Let’s start with the obvious. If you are amongst those who bought stock in Tesla at its IPO in 2010, you’ve seen a 15-fold gain. Ain’t hindsight wonderful? That’s the kind of story founders and investors dream about. The jury is out on Tesla’s future, but its history and impact are indisputable. Credit Elon Musk with inspiring nearly every automaker to produce an electric model.
This week the market greets another and long-anticipated energy-tech IPO with Bloom Energy seeking to raise $250 million at a market value of around $1.6 billion; numbers essentially identical to Tesla in 2010. In the yin-yang of energy realities; Bloom Energy’s fuel cells use natural gas to make electricity, meanwhile Tesla’s cars use electricity to virtue signal. (I know, a cheap shot; but some truth.) Will Bloom perform like Tesla? And will KR Sridhar, Bloom’s CEO, similarly ignite competition in fuel cells? We’ll soon see.
Neither Bloom nor Tesla were first to market with their respective technologies. Indeed, the underlying technology for Bloom and Tesla emerge from similarly old foundations. Battery-powered cars predate the internal combustion engine, and the fuel cell predates Thomas Edison’s first generating station by almost a half-century. That both batteries and fuel cells are finally practical at scale emerges from the long march of critical advances in basic materials sciences. Tesla can now ride the new abundance of lithium battery chemistry while Bloom rides the transformative abundance of natural gas from shale. Yes, Bloom is a Silicon Valley company, but its S1 properly notes the latter reality.
Creating electricity is the world’s biggest use of energy, a market where rotating-machines produce 98% of all kilowatt-hours; fuel cells have effectively no moving parts. Similarly, with transportation the world’s second biggest use of energy, battery-powered cars compete in a domain where internal-combustion engines power 99% of road-miles.
Before continuing, for those who have read my earlier Tesla commentaries in Forbes and other venues (e.g., Tesla Derangement Syndrome, or Why Silicon Valley Loves Mining), a stipulation is in order. One does not need to believe (and I don’t) that batteries will displace all or even a major share of internal-combustion engines to observe there’s a huge value in any technology that can go from a near zero share to even a tiny share of the enormous vehicle market. And EVs still constitute just 0.2% of cars on the world’s roads. (For the record, even a future where EVs capture a 30% share still leads to greater oil demand than today; see Do Electric Vehicles Spell OPEC's Doom?)
The same principle applies to Bloom. One does not have to believe that a new technology can transform the entire global electricity market to observe that significant financial opportunities happen long before reaching even a tiny share of a massive market. As it stands today, photovoltaic (PV) solar tech, supplying just 2% of the world’s kilowatt-hours, is the only other source of electricity not based on rotating machinery.
For investors, any ten-fold growth is tantalizing. Even if outcomes don’t “change the world” it can change a lot of savings accounts. And there is every reason to believe that there is far more than a ten-fold growth available in markets for fuel cells. The magnitude of the opportunity is highlighted by the fact that 70% of net growth in all global energy use over the next two decades will go to meet rising demand for kilowatt-hours. In America, the electric sector already consumes 50% more energy than the second highest energy consuming sector,, transportation, and that gap will keep widening here and everywhere.
Everything that’s central to a modern economy, from datacenters, to hospitals and factories, is powered by kilowatt-hours. And, relevant to the Bloom story, power reliability is the ascendant metric in a highly electric-dependent economy.
Electric utilities have achieved amazing levels of grid reliability and resilience. But the market has voted that even the grid’s 99.9% reliability is insufficient to meet, for example, a datacenter’s always-on requirements. That “vote” is measured by the tens of billions of dollars spent annually on buying back-up systems to add reliability at datacenters, hospitals and other similar critical facilities.
As the Bloom S1 notes (if obviously), the power grid has “inherent vulnerability to outages from weather events and other threats.” And, in no small irony given some of Bloom’s green-tech backers, the S1 also points out that “intermittent generation sources such as wind and solar are negatively impacting grid stability.” That’s why we see data centers prominent amongst Bloom’s customers. Data centers alone (again, from the S1) purchase nearly $20 billion of ‘commodity’ electricity globally, an amount that will double in five years. Odds are that’s an underestimate as the digitalization of everything accelerates.
Because Bloom fuel cells produce electricity on the customer premise, reliability derives essentially from two factors: the durability of the fuel cell itself, and the inherent resilience of the gas distribution system. With regard to the latter, the reliability of natural gas pipelines is better than 99.999% -- two more “9s” than the electric grid, which is to say some 100-fold more reliable. (For the electric-tech cognoscenti, buried power lines still don’t come close to that level of reliability and cost some four-fold more than a gas pipeline for the same energy delivery.)
There’s never been any doubt that distributed power generation eliminates long-wire risks. But it also entails, in nearly all cases, far higher maintenance associated with on-site rotating machinery and fuel storage. For those who promote the distributed solar option, setting aside its inherently higher cost, one is still left with the need for back-up machinery or massive and massively expensive on-site batteries. Bloom’s S1 also notes, in a kind of mini smack-down of its PV competition, that its fuel cells are “approximately 125 times more space efficient than solar power generation.”
When it comes to keeping lights and computers lit 24x7, energy storage is always relevant because of inevitable if episodic supply-chain interruptions in all systems. In this regard natural-gas-centric fuel cells have an unbeatable advantage over batteries integrated with solar, or anything. The labyrinthine U.S. natural gas distribution system has over 300 major storage systems that contain at any given moment around five to six weeks’ worth of national demand. Even the wildest battery dreamers talk only in terms of hours of storage, someday. Meanwhile, the combined total of all grid-scale battery storage installed today can hold a mere 10 seconds of national electricity demand. And the cost to store a unit of energy as natural gas is roughly 1,000-fold cheaper than using batteries.
Thus a winning high-reliability solution is found in the combination of innately reliable gas distribution and low-maintenance fuel cells. And Bloom’s design adds a uniquely valuable reliability feature wherein the internal elements of its machine are designed to be hot-swapped; i.e., replaceable while the machine is running.
Finally, consider as well one market for reliability and resilience that seems to be missing from Bloom’s otherwise informative S1; the Caribbean and other similar isolated and small-grid applications where most of electricity is produced by oil-burning diesel gensets. The world still generates twice as much electricity burning oil as using solar arrays.
Today’s state-of-the-art hardware and cheap natural gas have enabled micro-LNG (liquefied natural gas) exports to such micro-grid markets. The supertanker-sized LNG ships are the most cost effective ways to transport LNG, but micro-LNG can reach small markets on conventional ships for a price equivalent under $50 per barrel-of-oil equivalent, compared to diesel fuel delivered to those markets at over $150 a barrel. Most such natural gas delivered to micro-grids will likely be burned in gensets and small turbines, but fuel cells should capture significant market share where low maintenance, low-noise, near zero-emissions and ultra-reliability are critical.
Subsidies remain the highly visible elephant in the room. Bloom and its backers fought hard to restore parity with Tesla, solar and wind companies after Congress, briefly, eliminated fuel cell subsidies in 2015. But the key question for investors is the central challenge for Bloom’s team. Can the technologists keep driving costs down fast enough to survive the eventual (and appropriate) elimination of federal subsidies for energy tech? From an underlying engineering perspective, that’s far more likely to happen with fuel cells than with PVs and batteries.
In a closing contrast between Bloom and Tesla, the two companies find themselves on the opposite side of the fallout from the shale oil & gas boom. The economics of next-generation internal combustion engines using oil kept cheap from the shale revolution redounds to the disadvantage of Tesla. On the other hand, the still-expanding shale revolution promises cheap natural gas for as far as the eye can see, which redounds to the advantage of Bloom.
There is no small irony that the future for a Silicon Valley “unicorn” – a tech company valued at over $1 billion – is squarely aligned with the fortunes and technologies of shale gas production and pipelines.
I’m a partner in Cottonwood Venture Partners, a Manhattan Institute Senior Fellow, Faculty Fellow at Northwestern University's engineering school, and author of "Work In The Age Of Robots."
Date: Jul 26, 2018