Korea's fuel-cell strategy takes page from China solar playbook

[NEW YORK] South Korea is tapping into US ingenuity to drive the market for fuel cells, the clean-energy technology that converts hydrogen or natural gas into electricity.

Conglomerates based in South Korea are buying, investing in or partnering with US fuel-cell makers, seeking to build on their designs for the complex systems by incorporating cheaper production methods that will make them more economical.

Fuel cells are less cost-effective than coal or gas. That's fine when expense doesn't matter, like the Apollo space missions. But price becomes critical when they're aimed at industrial and commercial users, and South Korea is seeking to produce systems more cheaply. The goal: Do for fuel cells what China did for solar panels.

"Fuel cells are now at a tipping point, addressing real market needs," said Henri Winand, chief executive officer of Intelligent Energy Holdings Plc, a U.K.-based provider of fuel cell technology. "The industry is where solar was 10 years ago, before China made it a commodity."

Fuel cells work through a chemical reaction, and have little to no carbon emissions. Small systems run cars or forklifts, and larger shipping-container sized ones can power a factory or be linked together into multi-megawatt power plants feeding the grid.

Electricity produced from fuel cells costs about 9 cents to 12 cents a kilowatt-hour, depending on factors including gas prices, according to manufacturers. That compares to about 9 cents for coal and 6 cents for power plants that burn gas.

US companies have struggled to make the technology profitable, and the US Energy Department has spent about US$1.3 billion on fuel-cell research since 2006. United Technologies Corp, which supplied systems to NASA for space missions dating back to 1966, took a US$179 million charge, and then paid another US$48 million to divest its operations to ClearEdge Power LLC in 2013.

ClearEdge, which raised more than US$100 million to commercialise fuel cells, filed for bankruptcy in May 2014.

Two months later, South Korea's Doosan Corp stepped in to buy ClearEdge's South Windsor, Connecticut, factory and technology for US$32.4 million, combining it with Fuel Cell Power Inc., another company it purchased two weeks earlier.

The merged operation, Doosan Fuel Cell America, produces large, stationary systems for industrial and commercial uses. It announced last week that six of its systems are running in a Seoul suburb, providing 2.6 megawatts of capacity to the local power grid.

Longer term, Doosan's goal is to popularise them in the US, but it's focusing now on South Korea, where government incentives and a lack of domestic energy assets have made the country the top fuel-cell market.

"We have the greatest market opportunity in the US," said James Bemowski, vice chairman of Doosan in Seoul. "Right now the Korean market is even bigger. It gives us a chance to get a head start."

South Korea will take the largest share of the US$1 billion market for stationary fuel cells this year, followed by Japan and the US, according to Navigant Research. The market will reach US$15 billion by 2022.

"Korea has a long-range vision," said Prabhakar Singh, director of University of Connecticut's Center for Clean Energy Engineering. "What they really want is to become the best at making them for export, much like China did with solar."

South Korea is also promoting electric cars powered by fuel cells, an emerging rival to battery-powered vehicles. Hyundai Motor Co introduced its hydrogen-powered Tucson SUV in the US in 2014, the world's first mass-produced fuel-cell car.

"Parts of the US fuel cell industry would probably be gone without support from Korea," said Jeffrey Osborne, a Cowen & Co. analyst in New York.

Posco, South Korea's biggest steelmaker, began working with Danbury, Connecticut-based FuelCell Energy Inc in 2007, and is now its biggest customer and largest shareholder.

Posco and FuelCell Energy built the world's biggest fuel cell power plant, a 59-megawatt facility in South Korea, and Posco will begin manufacturing its own systems this year in the country under a licensing agreement with its US partner.

"We had this technology to build the big plants that Posco really wanted," said FuelCell Energy CEO Chip Bottone. "Their support allowed us to build the supply chain and prove the business model."

The Posco relationship is also going to help FuelCell Energy become profitable. The South Korea factory will be highly automated, and FuelCell Energy eventually plans to import the manufacturing know-how to help drive down its costs.

That's similar to the path of solar panels.

China began to dominate photovoltaic manufacturing starting about seven years ago, by adapting techniques developed in the US in the 1960s. Cheap financing helped manufacturers expand capacity, reducing costs through scale while improving production techniques.

China now supplies more than 75 per cent of the world's solar panels.

South Korea has been diving into fuel cells while US and European companies back away.

LG Corp bought a 51 per cent stake in Rolls-Royce Holdings Plc's Fuel Cell Systems for US$45 million in June 2012, and now operates its Ohio factory.

General Electric Co said last year that fuel cells would be limited to a niche technology because they often require costly platinum as a catalyst.

The company announced in July a breakthrough, using stainless steel instead. Six months later, GE agreed to co- develop and market fuel cells in the US and Asia with South Korea's GS Caltex Corp.

"Korea has a really good track record of driving down costs and coming out with superior products," said Intelligent Energy's Winand. "Korean cars were a laughingstock in the 1980s but look at Hyundai now."

BLOOMBERG