Energy Prices Fail to Boost Fuel-Cell Stocks

September 1, 2005
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The steady upward climb of oil prices and skyrocketing prices at the gas pumps has failed to generate new investment in emerging energy technology stocks, say industry observers.

For more than a decade, Perry Sadorsky has tracked the performance of alternative- energy systems in Canada and the U.S., particularly hydrogen fuel-cell companies.

The economics professor at York University’s Schulich School of Business says the common belief has long been that as oil prices rise, so too should the stock prices of fuel-cell stocks.

“What you would think is that oil prices would have a very pronounced effect” on renewables, he says. “We’ve done two different studies and we found out that oil prices were not much of a factor at all. What happened was the (stock) price of these fuel-cell and alternative-energy companies resembled more what happens in the technology sector.”

It turns out, Sadorsky adds, that among investment analysts and researchers, alternative energy companies have been viewed not as energy stocks, but as instrumentation and optic companies. “The analysts who follow the stocks aren’t even the ones who follow the energy sector.”

Many alternative-energy companies saw their stocks soar in the mid to late 1990s along with the rest of the high-tech sector, and subsequently plummet when the bubble burst in 2001.

“This poses a huge problem be! cause we’re not likely to see another technology bubble probably for a very long time, which means, how are these alternative energy companies going to get financing?” says Sadorsky. “This causes a real problem for them.”

Michal Moore, a senior fellow with the University of Calgary’s Institute for Sustainable Energy, Environment and Economy (ISEEE), says many factors conspire against wider acceptance of alternative fuels, key among them human nature.

Moore, who before joining ISEEE was chief economist at the U.S.’s National Renewable Energy Laboratory in Colorado, says high gasoline prices, for example, are readily absorbed by consumers because the costs come in “dribs and drabs,” and also because people are reluctant to trade in the SUV they’ve just purchased for the more economical four-banger.

Investors, meanwhile, remain leery about putting their money into something that won’t generate a guaranteed return, or where the payback fails to be consistent over long periods of ! time.

And the engineers who run the electricity grid are reluctant to integrate renewable power into the grid because they view options such as wind power as “intermittent, peaky, hard to ramp up and anticipate when it kicks in, and equally hard to ramp down,” Moore says.

Solutions – “twinning” power sources such as wind power and natural gas or coal, for example – must be viable at keeping energy costs under control, Moore adds.

The U.S. Energy Information Administration (EIA) recently projected the benchmark West Texas Intermediate oil price will average $59 US per barrel in the third quarter of 2005, around $15 higher than the same period last year.

The EIA also predicts the Henry Hub spot price for natural gas is expected to average $8.50 per thousand cubic feet in the fourth quarter. Henry Hub is the centralized point for natural gas futures trading in the U.S.

The EIA adds that “although natural gas storage remains above th e five-year average, several factors are expected to continue to support high natural gas prices, including high world oil prices, continued strength in the economy … limited prospects for growth in domestic natural gas production and concerns about the potential effects of hurricanes.”

MacMurray Whale, an analyst who covers sustainable energy for Sprott Securities, says until technologies such as hydrogen fuel cells become proven and reliable energy sources, oil prices could climb to $150 per barrel and alternative energies would still get the short shrift.

Whale says the alternative energy sector’s mediocre stock performance comes as no surprise, given that fuel-cell companies such as Ballard Power Systems of Vancouver and Hydrogenics Corp. in Mississauga have failed to attract serious interest from end-users to adopt fuel-cell technologies, largely because they cannot undercut competitors offering traditional power options.

“If you’re Wal-Mart or Costco and you’ve got the option of the fuel-cell thing and the battery thing and the price is the same … what are you going to do? Convert over to the new one at on-par price and risk it breaking down? Because if it breaks down, you’re dead.”

However, Hydrogenics believes it has a bright future producing alternative energy technologies despite the fact its stock has spiralled downward in recent months.

Rob McGillivray, director of business development at Hydrogenics, says that rising oil and natural gas prices will make hydrogen fuel cell products more competitive in the marketplace.

“That said, I think this is a bit more of a long-term driver and it certainly isn’t the only one,” McGillivray says.

Hydrogenics is currently focused on providing backup power generation to telecoms and data-centre markets, in addition to the “premium mobi! lity” market – handheld and portable electronic devices – as a pathway to reach larger markets in the future, such as the automobile industry.

“In attacking those markets, we feel we’re going to have a sustainable business, but we’ll also be building the technology and products to go to markets beyond that, and higher oil prices and more legislation around greenhouse gas emissions, issues around urban air quality, energy security, all those things are in there,” he says.

Whale likes some up-and-comers in alternative energy technology such as Vancouver’s VRB Power Systems Inc., which produces an efficient-flow battery whose performance surpasses traditional lead-acid batteries.

Victoria-based Carmanah Technologies is another company Whale keeps his eye on. The manufacturer of LED-based lighting and illumination offers products for the public transit, marine, aviation, roadway, industrial worksite and illuminated signage markets. Its stock price has jumped almost 50 per cent in the last year.

Manufacturers of hybrid products are also on his radar screen. “They haven’t quite got a fuel cell, but rather a step in between traditional power generators and the fuel cell, and it’s really catching on.”

Railpower Technologies, which refurbishes old locomotives and turns them into hybrid switchers to operate in railyards, has attracted a lot of attention from rail companies and investors alike.

The Vancouver-based company says railroads are seeking ways to reduce reliance on high fuel prices.

“For example, every one-cent rise (in fuel prices) for Union Pacific, the biggest railroad in North America, means $13 million of additional costs,” says Railpower spokesman Nigel Horsley. “So I think the railroad industry has been shocked into taking paramount consideration about the fuel price and where it’s going.”

Horsley says its lower-horsepower locomotives – which cost about two-thirds the price of standard machines – cut fuel costs by about 30 per cent.

Another Vancouver firm poised to take advantage of higher fuel costs is Azure Dynamics Corp., which manufactures hybrid systems targeted mainly at commercial fleet vehicles, such as courier companies and postal services.

Steven Glaser, vice-president of corporate affairs, says Azure will be producing commercial products for the marketplace by the end of the year.

Purolator Courier will be taking 30 hybrid vehicles into its fleet, while another 30 are currently operating with the U.S. Postal Service.

“We’ve progressed quite nicely – not what’s happening in the oil industry – but a nice progression,” Glaser says. “I certainly expect the adoption of our technology will happen – it’s happening now. We have vehicles being tested in large fleets.”

Hydrogenics’ McGillivray says greater adoption of hybrids will end up benefiting t! he fuel-cell sector.

“By definition you’re going to electric drives and electric systems … It’s very easy to take an electrified hybrid platform, take out the battery and the main power plant, and put in a fuel-cell alternative.”

(John Ludwick can be reached at