Transitions to Alternative Transportation Technologies: A Focus on Hydrogen (2008)

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2 Toward a Substantial and Durable Commitment: The Context of the Study This chapter sets out the worldview and philosophy that standards; hybrid electric vehicles also offering significantly guided the committee in responding to the inquiries of the improved fuel economy; and motor fuels derived from 2005 Energy Policy Act. The multiple questions posed by the biomass. statement of task should be understood within the context of These options can considerably reduce oil consumption the committee’s overall mission—to assess the resources the over the next 20 years, but they are unlikely to eliminate United States would need to support a transition in motor the problems of oil dependence and climate change. Their vehicles, fuels, and fueling infrastructure aimed at accom- ultimate resolution will require bringing to market vehicle plishing three essential public goals: technologies such as the hydrogen fuel cell vehicle (HFCV) or fully electric vehicles. Yet these are unlikely to enter the 1. Reduce the nearly complete dependence of road trans- market in sufficient numbers over the next 20 years to sub- portation on petroleum in order to improve energy security stantially reduce petroleum consumption. Thus, a technology in the face of political instability among oil producers and portfolio that includes all of these options will deliver greater mitigate the eventual peak in conventional oil production; benefit across the intervening 20 or so years. Nevertheless, 2. Lower the emissions of greenhouse gases from motor hydrogen technologies and infrastructure offer the potential, fuel production and use in order to sharply reduce the impact once successfully developed, to achieve fully the threefold of motor vehicle use on the global climate; and goals of energy policy—hence, their emphasis in the con- 3. Maintain economic competitiveness and growth while gressional inquiry and in the committee’s response to it. achieving the first two goals. Initiating a fundamental energy transition will require a policy commitment on the part of the federal government. The issues underlying these goals are large, persistent, This commitment and the policies that implement it must and global. They will not yield to a quick fix, nor can they remain substantial and durable over the decades needed to be addressed independently. Successful policy must deal complete the transition: with them as a whole, which requires supporting a balanced portfolio of technology options rather than emphasizing a • Substantial, in that policy provides meaningful incen- single solution. tives for fuel economy where the market price of the fuel Building such a portfolio can diversify the risk of delay does not include externalities, such as environmental and or even failure of any one technology. More important, a health costs from emissions or an oil vulnerability premium; portfolio can deliver benefits throughout the lengthy period and (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 This judgment assumes that hydrogen and electric energy can be made of the newly revised CAFE (corporate average fuel economy) in a way that does not release greenhouse gases over the long term. Some transition strategies, for example, could allow the manufacture of hydrogen The committee was not asked to study economic competitiveness and from natural gas or electricity from coal without capture and sequestration of growth but notes them as vital considerations in the policy process: to the the carbon emitted in those processes. The greater efficiency of the fuel cell extent that remedies to energy security and climate change impose near- or electric vehicle, relative to the conventional vehicles that they displace, term economic burdens, their implementation will be more difficult. Energy would offset the carbon release during a transition. However, in a mature security and climate change are discussed in greater detail in this chapter. hydrogen economy, effective capture and sequestration of the carbon dioxide Economic issues are of concern throughout the report. would become essential. 22 

TOWARD A SUBSTANTIAL AND DURABLE COMMITMENT: THE CONTEXT OF THE STUDY 23 • Durable, in that policies remain in place long enough be involuntary if supply is unable to keep up with growing for consumers, entrepreneurs, technologists, and investors demand” (GAO, 2007, p. 6). Similarly, the International to make the needed commitments of their own time and Energy Agency (IEA) concluded, “Worldwide, the rate of resources. [oil] reserve additions from discoveries has fallen sharply since the 1960s. In the last decade, discoveries have replaced To the extent that the United States makes such a commit- only half the oil produced” (IEA, 2006, p. 132). ment, the history of other technology transitions shows that The literature offers a wide range of estimates concerning our market-based economy and others around the world will the timing of a maximum in world oil production because prove highly effective in achieving the public goals of energy the data needed for more precise forecasting are not widely security and climate stabilization while preserving healthy available. Much useful information is (1) proprietary to and sustainable economic growth. companies, (2) a state secret in the major oil exporting countries, and/or (3) biased to achieve political and economic objectives. ENERGY SECURITY For example, a recent study by the National Petroleum The issue with energy security arises chiefly from the Council stated that “there are accumulating risks to continu- near-total dependence on conventional petroleum as the ing expansion of oil and natural gas production from the con- source of fuel for the transportation sector in the United ventional sources relied upon historically. These risks create States and most of the world’s economies. Adverse conse- significant challenges to meeting projected energy demand.” quences arise from global dependence on petroleum from These risks are both geological and geopolitical. Further, regions of the world that are either unstable or inimical to “Forecast worldwide liquids production in 2030 ranges from U.S. interests. Insecurity in petroleum supply holds the less than 80 million to 120 million barrels per day, compared prospect for large-scale disruptions of the world economy. with current daily production of approximately 84 million Energy insecurity is likely to increase over time as a result barrels. The capacity of the oil resource base to sustain grow- of the following: ing production rates is uncertain” (NPC, 2007, p. 91). To be sure, enormous resources of unconventional • The prospect of disruption of the petroleum supply oil—for example, oil shale or coal in the United States and chain, through terrorist attack, political instability in the tar sands in Canada—could be liquefied and substituted supplying nations, or natural disaster; for oil. Exploiting these resources could greatly extend the • Projected demand growth, especially among the devel- availability of gasoline and diesel fuel, but would also raise oping nations of non-OECD (Organization for Economic environmental issues. Chiefly, they would nearly double the Co-operation and Development) Asia (about 2.7 percent per carbon dioxide (CO2) emitted per gallon of fuel consumed, year until 2030), which strains reserve production capacity unless the emissions from production can be captured and that might have offset such disruptions (EIA, 2007); and permanently sequestered, and their use would increase the • The possibility that conventional oil production may demand for water. peak much sooner than accounted for in business-as-usual In addition, a peaking or leveling in production would forecasts. probably be attended by price increases, and these would induce a demand response—some combination of (1) greater The current petroleum market lacks the excess production efficiency in converting petroleum to services and (2) simply capacity that characterized past decades, and production and doing without. However, examining the potential contribu- demand remain in close daily balance. This means that any tion of either unconventional fuel resources or demand disruptive event, whether from a natural disaster or terrorist response falls outside the committee’s assigned tasks, and activity, can cause severe and lasting price shocks, leading they are not considered further here. to worldwide economic dislocation. This situation is unlikely to improve in the near future. CLIMATE CHANGE Demand continues to increase at the same time that conven- tional petroleum production faces a leveling and/or peaking The second element of the energy “trilemma” concerns of world oil production. In a recent study, the U.S. Govern- the environmental consequences of the buildup of CO 2 ment Accountability Office noted that “the total amount of and other greenhouse gases in the atmosphere. Light-duty oil underground is finite, and, therefore, production will one vehicles generate one-third of global CO2 emissions and day reach a peak and then begin to decline. Such a peak may about a third of U.S. emissions. Capturing CO2 emissions from individual vehicles is effectively impossible, so reduc- In the United States, 96 percent of the primary energy used in transporta- tion comes from conventional petroleum (EIA, 2007, Table 2.1e, p. 42). See, for example, Council on Foreign Relations, 2006, The National In addition to carbon dioxide, the “greenhouse gases” generally include Security Consequences of U.S. Oil Dependency, Independent Task Force water vapor, hydrogen itself, nitrous oxide, methane, hydrofluorocarbons Report No. 58, Washington, D.C. (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride. 

24 TRANSITIONS TO ALTERNATIVE TRANSPORTATION TECHNOLOGIES—A focus on hydrogen tions in the transportation sector can be effected only by to flash floods and severe erosion, are very likely (greater improved fuel economy and/or replacement of current fuels than 90 percent). with lower-carbon or zero-carbon fuels. Hydrogen contains The committee has not assessed climate change risks no carbon at all, but the production processes currently avail- but concludes that if immediate action is required to reduce able emit CO2—either from natural gas and other fossil fuels CO2 emissions, the transportation sector could provide a used to manufacture hydrogen or from fossil fuels that gen- significant share of the reductions. The hydrogen technolo- erate the electricity used to make hydrogen via electrolysis. gies discussed in this report are particularly promising for Even including these production-derived carbon emissions, large-scale reductions over the longer term. however, hydrogen fuel cell vehicles can reduce the well-to- wheels carbon given off by light-duty vehicles because of the MOTIVATING THE PRIVATE SECTOR TO MAKE greater efficiency of the fuel cell. THE ENERGY TRANSITION Nevertheless, achieving deep reductions in emissions from hydrogen production will require development and use The problems that arise from the security-environment- of processes that can capture and sequester the CO2 gener- economy trilemma become manifest to the public chiefly as ated in hydrogen manufacture, as well as greater use of low- motor fuel prices, trade imbalances, defense expenditures, carbon or zero-carbon energy sources for electricity genera- and inflationary pressures and less visibly but more conse- tion. Biofuels, especially if produced renewably, also would quentially, threats such as worldwide economic instability, reduce carbon emissions relative to conventional fuels. foreign policy challenges, and eventually global climate Although long-term in consequence, the threat of global change. For the past 35 years, proposed solutions have tended warming is of immediate concern, because moderate actions to emphasize one or, at most, two of these, with neglect of taken now could preclude the need for drastic actions taken the others. Energy policy has suffered from such selective later. According to the world’s clearinghouse for peer- inattention because the way in which one part of the problem reviewed climate science, the Intergovernmental Panel on is addressed strongly influences the other parts. Genuine Climate Change (IPCC), “The global atmospheric concen- progress requires a portfolio solution and a substantial com- tration of carbon dioxide has increased from a pre-industrial mitment that remains durable over the 40 or so years needed value of about 280 parts per million (ppm) to 379 ppm in for a transition. Such a solution is unlikely to arise from any 2005. The atmospheric concentration of carbon dioxide [and linear summation of the solutions for each component. methane] in 2005 exceeds by far the natural range over the In addition, near-term solutions should be considered in last 650,000 years (180 to 300 ppm) as determined from ice the context of long-term policy goals. For example, a more cores” (IPCC, 2007, p. 2). rapid transition might be achieved with use of technologies In 2005, a National Research Council (NRC) report that would not fit well in a mature, post-transition energy focused on these conclusions, stating that “in the judgment economy—for example, the venting of CO2 from distributed of most climate scientists, Earth’s warming in recent decades production of hydrogen from natural gas and perhaps even has been caused primarily by human activities that have from some large-scale production might be tolerated to speed increased the amount of greenhouse gases in the atmosphere” a transition, provided that some means of eventual carbon (NRC, 2005, p. 2). Although the debate over the science of capture and sequestration could reasonably be ensured. Nev- historical climatic changes has been largely resolved and ertheless, the sum of such short-term solutions is unlikely to there is agreement about the potential influence of continued lead to the most efficient or desirable long-term solution. greenhouse gas emissions on climate, the 2005 NRC report The committee believes that energy policy can no lon- notes that “there is still legitimate debate regarding how ger afford the luxury of short-term thinking or of selective large, how fast, and where these effects will be” (p. 2). inattention. Most recently, in 2007, the IPCC wrote that “[w]arming In a free society, the government cannot command an of the climate system is unequivocal, as is now evident from energy transition into being, and so must engage the private observations of increases in global average air and ocean sector. Indeed, government investment in the energy transi- temperatures, widespread melting of snow and ice, and rising tion will ultimately prove small in comparison with that from global average sea level” (IPCC, 2007, p. 5). The warming private sources—individuals, entrepreneurs, investors, and has been especially acute since 1995. According to the IPCC, businesses. For these reasons, the committee was asked to “eleven of the last twelve years (1995-2006) rank among the include private resource commitments in its estimates. 12 warmest years in the instrumental record of global surface To effectively marshal private resources, energy policy temperature (since 1850)” (p. 5). must create the appropriate framework of regulation and With regard to the consequences of the greenhouse gas incentive, augmented with meaningful investments in the buildup, the 2007 IPCC report noted that climate change risks research, development, and demonstration (RD&D) with are likely (greater than 66 percent) to include droughts, sea greatest leverage for the transition. With a wise and effective level rise, and increased tropical cyclone activity. Increased framework in place, private resources will flow to large and heat waves and heavy precipitation events, which can lead durable opportunities thus created. 

TOWARD A SUBSTANTIAL AND DURABLE COMMITMENT: THE CONTEXT OF THE STUDY 25 The history of large-scale transformations in other • Energy policy must offer greater certainty and pre- industries can illuminate the relative advantage of each in dictability than at present, if private markets are to marshal accelerating the energy transition. In general, two distinct the resources to accelerate the transition. Entrepreneurs, kinds of economic activity operate in parallel to set the innovators, and larger industries can manage uncertainties pace and direction of change. The first is a process of evo- in technology and markets. They do not, however, respond lutionary change in which improvements in technologies as effectively to political uncertainty. and infrastructure now in place or emerging in the market- • Policies should send consistent messages to innovators place dominate progress. The cumulative effect of these and investors, not only within the United States, but insofar incremental improvements can be striking—examples as possible internationally. include the development of faster microprocessors by Intel • Policies must be substantial. Half-measures produce or higher-resolution medical scanning devices by General half-results. Electric. Within the energy-fuels sector, the auto industry has • Policies must have integrity. Earmarked funding, for improved the fuel efficiency of motor vehicles between 1 and example, dilutes the resources available for essential research 2 percent each year for several decades. However, since the and demonstration; similarly, special exemptions for favored early 1980s, automakers have also responded to consumer industries or protected groups erode the public sense that the demand by using these efficiency gains to increase vehicle pain and the gain are fairly shared. weight and performance, rather than improve fuel economy. Similar improvements can be shown in the efficiency of The committee has condensed these principles into two electric generation and conventional oil production. In gen- core concepts—policies should be substantial and they eral—though not exclusively—market incumbents enjoy an should be durable. “Substantial” means that incentives are advantage in evolutionary technological change. Such evo- large enough to make a difference in marketplace decisions, lutionary improvements provide immediate progress toward and “durable” means that policy incentives remain in place the policy goals, but also compete with the revolutionary long enough for innovators to respond—which might require technologies. a planned phaseout to ensure sustainability. In contrast, revolutionary technologies, when successful, Contrasting cases of incentives for wind energy produc- redefine the marketplace and the competitive environment. tion and for solar photovoltaic technologies are used to Progress comes through discontinuous change and offers illustrate these principles. These cases compare and contrast far-reaching solutions as distinct from incremental improve- policy initiatives in two countries: (1) the consistent and ments. Historic examples include mechanical refrigeration, long-term feed-in tariff program for solar energy in Ger- solid-state electronics, and the telephone. The HFCV and many; and (2) the long-term, but intermittently authorized, the electric vehicle have the possibility to radically trans- production tax credit for installation of wind energy capacity form the worldwide motor vehicle industry, its attendant in the United States. Both of these programs were intended fuel infrastructure, and the electric utility industry. In gen- to promote the installation of renewable energy capacity, eral—and with many important exceptions—new ventures and both sought to build a viable long-term industry in their enjoy a competitive advantage in initiating radical technol- respective countries. ogy change because they have no incumbent technologies The committee has not examined the merits of the goals to defend. that either policy sought to achieve and makes no recommen- Policy can accelerate both radical and incremental change, dations regarding their adoption. Rather, it uses these cases but distinct instruments are needed for each. This implies that to illustrate the principles of substantial and durable energy a portfolio approach will accelerate the energy transition policy and how these can become important in achieving the most effectively. At any point in time, a well-founded energy public purpose. policy would support a portfolio of improving, emerging, and potentially revolutionary technologies, and it would The Feed-in Tariff Experience in Germany influence both established companies and entrepreneurial ventures. 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 PRINCIPLES FOR EFFECTIVE TRANSITION POLICY of renewable resources connected to the electricity grid. Several general desirable characteristics will influence After consideration of a wide variety of potential incentives, the success of any policies aimed at achieving the maximum including a renewable portfolio standard (RPS), the German practicable market share of vehicles fueled by hydrogen, the parliament devised an incentive program referred to around desideratum the committee was asked to estimate. The com- the world today as the feed-in tariff. mittee has used these principles throughout its report: The EEG provided incentives to install alternative renew- able options from biomass to wind energy, but by far the most See Figure 4.1 (Chapter 4). aggressive incentive was granted to installation of photovol- 

26 TRANSITIONS TO ALTERNATIVE TRANSPORTATION TECHNOLOGIES—A focus on hydrogen taic (PV) systems. The PV feed-in tariff satisfies the criteria cents/kWh, depending on system size and mainland versus suggested in this report as appropriate for a policy initiative island location. aimed at creating rapid and significant change in an existing The committee has not studied whether a feed-in-tariff energy delivery system: approach would mesh well with the requirements for rapid deployment of hydrogen systems and makes no recom- • Substantial. The program offered incentives to install- mendations regarding this policy instrument. Yet whatever ers of PV systems ranging from 45.7 to 57.4 euro-cents/kWh, policies are ultimately adopted in the United States, con- many times above the wholesale and retail electricity rates sideration of the basic principles employed by the German throughout Germany. program will surely lead to more rapid and effective results • Durable. The contracts with PV system owners are in establishing hydrogen policy that proves: for a 20-year period at a fixed payment rate. This allows the purchasers of a PV system to determine, subject only • Substantial enough to influence marketplace to variations in available sunlight, the cash flow from the decisions; investment made. • Durable for long enough to stimulate innovation, • Sustainable. No subsidy should endure indefinitely, investment, and cost reduction by suppliers of hydrogen and so a predictable phaseout becomes an important element vehicles and infrastructure technology, and of durability. This “digressive” tariff declines over time in • Sustainable by providing for reduction of the incentive a predictable manner. The tariff paid to a system owner for over time, as a signal to the market that hydrogen systems an installation brought on line at any time after January must become fully competitive with alternatives over a well- 1, 2002, is reduced by 5 percent from the rate paid for an defined period. installation made in the previous year, although the contract for that reduced rate was still for 20 years. The expectation Wind Energy Production Tax Credits underlying this digressive approach was that an expanding PV manufacturing base would lead to declining prices for The solar feed-in tariff program in Germany stands in delivered PV systems over time. marked contrast to the production tax credit (PTC) program for wind energy in the United States. The intent of the PTC Utility customers pay for the incentive through the estab- was to reduce the cost of wind energy and thereby make it lished rate structure, and the utility in turn makes payment more attractive to electric utilities and investors. PTCs for directly to the owner of the PV system connected to its grid. wind energy were first established in the 1992 Energy Policy Thus, the feed-in tariff becomes a form of tax, collected by Act and were initially valued at 1.8 cents/kWh produced the utility, much in the same way that certain weatherization during the first 10 years of operation. This credit applied to programs and special low-income rates are financed by U.S. installations put in service from 1994 through June 30, 1999. utilities via a small charge on each kilowatt-hour of electric- The PTC has been extended periodically, in similar form, and ity delivered. is still available today. The architects of the EEG were confident that the feed- However, the intermittency of this policy has inhibited the in-tariff policy would “create a stable investment climate, full achievement of its goals. Since its initial 5½ years, the while RPS policies would not” (Rickerson and Grace, 2007). PTC has never been renewed for more than 2 years, and it Indeed the UK Treasury’s recently published Stern Review was allowed to lapse completely on three separate occasions noted that “feed-in mechanisms achieve larger deployment for periods ranging up to several months, as shown in Table [of incented resources] at lower costs” because of the “assur- 2.1. Also, although in some cases authorization was retroac- ance of long-term price guarantees” (Stern Review, 2006, tive after a lapse, this provided little incentive because many p. 366). The Stern Review goes on to say that other types wind projects needed the financeable future income stream of incentives are less successful and more costly because from the PTC to be economically viable. “uncertainty discourages investment and increases the cost of capital as the risks associated with uncertain rewards require greater [return] rewards” (p. 366). It is possible that the feed-in tariff has been too successful. PV costs The EEG feed-in tariff has created a large, global, solar have not declined as much as expected, largely because soaring demand energy market in Germany, spawning numerous rapidly for PV-grade silicon has increased its cost. The German government is growing companies that did not exist before the EEG was considering increasing the rate at which the guaranteed price drops for new installations, but such changes remain speculative as of this writing. passed. These new enterprises grew in Germany (QCells, The committee notes that these proposed changes would reduce the subsi- for example) and around the world (SunTech in China, dies offered to new participants, not because the feed-in tariff has proved for example). Today, 18 countries in the European Union ineffective, but rather because policy officials seek to direct the subsidies have adopted feed-in tariffs to promote the deployment of to other forms of renewable energy, especially wind. The core idea that renewable generation technologies. For example, the feed- substantial and durable incentives can make a difference remains much in evidence—witness the unlikely emergence of Germany as an economic in tariffs initiated in Greece in June 2006 are 40-50 euro- power in solar photovoltaics. 

TOWARD A SUBSTANTIAL AND DURABLE COMMITMENT: THE CONTEXT OF THE STUDY 27 TABLE 2.1  Legislation of Production Tax Credits for to evaluate directly the damage done to U.S. wind energy Wind Energy in the United States businesses. Many of the impacts of the boom-bust cycle Date of Legislation In-service Dates are difficult to assess and even more difficult to value. Inef- ficiencies in production, costs of holding inventory, difficul- 1992 Energy Policy Act 1994-June 30, 1999 PTC lapsed June 30, 1999-December 1999 ties in managing supply chains, and costs associated with December 1999 2000-2001 maintaining (or reducing) a workforce all represent very PTC lapsed January 2002-February 2002 real, but hard-to-see, costs to a business trying to navigate the February 2002 2002-2003 uncertain market illustrated in Figure 2.1. Furthermore, many PTC lapsed January 2004-October 2004 companies may simply never have evaluated their losses, or October 2004 2004 (retroactive)-2005 August 2005 2006-2007 even if these numbers were estimated, they are not generally December 2006 2008 available publicly. SOURCE: Courtesy of American Wind Energy Association. ENTREPRENEURSHIP AS A FORCE FOR CHANGE A free economy grows and adapts through competition, The intermittent nature of the PTC has retarded both the “creative destruction” used by economist Joseph Schum- the installation of wind capacity in the United States and peter (1883-1950) to describe the industrial and societal the development of the wind energy industry in the United transformations that accompany widespread innovation. States. Figure 2.1 shows annual additions of wind power The central participants in this innovation process include in the United States, with telling decreases in installations (1) established for-profit companies offering products and in 2000, 2002, and 2004, following the expiration of the services pertinent to the energy transition; (2) new entre- PTC in 1999, 2001, and 2003. More significantly, in recent preneurial ventures just emerging into the marketplace; and years (2005 and 2006) the PTC has been extended before (3) investment institutions providing capital to both. Each it expired, and steady growth in wind capacity additions is has a unique role in the process of creative destruction, and anticipated during the now authorized 2005-2008 period. transition policies must reach all three to motivate change Although the impact of the PTC lapses on installation of and fully realize the opportunities for economic growth. wind capacity can easily be seen in Figure 2.1, it is harder 6/99—PTC expires, not 12/01—PTC expires, 12/03—PTC expires, 8/05—First time 12/06—1-year extended until 12/99 not extended until 2/02 not extended until PTC extended PTC extension 10/04 prior to expiration (through 2008) (through 2007) FIGURE 2.1  U.S. wind power capacity additions, 1999-2006. SOURCE: Courtesy of American Wind Energy Association. Figure2-1.eps BITMAP 

28 TRANSITIONS TO ALTERNATIVE TRANSPORTATION TECHNOLOGIES—A focus on hydrogen Nevertheless, energy policy has underappreciated the role of all types—fuel cells, transition-scale hydrogen production, the entrepreneurial venture. This committee seeks to recall and on-vehicle hydrogen storage. Any number of those might attention to it because the pace of the energy transition and emerge as leaders in the hydrogen transition, much as hap- the resources needed to achieve it will be influenced strongly pened in the telecommunications and computer fields. by the success of these entrepreneurial ventures. 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- Entrepreneurial Companies in the Transition to Hydrogen 2000. As shown in Table 2.2, the total capital raised by the In many sectors of the economy, entrepreneurial venture 10 NASDAQ-listed public companies was nearly $4 billion, capital-backed companies have been prominent players in as of year end 2006. It is interesting to note that the financial driving toward a new paradigm. Certainly this has been true statements for these companies show that $374 million of since deregulation of the telecom industry, which led to the additional capital was raised by this group of companies in emergence and rapid growth of many new, and now very 2006, more than half of it resulting from an investment in large, companies such as Cisco, Palm, Ciena, Nokia, and the Plug Power by a Russian consortium. like. The same has occurred in the computer and software In addition, six small companies involved with hydrogen sector, with entrepreneurial companies such as Apple, Com- systems are listed on the London AIM exchange with total paq, Microsoft, Sun Microsystems, Dell, and many others invested capital of more than $322 million (see Table 2.3). now dominant in their fields. In the economy as a whole, entrepreneurial companies TABLE 2.2  Capital Invested in Selected Small Public with venture capital backing have had an enormous impact. Hydrogen and Fuel Cell Companies Listed on the According to a study issued recently by the National Venture NASDAQ Capital Association, venture-backed companies employed Invested Capital 10.4 million people and generated $2.3 trillion in revenue in (million dollars) 2006, which represented 9.1 percent of the total private sector Companya (12/31/05)b (12/31/06)b work force and 17.6 percent of the total GDP (National Ven- ture Capital Association, 2007, p. 5). These same companies Ballard Power Systems (BLDP) 1,161 1,170 Distributed Energy Systems (DESC) 221 236 outperformed the overall economy by 2:1 in both rate of job Fuel Cell Energy (FCEL) 530 531 growth and sales growth. HOKU Scientific 32 33 Yet in the field of hydrogen production infrastructure and Hydrogenics (HYGS)— applications it has been widely assumed that the transition,   includes Stuart Energy 319 321 when it occurs, will be led by the major automotive and Mechanical Technology (MKTY) 122 131 Medis Technologies (MDTL) 209 287 energy companies, and little attention is given to the inno- Millennium Cell (MCEL) 108 114 vation being achieved by small entrepreneurial companies. Quantum Fuel Systems (QTWW) 255 288 Indeed, most of the major automotive players worldwide do Plug Power (PLUG) 532 752 have active fuel cell vehicle programs, and oil companies, notably Shell, Chevron, and BP, as well as several of the   Total 3,489 3,863 large industrial gas companies, have substantial activities aNASDAQ only, excludes AIM listed companies. in hydrogen production and infrastructure development. bOr nearest year end. Large industrial and aerospace companies, including United SOURCE: Compiled by the committee from publicly available financial statements on www.edgar-online.com (accessed November 2007). Technologies and General Electric, also have efforts under way in stationary fuel cell systems and hydrogen production TABLE 2.3  Capital Invested in Selected Small Hydrogen technologies. and Fuel Cell Companies Listed on the AIM Market in the It is difficult to determine how much capital has been United Kingdom invested by major corporations around the world in hydrogen Invested Capital technology because programs in these companies are typi- cally conducted by divisions or operations that do not issue Company Local Currency US$ financial reports separately from the parent. Estimates of Ceres Power (CWR) £18,062,000 35,943,380 Ceramic Fuel Cells, Ltd (CFU) AU$185,549,893 154,006,411 expenditures based on anecdotal evidence provided infor- ITM Power (ITM) £12,702,049 25,277,078 mally by corporate executives range from $2 billion or $3 Protonex (PTX) $29,609,155 29,609,155 billion to well over $10 billion. PolyFuel (PYF) $58,673,829 58,673,829 Despite the evidently substantial activities of large cor- Voller (VRL) £9,343,000 18,592,570 porate players in the hydrogen field, it is not by any means   Total 322,102,423 certain that the leaders in the transition will be the large com- panies that are currently active. Indeed many entrepreneurial SOURCE: Compiled by the committee from publicly available financial companies are pursuing hydrogen-relevant technologies of statements on the Internet, accessed July 2007. 

TOWARD A SUBSTANTIAL AND DURABLE COMMITMENT: THE CONTEXT OF THE STUDY 29   TABLE 2.4   Capital Raised by Private Sector Entrepreneurial Companies for Hydrogen Technologies Number of Companies Capital Raised Area of Company Focus in Database 2002-2007 ($) Fuel cells (of all types) 38 468,107,388 United States 21 327,595,800 Europe 13   91,212,248 Canada 4   49,299,340 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, anticipate which ones will achieve long-term success. Those and three are in the United Kingdom. who have studied the emergence of new technologies, such It is much more difficult to obtain data on investments in as radio and automobiles, point out that initially there were privately owned companies that pursue hydrogen technol- hundreds of new entrants but, in the end, only a few of those ogy because they do not make balance sheet data available companies survived and thrived. publicly. Data received from the U.S. Fuel Cell Council and As in all fields, entrepreneurs interested in hydrogen as a from two venture funds that were willing to share their deal business opportunity will respond vigorously to clear signals logs yield some approximate estimates: between 104 and about market opportunity. Deregulation of the telecommuni- 160 private entrepreneurial companies in the United States, cations industry, for example, created a flood of new entrants, Canada, and Western Europe are engaged in activities related pursuing opportunities that had previously been denied to to hydrogen and fuel cells. Almost no reliable data are avail- all but AT&T. Virtually all hydrogen-related companies able about private companies in the rest of the world that are saw increases in their share prices when the FreedomCAR pursuing hydrogen developments. Probably the best source program was announced, demonstrating a vigorous response of data on such companies is the Cleantech Network; it to government signals. During 1998-2001, signals from the has graciously provided aggregated data that show capital auto industry about imminent introduction of hydrogen- invested in more than 68 private fuel cell and/or hydrogen fueled vehicles led to a surge in private and public capital companies to be almost $805 million since 2002 (Table 2.4), flowing into entrepreneurial companies that offered tech- an astonishingly high number in view of the very difficult nologies able to serve this anticipated new market. investment climate in the early part of the decade. Since early 2000, however, the market has come to real- The 68 companies that reported financial investment data ize that the technology development timetables in hydrogen to the Cleantech Network were fewer than half of the 147 are longer than many had thought and the costs to achieve companies that the Network has identified in the hydrogen acceptable price and performance are greater than originally fuel cell space, so it is possible that the actual amount anticipated. As a result, in 2007 there was little investor invested is more than double the total shown in Table 2.4. enthusiasm for investment in hydrogen (except for the Rus- Among the private and small public companies engaged in sian consortium said to be investing in Plug Power). As a work on hydrogen may be a few that will be the future Cis- result, there are few new public offerings (and some that cos and Microsofts of the field, when and if the transition to came to market had to be withdrawn) and little interest in hydrogen occurs. The challenge for investors is, of course, to supporting new private companies in the space. Even compa- 

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