WHITE PAPER The Fuel Cell and Hydrogen Industries : 10 ...assets.fiercemarkets.net/.../reports/fuelcelltrends.pdfThe Fuel Cell and Hydrogen Industries:10 Trends to Watch back on the

Lisa Jerram Senior Research Analyst Anissa Dehamna Senior Research Analyst Mackinnon Lawrence Research Director

The Fuel Cell and Hydrogen Industries: 10 Trends to Watch Published 2Q 2014

WHITE PAPER

The Fuel Cell and Hydrogen Industries:10 Trends to Watch

Section 1 EXECUTIVE SUMMARY

The fuel cell industry is being cursed – or blessed, depending on one’s position – with interesting times. Over the past 18 months, there has been a real divergence in the fortunes of various fuel cell sectors. The stationary sector has seen 2 years of strong growth, with a boom in prime power and residential combined heat and power (resCHP) fuel cell system shipments. Some other sectors, such as portable, have continued to struggle. The fuel cell vehicle (FCV) market is seeing a revival of media attention as several automakers prepare to launch commercial FCVs in 2015. This is spurring a flurry of investment in hydrogen infrastructure, with stakeholders under pressure to build stations quickly. Hydrogen for power-to-gas applications has also seen a surge in interest as countries look to manage and optimize renewable resources.

Meanwhile, a great deal of churn has occurred among fuel cell companies, with several declaring bankruptcy or being acquired. In some cases, this has led to a major shift in a company’s strategy, with some revamping their technology offerings and preparing new product launches. This also means these companies are not shipping commercial units. These changes create the inevitable fluctuations in fuel cell product shipments from year to year.

This white paper looks at some of the major trends that Navigant Research sees happening over the next 12 months, potentially longer. The trends were generated from Navigant Research’s analysis of the fuel cell and hydrogen industries as well as research into the sectors in which fuel cells compete, including combined heat and power (CHP) generation, energy storage, and electric transportation.

The 10 key trends are:

» Fuel cells back on the radar of the skeptical U.S. media

» Stationary sector continues to lead the fuel cell industry

» Investors cautiously coming off the fence on fuel cells

» FCVs continue to be compared to plug-in electric vehicles (PEVs)

» Hydrogen infrastructure stakeholders must prove they can build stations

» CHP is on path to surpass prime power stationary fuel cells

» Fuel cells face stiff competition from engine- or turbine-based CHP

» Booming North American microgrid market offers opportunity for fuel cells

» Power-to-gas concept will be proven in Europe

» Portable fuel cells still struggling to hit the right value proposition

©2014 Navigant Consulting, Inc. Notice: No material in this publication may be reproduced, stored in a retrieval system, or transmitted by any means, in whole or in part, without the express written permission of Navigant Consulting, Inc.

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Section 2 10 KEY TRENDS IN THE FUEL CELL AND HYDROGEN INDUSTRIES

2.1 Fuel Cells Back on the Radar of the Skeptical U.S. Media

Fuel cells have been largely off the radar of the U.S. media since 2009, the year the Obama Administration unveiled its first U.S. Department of Energy (DOE) budget that proposed cutting fuel cell funding and shifted to full support of the coming plug-in electric vehicle (PEV) market. The message received by many in the U.S. media who do not closely follow the fuel cell industry was that fuel cells were dead. This sense persisted, even though the fuel cell industry had a compound annual growth rate (CAGR) of 29% from 2009 to 2012 (even with a drop in 2011), based on Navigant Research’s analysis in its 2013 Fuel Cells Annual Report and subsequent industry tracking.

Chart 2.1 Fuel Cell Shipped Capacity by Application, World Markets: 2009-2012

(Source: Navigant Research)

Some of this is due to lack of awareness of what is happening outside of the United States and some of it is due to conflating the state of fuel cell vehicles (FCVs) with all other fuel cell applications. Industry growth (seen in Chart 2.1) has largely been in the stationary sector and much of that has been outside of the United States. It is also due to Daimler’s announcement that it would delay its commercial FCV introduction from 2015 to 2017. This reinforced the perception of an industry always on the verge of commercialization.

With Toyota making a big public relations push for its new FCV set for release in 2015, and Hyundai making the rounds in the United States with its new fuel cell Tucson, fuel cells are

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back on the radar of the U.S. media. At this point, the U.S. media has a firmly entrenched skepticism about fuel cells that will continue to drive the tone of its coverage. While some skepticism is warranted, it is also at times disconnected from the reality of what a particular fuel cell market is doing. The result is that media coverage will continue to create confusion among the public about the viability of fuel cells in any application in any part of the world.

2.2 Stationary Sector Continues to Lead the Fuel Cell Industry

As shown in Chart 2.1, the stationary sector has been the leading sector for fuel cell capacity shipments. This trend continued in 2013, with stationary capacity increasing around 22% over capacity shipped in 2012. The stationary fuel cell sector also represented over 70% of global fuel cell revenue at the end of 2013. In 2014, there are already large new orders on the books, and Navigant Research has projected a 42% CAGR from 2014 to 2022 (according to Stationary Fuel Cells, published 1Q 2014).

There is continued demand, even while the stationary sector continues to experience consolidation and some company fallout. After buying UTC Power’s phosphoric acid fuel cell (PAFC) technology in 2012 and having considerable success in orders for the technology, ClearEdge declared bankruptcy in May 2014; the company is reportedly more than $100 million in debt. However, orders are still coming in for other prime power companies in the United States. The U.S. market will also likely see a flurry of orders come in to take advantage of the current fuel cell federal tax credit, which is set to expire in 2017. Although this credit is currently more of a driver for applications such as forklifts, it can help drive the stationary market over the next 2.5 years. Japan will continue its strong growth in residential fuel cell units, as government policy is driving a massive shift in how the country produces its energy, and South Korea continues to deploy utility-scale fuel cell power plants.

2.3 Investors Cautiously Coming Off the Fence on Fuel Cells

At the same time as fuel cells are back on the U.S. media’s radar, the technology is attracting renewed attention from investors. The investment community has shied away from the fuel cell industry for a number of years. This is partly due the continued delays in commercialization of certain fuel cell products – especially cars and portable fuel cells. It is also due to the lack of fuel cell companies turning a profit. Investors are making tentative steps back into this market, with a particular eye on companies in the stationary sector as well as companies like Plug Power, which has primarily targeted forklifts and whose stock has been heavily traded over the past year.

Investors will still look at the fuel cell industry cautiously, but will have a new openness to the potential of specific end-use markets that offer promising returns. They will not, however, be making any major moves without very careful and lengthy deliberations. Fuel cell companies would be wise to temper overly optimistic growth projections because it will not take much to sour investors on fuel cells again. Navigant Research also expects that companies involved in hydrogen infrastructure will attract investor interest, especially since these companies have the ability to expand the market for fuel cells in forklifts, passenger cars, and power-to-gas applications.


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2.4 FCVs Continue to be Compared to PEVs

Hyundai is already showing its latest FCV, the company’s first made available for lease and set to be available in all global markets. Toyota has been showing its FCV concept in advance of the company’s planned 2015 FCV commercial launch, and Honda has said it is coming out with a new FCV in 2015 as well – although the company has kept its plans a bit closer to the vest than Toyota or Hyundai. As noted, this activity is generating a lot of media scrutiny and general public interest. Navigant Research expects that, in the minds of the media and the public, FCVs will be perpetually tied to PEVs.

Given that FCVs are coming into a market where commercial PEVs have had a 4-year head start, automakers can expect the question in the minds of the media and the public to be, how does this stack up to a PEV and what does an FCV offer that a PEV does not? Tesla, in particular, has become the model PEV in the minds of many; FCVs will struggle to compare to Tesla simply because it is a premium model and the FCVs being introduced are not from automakers that mainly operate in the premium segments. The good news is that FCVs are being leased at a rate lower than the Tesla Model S. The bad news is that they currently do not have the cachet that a Tesla Model S does. The next year will, however, show how serious automakers are about promoting fuel cell technology. If automakers are serious about moving product and not just using FCVs as a public relations tool or a Zero Emission Vehicle (ZEV) mandate compliance car, they will have to work closely with the stakeholders building out infrastructure and develop innovative marketing strategies.

Navigant Research projects that FCVs will still see relatively low uptake rates as the infrastructure is still being built, with global penetration in the very low thousands over the first few years. This will be a measurable step up from limited demonstration runs but still a slow growing market penetration rate.

2.5 Hydrogen Infrastructure Stakeholders Must Prove They Can Build Stations

The next 18 months are do or die for infrastructure buildout for FCVs. With FCVs coming to the United States, Europe, Japan, and South Korea, governments are now investing heavily in hydrogen stations. The pressure is going to be on the various stakeholders to show that they can build stations cheaper than in the past and much, much faster. This will have to be a concerted and coordinated effort from energy or gas companies, hydrogen companies, companies providing the various components (compressors, electrolyzers, and dispensers), local authorities, and funding agencies.

Fortunately, there are some good early signs. California’s experience to date has been that hydrogen stations require a long lead time, as much as 24 months and sometimes longer. In September 2013, California committed to invest up to $20 million per year to support construction of 100 stations. In May, the California Energy Commission announced it had already selected recipients of up to $46.6 million in awards to build 28 stations. Japan’s plan to build 100 stations has had the active support of major oil and gas companies. These next 18 months will be key to showing whether this FCV commercial launch will take off.


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2.6 CHP Is on Path to Surpass Prime Power Stationary Fuel Cells

In the nascent fuel cell market, combined heat and power (CHP) configurations have seen the most unit deployments while electric-only prime power applications have more capacity deployed. These competing trends reflect a debate about which of these markets remains the most attractive for fuel cells.

This debate is part and parcel to a broader tradeoff between the economic attractiveness of combined or separate production of heat and power. Although onsite needs and site-specific factors will typically drive a decision one way or the other – with return on investment (ROI) considerations turning on cost of electricity, the spark spread between the price of natural gas and electricity, fuel access, run time, and heat load requirements, among other factors – continuous baseload operation and the utilization of the thermal energy currently provides an attractive ROI for stationary fuel cells.

That said, subsidies remain a key market driver. Navigant Research forecasts that subsidies will continue to drive much of this market for the near term. However, over the next decade, the shift in cost out in residential units, combined with increased interest in non-residential CHP units, will lead to a tipping point where CHP fuel cells will become the leading stationary fuel cell market over electric-only prime power systems. In non-residential CHP markets like retail, the thermal output from fuel cell units may prove valuable in combined cooling, heating, and power (CCHP) applications using a variety of new technologies, in addition to mature condensers. Electric-only applications for stationary fuel cells will continue to show positive growth, however, thanks to growing interest in grid stabilization and distributed generation.

2.7 Fuel Cells Face Stiff Competition from Engine- or Turbine-Based CHP

As noted, fuel cells hold significant potential in the diverse CHP market. Navigant Research forecasts that 7 GW of cumulative fuel cell CHP capacity will be installed between 2013 and 2022. Fuel cells will still face stiff competition from a broad suite of both incumbent and emerging commercial prime mover technologies across the global CHP landscape. Reciprocating internal combustion engine (ICE) systems, for example, represent the most established technology globally for the smaller range of CHP installations. These technologies are generally low cost and benefit from an extensive dealer network providing ongoing maintenance and service support. Alongside fuel cells, Stirling engine systems and microturbines are among a class of technologies still gaining commercial traction, although fuel cells have generally lagged behind these options across the broader CHP landscape.

Cost has been the primary obstacle to broader fuel cell adoption. While cost curve analysis shows a steady decline in fuel cell unit costs relative to other prime mover technologies in the CHP market – potentially reaching $1,000 to 1,500 per kW at a high volume of manufacturing for an all-in CHP unit – the most commercially mature fuel cell systems retail for around $30,000 per kW in Japan. Meanwhile, a recent Imperial College London study shows that a cost far below $4,100 per kW is not realistic in the near term, a figure the study correlates to 1 million installations. By contrast, ICE-based CHP systems less than 500 kW in size cost $800 per kW at the low end and $3,000 per kW at the high end. As demonstrated in Japan, for the


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near future, fuel cell CHP uptake remains highly dependent on subsidies, but Navigant Research expects that high manufacturing throughput can be achieved, resulting in residential CHP (resCHP) units reaching an acceptable price point for the mass market in Japan and Europe.

2.8 Booming North American Microgrid Market Offers Opportunity for Fuel Cells

Currently there are over 4,000 MW of microgrids deployed globally, with 47% of the market in North America. The campus/institutional market is the breakout market for microgrids within North America and is expected to take 63% of the market share by 2020 with 1.3 GW of capacity.

In the near term, Navigant Research expects the North American market to grow to 578.6 MW in 2015 – or $2.7 billion, which will grow to a $6.1 billion market by 2018. The success of microgrids in North America (half of the global market) represents an opportunity for all types of prime movers, including fuel cells.

There are over 68 MW of fuel cells deployed in North American microgrids, across 33 projects, to date. Fuel cells in this market have the advantage of low emissions, quiet operation, and the highest electrical efficiency out of all CHP prime movers. In the event that thermal energy is also a high value output, fuel cells can offer both high electric and thermal output. As natural gas prices rebound in the next 3 to 5 years, electrical efficiency will become more important to customers installing microgrids. As stationary fuel cells continue to come down in cost, Navigant Research expects fuel cells to steadily take market share.

Chart 2.2 Microgrid Capacity and Revenue, North America: 2014-2018


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2.9 Power-to-Gas Concept Will Be Proven in Europe

Large hydrogen electrolyzers are ideal for renewables integration. They are able to handle fluctuations in energy input from intermittent generation resources, and their capacity makes them ideal for balancing wind resources. Europe is trialing the power-to-gas concept with at least 9.17 MW installed across eight projects. Europe is the world leader in demonstrating the power-to-gas concept with two platforms in the North Sea and Mediterranean regions.

A key driver for Europe’s interest in the power-to-gas concept is the region’s intermittent generation resources. Wind is now supplying so much baseload power in some European countries – notably Germany – that it is no longer profitable to operate natural gas power plants. Moreover, the wind market in Europe is set to continue to grow over the next 5 years; the three largest markets for wind in Europe will be Germany, France, and the United Kingdom (composing 46% of the total European market in the 2014-2018 timeframe).

To date, Europe is the only region testing the power-to-gas concept at scale. Navigant Research anticipates that in the next 18 months European demonstrations will have proven the power-to-gas concept and that the market will move past technology validation into early commercialization.


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Navigant Research forecasts that the market for power-to-gas – forecast in hydrogen electrolyzer capacity (MW) installed– is likely to grow to as much as 665 MW in 2018, or an $850 million market. This base scenario estimate amounts to 4% of the wind forecast to be installed in Europe that same year, with a total installed capacity equivalent to 1.9% of the installed capacity of wind from 2014 to 2018. In the near term, Navigant Research estimates a $100 million market for power-to-gas in Europe in 2015. Although the majority of the market’s revenue will go to electrolyzer firms, inverter, power electronics, and other balance of plant manufacturers will also benefit.

Chart 2.3 Annual Capacity of Wind Installed, Select European Countries, and Power-to-Gas Capacity by Scenario, Europe: 2014-2018


2.10 Portable Fuel Cells Still Struggling to Hit the Right Value Proposition

This trend is a continuation from 2013 and has yet to show signs of abating. The portable fuel cell sector, which once showed real promise and had the attention of major companies like Toshiba, has not been able to find the right value proposition to break out. The sector has been plagued by companies continuing to push off commercialization dates. This year’s Consumer Electronics Show in Las Vegas displayed a portable fuel cell charger now being sold by Brookstone. However, fuel cell chargers still do not have the right price point or the killer app capability that will attract buyers given the competition in this sector. Navigant Research does not foresee the next 12 months being a breakout period for this sector.

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Section 3 ACRONYM AND ABBREVIATION LIST

Combined Cooling, Heating, and Power ................................................................................................. CCHP

Combined Heat and Power ...................................................................................................................... CHP

Compound Annual Growth Rate ............................................................................................................. CAGR

Department of Energy (United States) ...................................................................................................... DOE

European Union ........................................................................................................................................ EU

Fuel Cell Vehicle ..................................................................................................................................... FCV

Gigawatt .................................................................................................................................................. GW

Internal Combustion Engine ...................................................................................................................... ICE

Kilowatt .................................................................................................................................................... kW

Megawatt ................................................................................................................................................. MW

Plug-in Electric Vehicle ........................................................................................................................... PEV

Phosphoric Acid Fuel Cell ..................................................................................................................... PAFC

Return on Investment ............................................................................................................................... ROI

Residential Combined Heat and Power .............................................................................................. ResCHP

United States .......................................................................................................................................... U.S.

Watt ........................................................................................................................................................... W

Zero Emission Vehicle .............................................................................................................................. ZEV


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Section 4 TABLE OF CONTENTS

Section 1 ........................................................................................................................................................... 1

Executive Summary .......................................................................................................................................... 1

Section 2 ........................................................................................................................................................... 2

10 Key Trends in the Fuel Cell and Hydrogen Industries .................................................................................. 2

2.1 Fuel Cells Back on the Radar of the Skeptical U.S. Media .................................................................... 2

2.2 Stationary Sector Continues to Lead the Fuel Cell Industry ................................................................... 3

2.3 Investors Cautiously Coming Off the Fence on Fuel Cells ..................................................................... 3

2.4 FCVs Continue to be Compared to PEVs ............................................................................................. 4

2.5 Hydrogen Infrastructure Stakeholders Must Prove They Can Build Stations ........................................... 4

2.6 CHP Is on Path to Surpass Prime Power Stationary Fuel Cells ............................................................. 5

2.7 Fuel Cells Face Stiff Competition from Engine- or Turbine-Based CHP .................................................. 5

2.8 Booming North American Microgrid Market Offers Opportunity for Fuel Cells ......................................... 6

2.9 Power-to-Gas Concept Will Be Proven in Europe ................................................................................. 7

2.10 Portable Fuel Cells Still Struggling to Hit the Right Value Proposition .................................................... 8

Section 3 ........................................................................................................................................................... 9

Acronym and Abbreviation List ........................................................................................................................ 9

Section 4 .......................................................................................................................................................... 10

Table of Contents ............................................................................................................................................. 10

Section 5 .......................................................................................................................................................... 11

Table of Charts and Figures ............................................................................................................................. 11

Section 6 .......................................................................................................................................................... 12

Scope of Study ................................................................................................................................................. 12

Sources and Methodology ............................................................................................................................... 12

Notes ................................................................................................................................................................ 13


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Section 5 TABLE OF CHARTS AND FIGURES

Chart 2.1 Fuel Cell Shipped Capacity by Application, World Markets: 2009-2012 ............................................ 2

Chart 2.2 Microgrid Capacity and Revenue, North America: 2014-2018 .......................................................... 6

Chart 2.3 Annual Capacity of Wind Installed, Select European Countries, and Power-to-Gas Capacity by

Scenario, Europe: 2014-2018 ........................................................................................................ 8


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Section 6 SCOPE OF STUDY

Navigant Research has prepared this white paper to provide interested stakeholders at all levels of the fuel cell and hydrogen industries, including developers, analysts, investors, and policymakers, with an overview of 10 key trends that will affect the fuel cell and hydrogen industries over the next 12 months and beyond. Its major objective is to provide an understanding of some of the key market developments and movements that are likely to happen in the near future. Note that the report does not aim to offer an exhaustive assessment of the trends and their impacts, as Navigant Research provides comprehensive analyses in more in-depth reports.

SOURCES AND METHODOLOGY

Navigant Research’s industry analysts utilize a variety of research sources in preparing Research Reports. The key component of Navigant Research’s analysis is primary research gained from phone and in-person interviews with industry leaders including executives, engineers, and marketing professionals. Analysts are diligent in ensuring that they speak with representatives from every part of the value chain, including but not limited to technology companies, utilities and other service providers, industry associations, government agencies, and the investment community.

Additional analysis includes secondary research conducted by Navigant Research’s analysts and its staff of research assistants. Where applicable, all secondary research sources are appropriately cited within this report.

These primary and secondary research sources, combined with the analyst’s industry expertise, are synthesized into the qualitative and quantitative analysis presented in Navigant Research’s reports. Great care is taken in making sure that all analysis is well-supported by facts, but where the facts are unknown and assumptions must be made, analysts document their assumptions and are prepared to explain their methodology, both within the body of a report and in direct conversations with clients.

Navigant Research is a market research group whose goal is to present an objective, unbiased view of market opportunities within its coverage areas. Navigant Research is not beholden to any special interests and is thus able to offer clear, actionable advice to help clients succeed in the industry, unfettered by technology hype, political agendas, or emotional factors that are inherent in cleantech markets.


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NOTES CAGR refers to compound average annual growth rate, using the formula:

CAGR = (End Year Value ÷ Start Year Value)(1/steps) – 1.

CAGRs presented in the tables are for the entire timeframe in the title. Where data for fewer years are given, the CAGR is for the range presented. Where relevant, CAGRs for shorter timeframes may be given as well.

Figures are based on the best estimates available at the time of calculation. Annual revenues, shipments, and sales are based on end-of-year figures unless otherwise noted. All values are expressed in year 2014 U.S. dollars unless otherwise noted. Percentages may not add up to 100 due to rounding.


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Published 2Q 2014

©2014 Navigant Consulting, Inc. 1320 Pearl Street, Suite 300 Boulder, CO 80302 USA Tel: +1.303.997.7609 http://www.navigantresearch.com

Navigant Research has provided the information in this publication for informational purposes only. The information has been obtained from sources believed to be reliable; however, Navigant Research does not make any express or implied warranty or representation concerning such information. Any market forecasts or predictions contained in the publication reflect Navigant Research’s current expectations based on market data and trend analysis. Market predictions and expectations are inherently uncertain and actual results may differ materially from those contained in the publication. Navigant, and its subsidiaries and affiliates hereby disclaim liability for any loss or damage caused by errors or omissions in this publication.

Any reference to a specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise, does not constitute or imply an endorsement, recommendation, or favoring by Navigant Research.

This publication is intended for the sole and exclusive use of the original purchaser. No part of this publication may be reproduced, stored in a retrieval system, distributed or transmitted in any form or by any means, electronic or otherwise, including use in any public or private offering, without the prior written permission of Navigant Consulting, Inc., Chicago, Illinois, USA.

Note: Government data and other data obtained from public sources found in this report are not protected by copyright or intellectual property claims.


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