Businesses that want low-carbon, reliable distributed power are turning to fuel cells which, if costs come down, could compete with solar and wind energy for these deep-pocketed customers

Unlike solar panels or wind turbines, fuel cells are usually hidden from sight. But a growing number of big companies are relying on these mini power plants for a steady supply of electricity with a lower carbon footprint.

Fuel cells, which date back to the 1800s, generate electricity by putting natural gas through a chemical reaction. They release about half the emissions of a conventional power plant, according to the US Environmental Protection Agency.

Lately, fuel cells have emerged as a feasible alternative to solar-, wind- or grid-powered electricity because of lower-cost financing, generous federal and state subsidies, and the desire by companies to reduce their carbon footprint and, in some cases, their energy costs.

“They are not just an science experiment or even a green product. They can actually help a business save money,” says Lisa Jerram, principal research analyst at Navigant Research. “But more has to be done to bring down the price if you really want to see them spread beyond the current levels.”

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More than 100 megawatts’ worth of fuel cells were installed in the US in 2014, nearly four times as much as the 27 megawatts added in 2011, according to Navigant Research. By 2020, North America is expected to become a $6bn market for stationary fuel cells.

For now, though, fuel cells remain a niche business. They’re too bulky and expensive to appeal to small and medium-sized companies. Without subsidies, which need to be approved by Congress and state legislatures, they can’t compete with grid-powered electricity. And unless they can run on biogas made from organic materials such as agricultural waste or manure, which isn’t widely available, they aren’t truly renewable, since they require extracting natural gas, a fossil fuel.

Fuel cell market leaders include FuelCell Energy, a public company based in Connecticut that was founded in 1969, and Bloom Energy, a private firm backed by Silicon Valley venture capitalists including Kleiner Perkins. They have sold or leased fuel cells to dozens of corporate customers including WalMart, Ikea, Apple, Verizon, Coca-Cola, Kaiser Permanente, Target, Staples, FedEx and Pepperidge Farm, a unit of Campbell Soup Company.

Those companies tout the climate benefits of fuel cells. Even when powered by natural gas, fuel cells are cleaner than the US grid, which relies on power plants that burn coal, natural gas or petroleum for 67% of its electricity, according to the US Energy Information Administration.

Emissions reductions are even greater when using biogas. But finding reliable sources of biogas remains a challenge, partly because there aren’t enough fuel cells in place to attract enough investments in biogas production.

“As we become a huge energy consumer, we need to demonstrate environmental sustainability, and we want to reduce emissions by 100%,” said TJ Dicaprio, senior director for environmental sustainability at Microsoft, which is testing fuel cells at a small data center in Wyoming.

Ikea this month inaugurated a biogas-fed, 300-kilowatt fuel cell system at a retail store in Emeryville, California, across the bay from San Francisco. The project reflects the company’s goal to produce all the electricity it needs in the US from renewable sources by 2020. The company also has installed solar panels at most of its stores and in 2014 bought two wind farms.

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The economics of fuel cells require subsidies in most cases. Fuel cell projects receive a 30% federal tax credit and subsidies from states including California and Connecticut. Just as pay-as-you-go financing has driven the growth of distributed solar power, financing options that eliminate the need for businesses to pay for the upfront cost and installation of fuel cells have attracted many corporate customers.

Fuel cells aren’t cheap. A one-kilowatt system runs from about $4,000 to $8,000, Jerram said, depending on the technology and whether a system delivers only electricity or a combination of electricity and heat

Businesses generally want a two-year payback period for their capital investments, a target that can be hard to meet with fuel cells, Jerram said. So instead of owning them, companies sign long-term leases or power purchase agreements in which they pay for the electricity and leave ownership and maintenance to banks or other investors who collect a steady stream of revenue for 10 or 20 years. Monthly payments are usually lower, at least initially, than those customers would pay to utilities. They also get some certainty about their future energy bills, something that utilities can’t promise.

“Companies primarily want to see financial savings on top of the security and emission reduction,” says Chip Bottone, CEO of FuelCell Energy in Connecticut. The company’s annual revenue has grown from $88m in fiscal year 2009 to $180.3m in 2014.

Fuel cells become a more attractive economic proposition for customers who can make use of waste heat produced by the equipment. Some FuelCell Energy customers, including Pepperidge Farm, use that heat – in that case, in its bakery.

Fuels cells have another advantage over solar and wind: they can be used for backup power because they generate electricity on demand and around the clock. That’s valuable to companies for whom electricity is mission critical.

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Consider eBay, which two years ago installed a six-megawatt fuel cell from Bloom at a new data center in Salt Lake City. The internet company bought the fuel cells to power its entire data center, using the grid for backup. This setup allowed eBay to forego the need to buy diesel generators and batteries to produce backup power.

Today, fuel cell companies focus on large corporate customers, utilities or colleges and not on small or medium-sized businesses. FuelCell Energy focuses on projects of one megawatt or larger, for example, mostly for utilities. Utilities buy fuel cells either for developing clean energy projects for its business customers or to add low-carbon electricity into their own energy mixes in order to meet internal sustainability goals or regulatory mandates.

One company is working to downsize fuel cells, though it’s not a fuel cell developer. Microsoft, which inaugurated a $7.6m pilot project in Wyoming last year, wants mini fuel cells that will be wired directly to server racks, says Sean James, a senior search program manager at Microsoft. Integrating the power source into the server reduces the need for power electronics from a central system.

“We realized the benefit of distributed power generation throughout a data center,” James said. “If I integrate fuel cells into [computer] racks, then I eliminate all the upstream grid equipment. A lot of cost gets eliminated.”