Navigant Research Blog

Fuel Cell Vehicles: Not Dead Yet

— July 3, 2012

In spite of many efforts to declare fuel cell cars dead, top automakers are moving ahead with plans to produce commercial fuel cell vehicles (FCVs).  That was one of the key messages from the World Hydrogen Energy Conference, held last month in Toronto.

Granted, it’s not surprising that a group of people willing to spend time and money to get together and talk about hydrogen are, in fact, bullish on hydrogen.  But from the automakers’ media panel, where representatives from Daimler, Toyota and Honda sat for a long Q&A with the press, and from the hydrogen plenary and a panel on hydrogen market demand that I participated in, it’s clear that companies are still committed to this effort even though there are real hurdles in the way.

The automakers once again stated their commitment to releasing commercial FCVs roughly in the 2015 timeframe.  Some are more specific than others.  Honda’s Steve Ellis said the Japanese maker has not announced a hard date, but the company is working on a full model change from its current offering, the FCX ClarityDaimler reiterated that it will have a next generation FCV on the road in the 2014/2015 timeframe, and Toyota gave 2015 as its target.

Even though they have been talking up this timeframe for a couple of years, to be honest, I was half expecting the manufacturers to start walking back their dates, since enthusiasm for FCVs in some parts of the world has waned.  But they did not.  What has been pushed back is the timeframe for large-scale uptake, which OEMs are now saying likely won’t happen until  close to 2020.

Daimler’s Christian Mohrdieck said his company plans to get the price of the fuel cell drivetrains down to around that of a diesel hybrid, through volume production and some materials cost reduction.  Here I think he is talking about platinum, and it would behoove the platinum industry to think about making that happen.  I don’t think Mohrdieck was including the cost of hydrogen tanks in this estimate, in which case you have to bump up the FCV price further.  Hitting a competitive price point is still a concern for OEMs, from what I see.

It’s clear that hydrogen infrastructure is still a thorny issue.  The three OEM representatives at the conference were unanimous that they should not have to foot the bill for infrastructure buildout.  Even though Daimler has partnered with Linde to build 20 stations in Germany, Mohrdieck referred to this a “triggering” signal of the company’s intent to produce cars that can use hydrogen fuel.  Toyota also noted that it’s partnering with energy and gas companies in Japan to build stations, which will be placed in the same regions where Priuses are popular.

From my conversations with hydrogen companies, it is clear that they’re enthusiastic about the potential market from fuel cells.  While they’ve been involved in building infrastructure, especially in terms of materials handling but also with early passenger cars and buses, the fact remains that distributed vehicle fuelling is not their traditional business.  Eventually retail gas station operators must step in if the FCV market is to become viable.  This is happening in Germany, where Total Germany is part of a new initiative to build 50 stations by 2015.

No one doubts the major obstacles ahead.  But the OEMs are spending a lot, in terms of money and reputation, to forge ahead with fuel cell cars.


Discreetly, Cleantech Policy Advances

— July 2, 2012

The Supreme Court (SCOTUS) and its role in the everyday lives of the America people has been on full display as the justices declined to hear the appeals case challenging the authority of the Federal Energy Regulatory Commission (FERC).  (Oh, and there was something about healthcare.)

What’s really on stage in the former case is the contrast between Congressional policymaking and the distinct authority of the FERC.  The Commission is driving innovation through relatively discreet policymaking that is developing new markets for the cleantech space, despite roadblocks and partisan wrangling in the U.S. Congress.

The strategic wielding of policy instruments, whether regulations, taxes, or subsidies, can encourage markets, and for cleantech technologies from solar to advanced batteries can change their value proposition dramatically.  The German feed-in-tariffs (FITs) – which were recently cut – developed one of the most robust markets for solar photovoltaics (PV) in the world; their success is likely to help PV reach grid parity in the next several years.  Conversely, subsidies in japan are just starting to kick off.

What’s unique about the United States’ approach is the long demonstrated preference for business-based market advances, rather than mandate-based advances (e.g., the European Union’s renewable energy directives).  The FERC’s role, and perhaps more accurately, that of chairman Jon Wellinghoff (as Forbes has rightly pointed out) is to open markets to competition and provide market parameters that reward technological innovation.  As a result, select segments of the power industry in the United States are undergoing dramatic changes through mechanisms like real-time pricing and pay-for-performance compensation.  While subsidies and government support aren’t completely absent in the U.S., these more discreet policy changes are enlivening the cleantech industry in more subtle ways.

Here is a highlight of recent developments that have resulted from the FERC’s regulatory authority:

  • The Electric Reliability Council of Texas (ERCOT) set a new wind power generation record, as wind supplied 17.64% of the system’s load.  (See FERC Order 888.)
  • Advanced batteries such lithium-ion chemistries are being deployed to provide frequency regulation services through lucrative business models – this AES Energy Storage project at Laurel Mountain Wind Farm is one of the largest installations in the U.S.  (See FERC Order 755.)
  • Energy efficiency is now counted as a viable generation resource and compensated as such through demand response programs.  Viridity Energy and others have spearheaded viable business models based on saving consumers energy.

The global cleantech industry is one still dependent on policy direction; but discretion is often the best policy.


Elster Acquisition Signals Smart Grid Upside

— July 2, 2012

After weeks of speculation, German meter manufacturer Elster has been acquired by Melrose, a British buyout firm focused on engineering companies.  The deal, valued at $2.3 billion, signals that there is upside for smart grid hardware makers poised to capitalize on the global rise in new deployments.

The acquisition’s value raised some eyebrows because it was thought to be a high premium.  But this is not necessarily the case.  Melrose is paying a multiple of about 10 times estimated 2012 earnings.  By comparison, last year Toshiba paid roughly 10.7 times earnings (according to Credit Suisse estimates) for meter maker Landis+Gyr.  So, eyebrows should be lowering.

Why did Melrose strike now?  Because the market is heating up with potential rivals circling, according to Melrose CFO Geoff Martin: “There’s evidence that a number of global corporates are interested in this area, so we went fast,” Melrose told Bloomberg News.

Indeed, a market with a warming trend made it the right time for Elster’s majority owner, CVC Partners (itself an investment holding company like Melrose), to sell.  CVC Partners bought Elster in 2005 from German utility giant E.ON at an estimated price of $1.5 billion.  That’s a nice return on investment after 7 years.

Here is what Melrose gets in the deal for Elster:

  • A solid manufacturing business that’s a market leader in gas meters, and a meaningful player in electric meters
  • A company with a strong position in smart grid technology
  • A company active in markets with long-term upside drivers, such as the growing demand for energy, efficiency, and an increasing emphasis on gas

In particular, Elster is poised to do well in Europe, where roughly 49% of its business originates, and where it, along with several competitors, is part of a recent order for 1 million smart meters from Spanish utility giant Iberdrola.  Iberdrola plans to deploy 20 million of those meters between now and 2018.

In addition, the move to smart meters in Europe is expected to ramp up as utilities across the continent upgrade hardware as one means of meeting mandated targets of 20% reductions in energy consumption.  Elster management, though, may have second thoughts about this deal.  Those who remain after the planned exits of Elster CEO Simon Beresford-Wylie and CFO Rainer Beaujean must wonder what life will be like under the control of yet another holding company that will sell the enterprise in a few years.  Keep in mind Melrose’s corporate slogan: “Buy, Improve, Sell.”

For Elster’s customers, as well, the deal spells uncertainty.  Will Melrose make investments and provide direction that still keeps customers happy?  How committed will the new owners be to Elster’s current strategies, products, and markets?  This all remains to be seen.

In the larger context, the deal brings into focus other possible acquisition targets among meter manufacturers, such as Sensus and Itron.  Privately held Sensus, which is based in Raleigh, N.C., has been rumored to be on the block for months.  Itron, based in Liberty Lake, Wash., is publicly traded with a current market cap of about $1.6 billion.  There are no rumors of any deal for Itron, but that doesn’t mean one won’t materialize.  An acquisition for either company in the next 6 to 18 months wouldn’t surprise me at all.


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