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The Backup Plan

If Plug Power, a maker of hydrogen fuel cells, succeeds, it will be in an unexpected market.
December 6, 2005

Shortly after Roger Saillant took over as CEO of ailing Plug Power, in early 2001, he arranged for an “investor day” at the Albany, NY, company, which today makes hydrogen fuel cells aimed primarily at providing backup power for telecommunications and other businesses with networks in remote locations.

Hydrogen fuel cells provide heat and electricity from hydrogen stored in fitted tanks, doing so with minimal emissions of water and heat. The cells employ membranes that divide hydrogen atoms into protons and electrons. While the electrons travel around the membranes, generating direct current power, the protons pass through the membrane, combining with oxygen to produce heat and water without combustion emissions.

On that investor day back in 2001, Plug Power was in bad shape. Begun in 1997 as a joint venture between Mechanical Technology Inc. and DTE Energy Co. of Detroit, the company’s ambitious goal was create fuel cells for powering homes and businesses. While the initial prices were going to be high – $175,000 per unit – the company saw a future in which miniature units would cost about $5,000 apiece. Although the technology was still evolving at the time of its IPO in October 1999, under chairman George McNamee and CEO Gary Mittleman, Plug declared that homeowners coast to coast would line up for the hydrogen-powered fueling devices. It even boasted to investors and analysts that it had a customer and joint partner, GE Power Systems, poised to buy 485 units. There was giddiness among its 500 employees.

By spring 2000, however, the startup was failing to meet its specifications for the size and power output of the hydrogen cells, and was forced to release General Electric from its contract. Word of the failure spread through the industry – and customers disappeared. By August, CEO Mittleman had resigned, and he and other principals were accused by shareholders in a November 2000 lawsuit of overhyping the stock and dumping shares just before the GE deal went awry. (The suit was settled in May 2004.)

By the end of fiscal 2000, Plug’s net loss was more than $85 million, and it had laid off 90 employees (its workforce would bottom out at 250, before rising to 300 in 2005). Plug had burned through more than $200 million in startup capital and watched its inflated stock price plummet from a stratospheric $157 per share to $9 in less than six months.

So what was new CEO Saillant to do?

“I had people bring in a huge stone,” he recalled, “I stood on it and told investors and staff, ‘I’m going to bring you bedrock.’ I told them we would not and could not get hydrogen fuel cells into the mass market, because the technology was not there. I was treated like an idiot for a while. My investor-relations guy said he stood next to a guy that day who immediately got out his cell phone and said, ‘Sell Plug now.’ But my motivation was a simple commitment to truth. Investors need to know what the truth is.”

The truth is that hydrogen fuel cells have a long, slow road ahead before they appeal to the mass markets of homeowners and motorists. Indeed, making hydrogen fuel cells practical for small-scale applications is a problem that’s vexed many companies. Plug Power was hardly the only outfit in 1999 and 2000 guilty of over-optimism.

But the Plug Power story exemplifies another, more positive truth in the world of business: sometimes markets for a new product can appear in unexpected places.

In Plug Power’s case, surprise demand for hydrogen fuel cells grew out of a surge in an entirely different market: cellular telephone towers. According to the trade group CTIA-The Wireless Association, the number of wireless towers and antennas in the United States rose by a factor of 10 since 1994: from 18,000 to 175,000. While many cell towers are linked to the electric grid, they still require backup power in case of electrical outages. And many more towers are isolated from the grid and other conventional energy sources, and therefore must be powered by either gas-fueled generators or lead-acid batteries.

Plug Power found cell-tower builders and operators receptive to a pitch that they abandon batteries and diesel generators in favor of lighter, quieter, more environmentally friendly hydrogen fuel cells. (Plug Power is also targeting broadband suppliers and other utilities.)

Back in 1997, the company had committed most of its R&D and brain power to building a large, complex hydrogen-powered fuel source, GenSys, costing $175,000 to make and install, and intended to power homes, hospitals, apartment buildings, and other large, energy-hungry sites.

Saillant said his engineers took the guts from the GenSys machine – its fuel-core stack – and turned them into a far smaller product, GenCore, costing about $25,000, which could be built quickly and marketed rapidly. Then the company approached Verizon, Tyco, and other telecom players

“There are 80,000 to 100,000 opportunities a year for replacement or growth in the cell-tower industry,” Saillant says, “and 30,000 are maybe suitable for hydrogen fuel cells, and if we get 30 percent of that – well, it’s enough to get us going if we can make the argument.”

According to Saillant, the arguments go like this:

1. A hydrogen backup system, which is about the size of an outside central air-conditioning unit, takes up about 10 percent less space than the structures conventionally used to house diesel generators and batteries. And the fuel-cell systems are far lighter: 1,250 pounds per unit, compared with 2,750 for generators and 3,800 for eight-hour battery systems. Thus, hydrogen backup systems can be more readily installed on rooftops – a common site for cell towers.

2. While diesel generators generate carbon dioxide fumes and lead batteries can be prone to leakage, hydrogen cells emit only water and heat.

3. Plug Power’s hydrogen fuel cells last 15 hours – or an average five hours longer than lead batteries.

By Plug Power’s calculations, a GenCore hydrogen backup power system will soon cost $22,500 installed, versus $17,200 for a battery backup system. But Plug insists that the 10-year cost of maintaining and resupplying its hydrogen backup system rises only to $28,800, while the cost of a lead-acid battery system hits $35,300. In addition, Plug Power says it can use computer software to remotely monitor the level of power available at its backup sites, allowing for more efficient maintenance.

The company says it will have 500 of its smaller backup systems in place in the United States, Europe, and Asia by the end of 2005. Plug Power hopes the defense and utilities industries will take notice of them, and the company says it has a deal with Tyco Electronics Power Systems that will lead to the manufacture and installation of hundreds more units stateside and in Europe. Other customers are the states of Florida and Louisiana and the Federal Emergency Management Agency, which, in the wake of the flooding after hurricanes Katrina and Rita, are experimenting with backup power systems that might better survive hurricanes.

Plug Power admits that many potential customers are still skeptical of hydrogen, though, and more comfortable with batteries and diesel for backup power. “Cell-phone tower installers are very familiar with lead acid batteries, and that’s their default mode,” says Saillant. “If they put in a lead-acid battery and that fails, they don’t get fired, but if they put in a hydrogen cell, they can get fired.”

In addition, he says, Plug Power and its industry peers need to persuade both clients and communities that hydrogen is not risky to health and safety. Localities, he says, see hydrogen as a flammable chemical, not a fuel.

Finally, the logistics of refilling hydrogen tanks at remote locations remains a concern for buyers, who already have contracts with diesel-fuel or led-battery resuppliers.

Meanwhile, Saillant wants to discourage the kind of speculation that drove Plug Power’s stock price to unrealistic highs. He tells investors “some things will not happen in the next 10 to 20 years: the grid will not go away. No green technology will supply all the energy needs of the planet. Fuel cells will not power every single American home.”

On November 9, the company reported total revenue for the first nine months of 2005 of $10.8 million and a net loss of $35.3 million. And Plug’s share price still hovers in the $5-8 range. So whether Salliant’s new foundation will be strong enough to build on remains unproven.

Tom Mashberg is a reporter at the Boston Herald.

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