Navigant Research Blog

Fuel Cell Industry Faces a Precipice

— October 25, 2012

Of the 63 companies that could have a commercial fuel cell product by the end of 2015, 80% are small or medium-sized companies that need some form of private equity.

The fuel cell industry is sitting on a precipice.  For our October 16 webinar, “The Fuel Cell Industry in 2012,” we constructed two scenarios for the future of the sector.  In one scenario, shipment levels do not reach a sustainable level within the next 5 years and the industry grinds to a halt.  In another, more positive scenario, the industry reaches takeoff velocity in the next 2 years, with volumes ramping up and prices falling.  Which is more likely? Right now, I believe that unless the fuel cell community re-engages the VC community and starts to act in a more cohesive fashion, it’s facing scenario No. 1: The End.

What does the VC community need to come back into the market?

Realistic business plans. It’s not rocket science, but companies must offer a genuine assessment of the addressable market for their technology and the potential pitfalls along the way.  What investors don’t need is attempts to disparage other companies developing similar products, or exercises in wishful, over-optimistic thinking.  Be clear about what you are selling and to whom.

A good solid management team. Engineers are great at engineering.  Analysts are great at analysis.  And CEOs are great at being CEOs.  But it’s rare in a startup that people can move between these positions and really succeed.  In a fledgling industry, when the next 12 months are critical, you need people who are good at their specific jobs and can leverage their skill sets to the maximum.

A clear understanding of the level of investment needed to take the company into commercialization.  Realism has been sorely lacking in the fuel cell industry, and often, when a company says that it needs $1, it actually needs $10.

If the industry can get these building blocks in place, VC firms are likely to respond.  A recent conference in London, “Investing in Fuel Cells, the Resurgence” was such a success that the word on the street is that it is to become an annual event.  Nearly 10% of the registered attendees for our fuel cell webinar came from the financial industry.  At the upcoming Fuel Cell Seminar there is a special additional half-day workshop, “Investing in Hydrogen and Fuel Cells.”  Spot a trend?

Finally, the industry must become more cohesive.  This is not a call for more trade associations –we have plenty of those already.  What’s needed is a common understanding of costs, solutions, case studies, examples, and how the technology fits with other technologies.  Companies must work together, and stop focusing on negative campaigning, and highlight that fuel cells represent a technology on a spectrum of solutions.  Not the best for every application, but plenty good for many of them.

It really is do or die time in the industry.  It is up to the industry itself to decide which scenario becomes reality.


With Datsun Revival, Nissan Stays the Course

— October 23, 2012

Recent press articles have made much of a Nissan announcement that it plans to bring back the Datsun brand, with a $3,000 vehicle for emerging markets.  Car buyers in Europe and the United States wondered if something similar was coming to their markets.  The answer to that is quite simply no, not possible.  The main reason that such a vehicle will only be available in markets such as India, Russia, and Indonesia is that those countries have fewer rules and regulations about car specifications.  China used to be like that, but has tightened up in recent years, partly to try to slow down the growth in car sales to allow the infrastructure to catch up, especially in cities.

Buyers in mature markets such as Western Europe, North America, and Japan have certain expectations for a new vehicle regarding its comfort and performance, and increasingly they expect premium sound systems and navigation systems as well as power everything.  Automatic gearboxes have been pretty much standard in North America for decades, and as the technology gets more sophisticated they are catching on in Europe and the developed regions in Asia Pacific.  National and regional governments impose stringent safety and emission targets, all of which require enhancements that cost money.  Airbags are a major expense, as are exhaust after-treatments such as catalytic converters and particulate filters.

So if business can be done by going back to making simple, basic transportation why not give it a go? It’s been successful for Tata, in India, with its Nano vehicle.  In many emerging countries, a basic, well-made car is a big step up from ancient two-wheel vehicles or even carts pulled by animals.  As wealth spreads, the demand for simple transport will be strong in these countries that are not ready for hybrid or electric technology.

Some criticism has been leveled at Nissan management for this move, implying that it is a panic reaction to the weak sales of electric vehicles that have been supported by billions of dollars of investment in recent years.  But Nissan’s partner Renault has been in the basic vehicle business for many years, since taking over Romanian manufacturer Dacia in 1999.  And the basic Dacia models are proving popular in today’s sluggish European economies.  The Paris Motor Show highlighted Dacia’s expansion in the U.K. market.

So Nissan is not changing course by bringing back the Datsun brand.  It’s growing its volume products at the low end of newer markets while continuing its push to persuade mature markets that electric vehicles are where the future lies.  (This month Volkswagen announced it will pursue a similar subbrand strategy.) With most of the growth expected to be concentrated in the emerging market countries for the next few years, that seems like a sensible strategy.


On Smart Grids, the Long View is Best

— October 23, 2012

Recently I found myself in a Washington, D.C. hotel room, about to scream.  Which would have been pointless: the fan that had been running five hours nonstop would have prevented me from hearing myself.  The thermostat read “Power is off” and no amount of pushing buttons had improved the situation.

Fortunately, hotel engineering arrived to fix the problem.  The technician looked at the thermostat and said, “I can fix that.  This thermostat is wireless and has lost communication with the unit.  It’s a new system and we’re still getting used to it.”

I can relate to that.  I told him that I was in D.C. for a smart grid conference and we deal with lots of new technology too.

The technician went on:  the thermostat also connects to the motion sensor.  After 10 minutes of no motion in the room, the thermostat shuts off.  Some guests check out in the middle of the night, leave the air-con running full-blast, and housekeeping may not clean the room until 8 hours later.  That’s a lot of wasted energy.

Each room records its HVAC usage, which is downloaded to a laptop to give the hotel a fine-grained record of the usage.  Being a research analyst and therefore addicted to data – any data – that intrigues me.  Imagine using all that HVAC data to fine-tune a rate plan with Pepco.

Yet, this morning none of that was working and it was an ordeal to attempt work with so much white noise.  But so what?  Soon it was quiet again and that 800-room hotel is that much closer to significant energy savings.  Multiply that by all the 800-room hotels in the world and… well, I wish I were the person selling those thermostats.

There are two conclusions to draw from this scenario:  First, although the residential market for smart appliances has been slow to gain traction, the commercial and industrial market appears to be well down the road.  Reducing the energy bill is somewhere between passion and compulsion for facilities managers.

The second conclusion is more important: We should remember that progress is rarely linear.  “Two steps forward and one step back” may be frustrating but it is a net forward movement.  More efficient energy consumption is worth a little bit of irritation today in exchange for a permanent benefit.  Someone reminded me this week that utilities think in terms of decades when planning their projects.  So short-term technical hiccups are expected and tolerated – as long as reliable energy supply is maintained – when that technology can deliver a 20-year benefit.  Smart grids can improve forever the ways that we consume energy.  If new technology disrupts you for a few days or even a few months, do as the utilities do and take the long view.

And, sometimes, within frustration lies opportunity: I had no idea what I was going to blog before that articulate technician came to repair the thermostat.


Renewable Diesel’s Big Surge

— October 23, 2012

Biodiesel production in the United States fell 61% from its 2008 high of 678 million gallons per year (MGY) to 263 MGY by January 2010.  Precipitated by the lapse of a key $1 per gallon producer’s tax credit that had enabled biodiesel producers to recoup the cost of production and offset feedstock costs, this drop forced producers to idle capacity and set off a wave of bankruptcies across the country.  Amidst the doom and gloom, the industry was largely written off as a peripheral player in EPA’s rejiggered Renewable Fuel Standard (RFS2).

Today, with the producer’s tax credit reinstated, biodiesel has become a lone bright spot under RFS2 and an early success among advanced biofuels.  Production capacity is expected to expand over the next few years. U.S. biodiesel production currently exceeds 1 billion gallons per year (BGY), thanks in part to expanding production of renewable diesel.  Assuming adequate feedstock access, Pike Research’s forecasts suggest that renewable diesel production could continue to surge in the United States over the near-term.

A Crude Replacement

To understand renewable diesel’s surge, it is important to note the difference between conventional biodiesel and renewable diesel.  Solazyme explains:

The molecules in biodiesel are primarily FAMEs (fatty acid methyl ester), usually obtained by transesterification. Renewable diesel is hydrocracked and refined, and is nearly molecularly indistinguishable from standard diesel that comes out of the pump.

A superior product to conventional biodiesel, renewable diesel is fully fungible with existing diesel infrastructure.  This means that it can be used in place of crude oil-based diesel without any corrosion of pipelines or loss of performance in existing engines.  This makes renewable diesel particularly attractive.  For investors and project developers, it means end-market access while sidestepping many of the regulations and approvals that have confined conventional biodiesel to “cottage” status in the United States.

Meanwhile, biodiesel’s past troubles demonstrate that subsidies matter in commodity-dependent industries.  In the high-volume fuel business, scale and low-cost production drive success.  Consumers have proven unwilling to pay premiums for “green” or “renewable” fuels, forcing producers to compete with petroleum-based diesel on price.  Biodiesel production collapsed in 2008 and 2009 – not because of any inherent technological shortcomings, but because it was crippled by wildly fluctuating feedstock costs and a simultaneous loss of subsidy support.

Largely dependent on soy and canola as feedstocks, North American producers manage thin profit margins while competing for these soft commodities on the open market.  Dramatic price increases are the industry’s Achilles heel.  Since tax credits help offset price surges, a lack of financial support can leave biodiesel producers with excess supply on the market and no way to recoup production costs.

This partly explains why fats, oils, and greases (FOGs) have been such a hot feedstock in recent years.  A waste byproduct of restaurants and animal processing, FOGs offer producers a relatively price-stable alternative insulated from the demand pressures of vegetable oils and other food-based feedstocks.  Although collecting used cooking grease from restaurants has proven logistically difficult at scale, chicken fat, pork lard, and beef tallow from the food processing industry have driven a mini-renaissance in renewable diesel production.  Dynamic Fuels, a joint venture between food processing giant, Tyson Foods, and Syntroleum, has demonstrated the efficacy of this approach at its 75 MGY capacity Geismar Plant in Louisiana.

Renewable Diesel Comes Cheap

Superior performance and FOGs are only part of renewable diesel’s recent success.  Renewable diesel has also led among peer advanced biofuel production pathways with competitive capital costs.  Based on public data, renewable diesel facilities are currently being built at between $2 and $4 per gallon, compared to more than $10 per gallon for many cellulosic and thermochemical-based pathways.  With petroleum refineries being sold for less than $0.10 per gallon, lower capital expense matters.

Renewable diesel facilities also boast larger average capacities, taking better advantage of economies of scale.  Neste Oil led the way globally with 200-plus MGY facilities in Rotterdam and Singapore.  Emerald Biofuels and Diamond Green Diesel are expected to join Dynamic Fuels with 85 MGY and 136 MGY capacity plants under construction, forming a renewable diesel corridor along the Mississippi River in Louisiana.

Although Pike Research’s report, Clean Diesel Vehicles, forecasts that clean diesel vehicles will capture a slightly higher percentage of new light and medium duty U.S. vehicle sales than hybrids, even with sustained growth in renewable diesel production, volumes are likely to still be a drop in the overall fuel bucket.  With diesel confined to niche vehicle fuel status, renewable diesel producers’ future is likely to be in the heavy duty vehicle and aviation biofuel markets.  As conversion technologies developed by Honeywell’s UOP and Eni have demonstrated, hydrotreatment of traditional biodiesel feedstocks like fat can produce a range of distillates like renewable diesel and aviation biofuels at competitive costs.  With costs and performance competitive for these applications, feedstock access will dictate how long the industry can replicate its early success.


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