The Hydrogen Economy: Myth or Possibility?

The Hydrogen Economy:
Myth or Possibility?

By Kenneth Reid
Spear's Security Industry Analyst

With homeland security tantamount to energy security, policy makers in Washington are gradually embracing the notion that hydrogen, termed the "Freedom Fuel" by President Bush in his State of the Union address, is destined to become the ultimate energy alternative. The hydrogen economy promises to eliminate all the problems that the fossil fuel economy creates, including pollution and global warming. More importantly, it promises energy independence and even the possibility of distributed production, where individual users become the producers, as well. While these are reaching and hopeful notions, the obstacles to creating the Hydrogen Economy are far from trivial.
Even so, the Congress and the US military believe the issue is worth study and exploration. The Senate Energy and Natural Resources Committee approved an energy bill recently and the full Senate is scheduled to review the legislation this month. The Senate bill authorizes $860 million from fiscal 2006-2010 for the promotion of fuel-cell based technology. A tax provision that would subsidize 15% of the costs for early adopters is likely to be included in the bill.

Why Hydrogen?

      Hydrogen is everywhere. It happens to be the most abundant element in the universe and in its gaseous form it is the lightest gas, since it is made up of two very simple atoms. It is colorless, odorless, tasteless and nontoxic at room temperature and pressure. While hydrogen can be burned and contains more useful energy per pound than any other fuel, the hydrogen economy will not run primarily on hydrogen combustion because the gas is difficult to compress and to store compared to natural gas. Instead, fuel cells will be employed to produce electricity directly from a chemical reaction powered by hydrogen. When hydrogen and oxygen are combined in the presence of a catalyst (typically platinum) they produce electricity. As such, the fuel cell system has similarities to an internal combustion engine, except that it operates very efficiently at low temperatures and with minimal moving parts. In the process of electrochemical conversion to create electricity, the only byproducts of the fuel cell are water and heat.
      Unfortunately, it takes energy to produce hydrogen in a useable form, which means that moving to a pure hydrogen economy will be a complicated undertaking. Hydrogen is the cleanest fuel available, but it is typically produced by an electric process (water electrolysis), which requires conventional power sources, whether they be hydro dams, coal- or gas-fired generators or nukes. To significantly reduce our dependence on fossil fuels, our electric generating plants will have to switch to renewable sources of energy, and the marketplace will have to agree on a standard for producing, storing, transporting and utilizing hydrogen. That will take some time.
      Meanwhile, in the United States more than 2/3 of our power is generated by fossil fuels, with nuclear contributing around 20%, hydroelectric 7%, and solar, wind, geothermal and other sources collectively generating only 5%. One thing that could really spur the development of hydrogen alternatives, however, is reaching Peak Oil much sooner than expected. How will we know that is happening? The price of oil will move above $100/barrel.

Baby Steps

Despite the long-term time horizon for this paradigm shift, the first halting steps toward the Hydrogen Economy are already being taken in the form of hybrid fuel-cell vehicles that either burn hydrogen directly or generate electricity from hydrogen derived from methanol, gasoline or sodium borohydride. These engines are about twice as efficient as internal combustion engines and they output significantly less pollution. Every automaker is looking at this technology and the military is already contracting with General Motors and several fuel cell manufacturers and systems integrators, including Hydrogenics (HYGS) and Quantum Fuel (QTWW), to develop hybrid fuel cell-powered vehicles, as well as portable power applications. Fuel cell systems are both clean and quiet, and therefore can provide a military advantage. Moreover, the U.S. army has the largest fleet of vehicles in the world and because a gallon of gasoline can cost up to $400 delivered to the battlefield, energy alternatives are in demand. GM, which makes about half the military's vehicles, expects the armed forces to fund some of the costs of further hybrid development.
In terms of remote power applications, there are both commercial and military uses for fuel-cell technology. Hydrogenics has developed a proprietary proton exchange membrane (PEM) fuel cell and electrolyzer combination that is designed specifically to extend the silent watch capabilities of the U.S. Army's Stryker Light Armored Vehicle (LAV). Meanwhile, Gillette, Motorola, Dow and Panasonic are among the many companies looking to power portable electronics with fuel cells. Motorola expects its fuel cells to run about 10 times longer than standard batteries before needing refilling, which can be accomplished by inserting a small cartri dge.
Dow is working with Millennium Cell (MCEL) to develop a variety of long-lasting portable power supplies. Why? In a study by the US Fuel Cell Council (not necessarily an unbiased study), the Council estimates a $2 billion market for handheld fuel cells by 2011, with 19 million fuel cell units expected to be shipped in 2006, increasing to 105 million units in 2011. In other words, this technology may be adopted sooner than we think.

Caveat

The hydrogen fuel cell companies are extremely speculative investments at this time. Do not invest heavily in the stocks mentioned above. We are taking the time to profile them to update you on an area of investor interest that you will continue to hear a great deal about in the media. We believe fuel cell stocks are best bought low and then sold into the strength provided by an major media buzz, and we recommend you set stops and respect them.
Editor's Note: Kenneth Reid is editor of Spear's Security Industry Analyst, 45 Wintonbury Ave., Bloomfield, CT 06002. SSIA provides investment information on security growth stocks. The A-List returned 344% for the period January 1, 2004 to June 17th, 2005. For more information on this excellent service call 1-800-491-7119 or visit the web site at www.spearreport.com/ssia.