balance-of-plant technologies for testing. This program also will examine 
the technology barriers to fuel-flexible systems for automobile applications. 
The $5.5 million reserved for buildings will go toward developing a prototype 
fuel processor, completing the design competition for a 50kW co-generator 
for buildings, and other research and development.

Deregulation has cast light on alternative forms of power supply. As 
customers 
possibly decide to use on-site generation as opposed to power delivered 
across a transmission grid, this dramatically alters the traditional business 
of most energy companies. Large commercial and industrial customers that 
suddenly opt for fuel cell solutions to their energy needs would have 
dramatic 
financial impact on their incumbent energy provider. As a result, many 
electric utilities and energy providers are investing in fuel cells as 
a hedge against a possible shrinkage within their own supply businesses. 
Southern Company is a good example. Just this month, Southern joined Alabama 
Municipal Electric Authority, Mercedes-Benz U.S. International, Inc., and 
FuelCell Energy in a partnership to "drive a growing interest in fuel cell 
technology." Specifically, Southern is providing funding for a fuel cell 
plant to be located in the service territory of Alabama Power, a Southern 
subsidiary. The plant will convert pipeline natural gas into electricity 
at a reported efficiency of about 50 percent, compared with 33 percent 
for conventional generation, which will feed the power distribution system 
of Mercedes-Benz.

Another example is Enron, which just two weeks ago entered into an alliance 
with FuelCell Energy, Inc., to develop and market FuelCell Energy's Direct 
FuelCell products, focusing on state renewable and energy conservation 
programs. As part of the partnership, Enron is investing about $5 million 
in the common stock of FuelCell Energy. In its announcement of the 
partnership, 
Enron stated that "the transaction enables us to reach the developing markets 
for clean energy and renewable energy, which may be served through 
distributed 
generation products, such as fuel cells."

These are just two examples of many energy companies that are devoting 
money to fuel cells and other forms of distributed generation. Some state 
regulatory commissions have debated whether or not to allow utilities to 
own their own distributed generation equipment technologies. As a result, 
we are seeing a trend of utilities investing in companies that are already 
developing distributed generation solutions, instead of doing it themselves.

The investment appears to be a smart one. According to Stephens, Inc., 
an investment banking firm, common industry projections put the potential 
for the automotive fuel cell market at $50 billion annually by 2020 and 
as high as $100 billion (cumulative) for the stationary power markets within 
10 years. The increase is due in large part to the growth of Internet-based 
industry and the need for mission-critical systems at dot-com operations. 
Microturbines*small generators that can produce enough power for a small 
business*have beaten fuel cells to market and are currently manufactured 
by the likes of Capstone, Caterpillar and Solar Turbines. Microturbines 
reportedly could be potentially superior to fuel cells with regard to low 
emissions. Many energy companies and power marketers such as Williams, 
Alliant Energy and American Energy Savings have made announcements just 
within the last month that they will market microturbines to customers. 
Yet, the distributed generation market should become much tighter once 
fuel cells become commercially available, something that this hefty new 
grant from the U.S. government should push forward. 

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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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wmcnamara@scientech.com
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