After decades of struggle, the American fuel cell business may finally have its day in the sun -- and then provide critical grid support when the sun goes down.

Greentech Media’s Eric Wesoff has long maintained a tongue-in-cheek list of the top publicly traded profitable fuel cell firms. As of the last such update in April of this year, the list was still blank.

But FuelCell Energy, the biggest of the publicly traded U.S. fuel cell manufacturers, now appears poised to make that list after running losses since its IPO in 1992. According to Bloomberg, the company posted record sales, driving down its net loss on the fiscal third quarter of this year to just $5.6 million on revenues of $53.7 million, down from $9.9 million a year earlier, and its order backlog has ballooned to $380.8 million. The company is now within reach of being in the black.

I spoke with company CEO Chip Bottone and Vice President of Investor Relations Kurt Goddard at the end of July, and they were optimistic that profitability was finally within reach. “Fuel cells have overpromised and undelivered for decades,” Bottone said. “We’re now interested in making money the old-fashioned way: reduce capital costs, make margin, and be competitive with traditional power generation. We’re really trying to build credibility for the industry.”

The company now says its levelized cost of energy (LCOE) is $0.14 to $0.15 per kilowatt-hour, without subsidies, depending on the price of gas. Industrial consumers in the U.S. typically buy gas for around $4.50 per million BTU, the company says, with gas prices on the East Coast closer to $5.50. Wesoff quoted Bottone in April 2012 as saying that, “At $5 gas, we're at $0.135" per kilowatt-hour, and that every $2 drop in the price of natural gas translates to a penny lower in the price per kilowatt-hour. By those metrics, FuelCell Energy is already grid-competitive without subsides in Hawaii and Alaska in the industrial market, and in at least seven states in the commercial market.

With subsidies, such as the federal investment tax credit and the California state incentive, Bottone says their fuel cell system can produce power for $0.09 to $0.11 per kilowatt-hour, making it competitive with grid power in that state as well.

Bottone isn’t counting on subsidies to be competitive, however. “We don’t need more money from government,” he told me. “We just need to spend it better.”

At those prices, some might look at fuel cells as a potential competitor to other low-carbon technologies like wind and solar, but Bottone doesn’t see it that way. “We compete against people doing nothing, not against wind and solar,” he explained. “There’s no single solution to this stuff. Wind and solar and gas will always be there.”

“We compete with utility programs, and our IRR [internal rate of return] is the metric,” he continued. “On an unlevered basis, we need to make an IRR of 10 percent to 13 percent. With a little leverage, our payback is under three years. People can say yes to that. Adding CO2 offsets can get the payback down to a year.”

Large-scale market

FuelCell Energy is very different from its better-known competitor, Bloom Energy.

FuelCell Energy’s main product line uses a molten carbonate technology, which scales up well. Bloom Energy uses solid-oxide technology, which doesn’t scale well, but whose greater power density makes it attractive for applications where a small physical footprint is important.

FuelCell Energy is focused on large systems (over 1 megawatt in size), where the economics can be more attractive. It sells units with a long-term service contract for about $3,000 per kilowatt of capacity, excluding installation, as compared with Bloom Energy’s reported $8,000 per kilowatt, excluding installation and subsidies.

The larger plants make them better suited to running on fuels like waste gas and biogas, because of the cost of the equipment needed to clean up the gas. Sulfur, siloxanes (which result from things like cosmetics), and water must be removed from the gas. Sulfur is the hardest contaminant to remove, because the gas must have no more than 30 parts per billion of it before it is used in the fuel cell. “You’ve got to have enough gas to pay for the gas cleanup unit,” Bottone explained, a cost which typically runs around three cents per kilowatt-hour. “There isn’t a clean solution below 1 megawatt that will pencil out. It’s marginal at 300 kilowatts -- you need to have a lot of intangible benefits.” Generally, Bottone claims that his units are more tolerant of contaminants than are competing fuel cell technologies.

FuelCell Energy has a larger customer base, with around 80 units operating in more than 50 separate locations in nine countries. Bottone expects to have a total portfolio of 150 megawatts to 200 megawatts in operation by the end of the year. The company also has a much longer track record, with 1.8 billion kilowatt-hours of operating time in the field, according to Bottone.

Grid support strategy

Utilities are wringing their hands over the prospect of customers unplugging from grid power and generating their own, as we have documented at length here at Greentech Media. This week, the Wall Street Journal noted that the number of electricity-generation units at commercial and industrial sites has more than quadrupled since 2006. From big-box stores like Wal-Mart and Kroger, to corporate campuses like Google and Apple, to engineering and manufacturing companies like BMW and SAIC, to data center operators and telecom firms like Verizon, more companies are finding cost and reliability benefits in generating their own power from solar, wind, biogas and fuel cells.

As self-generation increases, it’s becoming more difficult for utilities to turn a profit on their large, centralized generation facilities. This year has brought a steady drumbeat of reports of nuclear and coal-fired power plants being shuttered. Utilities are increasingly being challenged to join the distributed energy revolution -- or suffer the decline of their businesses.

One major utility took the bit between its teeth two weeks ago. NRG Energy announced a co-marketing agreement with FuelCell Energy in which it will market the fuel cell power plants to its customer base, as well as offering financing and power purchase agreements to interested buyers. For those who want the technology but don’t want to own the plant, NRG Energy will buy the plant, then sell the power to the customer under a power-purchase agreement. FuelCell Energy will install, operate and maintain all the plants, making it easy for customers to adopt the technology.

While such a partnership is still relatively new, it makes perfect sense. Distributed generation from fuel cells offers benefits to both the customer and the utility:

Fuel cell systems are always on, so they function as 24/7 baseload power, making them a suitable replacement for retiring coal and nuclear baseload power stations.

They generate clean and reliable power, so they support utilities in meeting some of their biggest operational challenges: maintaining voltage and frequency within tight parameters. These attributes are extremely important to sensitive facilities like hospitals and manufacturing operations.

Fuel cells generate less emissions than conventional natural-gas fired power generators. Their emissions are not zero (contrary to what you may have read elsewhere), but they’re very low. “We release less CO2 than any other power generation option in our size class per megawatt-hour, due to the high electrical efficiency,” Goddard told me.

They’re very quiet, offering a far more desirable alternative to noisy diesel- or gas-fired generators, especially in urban environments.

They generate power where it is used, reducing the long-term cost of maintaining the transmission and distribution grids.

Due to their size and high operating temperatures, the FuelCell Energy systems can generate hot water as well as electricity, giving them very high overall efficiency (up to 90 percent). When only used to generate power, instead of using the waste heat to make hot water, the efficiency is still high relative to conventional power generation, at around 47 percent.

"Baseload combined heat and power (CHP) fuel cells have virtually zero emissions, making them well suited to provide reliable electricity, hot water, steam or absorption chilling to universities, hospitals, and other large power users," remarked NRG Solutions President Thomas Gros in a press release.

Bottone believes that creating such partnerships with utilities is a far more desirable way to go than competing with them directly, noting that the German utility giant E.ON set up a separate, unregulated company to provide decentralized solutions as they were forced to shut down some large centralized plants that had become unprofitable.

“If you opt out of the grid, you save 5 euro-cents per kilowatt-hour,” he said. “So E.ON is following the customers opting out of the grid. In the U.S., the investor-owned utilities are only motivated by return on capital, so for them, bigger is better. We're having discussions with the highest levels at utilities, on the demand side, and saying: 'Look, instead of me peeling off your customers at substation X, we’ll put the fuel cells in at those substations. How can we work together?'"

The partnership strategy may be particularly attractive at the periphery of the distribution grids, where maintaining required voltage and frequency levels is expensive for utilities. “We’ve got very sophisticated equipment on our plants,” Bottone explained. “We’ve put them in and utilities picked up better quality power, or discovered that customers had issues they weren’t aware of, like low voltage.”

But the utilities and fuel cell manufacturers need to work together. “Multi-megawatt installations need to make sense in supplying baseload power where it’s really needed,” Bottone said. “Centralized power generation of many megawatts is the challenge. Distributed generation can help with the baseload issue in a much more cost-effective way.”

***

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books (Profit From the Peak and Investing in Renewable Energy) and hundreds of articles, and has been published by Scientific American, Slate, the Harvard Business Review blog, Financial Times Alphaville, Quartz, the Economist Intelligence Unit, and many other publications.