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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen 2 Toward a Substantial and Durable Commitment: The Context of the Study This chapter sets out the worldview and philosophy that guided the committee in responding to the inquiries of the 2005 Energy Policy Act. The multiple questions posed by the statement of task should be understood within the context of the committee’s overall mission—to assess the resources the United States would need to support a transition in motor vehicles, fuels, and fueling infrastructure aimed at accomplishing three essential public goals: Reduce the nearly complete dependence of road transportation on petroleum in order to improve energy security in the face of political instability among oil producers and mitigate the eventual peak in conventional oil production; Lower the emissions of greenhouse gases from motor fuel production and use in order to sharply reduce the impact of motor vehicle use on the global climate; and Maintain economic competitiveness and growth while achieving the first two goals.1 The issues underlying these goals are large, persistent, and global. They will not yield to a quick fix, nor can they be addressed independently. Successful policy must deal with them as a whole, which requires supporting a balanced portfolio of technology options rather than emphasizing a single solution. Building such a portfolio can diversify the risk of delay or even failure of any one technology. More important, a portfolio can deliver benefits throughout the lengthy period (perhaps extending to 2050) required for a hydrogen-based transportation system to mature. Consider as examples the improved fuel economy of conventional vehicles, the intent of the newly revised CAFE (corporate average fuel economy) standards; hybrid electric vehicles also offering significantly improved fuel economy; and motor fuels derived from biomass. These options can considerably reduce oil consumption over the next 20 years, but they are unlikely to eliminate the problems of oil dependence and climate change. Their ultimate resolution will require bringing to market vehicle technologies such as the hydrogen fuel cell vehicle (HFCV) or fully electric vehicles.2 Yet these are unlikely to enter the market in sufficient numbers over the next 20 years to substantially reduce petroleum consumption. Thus, a technology portfolio that includes all of these options will deliver greater benefit across the intervening 20 or so years. Nevertheless, hydrogen technologies and infrastructure offer the potential, once successfully developed, to achieve fully the threefold goals of energy policy—hence, their emphasis in the congressional inquiry and in the committee’s response to it. Initiating a fundamental energy transition will require a policy commitment on the part of the federal government. This commitment and the policies that implement it must remain substantial and durable over the decades needed to complete the transition: Substantial, in that policy provides meaningful incentives for fuel economy where the market price of the fuel does not include externalities, such as environmental and health costs from emissions or an oil vulnerability premium; and 1 The committee was not asked to study economic competitiveness and growth but notes them as vital considerations in the policy process: to the extent that remedies to energy security and climate change impose near-term economic burdens, their implementation will be more difficult. Energy security and climate change are discussed in greater detail in this chapter. Economic issues are of concern throughout the report. 2 This judgment assumes that hydrogen and electric energy can be made in a way that does not release greenhouse gases over the long term. Some transition strategies, for example, could allow the manufacture of hydrogen from natural gas or electricity from coal without capture and sequestration of the carbon emitted in those processes. The greater efficiency of the fuel cell or electric vehicle, relative to the conventional vehicles that they displace, would offset the carbon release during a transition. However, in a mature hydrogen economy, effective capture and sequestration of the carbon dioxide would become essential.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen Durable, in that policies remain in place long enough for consumers, entrepreneurs, technologists, and investors to make the needed commitments of their own time and resources. To the extent that the United States makes such a commitment, the history of other technology transitions shows that our market-based economy and others around the world will prove highly effective in achieving the public goals of energy security and climate stabilization while preserving healthy and sustainable economic growth. ENERGY SECURITY The issue with energy security arises chiefly from the near-total dependence3 on conventional petroleum as the source of fuel for the transportation sector in the United States and most of the world’s economies. Adverse consequences arise from global dependence on petroleum from regions of the world that are either unstable or inimical to U.S. interests.4 Insecurity in petroleum supply holds the prospect for large-scale disruptions of the world economy. Energy insecurity is likely to increase over time as a result of the following: The prospect of disruption of the petroleum supply chain, through terrorist attack, political instability in the supplying nations, or natural disaster; Projected demand growth, especially among the developing nations of non-OECD (Organization for Economic Co-operation and Development) Asia (about 2.7 percent per year until 2030), which strains reserve production capacity that might have offset such disruptions (EIA, 2007); and The possibility that conventional oil production may peak much sooner than accounted for in business-as-usual forecasts. The current petroleum market lacks the excess production capacity that characterized past decades, and production and demand remain in close daily balance. This means that any disruptive event, whether from a natural disaster or terrorist activity, can cause severe and lasting price shocks, leading to worldwide economic dislocation. This situation is unlikely to improve in the near future. Demand continues to increase at the same time that conventional petroleum production faces a leveling and/or peaking of world oil production. In a recent study, the U.S. Government Accountability Office noted that “the total amount of oil underground is finite, and, therefore, production will one day reach a peak and then begin to decline. Such a peak may be involuntary if supply is unable to keep up with growing demand” (GAO, 2007, p. 6). Similarly, the International Energy Agency (IEA) concluded, “Worldwide, the rate of [oil] reserve additions from discoveries has fallen sharply since the 1960s. In the last decade, discoveries have replaced only half the oil produced” (IEA, 2006, p. 132). The literature offers a wide range of estimates concerning the timing of a maximum in world oil production because the data needed for more precise forecasting are not widely available. Much useful information is (1) proprietary to companies, (2) a state secret in the major oil exporting countries, and/or (3) biased to achieve political and economic objectives. For example, a recent study by the National Petroleum Council stated that “there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically. These risks create significant challenges to meeting projected energy demand.” These risks are both geological and geopolitical. Further, “Forecast worldwide liquids production in 2030 ranges from less than 80 million to 120 million barrels per day, compared with current daily production of approximately 84 million barrels. The capacity of the oil resource base to sustain growing production rates is uncertain” (NPC, 2007, p. 91). To be sure, enormous resources of unconventional oil—for example, oil shale or coal in the United States and tar sands in Canada—could be liquefied and substituted for oil. Exploiting these resources could greatly extend the availability of gasoline and diesel fuel, but would also raise environmental issues. Chiefly, they would nearly double the carbon dioxide (CO2) emitted per gallon of fuel consumed, unless the emissions from production can be captured and permanently sequestered, and their use would increase the demand for water. In addition, a peaking or leveling in production would probably be attended by price increases, and these would induce a demand response—some combination of (1) greater efficiency in converting petroleum to services and (2) simply doing without. However, examining the potential contribution of either unconventional fuel resources or demand response falls outside the committee’s assigned tasks, and they are not considered further here. CLIMATE CHANGE The second element of the energy “trilemma” concerns the environmental consequences of the buildup of CO2 and other greenhouse gases in the atmosphere.5 Light-duty vehicles generate one-third of global CO2 emissions and about a third of U.S. emissions. Capturing CO2 emissions from individual vehicles is effectively impossible, so reduc- 3 In the United States, 96 percent of the primary energy used in transportation comes from conventional petroleum (EIA, 2007, Table 2.1e, p. 42). 4 See, for example, Council on Foreign Relations, 2006, The National Security Consequences of U.S. Oil Dependency, Independent Task Force Report No. 58, Washington, D.C. 5 In addition to carbon dioxide, the “greenhouse gases” generally include water vapor, hydrogen itself, nitrous oxide, methane, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen tions in the transportation sector can be effected only by improved fuel economy and/or replacement of current fuels with lower-carbon or zero-carbon fuels. Hydrogen contains no carbon at all, but the production processes currently available emit CO2—either from natural gas and other fossil fuels used to manufacture hydrogen or from fossil fuels that generate the electricity used to make hydrogen via electrolysis. Even including these production-derived carbon emissions, however, hydrogen fuel cell vehicles can reduce the well-to-wheels carbon given off by light-duty vehicles because of the greater efficiency of the fuel cell. Nevertheless, achieving deep reductions in emissions from hydrogen production will require development and use of processes that can capture and sequester the CO2 generated in hydrogen manufacture, as well as greater use of low-carbon or zero-carbon energy sources for electricity generation. Biofuels, especially if produced renewably, also would reduce carbon emissions relative to conventional fuels. Although long-term in consequence, the threat of global warming is of immediate concern, because moderate actions taken now could preclude the need for drastic actions taken later. According to the world’s clearinghouse for peer-reviewed climate science, the Intergovernmental Panel on Climate Change (IPCC), “The global atmospheric concentration of carbon dioxide has increased from a pre-industrial value of about 280 parts per million (ppm) to 379 ppm in 2005. The atmospheric concentration of carbon dioxide [and methane] in 2005 exceeds by far the natural range over the last 650,000 years (180 to 300 ppm) as determined from ice cores” (IPCC, 2007, p. 2). In 2005, a National Research Council (NRC) report focused on these conclusions, stating that “in the judgment of most climate scientists, Earth’s warming in recent decades has been caused primarily by human activities that have increased the amount of greenhouse gases in the atmosphere” (NRC, 2005, p. 2). Although the debate over the science of historical climatic changes has been largely resolved and there is agreement about the potential influence of continued greenhouse gas emissions on climate, the 2005 NRC report notes that “there is still legitimate debate regarding how large, how fast, and where these effects will be” (p. 2). Most recently, in 2007, the IPCC wrote that “[w]arming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level” (IPCC, 2007, p. 5). The warming has been especially acute since 1995. According to the IPCC, “eleven of the last twelve years (1995-2006) rank among the 12 warmest years in the instrumental record of global surface temperature (since 1850)” (p. 5). With regard to the consequences of the greenhouse gas buildup, the 2007 IPCC report noted that climate change risks are likely (greater than 66 percent) to include droughts, sea level rise, and increased tropical cyclone activity. Increased heat waves and heavy precipitation events, which can lead to flash floods and severe erosion, are very likely (greater than 90 percent). The committee has not assessed climate change risks but concludes that if immediate action is required to reduce CO2 emissions, the transportation sector could provide a significant share of the reductions. The hydrogen technologies discussed in this report are particularly promising for large-scale reductions over the longer term. MOTIVATING THE PRIVATE SECTOR TO MAKE THE ENERGY TRANSITION The problems that arise from the security-environment-economy trilemma become manifest to the public chiefly as motor fuel prices, trade imbalances, defense expenditures, and inflationary pressures and less visibly but more consequentially, threats such as worldwide economic instability, foreign policy challenges, and eventually global climate change. For the past 35 years, proposed solutions have tended to emphasize one or, at most, two of these, with neglect of the others. Energy policy has suffered from such selective inattention because the way in which one part of the problem is addressed strongly influences the other parts. Genuine progress requires a portfolio solution and a substantial commitment that remains durable over the 40 or so years needed for a transition. Such a solution is unlikely to arise from any linear summation of the solutions for each component. In addition, near-term solutions should be considered in the context of long-term policy goals. For example, a more rapid transition might be achieved with use of technologies that would not fit well in a mature, post-transition energy economy—for example, the venting of CO2 from distributed production of hydrogen from natural gas and perhaps even from some large-scale production might be tolerated to speed a transition, provided that some means of eventual carbon capture and sequestration could reasonably be ensured. Nevertheless, the sum of such short-term solutions is unlikely to lead to the most efficient or desirable long-term solution. The committee believes that energy policy can no longer afford the luxury of short-term thinking or of selective inattention. In a free society, the government cannot command an energy transition into being, and so must engage the private sector. Indeed, government investment in the energy transition will ultimately prove small in comparison with that from private sources—individuals, entrepreneurs, investors, and businesses. For these reasons, the committee was asked to include private resource commitments in its estimates. To effectively marshal private resources, energy policy must create the appropriate framework of regulation and incentive, augmented with meaningful investments in the research, development, and demonstration (RD&D) with greatest leverage for the transition. With a wise and effective framework in place, private resources will flow to large and durable opportunities thus created.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen The history of large-scale transformations in other industries can illuminate the relative advantage of each in accelerating the energy transition. In general, two distinct kinds of economic activity operate in parallel to set the pace and direction of change. The first is a process of evolutionary change in which improvements in technologies and infrastructure now in place or emerging in the marketplace dominate progress. The cumulative effect of these incremental improvements can be striking—examples include the development of faster microprocessors by Intel or higher-resolution medical scanning devices by General Electric. Within the energy-fuels sector, the auto industry has improved the fuel efficiency of motor vehicles between 1 and 2 percent each year for several decades. However, since the early 1980s, automakers have also responded to consumer demand by using these efficiency gains to increase vehicle weight and performance, rather than improve fuel economy.6 Similar improvements can be shown in the efficiency of electric generation and conventional oil production. In general—though not exclusively—market incumbents enjoy an advantage in evolutionary technological change. Such evolutionary improvements provide immediate progress toward the policy goals, but also compete with the revolutionary technologies. In contrast, revolutionary technologies, when successful, redefine the marketplace and the competitive environment. Progress comes through discontinuous change and offers far-reaching solutions as distinct from incremental improvements. Historic examples include mechanical refrigeration, solid-state electronics, and the telephone. The HFCV and the electric vehicle have the possibility to radically transform the worldwide motor vehicle industry, its attendant fuel infrastructure, and the electric utility industry. In general—and with many important exceptions—new ventures enjoy a competitive advantage in initiating radical technology change because they have no incumbent technologies to defend. Policy can accelerate both radical and incremental change, but distinct instruments are needed for each. This implies that a portfolio approach will accelerate the energy transition most effectively. At any point in time, a well-founded energy policy would support a portfolio of improving, emerging, and potentially revolutionary technologies, and it would influence both established companies and entrepreneurial ventures. PRINCIPLES FOR EFFECTIVE TRANSITION POLICY Several general desirable characteristics will influence the success of any policies aimed at achieving the maximum practicable market share of vehicles fueled by hydrogen, the desideratum the committee was asked to estimate. The committee has used these principles throughout its report: Energy policy must offer greater certainty and predictability than at present, if private markets are to marshal the resources to accelerate the transition. Entrepreneurs, innovators, and larger industries can manage uncertainties in technology and markets. They do not, however, respond as effectively to political uncertainty. Policies should send consistent messages to innovators and investors, not only within the United States, but insofar as possible internationally. Policies must be substantial. Half-measures produce half-results. Policies must have integrity. Earmarked funding, for example, dilutes the resources available for essential research and demonstration; similarly, special exemptions for favored industries or protected groups erode the public sense that the pain and the gain are fairly shared. The committee has condensed these principles into two core concepts—policies should be substantial and they should be durable. “Substantial” means that incentives are large enough to make a difference in marketplace decisions, and “durable” means that policy incentives remain in place long enough for innovators to respond—which might require a planned phaseout to ensure sustainability. Contrasting cases of incentives for wind energy production and for solar photovoltaic technologies are used to illustrate these principles. These cases compare and contrast policy initiatives in two countries: (1) the consistent and long-term feed-in tariff program for solar energy in Germany; and (2) the long-term, but intermittently authorized, production tax credit for installation of wind energy capacity in the United States. Both of these programs were intended to promote the installation of renewable energy capacity, and both sought to build a viable long-term industry in their respective countries. The committee has not examined the merits of the goals that either policy sought to achieve and makes no recommendations regarding their adoption. Rather, it uses these cases to illustrate the principles of substantial and durable energy policy and how these can become important in achieving the public purpose. The Feed-in Tariff Experience in Germany On April 1, 2000, the German government introduced the Renewable Energy Resources Act—known in Europe as the EEG—to provide substantial incentives for the installation of renewable resources connected to the electricity grid. After consideration of a wide variety of potential incentives, including a renewable portfolio standard (RPS), the German parliament devised an incentive program referred to around the world today as the feed-in tariff. The EEG provided incentives to install alternative renewable options from biomass to wind energy, but by far the most aggressive incentive was granted to installation of photovol- 6 See Figure 4.1 (Chapter 4).
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen taic (PV) systems. The PV feed-in tariff satisfies the criteria suggested in this report as appropriate for a policy initiative aimed at creating rapid and significant change in an existing energy delivery system: Substantial. The program offered incentives to installers of PV systems ranging from 45.7 to 57.4 euro-cents/kWh, many times above the wholesale and retail electricity rates throughout Germany. Durable. The contracts with PV system owners are for a 20-year period at a fixed payment rate. This allows the purchasers of a PV system to determine, subject only to variations in available sunlight, the cash flow from the investment made. Sustainable. No subsidy should endure indefinitely, and so a predictable phaseout becomes an important element of durability. This “digressive” tariff declines over time in a predictable manner. The tariff paid to a system owner for an installation brought on line at any time after January 1, 2002, is reduced by 5 percent from the rate paid for an installation made in the previous year, although the contract for that reduced rate was still for 20 years. The expectation underlying this digressive approach was that an expanding PV manufacturing base would lead to declining prices for delivered PV systems over time. Utility customers pay for the incentive through the established rate structure, and the utility in turn makes payment directly to the owner of the PV system connected to its grid. Thus, the feed-in tariff becomes a form of tax, collected by the utility, much in the same way that certain weatherization programs and special low-income rates are financed by U.S. utilities via a small charge on each kilowatt-hour of electricity delivered. The architects of the EEG were confident that the feed-in-tariff policy would “create a stable investment climate, while RPS policies would not” (Rickerson and Grace, 2007). Indeed the UK Treasury’s recently published Stern Review noted that “feed-in mechanisms achieve larger deployment [of incented resources] at lower costs” because of the “assurance of long-term price guarantees” (Stern Review, 2006, p. 366). The Stern Review goes on to say that other types of incentives are less successful and more costly because “uncertainty discourages investment and increases the cost of capital as the risks associated with uncertain rewards require greater [return] rewards” (p. 366). The EEG feed-in tariff has created a large, global, solar energy market in Germany, spawning numerous rapidly growing companies that did not exist before the EEG was passed. These new enterprises grew in Germany (QCells, for example) and around the world (SunTech in China, for example). Today, 18 countries in the European Union have adopted feed-in tariffs to promote the deployment of renewable generation technologies. For example, the feed-in tariffs initiated in Greece in June 2006 are 40-50 eurocents/kWh, depending on system size and mainland versus island location.7 The committee has not studied whether a feed-in-tariff approach would mesh well with the requirements for rapid deployment of hydrogen systems and makes no recommendations regarding this policy instrument. Yet whatever policies are ultimately adopted in the United States, consideration of the basic principles employed by the German program will surely lead to more rapid and effective results in establishing hydrogen policy that proves: Substantial enough to influence marketplace decisions; Durable for long enough to stimulate innovation, investment, and cost reduction by suppliers of hydrogen vehicles and infrastructure technology, and Sustainable by providing for reduction of the incentive over time, as a signal to the market that hydrogen systems must become fully competitive with alternatives over a well-defined period. Wind Energy Production Tax Credits The solar feed-in tariff program in Germany stands in marked contrast to the production tax credit (PTC) program for wind energy in the United States. The intent of the PTC was to reduce the cost of wind energy and thereby make it more attractive to electric utilities and investors. PTCs for wind energy were first established in the 1992 Energy Policy Act and were initially valued at 1.8 cents/kWh produced during the first 10 years of operation. This credit applied to installations put in service from 1994 through June 30, 1999. The PTC has been extended periodically, in similar form, and is still available today. However, the intermittency of this policy has inhibited the full achievement of its goals. Since its initial 5½ years, the PTC has never been renewed for more than 2 years, and it was allowed to lapse completely on three separate occasions for periods ranging up to several months, as shown in Table 2.1. Also, although in some cases authorization was retroactive after a lapse, this provided little incentive because many wind projects needed the financeable future income stream from the PTC to be economically viable. 7 It is possible that the feed-in tariff has been too successful. PV costs have not declined as much as expected, largely because soaring demand for PV-grade silicon has increased its cost. The German government is considering increasing the rate at which the guaranteed price drops for new installations, but such changes remain speculative as of this writing. The committee notes that these proposed changes would reduce the subsidies offered to new participants, not because the feed-in tariff has proved ineffective, but rather because policy officials seek to direct the subsidies to other forms of renewable energy, especially wind. The core idea that substantial and durable incentives can make a difference remains much in evidence—witness the unlikely emergence of Germany as an economic power in solar photovoltaics.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen TABLE 2.1 Legislation of Production Tax Credits for Wind Energy in the United States Date of Legislation In-service Dates 1992 Energy Policy Act 1994-June 30, 1999 PTC lapsed June 30, 1999-December 1999 December 1999 2000-2001 PTC lapsed January 2002-February 2002 February 2002 2002-2003 PTC lapsed January 2004-October 2004 October 2004 2004 (retroactive)-2005 August 2005 2006-2007 December 2006 2008 SOURCE: Courtesy of American Wind Energy Association. The intermittent nature of the PTC has retarded both the installation of wind capacity in the United States and the development of the wind energy industry in the United States. Figure 2.1 shows annual additions of wind power in the United States, with telling decreases in installations in 2000, 2002, and 2004, following the expiration of the PTC in 1999, 2001, and 2003. More significantly, in recent years (2005 and 2006) the PTC has been extended before it expired, and steady growth in wind capacity additions is anticipated during the now authorized 2005-2008 period. Although the impact of the PTC lapses on installation of wind capacity can easily be seen in Figure 2.1, it is harder to evaluate directly the damage done to U.S. wind energy businesses. Many of the impacts of the boom-bust cycle are difficult to assess and even more difficult to value. Inefficiencies in production, costs of holding inventory, difficulties in managing supply chains, and costs associated with maintaining (or reducing) a workforce all represent very real, but hard-to-see, costs to a business trying to navigate the uncertain market illustrated in Figure 2.1. Furthermore, many companies may simply never have evaluated their losses, or even if these numbers were estimated, they are not generally available publicly. ENTREPRENEURSHIP AS A FORCE FOR CHANGE A free economy grows and adapts through competition, the “creative destruction” used by economist Joseph Schumpeter (1883-1950) to describe the industrial and societal transformations that accompany widespread innovation. The central participants in this innovation process include (1) established for-profit companies offering products and services pertinent to the energy transition; (2) new entrepreneurial ventures just emerging into the marketplace; and (3) investment institutions providing capital to both. Each has a unique role in the process of creative destruction, and transition policies must reach all three to motivate change and fully realize the opportunities for economic growth. FIGURE 2.1 U.S. wind power capacity additions, 1999-2006. SOURCE: Courtesy of American Wind Energy Association.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen Nevertheless, energy policy has underappreciated the role of the entrepreneurial venture. This committee seeks to recall attention to it because the pace of the energy transition and the resources needed to achieve it will be influenced strongly by the success of these entrepreneurial ventures. Entrepreneurial Companies in the Transition to Hydrogen In many sectors of the economy, entrepreneurial venture capital-backed companies have been prominent players in driving toward a new paradigm. Certainly this has been true since deregulation of the telecom industry, which led to the emergence and rapid growth of many new, and now very large, companies such as Cisco, Palm, Ciena, Nokia, and the like. The same has occurred in the computer and software sector, with entrepreneurial companies such as Apple, Compaq, Microsoft, Sun Microsystems, Dell, and many others now dominant in their fields. In the economy as a whole, entrepreneurial companies with venture capital backing have had an enormous impact. According to a study issued recently by the National Venture Capital Association, venture-backed companies employed 10.4 million people and generated $2.3 trillion in revenue in 2006, which represented 9.1 percent of the total private sector work force and 17.6 percent of the total GDP (National Venture Capital Association, 2007, p. 5). These same companies outperformed the overall economy by 2:1 in both rate of job growth and sales growth. Yet in the field of hydrogen production infrastructure and applications it has been widely assumed that the transition, when it occurs, will be led by the major automotive and energy companies, and little attention is given to the innovation being achieved by small entrepreneurial companies. Indeed, most of the major automotive players worldwide do have active fuel cell vehicle programs, and oil companies, notably Shell, Chevron, and BP, as well as several of the large industrial gas companies, have substantial activities in hydrogen production and infrastructure development. Large industrial and aerospace companies, including United Technologies and General Electric, also have efforts under way in stationary fuel cell systems and hydrogen production technologies. It is difficult to determine how much capital has been invested by major corporations around the world in hydrogen technology because programs in these companies are typically conducted by divisions or operations that do not issue financial reports separately from the parent. Estimates of expenditures based on anecdotal evidence provided informally by corporate executives range from $2 billion or $3 billion to well over $10 billion. Despite the evidently substantial activities of large corporate players in the hydrogen field, it is not by any means certain that the leaders in the transition will be the large companies that are currently active. Indeed many entrepreneurial companies are pursuing hydrogen-relevant technologies of all types—fuel cells, transition-scale hydrogen production, and on-vehicle hydrogen storage. Any number of those might emerge as leaders in the hydrogen transition, much as happened in the telecommunications and computer fields. Over the past decade, many of these entrepreneurial venture-capital-backed companies were able to complete public offerings on the NASDAQ market, mainly in 1999-2000. As shown in Table 2.2, the total capital raised by the 10 NASDAQ-listed public companies was nearly $4 billion, as of year end 2006. It is interesting to note that the financial statements for these companies show that $374 million of additional capital was raised by this group of companies in 2006, more than half of it resulting from an investment in Plug Power by a Russian consortium. In addition, six small companies involved with hydrogen systems are listed on the London AIM exchange with total invested capital of more than $322 million (see Table 2.3). TABLE 2.2 Capital Invested in Selected Small Public Hydrogen and Fuel Cell Companies Listed on the NASDAQ Companya Invested Capital (million dollars) (12/31/05)b (12/31/06)b Ballard Power Systems (BLDP) 1,161 1,170 Distributed Energy Systems (DESC) 221 236 Fuel Cell Energy (FCEL) 530 531 HOKU Scientific 32 33 Hydrogenics (HYGS)—includes Stuart Energy 319 321 Mechanical Technology (MKTY) 122 131 Medis Technologies (MDTL) 209 287 Millennium Cell (MCEL) 108 114 Quantum Fuel Systems (QTWW) 255 288 Plug Power (PLUG) 532 752 Total 3,489 3,863 aNASDAQ only, excludes AIM listed companies. bOr nearest year end. SOURCE: Compiled by the committee from publicly available financial statements on www.edgar-online.com (accessed November 2007). TABLE 2.3 Capital Invested in Selected Small Hydrogen and Fuel Cell Companies Listed on the AIM Market in the United Kingdom Company Invested Capital Local Currency US$ Ceres Power (CWR) £18,062,000 35,943,380 Ceramic Fuel Cells, Ltd (CFU) AU$185,549,893 154,006,411 ITM Power (ITM) £12,702,049 25,277,078 Protonex (PTX) $29,609,155 29,609,155 PolyFuel (PYF) $58,673,829 58,673,829 Voller (VRL) £9,343,000 18,592,570 Total 322,102,423 SOURCE: Compiled by the committee from publicly available financial statements on the Internet, accessed July 2007.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen TABLE 2.4 Capital Raised by Private Sector Entrepreneurial Companies for Hydrogen Technologies Area of Company Focus Number of Companies in Database Capital Raised 2002-2007 ($) Fuel cells (of all types) 38 468,107,388 United States 21 327,595,800 Europe 13 91,212,248 Canada 4 9,299,340 Fuel cell components (e.g., membranes) 8 127,490,300 United States 2 59,900,000 Europe 6 67,590,300 Hydrogen production (e.g., electrolyzers, reformers) 12 64,688,900 United States 6 47,255,000 Europe 2 3,800,000 Canada 4 13,633,900 Hydrogen storage (e.g., tank, hydrides) 3 6,710,309 United States 2 808,000 Europe 1 5,902,309 Hydrogen infrastructure (e.g., compressors, dispensers) 1 2,055,000 Canada 1 2,055,000 Other (e.g., integrators, applications providers, vehicle retrofit) 6 135,786,000 United States 3 93,020,000 Europe 2 11,000,000 Canada 1 31,766,000 Total 68 804,837,897 SOURCE: CleanTech Network, personal communication, July 16, 2007. Two of these companies are U.S.-based, one is Australian, and three are in the United Kingdom. It is much more difficult to obtain data on investments in privately owned companies that pursue hydrogen technology because they do not make balance sheet data available publicly. Data received from the U.S. Fuel Cell Council and from two venture funds that were willing to share their deal logs yield some approximate estimates: between 104 and 160 private entrepreneurial companies in the United States, Canada, and Western Europe are engaged in activities related to hydrogen and fuel cells. Almost no reliable data are available about private companies in the rest of the world that are pursuing hydrogen developments. Probably the best source of data on such companies is the Cleantech Network; it has graciously provided aggregated data that show capital invested in more than 68 private fuel cell and/or hydrogen companies to be almost $805 million since 2002 (Table 2.4), an astonishingly high number in view of the very difficult investment climate in the early part of the decade. The 68 companies that reported financial investment data to the Cleantech Network were fewer than half of the 147 companies that the Network has identified in the hydrogen fuel cell space, so it is possible that the actual amount invested is more than double the total shown in Table 2.4. Among the private and small public companies engaged in work on hydrogen may be a few that will be the future Ciscos and Microsofts of the field, when and if the transition to hydrogen occurs. The challenge for investors is, of course, to anticipate which ones will achieve long-term success. Those who have studied the emergence of new technologies, such as radio and automobiles, point out that initially there were hundreds of new entrants but, in the end, only a few of those companies survived and thrived. As in all fields, entrepreneurs interested in hydrogen as a business opportunity will respond vigorously to clear signals about market opportunity. Deregulation of the telecommunications industry, for example, created a flood of new entrants, pursuing opportunities that had previously been denied to all but AT&T. Virtually all hydrogen-related companies saw increases in their share prices when the FreedomCAR program was announced, demonstrating a vigorous response to government signals. During 1998-2001, signals from the auto industry about imminent introduction of hydrogen-fueled vehicles led to a surge in private and public capital flowing into entrepreneurial companies that offered technologies able to serve this anticipated new market. Since early 2000, however, the market has come to realize that the technology development timetables in hydrogen are longer than many had thought and the costs to achieve acceptable price and performance are greater than originally anticipated. As a result, in 2007 there was little investor enthusiasm for investment in hydrogen (except for the Russian consortium said to be investing in Plug Power). As a result, there are few new public offerings (and some that came to market had to be withdrawn) and little interest in supporting new private companies in the space. Even compa-
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen nies with successful track records in development and market entry are facing challenges in raising the capital needed to keep moving forward. Interest could be reignited quickly if the United States were to make a substantial and durable commitment to policies that would send a clear signal to the capital markets that hydrogen was a priority option in addressing the security-environment-economy trilemma described earlier in this chapter. CONCLUSION The introduction of production hydrogen fuel cell vehicles and the establishment of a hydrogen infrastructure are high-risk, high-payoff endeavors that would promote the global good—through reduced oil dependence and risk of climate change. Major automotive companies, fuel companies, and entrepreneurial ventures have devoted considerable resources to developing such vehicles, with support from governments around the world. Nevertheless, difficult technical issues remain, especially the development of cost-effective hydrogen storage on the vehicles and fuel cell systems that meet durability and customer requirements. For this reason, all of the private companies that are involved will continue to depend on a government commitment that is substantial enough to make a difference and that remains durable until HFCVs are competitive. REFERENCES EIA (Energy Information Administration). 2007. International Energy Outlook 2007. IEO 2007 Reference Case, p. 30. Washington, D.C. GAO (Government Accountability Office). 2007. Crude Oil—Uncertainty About Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production. GAO-07-283. Washington, D.C. IEA (International Energy Agency). 2006. World Energy Outlook 2005. Washington, D.C. IPCC (Intergovernmental Panel on Climate Change). 2007. Summary for Policymakers. In Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK: Cambridge University Press. NPC (National Petroleum Council). 2007. Facing the Hard Truths About Energy—A Comprehensive View to 2030 of Global Oil and Natural Gas. Washington, D.C. NRC (National Research Council). 2005. Review of the Research Program of the FreedomCAR and Fuel Research Partnership: First Report. Washington, D.C.: The National Academies Press. NRC. 2006. Understanding and Responding to Climate Change: Highlights of National Academies Reports. Updated in 2006. Washington, D.C.: The National Academies Press. National Venture Capital Association. 2007. Venture Impact: The Economic Importance of Venture Capital Backed Companies to the U.S. Economy. Fourth Ed. Arlington, Va. Rickerson, W., and R.C. Grace. 2007. The Debate over Fixed Price Incentives for Renewable Electricity in Europe and the United States: Fallout and Future Directions. White Paper prepared for the Heinrich Boll Foundation. Stern Review. 2006. Policy Responses for Mitigation: Accelerating Technological Innovation. Cambridge, UK: Cambridge University Press.