Has the fuel cell car's time finally come?

  @FortuneMagazine August 15, 2013: 7:30 AM ET
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(Fortune)

Hydrogen is the fuel of the future -- and always will be. So goes a long-running joke in engineering circles. The quest to build a car powered by one of the most abundant elements on earth dates back to 1966, when GM created the first fuel-cell vehicle, the futuristically named and wildly impractical Chevrolet Electrovan. (Hydrogen tanks and fuel cells to convert the gas into electricity filled the entire rear section of the van.) In the decades since, the major automakers have spent billions in a quest to perfect the hydrogen car -- with little to show for their R&D dollars. Though hydrogen fuel cells have become much smaller, cheaper, and infinitely more efficient over the years, the technology has remained stuck on a road to nowhere. Fewer than 500 fuel-cell cars were sold globally last year, according to Navigant Research.

But at long last we might -- just maybe -- be on the verge of a hydrogen moment. Virtually every major carmaker is preparing to launch hydrogen-powered models in the next few years. Toyota (TM), which has been working on fuel-cell technology with BMW, will unveil a new hydrogen fuel-cell car at the Tokyo auto show in November. The as-yet-unnamed vehicle will go on sale in 2015 and is expected to have a sticker price that's less than a Tesla S (TSLA), which costs about $70,000. Hyundai will lease 1,000 hydrogen cars based on its Tucson crossover in the U.S. starting in 2015. Renault and Nissan have announced a partnership with Daimler and Ford (F, Fortune 500) to share the cost of developing fuel-cell vehicles that could be on the market as soon as 2017. And GM (GM, Fortune 500) and Honda announced in July that they were forming a technology joint venture to produce hydrogen cars by 2020. Honda (HMC) will also launch a new generation of its fuel-cell-powered Clarity, which it has been leasing in limited numbers in California, by 2015.

What's behind all the activity? The cynical view is that the auto industry is simply scrambling to meet California's strict air regulations: By 2025 more than 22% of new sales for the major automakers must be zero-emission or plug-in hybrids. "With electric car sales not living up to expectations, the carmakers are looking for a hedge to meet the standards in California, and hydrogen provides that," says Kevin See, a senior analyst at Lux research.

That may be true. But fuel-cell proponents are feeling optimistic for a good reason: Hydrogen appears to be close to making economic as well as environmental sense. The price of hydrogen fuel cells has dropped dramatically, and the range and reliability have increased. A seven-year U.S. Department of Energy study released late last year concluded that carmakers can easily achieve as much as 254 miles on a single tank of hydrogen -- enough to effectively cure range anxiety. (It takes about three minutes to fill up a hydrogen car.) Right now hydrogen is two to three times as expensive as gasoline on a per-gallon-equivalent basis. But because fuel cells are twice as efficient as gasoline engines, hydrogen fuel is only slightly more expensive. The DOE report concluded that, at scale, hydrogen could quickly cost less than gas.

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The environmental case for fuel-cell cars has always been a slam dunk. Fuel cells work by splitting electrons out of hydrogen to generate a current that can cleanly and silently power an electric motor. Nothing is emitted from the tailpipe except some water vapor. Overall, according to the DOE, a hydrogen fuel-cell car emits 30% to 50% less greenhouse gas than a gasoline-powered one. (While the car generates no emissions, producing the hydrogen itself does create some emissions because of the intense energy needed to extract it from natural gas, currently the most common feedstock.)

But the biggest challenge facing fuel-cell cars today is the same as it's always been -- a lack of infrastructure. Only a handful of hydrogen filling stations exist in the U.S. "What we have is a chicken and egg problem," says Chris Hostetter, the group VP for strategic planning at Toyota Motor Sales USA. "The entrepreneurs don't want to invest in hydrogen stations until there are enough cars on the road, and the carmakers can't sell large numbers of the car unless there's a place to fuel them."

Former California governor Arnold Schwarzenegger tried to address the issue in 2004 when he outlined his vision for a California Hydrogen Highway Network. His goal was to build 250 hydrogen fueling stations and have 20,000 hydrogen vehicles on the road by 2010. Three years after the Governator's deadline, however, California has only nine public hydrogen stations and another 19 in development, and only a few hundred hydrogen vehicles, according to the California Fuel Cell Partnership.

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By comparison, there are some 250 million gasoline-powered vehicles on the road in America, serviced by 170,000 filling stations. Each new hydrogen station costs as much as $3 million to build. A back-of-the-envelope calculation suggests it would cost $512 billion -- roughly the GDP of Sweden -- to replace all the gas stations.

The industry is hoping for incremental progress. Keith Malone, a spokesperson for the California Fuel Cell Partnership, explains that the state of California is offering $20 million this year to help businesses fund new stations. "If the state over the next few years can help open around 100 hydrogen stations in areas where early adopters live," says Malone, "that should be enough to reach the critical mass needed for the private sector to take over." The subsidy should be enough to help launch as many as 20 stations this year. So far, though, it's not clear that the full $20 million will even get used.

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As with many things green, it looks as if California will have to take the lead. The DOE has spent over $1.5 billion in the past 10 years on fuel-cell and hydrogen R&D. But Washington is offering no incentives to major hydrogen producers, like Air Products & Chemicals (APD, Fortune 500) and Linde, to build more stations nationwide.

The danger is that America may fall short on yet another green technology (like the rapid demise of U.S. solar manufacturers). Germany has committed to building 50 new hydrogen filling stations, and Japan to 100. It's largely up to Washington to make sure that in the U.S. hydrogen doesn't remain stuck as the fuel of the future.

This story is from the September 2, 2013 issue of Fortune. To top of page



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