The Coming Hydrogen Economy Fuel cells powered by hydrogen are about to hit the market. In time, they'll let us kiss the sheikhs goodbye.
By David Stipp

(FORTUNE Magazine) – As far back as Jules Verne, visionaries have predicted that society will someday be utterly transformed by energy based on hydrogen. The lightweight gas, the most abundant element in the universe, can be made from water. It is wondrously clean, emitting mainly pristine steam when burned. When fed into fuel cells, which generate electricity, it offers unprecedented efficiency--these electrochemical reactors extract twice as much useful energy from fuel as internal-combustion engines can.

In fact, hydrogen-powered fuel cells promise to solve just about every energy problem on the horizon. In homes and offices, fuel cells would keep the lights on when the grid can't. Cars propelled by the cells wouldn't foul the air. Hydrogen-based energy would mean less global warming as we shift away from fossil fuels.

None of this is as pie-in-the-sky as it sounds. Potent commercial forces are bringing the hydrogen economy along faster than anyone thought possible only a few years ago. In the next two years, the first wave of products based on hydrogen-powered fuel cells is expected to hit the market, including cars and buses powered by fuel cells, and compact electric generators for commercial buildings and houses. Technology for generating hydrogen is ready now: "reformers" that extract hydrogen from natural gas, and "electrolyzers," Jules Vernian devices that extract hydrogen from plain water. Those electrolyzers, if powered by so-called renewable-energy technologies like wind turbines and solar panels, could truly put an end to oil. Wind turbines and solar panels are emerging fast; after long decades of development, they have entered a Moore's law-like pattern of rapidly falling costs. All these advances add up to a startling reality. Major oil companies have begun to bet quietly but heavily on a hydrogen future. So have many of the largest manufacturers, including United Technologies, General Electric, Du Pont--and every major car company.

Like all disruptive technologies, the hydrogen revolution must overcome major barriers to achieve ubiquity, however. The greatest hurdle is cost: Fuel cells are too pricey for all but niche applications, and they're likely to remain so until economies of scale kick in. Likewise, fully installing the infrastructure needed to produce and deliver hydrogen on a massive scale--think of the refineries, pipelines, and gas stations that have been built to support the oil economy--will take decades and require tens of billions of dollars. Meanwhile, support for hydrogen technology in Washington, D.C., has been almost as evanescent as the gas: For the fiscal year ended Sept. 30, the Department of Energy's hydrogen research budget was $27 million, a minuscule 0.14% of the DOE's total budget--and earlier this year the Bush Administration proposed roughly halving that allotment.

Still, it's hard to dismiss a technology that promises a way to kiss the sheikhs goodbye. Suppose further unthinkable things happen--a fundamentalist coup in Saudi Arabia, say, or terrorist attacks on the kingdom's brittle petroleum infrastructure, either of which might precipitate an oil crisis. Could we put the Hydrogen Age on the fast track?

Hydrogen experts, though accustomed to thinking in decades instead of years or months, are already mulling that question, and their answer can be summed up as "yes." A major source of hydrogen is instantly available: natural gas, or methane. Already it is widely processed into hydrogen for manufacturing plastics, "hydrogenated" vegetable oil, and other products. Making hydrogen this way is not totally environmentally friendly--reforming methane generates carbon dioxide, the main culprit in global warming. But it's strategically friendly: Today 99.5% of the methane consumed in America is produced in the U.S. and Canada. What's more, companies such as Praxair of Danbury, Conn., and Air Products & Chemicals of Allentown, Pa., operate a limited but widely dispersed hydrogen infrastructure in the U.S., including pipelines, storage terminals, tanker trucks, and reformers.

Such assets represent a kind of hydrogen-economy starter kit. To jump-start the transition, the first order of business would be to outfit service stations to fuel the hydrogen-powered cars that will soon reach the market, says C.E. "Sandy" Thomas, president of H2Gen Innovations, an Arlington, Va., startup developing novel low-cost methane reformers. Revving up the hydrogen economy would also probably require heavier spending, by industry or government, to accelerate the low-cost mass production of fuel cells, says John A. Turner, a principal scientist at the DOE's National Renewable Energy Laboratory in Golden, Colo. The technology faces the classic chicken-and-egg problem, he explains: To compete with piston engines and achieve mass commercialization, the costs of the technology must come down by at least a factor of ten. That can happen, but probably not without the cost savings that flow from mass production.

Short-term moves like those would pave the way to a future that excites giant oil companies and environmentalists alike--in which methane would begin to recede as a hydrogen feedstock while renewable sources, like solar and wind power, and biomass, would come to the fore. Before September's terrorist attacks such a shift was projected to happen around the middle of this century. Royal Dutch/Shell, one of the oil giants that is investing heavily in a hydrogen future, projects that by 2050 about half of the world's entire energy supply may well originate with renewables. (See chart.)

Around the industrialized world, the seeds of oil displacement are already visible. Next year, for instance, three major energy companies in Scandinavia plan to build a pilot plant to make hydrogen from wind power. While it's only a start, the implications are huge: Denmark, the world wind-power leader, already gets nearly 15% of its electricity from the wind. Use that electricity to produce hydrogen, and the Danes would have the energy equivalent of the euro: an energy currency that can be efficiently swapped for heat or locomotion, or turned back into electricity. And while electricity is hard to store in large quantities, hydrogen is easy. The Scandinavians plan to use it in fuel-cell-equipped buildings and vehicles--such as the hydrogen-powered buses that DaimlerChrysler expects to roll out in Europe next year.

The U.S. is rich with similar prospects. The windy Dakotas, if studded with twirling wind turbines, could become the Saudi Arabia of hydrogen. Spare megawatts from the 55 major dams along the Columbia River and its tributaries in the Pacific Northwest could be fed into electrolyzers, turning them into the equivalent of inexhaustible oil gushers. Hawaii could help too: Its volcanically abundant geothermal energy could be tapped to generate electricity for churning out hydrogen.

In a telling sign of how far renewable energy has matured since the Age of Aquarius, Home Depot recently started selling solar photovoltaic systems made by AstroPower of Newark, Del., at some of its California stores. Meanwhile, companies such as United Solar Systems in Troy, Mich., have rolled out nifty forms of solar roofing--including shingles that can double as little power plants. Solar cells are only one-tenth as expensive today, on a per-watt basis, as they were in the 1980s, and manufacturers are having trouble keeping up with demand. Worldwide, photovoltaic sales jumped 38% last year. (No high-tech bust there.)

Despite its dropping cost, solar power is still too expensive to mount a serious challenge to grid-supplied electricity--most solar installations power buildings and machines remote from the grid, or are fostered by government-sponsored programs. But wind power, the other high-growth prospect in renewable energy, faces no such limitation.

Thanks to advances such as the advent of monster 1.65-megawatt turbines, wind-power costs have dropped 90% since 1980. In some places, wind watts are now cheaper than those from oil- or gas-fired generators. Over the past decade wind power worldwide has grown, on average, 25% a year, faster than any other energy source, says the Worldwatch Institute, a Washington, D.C., think tank. (Only solar comes close, with a 20% annual growth rate.)

Europe's wind capacity could reach a staggering 60 billion watts by 2010, enough to serve 75 million people, according to the European Wind Energy Association. (By comparison, a large nuclear plant has a capacity of about one billion watts.) The U.S. lags behind Europe in developing wind power, but America's wind-generating capacity is ramping up fast--it's expected to increase by a whopping 60% this year, or 1.5 billion watts.

Much of the growth is happening not in green-dominated California but in America's thrifty heartland. For example, five years ago a school district in Eldora, Iowa, proposed erecting a wind turbine to supply its high school with electricity. The local utility blocked the idea by refusing to allow the wind-supplied watts to offset grid power at the going rate, says Bill Grove, superintendent of the Eldora-New Providence school district. Recently, though, the utility, Alliant Energy of Madison, Wis., rethought the issue and decided to join with the district to install a turbine three times as powerful as originally planned.

Simple arithmetic has inspired a growing number of Midwestern towns, school districts, and farmers to emulate Eldora's pioneering move, says Thomas A. Wind, a wind-power consultant in Jefferson, Iowa. The systems generally pay for themselves over a decade or so, he adds, then continue to whirl out cash year after year.

Richard and Robert Kas, farmers in Woodstock, Minn., were among the first to capitalize on the trend. Two years ago they allotted six acres of their family farm to an energy firm that planted 17 wind turbines, together capable of generating up to ten megawatts, enough for some 4,000 homes. Now the brothers are about to install two 750-kilowatt turbines of their own to sell power to the local utility. Richard estimates the turbines will each generate $25,000 annually after paying for themselves over about 12 years.

Renewable energy, excluding hydropower, which currently dwarfs other renewables, provides only 2% of U.S. electricity today. But its potential is huge. The harnessable wind power in Midwestern and Western states alone could supply as much electricity during a 15-year period as all of Saudi Arabia's vast oil reserves if they were burned in power plants, according to a federal study.

Such factoids are no longer merely the stuff of environmental confabs and engineering conventions--they are guiding boardroom decisions. Energy bellwethers such as ABB in Zurich and Enron in Houston are positioning themselves to become hydrogen sheikhs by making major investments in wind power. Meanwhile, Royal Dutch/Shell has formed a division devoted to hydrogen and a division devoted to renewables--Shell's top executives have promised to kick-start the new businesses with investments of at least $500 million by mid-decade. Britain's BP (the former British Petroleum now calls itself the "beyond petroleum" company) has made a major push into solar power--it's the No. 3 photovoltaics maker. (Sharp and Kyocera, both of Japan, are the leaders.)

Clearly, the energy industry will look a lot different two decades hence. Based increasingly on hydrogen, its big players will be more diverse and far-flung than ever. Indeed, they'll probably resemble oil producers crossed with electric utilities. The energy industry's small players will be even stranger creatures: They're likely to be people like us--when we're not using the fuel cells in our homes and cars, we'll plug them in to serve as Internet-like "micropower" nodes supplying electricity to the grid.

Fuel cells are increasingly shaping up to be the 21st century's answer to the internal-combustion engine. You'll probably be able to buy yourself a fuel cell this Christmas. By year-end, Sunbeam's Coleman Powermate unit plans to launch small, portable power modules incorporating fuel cells made by Ballard Power of Vancouver. Plug Power of Latham, N.Y., H Power of Clifton, N.J., and other companies are readying bigger fuel-cell systems designed to supply homes and small businesses with electricity and heat--many have been installed in pilot programs, and full-scale launches are expected by 2004.

In part because of California's recent electricity crisis, the please-let-there-be-light market for fuel cells is likely to skyrocket: Sales, estimated at $218 million last year, should reach $2.4 billion by 2005, according to a recent analysis by Fuel Cell Technology News, a Norwalk, Conn., newsletter.

One surprising thing about this projection is that there's already a substantial market for fuel cells. In fact, the "stationary" market for the cells has been quietly growing for years. A decade ago, International Fuel Cells, a United Technologies unit in South Windsor, Conn., introduced fuel-cell systems to supply "uninterruptible" power to buildings. Now its 200-kilowatt PC25 systems are electrifying everything from an Omaha bank to a former stable in New York City's Central Park that's used as a police station. The latter system, housed in a van-sized green box next to the old stable, enabled the city to avoid a $1.2 million power-line upgrade--office machines at the precinct house sometimes couldn't all be on at once until the fuel cell was installed in 1999.

Toward the end of this decade, fuel-cell cars should become the hydrogen economy's main driver. Indeed, the auto industry has made by far the boldest investment in the new technology. Four years ago Ford and Daimler-Benz, now DaimlerChrysler, stunned rivals by committing $750 million to a joint venture with Ballard aimed at rolling out fuel-cell cars by 2004. Not to be outdone, General Motors and Toyota teamed up in pursuit of the same goal. Honda, Renault-Nissan, Hyundai, and Volkswagen have also joined the race.

Today some $500 million to $1 billion a year is going into this automotive Manhattan Project, according to analysts. None other than Henry Ford's great-grandson Ford Chairman William Clay Ford Jr. has declared that the fuel cell will "finally end the 100-year reign of the internal-combustion engine."

The venerable piston engine won't be a pushover, though--versatile and cheap, it embodies an entire century of tinkering. Further, there's still no widely accepted way to carry lots of hydrogen around in vehicles. This problem stems from the same property that made hydrogen useful for getting early-20th-century Zeppelins aloft: It's very low-density stuff, so small amounts occupy a large volume.

Like all gases, however, hydrogen can be compressed, so one proposed solution calls for cars to carry special tanks filled with pressurized hydrogen. Such tanks already exist, but more work is needed to establish safety standards for their widespread use in vehicles. (If hydrogen makes you think of the Hindenburg, think again: A 1997 report showed that the famous Zeppelin's skin was painted with chemicals used in rocket fuel. Ignited by static electricity, the chemicals probably were the main cause of its fiery 1937 demise, not the hydrogen inside. In fact, hydrogen dissipates so rapidly outside buildings that the risk of an explosion while gassing up a fuel-cell car with the stuff is practically nil.)

It's likely to be at least several years before you can buy hydrogen at the corner gas station. But if you want to gas up your fuel-cell car at home, you might use one of the highly efficient electrolyzers that Stuart Energy Systems of Toronto is developing. The hydrogen appliances would require only a garden hose (for water) and an electrical outlet to generate enough hydrogen overnight for your daily commute.

The main alternative to onboard hydrogen tanks requires that cars carry compact reformers to synthesize the gas from either gasoline or methanol (wood alcohol). Those liquid fuels wouldn't require radical changes to the corner gas station. But gasoline reformers are costly, bulky, energy consuming, and complex--and they're still at the prototype stage. Methanol, while closer to prime time and less polluting to reform into hydrogen than gasoline, is very toxic. Ingesting half a cup can kill you, and unlike gasoline, it doesn't induce vomiting when swallowed.

Given those daunting problems, why are industry statesmen like Bill Ford so sure that fuel cells will blow away the piston engine? One reason is that the cells offer an astounding 100% leap in fuel efficiency over the venerable competition. Another is that fuel-cell technology is zipping along an arc of development that promises to amplify its already compelling pluses for decades to come. The piston engine, by comparison, is a mature technology that's increasingly difficult to improve.

Despite its recent fiscal woes, DaimlerChrysler, like every other major automaker, is pouring hefty sums into the effort to launch the cars between 2003 and 2005. But they won't necessarily turn up in showrooms then. The first ones are expected to be marketed as "fleet" vehicles such as taxis. That's because corporate fleets can be gassed up at home bases and so can be rolled out before hydrogen is widely available at service stations. The fuel-cell car market probably won't surpass 5% of U.S. new-vehicle sales, now about 850,000 vehicles a year, until after 2008.

That is, unless the federal government steps in to fast-track the hydrogen economy. Doing so would require a major energy-policy rethink--but probably nothing like the extravagant spending with which the government tried to answer the oil shocks of the 1970s. Instead, seed funding, tax incentives, and mandates for electric utilities to add more renewable power would help; so would shifting federal vehicle fleets to fuel cells. Uncle Sam's hydrogen to-do list might include:

--Creating incentives to install methane reformers at 10% of the nation's service stations--the minimum deemed necessary to support initial mass commercialization of fuel-cell cars. The installations would cost a total of $4.1 billion, according to a study last year jointly funded by the DOE and Ford Motor.

--Earmarking, say, $500 million a year through mid-decade to hurry wind, solar, and other renewable-energy technology. Tax incentives would help erect wind turbines; R&D grants might speed development of advanced "multilayer" solar cells, capable of cutting the cost of solar power in half.

--Providing $500 million to ramp up fuel-cell manufacturing. The money would fund federal R&D matching grants for labs working on fuel-cell manufacturing processes. It would also pay for shifting federal vehicle fleets to fuel-cell technology, helping fuel-cell makers more quickly achieve economies of scale.

Federal handouts for hydrogen might seem anathema to the oilman in the White House. Yet in Texas two years ago then-governor George W. Bush enacted a sweeping mandate that made Texas a leader in renewable energy. Its first phase requires the state's electric utilities to add 400 megawatts of renewable-energy generating capacity by 2003. The utilities opted for wind power; won over by its low cost, they have since doubled their renewable-energy commitment. Randall Swisher, executive director of the American Wind Energy Association, a trade group in Washington, D.C., calls the Texas program "the most effective renewable-energy policy in the country." More such mandates are sorely needed, adds Swisher, for many utilities and state power regulators still view wind power with a jaundiced eye.

Once the fuel-cell market begins to take off, its impact could snowball. Using hydrogen to combine such renewable energy sources with highly efficient fuel-cell cars could deliver a double whammy to oil's hegemony, says Amory Lovins, an influential energy expert at Rocky Mountain Institute in Snowmass, Colo. That's because the cars' fuel cells could be used both for transportation and, when parked, to generate electricity to feed into the grid. The dividends from such dual-use "Hypercars," he predicts, would probably make them less expensive to get around in than conventional gasoline-powered cars even when oil is still fairly plentiful and cheap, accelerating its displacement by hydrogen. Oil will still have a role in future years: "It will be good mainly for holding up the ground," he quips.