As someone who missed out on the meteoric rise of the Battery Electric Vehicle (BEV) market, the question I have been asking myself more recently is what will emerge as a viable alternative in the years to come. One such alternative I came across (on an episode of Jim Cramer’s, Mad Money) are Fuel Cell Electric Vehicles (FCEV’s).
Current state of play: Electric Vehicles
Despite having less than 2% global market share (as a proportion of total cars sold), BEV stocks have soared well above conventional car manufacturers in both market cap and YTD stock performance, even when some of those same conventional manufacturers compete in both markets.
How do FCEV’s work?
Put simply, FCEV’s have three key components — (1) an anode (2) a cathode (3) electrolyte membrane. All three rely on one crucial ingredient — hydrogen.
Skipping the technicalities — in goes hydrogen, and with the help of a catalyst, it generates electrical current, water (and some heat).
The beauty of this process is that you don’t need combustion like a conventional vehicle, it operates silently, has no tailpipe emissions and allows you to store energy in the form of (normally liquified) hydrogen in your gas tank.
This is broadly similar to a BEV but replaces the need for lithium batteries as power is generated directly in the gas tanks of the vehicle.
The benefits
FCEV’s are pitched against BEV as a competitor to create zero emissions (in the driving process). In many ways, FCEV technology helps to overcome some of the major problems associated with BEV’s. Namely, they take only a few minutes to fill up compared to closer to an hour for a BEV, have a longer range (over 480km in many cases) and they reduce reliance on heavy (limited supply) lithium batteries, making vehicles lighter and more fuel efficient.
Chicken & Egg problem
Yet despite those efficiencies, the biggest challenge to FCEV’s taking off is the classic chicken and egg problem. It goes something like this — without a viable network of hydrogen fueling stations, FCEV’s struggle to gain in popularity as they have limited appeal to someone who can’t reliably use them. However, without sufficient customers, infrastructure spend on fueling stations remains largely limited.
Whilst BEV vehicles had a similar issue to start, FCEV’s are uniquely disadvantaged. A typical hydrogen fueling station can’t be plugged into the power grid like a charging station can. Any provider will need to insure they have a hydrogen distribution network to safely store and handle liquified hydrogen, a very flammable substance. This makes hydrogen fueling stations costly to set up and increases the cost of entry for new participants.
The average station costs $1.1m vs $600k for a charging station (with 4x 150KWH charging points). No surprises then how sparce hydrogen fueling stations are in the US and Europe. As of 2019, there were only 177 hydrogen stations in all of Europe combined, and 39 stations in the US (35 of which are located in California). The infrastructure is vastly underbuilt.[1]
The big picture
You may argue however, that if FCEV’s help us fight the challenge of climate change and CO2 emissions — maybe it’s risk worth taking. Here, yet again, FCEV’s come up short. Hydrogen is typically created by electrolysis — a process of separating hydrogen from oxygen, in water. Whilst we have an abundant supply of (sea) water, electrolysis is an exceptionally wasteful method of creating energy. In fact, the overall efficiency rate of electrolysis in producing energy to powering a car is 30–50% of that compared to a BEV[2]. In other words, for the same $ amount of electricity spent to generate electricity, you could obtain more than twice the amount of energy to power a BEV than you would to power an FCEV.
This is particularly problematic when considering the cost of entry into the market. The average FCEV costs almost 1.5x the price of a BEV before energy costs are considered. That delta only widens when you include the higher cost of fueling your FCEV.
Localised demand
So FCEV’s cost more, struggle from lack of infrastructure and are less efficient (from a cost of energy perspective). So they have and will likely continue to struggle to expand passenger vehicle sales. However, one area where FCEV’s can and have done well, are in localized demand centres such as airports, city busses and utility vehicles.
Companies such as Hyundai and Plug Power have done exceptionally well here as they can cut the inefficiencies associated with heavy batteries and support the investment required to build hydrogen stations, where they can tap into reliable, repeat customers such as city busses or factory utility vehicles. These locations however, often go hand-in-hand with cheap access to renewable power sources to obtain the hydrogen such as Hyundai’s partnership in Switzerland[3].
Final say
One thing that made BEV’s great is having a transformational company such as Tesla pioneer the change. You need a sexy, elusive brand to help drive the change in customer behavior, which then justifies the return in building out charging infrastructure. FCEV’s have an even larger struggle — they require more expensive infrastructure, cannot claim to be more efficient and as for pioneering companies… Honda, Hyundai, Toyota don’t personally strike me as being the right brand to drive the transition to FCEV’s. Whilst industrial vehicles and long range trucks may be the ideal candidate for fuel cell technology, I’d want to see better vertical integration in those companies particularly around renewable power generation, before I part with my money.
Verdict: Cautiously Bearish
Timeframe: 1–3 Years
