Will new orders mean new growth for FuelCell Energy?

Once seen as super-sexy, the fuel cell industry has been patiently waiting for the return of the exuberance today enjoyed by other green technologies like solar and wind.

So will new sales and an OEM agreement for high profile fuel cell power plant maker FuelCell Energy (FCE) (NASDAQ: FCEL) of Connecticut finally translate back into investor enthusiasm?

FCE develops and markets power plants that generate electricity with up to twice the efficiency of conventional fossil fuel plants, using a variety of fuels like natural gas and renewable biogas. And the company does it with virtually no air pollution and dramatically reduced greenhouse gas emissions.

The company's huge "Direct FuelCell"-branded (DFC) generators range in size from 300 kW to 2.4 MW, and are scalable for distributed generation and base load electricity applications 10 MW and larger, the company claims.

POSCO Power, South Korea's largest independent power producer, last week purchased a 2.4 MW fuel cell power plant from FuelCell Energy, and signed a 10-year manufacturing and distribution agreement. The plant, to be made up of two of the company's DFC units, will be the largest fuel cell power plant in the world upon its installation, according to FCE.

The largest is currently FuelCell Energy's 1.5 MW plant that helps power the Sheraton San Diego Hotel in California.

Although the exact site for the new Korean installation has not yet been announced, the companies said it would support the electricity grid and generate enough energy for up to 2,000 homes.

"This record-setting fuel cell installation inaugurates our new strategic alliance with FuelCell Energy on an auspicious note,'' said Seung-Woo Lee, POSCO Power's president and chief executive.

"After it is installed, we will be able to demonstrate this cutting-edge technology to potential customers, including other utility companies and independent power producers, who will represent the core of our future marketing efforts.''

POSCO has invested $29 million into FCE, buying almost 7 per cent of the company, and plans to OEM FCE's technology and sell its own DFC-based power plants over the next two years.

South Korea is seen as an attractive market for fuel cell technology, as it currently imports around 90 per cent of its electricity.

Last week, FCE also announced the sale of one of its DFC plants to the Riverside Wastewater Treatment facility in Riverside, California. The environmentally-friendly power system will significantly reduce emissions for the facility, which processes 30 million gallons of wastewater each day, and will be powered by gas from a sewage treatment facility serving the city.

The gas had previously been used by three reciprocating engines to power the treatment plant. However, because fuel cells involve no combustion—converting renewable digester gas into electricity electrochemically—they operate hundreds of times cleaner than conventional power generators.

“The superior emissions characteristics of our fuel cells are an important factor in California, a state that is very serious about its clean air programs,” said William Karambelas, FuelCell Energy’s Vice President of Business Development, Western Region.

It's been a generally bleak last few years for the fuel cell business, with even the industry's trade group characterizing it apologetically as "the technology du jour of 2003" (see Greentech industries feel slighted by new U.S. budget).

So it was significant last week when analysts Clean Edge forecasted significant new upside in the fuel cell industry, specifically in power plant-type applications such as those delivered by FCE (see Underdog fuel cells to outperform, says Clean Edge). Clean Edge sees the $1.4 billion fuel cell market expanding to $15.6 billion in a decade, which admittedly is still less than a quarter of its prediction for solar.

That said, not all Wall Street analysts are breaking out their FCE party hats and noisemakers.

"[The company] reported 1Q07 results that were disappointing from a top and bottom line perspective, but showed continued progress on management's strategic plan. We believe that management is forming beneficial long term alliances, but short term benefit is minimal due to the long lead times and nascence of the market," wrote analyst Jeff Osborne of CIBC World Markets in a research note.

FCE's relationship with POSCO was seen as encouraging, but not material to the company's stock price in the short term.

"We view this relationship positively, but note that it will take time for financial benefits to materialize," he said.

In its latest quarterly call late last week, management shared ambitious goals to bring down the costs of products. The company plans to increase the life of its fuel cell stacks to 5 years from the current 3 years. In addition, it said it intends to reduce design cost of products by ~20% at current volumes and increase power output by 15%. These improvements should help boost multi-MW orders and drive leverage, management said.

CIBC's Osbone is taking a cautious stance, lowering his 2007 revenue expectations for FCE to $36.0 million from $58.8 million, and 2008 revenue estimates to $58.1 million from $71.9 million.

Headquartered in Danbury, Connecticut, FuelCell Energy has provided equipment to over 50 power plants worldwide that have generated more than 150 million kilowatt hours. It faces increasing competition, particularly from companies like HydroGen Corporation.

Read all of the Cleantech Group's coverage of FuelCell Energy here.

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