Subsidies Required – For Now

Making installation of fuel cells in multi-tenant projects pencil remains a primary ongoing challenge, but investors are finding some solutions.

At least until suppliers further reduce fuel cell production costs and boost efficiencies—a quite realistic expectation—making projects pencil remains a primary ongoing challenge. In a recent webinar hosted by Pike Research, prominent fuel cell expert Kerry-Ann Adamson stressed the great promise stationary fuel cell technologies hold—while also acknowledging the cost-related impediments to market penetration.

Adamson, one of Pike’s research directors, related that fuel cells can ultimately become viable alternatives to grid-sourced electricity generated through turbines powered by coal, natural gas and nuclear energy. She also noted that fuel cells can be exceptionally reliable complements to other distributed generation sources, such as ground-source energy, solar photovoltaic arrays and wind-powered turbines.

Perhaps most important from an economics perspective, considering fuel cell technologies’ current position within the innovation cycle, “there’s no reason to think innovations over the coming half-decade can’t bring costs down significantly,” Adamson concluded.

Adamson also presented a graph highlighting the “un-subsidized” 2011 cost ranges nationwide for stationary fuel cells relative to alternative electricity sources. At roughly 7 to 17 cents per kilowatt-hour, fuel cells came in generally higher than electric power generated by coal-, natural gas- and nuclear-powered turbines. Fuel cell costs were also higher than wind and lower than solar PV—but of course are far more reliable, as they can run 24/7/365.

Accordingly for the time being, landlords (and corporate property owners) today pretty much need to tap some combination of public subsidies—grants, rebates, tax credits and the like—if they want to economically tap into electricity generated by fuel cells.

At Hines’ La Jolla Commons development, under construction in San Diego, it made most sense to engage cell provider Bloom Energy in a purchase and maintenance agreement running through LPL’s 15-year initial net lease term—with the tenant securing benefits of the Federal Investment Tax Credit program. Factoring in the tax credit, benefits from California’s Self Generating Incentive Program (for investing in carbon-neutral fuel cells and purchasing biogas), and the lowered operating expenses LPL can expect from on-site generation, the La Jolla Commons investment should see a payback period of no more than about 5-1/2 years, Hines calculates.

In the case of 1211 Avenue of the Americas, the Beacon Capital Partners-led partnership that owns the real estate also essentially owns the 400-kw fuel cell, with News Corp. affiliates (Fox News included) agreeing to purchase all the electricity it generates at the same price charged by the local utility.

The property ownership entity received a $2 million state grant, while arranging to pass along the federal tax credit to fuel cell manufacturer UTC Power—which could put the credit and its accelerated depreciation capability to more productive use. UTC covered the unit’s cost, including installation, and also retains full operating and maintenance responsibilities for 10 years.

In turn, the property pays UTC a monthly service fee that repays the cost of the project, less the “monetized” value of the tax credits and grant, plus maintenance and repairs. “We like that structure,” related Al Scaramelli , Beacon’s senior vice president overseeing energy and sustainability projects, adding that system maintenance is better left to the technology vendor.

Of course, technology vendors and public agencies are open to other models, as well. In some cases Bloom, UTC and other vendors essentially own the systems while guaranteeing long-term electricity rates. Third-party power purchase agreements pertaining to fuel cells are another possibility.

Going forward, it appears likely fuel cell electricity costs will continue downward, even as grid-sourced power will probably head in the opposite direction. Hence, fuel cell systems can be effective hedges against higher utility rates, particularly given that natural gas and biogas prices appear unlikely to rise as quickly, speculated Paul Twardowski, the regional senior managing director overseeing La Jolla Commons.

For more on fuel cell installations in multi-tenant properties, turn to “Stored Energy” in the March 2013 issue of Commercial Property Executive.