In the effort to replace conventional energy sources with more environmentally friendly ones, many different approaches are being explored. While wind and solar are the favorites, the prospects of fuel cell technology should not be ignored, and with fuel cell-related company Nikola Corporation (NKLA 24.03%) making headlines lately, we have to ask: what are fuel cells, and how can we invest in them?
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What are fuel cells?
Fuel cells are similar to traditional engines or generators in that they take in fuel and oxygen to produce electricity to power a car or building. However, unlike traditional engines that use combustion, fuel cells create electricity through an electrochemical process, like a battery.
Typically hydrogen is the fuel used in fuel cells; however, some are able to use other fuel sources like natural gas and biogas as well. This is the case for solid oxide fuel cells, which means that they are able to connect to existing natural gas lines, removing the need for additional infrastructure. One private company, Watt Fuel Cell, has been installing its natural gas-powered fuel cells in homes in the Pittsburgh area for a couple of years now.
The environmental impact of fuel cells is less than that of traditional power sources. Even though the fuel cells produce carbon dioxide when powered by natural gas, their carbon footprint is lower than those of other combustion-related systems. This is a result of the greater efficiency of the fuel cell, meaning that it is able to get more electricity out of the same amount of fuel than traditional systems. Additionally, carbon capture is a possibility with large systems, which would remove their carbon footprint almost entirely.
How to invest?
For those wanting to invest in fuel cell companies, there are two main types to consider. The first is those focused on producing fuel cells for vehicles. While automakers like Toyota Motor and BMW are pursuing cars powered by hydrogen fuel cells, the companies that provide the most direct exposure are Nikola, Ballard Power Systems (BLDP 4.35%), and Plug Power (PLUG 12.88%). Some companies are instead pursuing the use of solid oxide fuel cells for powering homes, commercial buildings, and microgrids. Bloom Energy (BE 4.07%) and FuelCell Energy (FCEL 13.89%) are examples of this type.
Should you invest?
A small, speculative position that you are not afraid to lose could be fine for those really eager to get exposure to the industry, but for the average investor, investing in these companies is still too risky. While some of the companies are seeing revenue growth, none are reliably generating profits or positive operating cash flows yet. Since they are not generating cash from operations, they are likely to continue to raise cash through debt and equity offerings. Adding debt increases fixed costs, which can put pressure on the company's finances, and adding equity dilutes the positions of existing shareholders. Either way, waiting on the sidelines until these companies' futures are a little clearer is the prudent option for investors.
