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Fuel cell businesses resurgent a decade after early hype

K. R. Sridhar, CEO of Bloom Energy
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A new eBay data center in South Jordan, Utah, enables the e-commerce giant to keep its goods flowing, but it is remarkable for another reason entirely. The center is the first facility of its kind to generate all its electricity on site from fuel cells, which are provided by Bloom Energy.

The data center is one more sign that fuel-cell energy companies are in the early stages of a rally. After nearly 10 years of spiraling stock prices, recent technological innovations and improved balance sheets are attracting Fortune 500 companies, both as customers and partners. Now, an industry known for operating in the red shows signs of achieving profitability.

"The market is more and more becoming aware of the attributes of fuel cells and buying into them and all of that is leading to large annual production of fuel cell technology," said Scott Samuelsen, director of the Fuel Cell Research Center at the University of California at Irvine.

Revenue from stationary fuel cells grew 55 percent last year, to $1.3 billion, according to Navigant Research's Fuel Cells Annual Report 2013.

Fuel cell systems convert fuels such as natural gas, methane and biogas into electricity via an electrochemical process with minimal emissions. While wind and solar provide intermittent power, fuel cells operate continuously.

"In the early 2000s there was a lot of hype around the sector," said Kerry-Ann Adamson, a Navigant fuel cell analyst. "The technology was in the grip of trying to find where the problem in the market was. At the time, it was a solution without a problem."

But Samuelsen at the Fuel Cell Research Center said two developments have emerged since to lay the groundwork for this rally.

The first is the rise of high-temperature fuel cells. Much of the technology popular 10 years ago required expensive rare earth, such as platinum. But the fuel cell systems from companies such as Bloom and FuelCell Energy are made from cheaper and abundant ceramics.

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Tax credits and state rebates have also reduced the cost of fuel cells by as much as half the sticker cost. Programs in California and New Jersey have made fuel cells competitive with conventional energy, reducing the cost of capital investments by up to half when combined with federal subsidies.

That has lead to increased volume and cost reductions, said Samuelsen. Between 2003 and 2011, the price of producing energy from fuel cells fell from $10,000 per kilowatt to about $2,500, according to FBR Capital Markets research.

Projects like eBay's data center are important confidence boosters for companies exploring fuel cells as an option, said Matt Ross, chief marketing officer for Bloom Energy. The privately held company is based in Sunnyvale, Calif., and is backed by $1 billion in venture capital.

Since shipping its first Bloom Boxes to Google in 2008, the company has sold units and energy to companies including Wal-Mart and AT&T. It has also worked with utilities including California's PG&E and Delmarva in Delaware to provide energy.

"We think eBay is a real leader in the data center sector. They've taken a very bold step," said Bloom Energy's Ross. "I have no doubt that others are going to be following their footsteps."

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Bloom declines to disclose its financials. The company told Fortune last year that it expects to reach profit this fiscal year.

Two recent announcements could help Bloom get there. It has begun a leasing program backed by Bank of America that will target Fortune 1,000 companies and customers with medium-capacity needs. It also recently entered a joint venture with Japan's Softbank to help fill the country's energy deficit following the Fukushima nuclear plant disaster.

Another emerging market for fuel cells is South Korea, where the government aims to generate 10 percent of power from renewable sources by 2020. FuelCell Energy, which builds fuel cell energy plants, is currently constructing the world's largest fuel cell park in South Korea with a capacity of 59 megawatts.

FuelCell shares are up about 35 percent this year to $1.25. The median price target now sits at $1.88, according to Thomas One Analytics. FBR Capital Markets believes FuelCell's strong growth in revenue and its backlog of orders—up 126 percent year over year to $410 million—will drive the company to profitability next year.

The road to profitability looks longer for Ballard Power Systems, the leading fuel cell provider for telecoms-backup systems in Asia and South Africa. Ten years ago the company was focused on the nascent electric vehicle sector. It has since focused on money-making ventures like backup energy and powering warehouse forklifts.

Lazard Capital notes that Ballard has reduced its losses, and estimates the company could reach break even in the next few years.

The industry still faces significant risks. It remains largely dependent on government subsidies. If tax credits for renewable energy falter, business could suffer.

Fuel cell companies typically have a narrow portfolio of clients, as well. Just five companies accounted for 86 percent of FuelCell Energy's business in 2012, with South Korean energy company POSCO Energy accounting for 76 percent.

Reception from utilities has so far been mixed, with some companies embracing partnerships and others shunning the potentially disruptive companies. Fuel Cell Research Center's Samuelsen said differences are to be expected during industry shifts. He believes fuel cells will become a needed asset in building smart grids.

"Any fundamental change in a market takes decades. The shift in the energy market to a more resilient, low carbon, distributed energy generation system will take decades to fully deploy," said Navigant's Adamson. "The investment communities are now wise to the fact that the energy markets are in this period of change. Change equals opportunity and they are coming back to the fuel cell industry."

CORRECTION: An earlier version of this story stated that revenues from stationary fuel cells this year grew 55 percent to $1.3 billion. That was the revenue growth for fuel cells in 2012.

—By CNBC's Tom DiChristopher. Follow him on Twitter @tdichristopher.