I love new technology. As someone who was both science- and business-trained, there is nothing more exciting to me than seeing new technology entering the market, finding its initial niche and driving costs down, then flowing into new applications. When it happens, it is thrilling to watch, and can make investors a lot of money.
But I have also been watching the fuel cell market since 2000, as a sell-side analyst, and it has been an industry that has promised much and delivered very little. Examined objectively, this is still a space requiring large government subsidies to gain any traction at all. The promise continues to be that with a little more work, costs can be driven down to the point where the economic chasm can be crossed, and the companies in the space will start to generate profits. Let me explain why this isn't likely, specifically in the case of Plug Power (PLUG).
Hydrogen-fueled proton exchange membrane (or PEM) fuel cells are just one type, but they are ones that captured the imagination of investors in the first few years of this century. The potential is seemingly huge, with easy refueling, high efficiency, pollution-free operation and an inexhaustible supply of hydrogen fuel. However, when I covered the space, my recommendations on the sector could probably be summarized by "sell", because of some uncomfortable facts, namely that fuel cells are expensive, hydrogen fuel for those cells is also expensive and hydrogen is hard to store and takes up a lot of room.
Still, it is possible for an expensive technology to find its niche, and begin a meteoric sales rise. Witness what happened to LCD monitors over time, in spite of them being initially smaller and more expensive than comparable CRT monitors. As the cost of LCD declined with scale, sales exploded. Perhaps the same thing can happen with fuel cells.
Plug Power suggests that the niche market leading to explosive sales growth is the materials handling market, but an objective analysis would suggest this is not the case.
The International Journal of Hydrogen Energy published an article by Renquist, Dickman and Bradley (all from the Colorado State University) in late 2012. Entitled "Economic comparison of fuel cell powered forklifts to battery powered forklifts", they brought some nuances to the debate that even Dr. Hugh Akston, in his recent articles regarding PLUG, did not raise. Specifically, this analysis considers a number of competing forklift power supplies:
Conventional battery packs, with standard recharging
Fast-charge battery packs with a 15 kW charger
Fast-charge battery packs with a 30 kW charger
Fast chargers are used to provide top-up charging to the battery packs without removing them from the forklift, during the two 15 minute coffee breaks and one 30 minute lunch break allowed in most warehouses. By adding energy during the work day, the operating time of the battery pack is extended, albeit at the cost of reducing battery life to 3 years and necessitating a more expensive battery pack ($4,500, in this case). In the past, most of the potential for replacing battery-powered forklifts with those using fuel cells compared the option of using conventional battery packs to using fuel cells. When the required daily workload for a given forklift increases, it seems feasible that fuel cells will look better and better by comparison to battery swapping. This, however, is the first study I've seen that looks at fast charging as a competitor to fuel cell use.
Technical data on the various options came from manufacturers like Raymond, Plug Power and Toyota Materials Handling, and was vetted by interviews with users of all types of forklifts. This includes data on costs of forklifts (for example, $35,000 per fuel cell forklift, with a replacement fuel cell required in 5 years at a cost of $11,000, while a conventional battery powered forklift costs $27,000 and requires a new battery pack in 5 years at a cost of $4,000). The modeled fleets of forklifts were each 50 units. As this was a "net present cost" study, discount rate used was 8%, inflation was 1.9%, and borrowing rate of the company when buying capital equipment was 6%. Electricity had a cost of $0.09/kWh an additional demand charge of $6.89/kW, which makes using fast chargers more expensive. All energy consumption was scaled to a conventional forklift and complete use on one shift of its single battery pack; if conventional forklifts needed to be used for more than one shift a day, then additional battery packs, a battery room, staff and equipment were included in the model. The hydrogen used for equivalence to a single-shift conventional forklift was 1.75 kg, at a cost of $16.25/kg delivered to the warehouse and placed into an on-site gaseous storage facility.
Without making a long story even longer, the results were that fuel cell-equipped forklifts were the most expensive option across the board, for any amount of work ranging from using only 1/10 of the energy in a single battery-powered forklift per day, to requiring use of the forklift continuously, on all three shifts. If less than the work from one conventional battery pack is required, then conventional batteries and charging is the best option. From roughly one shift through two shifts, a 15 kW fast charger option becomes economically optimal.
Once continuous use is required, a 30 kW fast charger becomes the option of choice. However, to put these results in perspective, the three battery-powered options are reasonably close in present-day costs, at around $50,000 per forklift at one shift of use in a 50 forklift fleet, versus perhaps $115,000 per fuel cell-equipped forklift required for the same amount of work in the same size fleet. The discrepancy becomes worse as workload increases, and at continuous use the cost for the battery-equipped fleet averages about $100,000 per forklift, but is estimated to be $230,000 per fuel cell-equipped forklift.
No subsidies of any type were included in this analysis. If there are subsidies available for the fuel cell-equipped forklifts, this may make the forklift option look better, but one would assume that subsidies will eventually disappear, as volumes increased.
However, the biggest problem facing PLUG, to my way of thinking, is what drives those higher costs for fuel cell-powered forklifts. I have recreated the models from the Renquist, Dickman and Bradley paper, and determined that, for forklifts used on three shifts a day, roughly 7% of costs come from the purchase and maintenance of hydrogen storage equipment and the forklifts themselves, and 24% of costs come from the purchase of the forklifts and replacing the fuel cells at required intervals. That leaves 69% of the costs that come from hydrogen fuel. Out of the roughly $230,000 net present cost for each fuel cell-powered forklift over its project life, only $16,000 of cost comes from hydrogen storage equipment, and $54,000 from the forklifts themselves. Even if the cost of the fuel cells being built by PLUG were magically reduced to zero, the $130,000 cost discrepancy between using a fast charger option and fuel cells can't be bridged. The only way to reduce the cost of using fuel cell-powered forklifts is to drop the price of hydrogen.
Dropping the price of hydrogen fuel is in the hands of companies like Praxair, and they have no incentive to cut into their profits to help sales at PLUG. Yes, I recognize there is an argument that lower hydrogen prices might encourage more forklift sales, and perhaps improve the fuel supplier's overall profitability, but this assumes that both sufficient margin and capacity exist to allow this price drop to happen. In this case, I would estimate that the cost of hydrogen needs to drop to about $1.50 per kg, from the assumed level of $16.25 per kg in the paper, and that magnitude of cost reduction very likely isn't allowed simply due to the cost of natural gas feedstock used in steam reformation to make the hydrogen.
With hydrogen cost being the largest contributing factor to limiting the adoption of fuel cell-powered material handling equipment, the problem isn't one that PLUG can solve. Yes, there will be many users that will pay for a trial, especially if a government provides help on the costs as with the latest FedEx announcement. There may even be a few warehouse locations where the workload is high enough, electricity is expensive enough and the loss of space taken up for fast charging forklifts is unacceptable that buying forklifts containing fuel cells is justified. But it would be my guess that this is not going to drive the sort of volume adoption that will allow costs for fuel cells and availability of hydrogen to reach the stage required for PLUG investors to really profit.
PLUG has proved to be a very good trade in the last few months, with excitement driving the stock up. But it also appears that there is no fundamental reason to believe that sales growth will be strong. What is required to provide warehouse operators with the incentive to buy forklifts containing fuel cells is lower costs than using forklifts containing batteries. Unfortunately, the ability to provide those lower costs is outside of PLUG's control, because this isn't solved by improving operating life or lowering the cost of the fuel cell, it requires cheaper hydrogen fuel, which is not something that PLUG claims to solve. Investing in companies that need others to solve their problems for them is not sound investing. Take a profit and get out.
it wouldn't change anything - prices have not come down meaningfully for hydrogen - so the study results remain perfectly valid and the investment thesis for Plug remains flawed just as it ever was.
There's no potential short or intermediate term as the cost of hydrogen prohibits fuel cell technology to become economically feasible without large subsidies or outside of very narrow niches. As long as hydrogen prices don't come down as much as 80% from today's levels fuel cell technology will remain a marginalia in vehicle powering.
They should consider buying fast charging technology to optimize their cost structure. Same for Wal-Mart.
yes - that's why they use the technology only in exceptional cases and rely on fast charging technology instead.
They could have bought the whole company at that time for some more millions but instead decided to just keep them afloat because of their fledgling Hypulsion joint venture which aims to fathom the European fork lift market (and hasn't made any progress at all so far). This is a very minor investment for a company the size of Air Liquide and from their decision to just hold Andy's head over water instead of outright buying the company on the cheap at that time you can easily see which level of importance they place on the technology.
It is like Pfizer investing a few million dollars into any tiny Biotech company just to stay tuned.
wow - a huge surprise - the underwriter of the offering iniates the shares on a positive note - a rare event which should help to take out the $5 price target during today's session...
actually that was "Capital Ventures International" an arm of Susquehanna Bank. They bought the shares for an immediate gain of at least 20% or $6 mln (most likely much more as the stock went to $4 on that day) and might have very well hedged this position by shorting an equal amount of shares in preparation of the upcoming offering. They would still have the warrants to participate in any further upmove.
if they would own shares the price target would be $20 - this is just the usual deal - you pick an underwriter, the underwriter earns a lot of fees and you earn a good coverage initiation.
the market does in fact not embrace the technology - there are some large companies who use the devices for variuos reasons in a tiny fraction of their overall facilities - most of these companies have repeatedly placed small repeat orders with Plug Power for several years now.
wouldn't chase the stock here
nonsense - the violence of the movement speaks for itself - there will be bad news and we will learn about them pretty soon I guess
don't make me laugh - the stock was half that price two months ago and there they did not buy back a single share
lol - 30% down on huge volume from the start - perhaps you want to show me another example like this within the last few months ?