New federal tax provisions and state incentives are targeting installations of fuel cells. Does this mark a turning point for the US fuel cell market?

Years in the making, when the Energy Policy Act of 2005 (the EPAct) finally passed into law late last summer, it received loud critiques in the media for the heavy subsidies and incentives provided to the traditional fossil fuel and nuclear power industries. Still, while these critiques may be merited, there are provisions in the new legislation that are hardly insignificant for their impact in support of emerging clean energy sources.

One of those provisions is a new investment tax credit for fuel-cell installations. As of Jan. 1, 2006, new fuel cell owners are receiving a tax credit of up to 30% of system cost, capped at $1,000 per kW (see Section 1336 of the EPAct, which alters Section 48 of the US Tax Code). The credit is eligible for systems with a nameplate capacity of at least 500 watts and an electrical efficiency greater than 30%. 

Even taken alone, the new tax credit could certainly have a meaningful effect on the stationary fuel cell market in the US. Importantly, however, the federal tax credit is additive with respect to both other federal incentives found in the EPAct and most state subsidies. As with many other clean energy technologies, federal tax policy can provide a critical base around which the states can innovate and target specific applications.

Connecticut, for example, has long been a leading supporter of the fuel cell industry. The Connecticut Clean Energy Fund (CCEF), a ratepayer public benefit fund created in 1998 as part of electricity deregulation, has for several years offered a “buy-down” program to contribute to the capital costs of a new fuel cell.  Last fall, CCEF announced a new $21 million “Onsite Renewable DG Program” targeting commercial, industrial and institutional customers. Under the program, $9 million is reserved for fuel cell installations. In December, under a separate solicitation, CCEF announced support for a 4-MW fuel-cell project by PPL Energy Services, which will be one of the largest installations in the country.

In addition to financial incentives, Connecticut is among the states at the vanguard of legislative changes in support of fuel-cell distributed generation projects.  In 2005 legislation (“An Act Concerning Energy Independence”), the Connecticut legislature included, among other provisions, a requirement that gas companies waive the retail delivery charge for the transportation of natural gas from local distribution companies to “a customer-side distributed generation unit,” defined to include fuel cells.  This same legislation exempts operators of onsite distributed-generation resources from the requirement to pay backup power demand costs, provided the systems are “reasonably available to support system-wide capacity requirements.”

In California, Gov. Arnold Schwarzenegger issued an executive order (S-20-04) requiring state agencies, departments, and other entities under his authority to reduce grid purchases of energy by 20% by 2015. Importantly, the order specifically calls on the implementation of “distributed generation technologies” to achieve the goal.

The California model parallels a similar provision of the federal energy act. Section 783 of the EPAct allows federal agencies tasked with energy savings goals to use the lease or purchase of a stationary fuel cell to meet that requirement and authorizes the appropriation of meaningful sums (beginning at $20 million in 2006 and rising to $100 million in 2009 and 2010) to help agencies carry out their procurement.

As is to be expected, the details matter and vary from state to state, but around the country the confluence of new federal incentives, state support and new regulations and distributed generation mandates have created a new climate for fuel cell technologies. The specifics are beyond the scope of this overview, but from California to Florida, Ohio to Texas, fuel cells are being promoted for their energy security, environmental and economic development benefits.

For many electricity consumers, such as industrial users with needs for “high-quality” power and other commercial users needing high levels of reliability, the utility grid can simply no longer be seen as a viable solution. Telecommunications companies (such as Sprint) will be deploying fuel cells at critical locations in Florida's storm-ravaged areas. As energy expert Daniel Yergin opined recently in The Wall Street Journal, the 2005 storm season has underscored a “transition in the idea of energy security.” New solutions for reliable energy will be the order of business in the coming years in applications as varied as protecting our critical telecommunications infrastructure to protecting the famed 35,000-bottle wine collection in New Orleans' Brennan's Restaurant, which was ruined in the weeks without power for refrigeration after Hurricane Katrina.

While holding security of emergency facilities alongside premium wine collections may seem incongruous, it merely highlights the breadth of new potential applications for fuel cells. The new federal tax credits may well attract new customers that otherwise would not have considered such advanced technologies. Combined with target state incentives, fuel cells might now represent an ideal solution for a forward-thinking business or institution with some additional environmental interest. The question remains of whether fuel cells can deliver on this promise of reliability and security. We think the next twelve months will bring new examples that they can and will meet the challenge.

CAMERON BROOKS is project director at Clean Energy Group. MARK BARNETT is a technology associate of Foley Hoag LLP.

DE - March/April 2006