I have just returned from a trip to London to evaluate some business opportunities in carbon trading stemming from the commencement of the Kyoto protocol. I was surprised by the level and intensity of interest in this market.

A few relevant trends I noticed:

• Significant interest by investors in carbon and emissions trading. Including numerous private equity style investment funds being raised to trade carbon credits and develop carbon offset projects.
• Deep government support for technology, trading mechanisms, and public awareness. For more information, check out www.thecarbontrust.co.uk, the site for a government funded independent organization focused on reducing the UK’s carbon footprint.
• A broad-based industry interest in clean technology, far surpassing what we see in the US. This trend is illustrated not the least by massive advertising campaigns from industry and government about the need for cleaner fuels, lower emissions, and more environmental and sustainable awareness. One of the most notable ad campaigns, which Americans will also be aware of, is British Petroleum.
• And perhaps of real concern for us in America, a broad distrust of the US government and the Bush adminisitration, especially its motivations when it comes to the environment.

Last Tuesday night, I had the pleasure of attending the holiday party and opening celebration for the Boulder office of the Rocky Mountain Institute.

Rocky Mountain Institute Web Site

For those who may not be familiar, RMI was founded by Dr. Amory Lovins, one of the few people in the energy arena who truly deserves the label “legend” and “guru”. At the party, Amory treated us to an extemporaneous 20 minute talk focused on RMI’s latest research project, funded in part by the U.S. Department of Defense, entitled “Winning the Oil Endgame”.

In a nutshell, “Winning” outlines a multi-decade strategy to wean the U.S. off of oil entirely — clearly, a laudable goal. The main elements of the “Winning” story are reasonably simple. The U.S. can cut its oil consumption by half through increased efficiency, and supply the other half with alternative fuels (biofuels, natural gas, ultimately hydrogen). The second part of the story is very interesting to examine in its own right, but it is the first part of this story that intrigued me: cutting oil consumption in half. Is this really possible?

Through compelling statistics, analysis and logic, Amory convincingly argued that, yes, such reductions in oil consumption are really possible. He noted the enormous energy penalty imposed by our vehicles’ weight: only about 5% of a car’s loaded weight is associated with the human cargo, and only about 12% of fuel burned to move the car’s loaded weight is transferred to the wheels, meaning that less than 1% of automotive energy consumption is truly useful in transporting the human being. Yes, that’s right, less than 1% of the energy content of all oil consumption produces the result that is desired. This is the best that a mature auto industry can do, even with untold billions of dollars of R&D investment over the past hundred years?

Therefore, the big lever on auto efficiency is to reduce the weight of cars. Of course, a behavioral switch away from SUV’s to lighter cars would be an easy start. But RMI doesn’t assume this as a requirement for their analysis. Rather, RMI claims that the technologies to cut any car’s weight (without downsizing) in 1/2 or more are available today. Of these technologies, the most important is the use of incredibly light yet incredibly strong composites in lieu of steel. Low-weight auto designs incorporating composites, if done in an integrated manner, can also reduce auto manufacturing costs dramatically. Detroit ought to be paying attention. I’m guessing the Japanese are.

This nugget is just one of dozens (hundreds?) of really interesting and provocative observations in “Winning”. Obviously, anything past a few years looking ahead in the energy and transportation sectors involves some major speculations. In the uncertain and volatile future that faces us, maybe not all of the projections and possibilities offered in “Winning” will ultimately be borne out, but I strongly suspect that many are very legitimate. The sponsorship of USDOD, combined with forewards written by George Schulz (ex-Sec’y of State under Reagan) and Sir Mark Moody-Stuart (ex-Chairman of Royal Dutch/Shell), give credence to the contents of “Winning”. It is not the work of a naive utopian, but rather deserves serious consideration by sober policy-makers, businesspeople, and citizens. Get the book.

Winning the Oil Endgame

The core technology in PEM fuel cells remains the MEA and membrane. Stack technology is becoming a commodity. But the solution to a low cost long term durable high performance membrane is elusive. The major player Dupont still owns this market with their nafion category of products. Several challengers have risen to try their hand, but really have ben unable to make a major dent in Dupont’s nafion, or the industry need. By my guess the challengers still have only in the very low double digit millions in revenue.

As an example, rapid growing Hoku Scientific, the latest craze for investors, is on a run rate of c. $5 mm in revenue. It is even making a bit of money. However with a market cap of $150 mm, a bit aggressive.

Take note: That market cap is close to the total volumes of commercial PEM fuel cell sales for Hoku’s entire target customer base.

Polyfuel, another membrane producer, took the AIM route, and is of a similar size.

The problem for the membrane and MEA producers is 3 fold:

With the advent of the challengers, their is not a big enough near term market for any of them to grow profitably (the whole PEM fuel cell market in terms of cost for total pilot and commercial units shipped is well less than $200 mm/year)

• PEM fuel cells are being supplanted in R&D spending by SOFC and DMFC or microPEMs (which either do not need membranes like these, or need far less square footage of membrane).
• The prices and performance are still not where the fuel cell industry needs them to be to commercialize, even if it can get the rest of its act together.