National Institute of Standards and Technology ? Technology Administration? U.S. Department of Commerce

NISTIR 7161

The Role of the U.S. National Innovation System

in the Development of the PEM Stationary Fuel Cell

John M. Nail

Gary Anderson

Gerald Ceasar

Christopher J. Hansen

February 2005
NISTIR 7161 

The Role of the U.S. National 

Innovation System in the 

Development of the 

PEM Stationary Fuel Cell 

John M. Nail 

Economist 

Economic Assessment Office 

Advanced Technology Program 

Gary Anderson 

Economist 

Economic Assessment Office 

Advanced Technology Program

Gerald Ceasar 

Program Manager 

Information Technology and Electronics Office 

Electronics and Photonics Technology Group 

Advanced Technology Program 

Christopher J. Hansen 

Doctoral Candidate, Oxford University 

(Formerly with the Economic Assessment Office, 

Advanced Technology Program) 

February 2005 

U.S. DEPARTMENT OF COMMERCE 

Carlos M. Gutierrez, Secretary 

TECHNOLOGY ADMINISTRATION 

Phillip J. Bond, Under Secretary of Commerce for Technology 

NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY 

Hratch G. Samerjian, Acting Director 

ADVANCED TECHNOLOGY PROGRAM 

Marc G. Stanley, Director 

i 

Abstract 

This report originated in the authors’ participation in a multi-country study of national 

innovation systems and their impact on new technology development, sponsored by the 

Organization for Economic Cooperation and Development (OECD). Our task was to look 

at the U.S. national innovation system’s impact on the commercial development of 

Proton Exchange Membrane (PEM) fuel cells for residential power applications. 

Early drivers of PEM fuel cell innovation were the aerospace and defense programs, in 

particular the National Aeronautics and Space Administration (NASA), which used fuel 

cells on its spacecraft. In the early 1990s, deregulation hit the electric utility industry, 

which made utilities and entrepreneurs see the potential in generating electricity from 

distributed power. 

Throughout the 1990s, the Department of Energy funded a significant portion of civilian 

fuel cell research, while the Department of Defense and NASA funded more esoteric 

military and space applications. In 1998, the Department of Commerce’s Advanced 

Technology Program (ATP) awarded the first of 25 fuel cell projects, as prospects for 

adoption and commercialization of fuel cell technologies improved. 

Based on findings from this study and discussions with an OECD-sponsored working 

group studying innovation in energy technologies, we find that private industry 

conducts significant amounts of basic research in fuel cells. This is partially driven by the 

significance of the automotive, energy, and electronics industries in the participating 

countries. Energy security is another prime driver. Industry receives a majority of the 

new fuel cell patents issued. However, national laboratories and universities continue to 

publish the majority of papers devoted to fuel cells. These findings support the value of 

public-private partnerships such as ATP, especially projects that link universities or 

national labs with private industry either through a formal joint venture or as a 

subcontractor. In addition, the working group acknowledged government’s important 

role both in terms of developing fuel cell standards through collaborations between 

standards development organizations and national labs, and in dealing with a wide 

variety of public safety issues. These findings support National Institute of Standards 

and Technology initiatives in facilitating standards development for fuel cells. 

Despite the excitement generated by discussion of the “hydrogen economy,” most fuel 

cell applications are still at the pre-commercialization stage. Commercial products for 

small portable uses may be available in the marketplace within the next year or two. 
ii 

Acknowledgments 

This report originated in the authors’ participation in a multi-country study of 

national innovation systems and their impact on new technology development, 

sponsored by the Organization for Economic Cooperation and Development 

(OECD). We would like to thank Inja Paik from the Department of Energy and Jerry 

Sheehan from OECD for asking us to participate in this study. We learned a great 

deal of new information about fuel cell development through this exercise. We 

would like to thank the following people in the Advanced Technology Program’s 

(ATP’s) Economic Assessment Office: Connie Chang, Jeanne Powell, and Stephanie 

Shipp. We would also like to thank Purabi Mazumdar, Dilip Banerjee, Elissa 

Sobolewski, and Don Bansleben from ATP; Laura Schultz from the Building and Fire 

Research Laboratory of the National Institute of Standards and Technology; and 

Brian Belanger, former Deputy Director of ATP; for their helpful comments. 

We thank Nita Congress, with the editing firm Grammarians, for her outstanding 

editing and desktop design. We are grateful to the following people at Plug Power 

for the generous use of their time during our interviews and for sharing many of 

their insights during the past decade of fuel cell development: Glenn Eisman, John 

Elter, Bill Ernst, and Wayne Huang. 
iii 

Executive Summary 

The authors of this report were asked to participate in a Conference on Innovation in 

Energy Technologies sponsored jointly by the Organization for Economic 

Cooperation and Development (OECD), International Energy Agency, U.S. National 

Academies, and the U.S. Department of Energy (DOE). The objective of the 

conference was to examine the national innovation systems in various OECD 

countries, with a particular emphasis on understanding the organization of energy 

innovation systems so that appropriate links can be established between the public 

and private sectors, and effective public policy developed and implemented. While 

the conference theme was not limited to fuel cells, this technology was a prime focus, 

since it is a key initiative in many national energy innovation programs. The studies 

prepared for the conference focused on the following issues: 

The respective roles of market forces and government policies in 

establishing objectives for energy innovation and directions for research. 

The relative contributions and degree of collaboration among industry, 

universities, and government in financing and performing research and 

development (R&D). 

Obstacles impeding the commercialization of new energy technologies. 

The focus of this project was to study the role and impact of the U.S. national 

innovation system in the technological and commercial development of the 

stationary fuel cell (for example, to provide energy for a residence) as opposed to an 

automotive fuel cell, which would be used to power a car. The authors chose to limit 

the study’s scope to the development of the Proton Exchange Membrane (PEM) fuel 

cell for residential use. 

The study methodology entailed a review of both the fuel cell industry as a whole, 

including its history, drivers of knowledge innovation, and patterns of knowledge 

creation; and an examination of a single company, Plug Power, that has played a 

central role in the development of stationary fuel cell systems for powering 

residences and businesses independent of the power grid. The researchers drew 

upon personal experience in the fuel cell area as scientists or project managers with 

the Advanced Technology Program (ATP). Additionally, extensive interviews were 

conducted with executives from Plug Power; the research also encompassed a 

literature review. 
iv  Executive Summary 

The study’s key findings in terms of the three OECD objectives are presented below. 

Respective Roles of Market Forces and U.S. Government Policies in Establishing 

Objectives for Energy Innovation and Directions for Research 

Because the technology entails limited emissions and no moving parts, 

fuel cells are a relatively attractive energy source. This attractiveness 

notwithstanding, commercial development of fuel cell technology, which 

is a fairly old technology, has been progressing at a glacial pace. To date, 

market forces have been unable to pull fuel cell technology into the 

commercial marketplace. 

The Federal Government played a role in the early development of fuel 

cells through sponsorship of private research by large mission-oriented 

agencies involved in space and defense. These arrangements worked 

well, because cost was not an issue, only performance. Technical 

advances were thus enabled without researchers being held back by the 

economics of commercialization. 

As fuel cell technology has moved closer to commercialization, U.S. 

national innovation policy has shifted toward leveraging the assets of the 

public sector with those of the private to ensure the technology’s 

marketplace competitiveness with regard to cost and reliability. 

The DOE Hydrogen Roadmap provides a means of establishing 

objectives and directions for future fuel cell research. The Roadmap calls 

for a 2015 commercialization decision by industry based on the success of 

government and private research. There are no arbitrary sales quotas or 

scheduled deployment targets. Only after consumer requirements can be 

met and a business case justified will market introduction begin. A report 

by the National Research Council (2004) reviews many of the technical 

goals laid out by the Hydrogen Roadmap and provides suggestions for 

improvement. One of the report’s primary recommendations to DOE is to 

regularly update the report to reflect progress. It suggests that the best 

way to achieve this objective is for DOE to develop and deploy a systems 

analysis approach to understanding full costs, defining options, 

evaluating research results, and helping balance its hydrogen program 

for the short, medium, and long term.1 

 

1p. 4. 
Executive Summary  v 

Relative Contributions and Degree of Collaboration among Industry, Universities, 

and Government in Financing and Performing R&D 

President Bush continues to push for higher hydrogen/fuel cell funding. 

His FY 2005 budget request exceeds the FY 2004 appropriation by 23 % 

and is almost double the FY 2003 level.2

DOE has been the primary government-funding source for fuel cell 

research since 1978. While the actual contribution of the private sector is 

unknown, a reasonable estimate of the costs of 10 to 20 years of fuel cell 

research by the “Big 3” automakers would probably exceed the 

government figure by a substantial amount.3 However, given the lack of 

commercial success by private companies in this arena, the government 

will probably need to play a vital role in facilitating the 

commercialization of this technology. 

Universities spent over $4 billion in research funds for all of 1999 in 

disciplines related to fuel cell research, although the exact figure devoted 

to fuel cells is unknown. It is most likely a small fraction of that figure.4 

The amount of patenting in the fuel cell area has increased substantially 

from the mid-1990s. Most recent patents are assigned to private 

corporations rather than to government or academic organizations. This 

is at least a partial result of revisions to the Federal Acquisition 

Regulations in 2003, which permitted advance patent waivers to be 

granted to small businesses for technology development programs that 

are cost shared by industry.5

Collaborations between the government and private sector in civilian fuel 

cell research applications are generally of two types: those funded by 

DOE, the largest federal monetary contributor to fuel cell research, and 

those supported by ATP. DOE collaborations lead to work done by either 

 

2U.S. DOE (2004), p. 13. 

3The U.S. automakers do not disclose R&D figures in their annual reports. DaimlerChrysler, a German automaker, spent approximately $7 billion on R&D in 2003. Daimler-Chrysler 

has been working on automotive fuel cell technology for 10 years now. If it even spent 1 % of its 

R&D budget on fuel cell technology, the figure would be $70 million. Therefore, one could 

extrapolate a similar amount to the two remaining U.S. automakers since they are similar in size to 

Daimler-Chrysler. 

4Stoup (2001). 

5www.epa.gov/fedrgstr/EPA-IMPACT/2003/August/Day-21/i21172.htm. 
vi  Executive Summary 

private companies or universities, but research outcomes are dependent 

on the scope specified by the agency request. ATP, on the other hand, 

creates open competitions wherein the companies suggest projects 

involving high-risk R&D project ideas they believe will have high 

commercial possibilities and a large potential for broad-based economic 

benefits to the national economy. 

The Department of Defense (DOD) conducts significant fuel cell research 

for various mission-oriented applications. In FY 2004, DOD was 

authorized to spend approximately $70 million in fuel cell R&D.6 

Collaborations within the private sector reveal an interesting 

phenomenon. Despite a relatively paltry record of commercialization 

success, the fuel cell industry is already global in nature. For example, a 

small firm such as Plug Power has already partnered with a Japanese 

company, Honda, to create a reformer that allows hydrogen to be 

produced at a residence for automobiles, as well as electricity and heat. 

Plug also has partnerships with two German companies, Celanese and 

Vaillant. Celanese develops high-temperature membranes for Plug. 

Vaillant is helping Plug demonstrate fuel cells that capture the heat 

produced in a fuel cell and use it to create hot water for a residence. 

Many automotive and energy companies have partnered with various 

smaller and independent fuel cell makers, choosing to take equity 

positions instead of acquisitions. They continue to invest money in 

internal R&D programs, but it is difficult for an outsider to judge 

whether these programs are creating significant advances that may be 

revealed in a few years or whether they are a means for these firms to 

remain technically competent in case some other company delivers 

significant technology breakthroughs. 

Overall, the PEM fuel cell industry consists of a core group of 

companies—e.g., Ballard (Canada), Plug Power (U.S.), and UTC Fuel 

Cells (U.S.)—engaged in commercializing the technology. Each company 

has large partners on both the demand side (automotive and utility 

companies) and the supply side (chemicals and specialty materials 

companies). 

 

6U.S. Fuel Cell Council Federal Fuel Cell Funding Chart. 
Executive Summary  vii 

Obstacles Impeding Commercialization of PEM Stationary Fuel Cells 

There remains a large gap between today’s costs of fuel cell technology 

versus comparable existing energy technologies. For PEM stationary fuel 

cells to be commercially viable, installed costs must be reduced by a 

substantial factor. The exact number is difficult to quantify because 

production efficiencies cannot be estimated until large-scale production 

begins. A 2001 study by the Energy Information Agency assumed that 

fuel cell capital costs then equaled approximately $3 625 (1998$) per 

kilowatt (kW) of electricity with 40 % efficiency versus gas turbine capital 

costs of $900 per kilowatt of electricity with 29 % efficiency.7 The agency’s 

model assumes a price drop to $3 000 per kilowatt by 2009, to $2 450 per 

kilowatt by 2014, and to $1 750 per kilowatt by 2019. These numbers may 

be somewhat optimistic regarding the current cost of producing a 

residential fuel cell, but the trajectory of cost reductions needed for 

commercialization to become a reality are the same regardless of today’s 

cost. 

The near-term commercial potential of fuel cells is limited to portable 

applications and niche markets such as, for example, uninterruptible 

power supply. Larger markets may take a very long time to deliver the 

returns needed to justify the large investments being made now and over 

the next several years. Although fuel cell companies are attempting to 

develop products designed for those larger, more potentially lucrative, 

markets, these companies may not be able to support themselves before 

these markets develop. Given the times needed to develop these 

technologies and the financial positions of most small fuel cell 

companies, it is likely that some type of consolidation will occur; 

otherwise, companies will need to find more commercially salable 

products now—perhaps at the expense of developing truly revolutionary 

technologies. 

Safety and standards issues must be addressed. DOE recently awarded 

several new projects in this area, and the National Institute of Standards 

and Technology is developing standards using a residential fuel cell 

supplied by Plug Power. More DOE funds are being allocated to safety 

and testing as well as to public education. 

 

7Boedecker, Cymbalsy, and Wade (2001). 

ix 

Contents 

Abstract..................................................................................................................................... i

Acknowledgments ................................................................................................................. ii

Executive Summary ..............................................................................................................iii

Contents.................................................................................................................................. ix

I. Introduction to the Study.............................................................................................. 1

II. Overview of Fuel Cells .................................................................................................. 5

A. Description of Fuel Cells....................................................................................... 5

B. Types of Fuel Cells................................................................................................. 7

C. Fuel Cell Applications........................................................................................... 8

III. Drivers of Innovation in the Fuel Cell Industry ...................................................... 11

A. Historical Drivers of Innovation........................................................................ 12

B. Public Policy as a Driver of Innovation ............................................................ 14

C. Plug Power............................................................................................................ 25

IV. Knowledge Creation and the Use of Intellectual Property in the 

Fuel Cell Industry ........................................................................................................ 29

A. Historical Government Support for Knowledge Creation in 

PEM Fuel Cells ..................................................................................................... 29

B. University Support of Fuel Cell Research ........................................................ 30

C. Government Support for Knowledge Creation in Fuel Cells 

(Outside of the Advanced Technology Program) ........................................... 31

D. Intellectual Property in Fuel Cells ..................................................................... 34

V. Technological Innovation Leads to Commercialization of Stationary 

Fuel Cells....................................................................................................................... 39

A. Analytical Framework......................................................................................... 40

B. Likelihood of Commercial Success.................................................................... 40

VI. Conclusions................................................................................................................... 49

A. Drivers of Fuel Cell Innovation.......................................................................... 49

B. Innovation in the Energy Sector: Knowledge Creation, Diffusion, and 

Exploitation........................................................................................................... 50

C. Public Policy for Innovation in Fuel Cells ........................................................ 51

About the Authors ............................................................................................................... 53

References.............................................................................................................................. 55

1 

I. Introduction to the Study 

The motivation for this study came from a request by the Organization for Economic 

Cooperation and Development (OECD) to study the U.S. national innovation 

system’s impact on energy technologies, which focused primarily on emerging fuel 

cell technology developments. Our mission was to study developments of 

residential/stationary fuel cell technology in the United States and, in particular, the 

influence of the national innovation system on its development.1 We were asked to 

answer certain questions by OECD. For example, what are the drivers of innovation? 

In what manner do governments and universities assist in this effort? What is the 

role of public-private partnerships? 

We answered these questions at an industry level, but in order to understand 

innovative processes, we believed it was necessary to examine the experiences of 

individual companies. We determined that the scope of fuel cell development was 

enormous, even though there are only a few commercial products available in the 

marketplace. Therefore, besides researching broad-based industry trends, we 

focused our efforts on an individual company, Plug Power, in order to highlight its 

experience with the national innovation system and, hopefully, to gain some 

insights. We felt that it would be helpful to illustrate how research and development 

(R&D) in this field has progressed to date and to explore marketplace issues by citing 

experiences of one of the major players in the field. Plug Power, an Advanced 

Technology Program (ATP) awardee, was willing to share considerable detail about 

its fuel cell experiences, and so we include the information in the report. Citing this 

example, as well as similar information regarding other fuel cell companies, does not

constitute endorsement of those firms or their products by the National Institute of 

Standards and Technology (NIST). 

These topics are organized into the following structure. Section II contains a 

description of the fuel cell, the types of fuel cells available, and their potential 

commercial application. Section III describes the drivers of innovation within the fuel 

cell industry. Section IV describes knowledge creation within the fuel cell industry. 

Section V focuses on commercialization issues. Section VI presents several 

conclusions drawn from the study. 

The purpose of this publication is several-fold: 

 

1The OECD mission statement can be found at www.oecd.org/dataoecd/25/45/ 

2495364.pdf. 
2  I. Introduction to the Study 

The study provides a snapshot of the state of the fuel cell industry in 2004 

as it relates to the national innovation system, private sector players, and 

the intellectual property arena. 

The study provides a detailed explanation of efforts by ATP and NIST in 

the fuel cell area. 

Conclusions for this study were used in the comprehensive OECD study 

covering nine other nations’ efforts in fuel cell development. 

This study will be summarized into a 15-page report, which will then be 

combined with similar summaries from the nine other nations. 

The conclusions from the comprehensive fuel cell study will be combined 

with other large multi-country studies related to biotechnology and 

knowledge-intensive services in order to create a comprehensive “lessons 

learned” document, summarizing the knowledge gained from all three 

large studies. 

Since its beginning, the U.S. Government has enacted policies and laws that 

encourage innovation. The national innovation system is not a formal institution per 

se, but a set of policies designed to advance science and technology and to 

commercialize new discoveries. Some examples of the national innovation system 

from history include the following: 

The Constitution provided for a national patent system. 

Alexander Hamilton promoted government tariffs as a way to protect 

new industries from competition. 

The Morrill Act of 1862 created land-grant colleges.2

The Federal Government provided free land to build canals and 

railroads. 

Although circumstances and times have changed considerably, the U.S. Government 

continues to pursue policies that encourage and support innovation. 

 

2In 1862, Congress’s first Morrill Act granted each state 30 000 acres of federal land for 

every senator and representative. Each state was to sell the land and invest the proceeds in an 

endowment in order to establish at least one college whose mission was—and continues to be 

today—to incorporate the traditions of the liberal arts and sciences with those of the practical, 

mechanical, and industrial. 
Introduction to the Study  3 

One of the greatest innovations in human history was the ubiquitous deployment of 

electricity. Thomas Edison understood that large amounts of capital were needed to 

commercialize new technology, which is why he placed his first electric power 

station in the Wall Street district of New York in 1882. Edison envisioned a world of 

distributed power wherein the power was generated at the plant that used the 

energy or in the home. However, by the 1920s, the electric power industry followed a 

model that relied upon centralized power generation and distribution across wires. 

By the 1980s, the efficiency gains from building ever-larger power plants dissipated, 

and the trend of larger plants and declining prices reached a sudden end.3 Another 

technology that generates electric power, the fuel cell, has experienced steady 

technical advances over the last four or five decades. This study examines the 

development of the fuel cell through the U.S. national innovation system. 

 

3Dunn (2000), p. 6. 

5

II. Overview of Fuel Cells 

This section describes the fuel cell, the different types of fuel cells available, and their 

commercial applications. 

A. Description of Fuel Cells 

A fuel cell is an electrochemical device that produces electricity silently and without 

combustion. A fuel cell consists of two electrodes, an anode and a cathode, with an 

electrolyte sandwiched in between. Figure 1 is a diagram of a typical fuel cell. 

Oxygen passes over one electrode and hydrogen over the other, generating 

electricity, water, and heat. Unlike other electrochemical devices such as batteries, a 

fuel cell only requires a continuous flow of hydrogen and does not run down or 

require recharging. It will produce energy in the form of electricity and heat as long 

as fuel is supplied. 

Figure 1. A fuel cell membrane electrode assembly operation. Adapted 

from Fuel Cell World Council (1999). 

Fuel cells thus make usable energy in the form of electricity and heat by combining 

hydrogen and oxygen from the air in an electrochemical reaction. For stationary 

applications, hydrogen is typically made on site from natural gas by means of a 

reformer. Fuel cells are highly energy efficient, extracting two to three times more 

useful energy from fuels than other generation methods.1 Since a fuel cell has no 

 

1U.S. DOE (2003), p. 1. 

Electrolyte

(Membrane)

- +

+ +

+

2H +

2e -

O 2

1

2

2H +

2e -

H 2

2e -

2H +

Anode Cathode

heat

+

water H 2O

Hydrogen

(from fuel)

Oxygen

( from air)
6  II. Overview of Fuel Cells 

moving parts in its core system, its reliability can be high. Because fuel cells do not 

involve combustion, the device produces no air pollutants when operating with pure 

hydrogen as a fuel, and greatly reduces air pollutants when operating with reformed 

hydrogen. 

As shown in figure 2, a fuel cell system consists of three main components that work 

together: a fuel reformer, a fuel cell stack consisting of many membrane electrode 

assemblies, with gas and water distribution manifolds and electronic controls and 

power conversion equipment. The reformer is responsible for producing a hydrogenrich stream, typically from a fossil fuel source, which is then fed into the stack 

containing the membrane assembly to be combined with oxygen from the air. This 

catalytic reactive combination of hydrogen and oxygen produces electricity. 

Reformers can be designed to convert a number of everyday fuels into hydrogen, 

including natural gas, propane, coal-bed gas (sour gas), landfill decomposition gas, 

and gasoline. The reformer converts the hydrogen from the hydrocarbon molecule, 

generally using the steam or heat captured from the operating fuel cell. 

Alternatively, hydrogen can be produced in bulk at a separate facility and then 

transported and stored on site in a compressed gas form or bound in a metal 

hydride. 

Figure 2. Fuel cell system components and flow diagram. Adapted from 

Fuel Cell World Council (1999). 

The heart of the fuel cell is the membrane electrode assembly, composed of an anode, 

cathode, electrolyte, and associated channels to deliver hydrogen and oxygen and to 

remove water and heat. The anode and cathode have to be electrically isolated from 

INVERTER

HYDROGEN 

RICH GAS FUEL INPUT

HEAT

RECOVERY

FUEL PROCESSING PREHEATING HEAT FOR

COGENERATION

FUEL

CELL

STACK

FUEL

REFORMER

OXYGEN (AIR)

AC POWER

OUTPUT

DC POWER

OUTPUT

WATER
II. Overview of Fuel Cells  7 

each other, but with a membrane in between that allows hydrogen ions catalytically 

produced at the anode to migrate to the cathode to combine with oxygen from the 

air, producing water. The electric current flows from one electrode to the other thru 

the electrical load. The fuel cell system (figure 2) contains a fuel cell stack, so called 

because it is a stack of the fuel cells shown in figure 1. The size of the stack 

determines how much power and voltage can be produced by the system. The third 

part of a fuel cell system consists of the electronic controls and power conversion 

equipment. Integral to efficient design, electronic controls balance the inflows and 

outflows of fuel, air, and cooling agents. Power conditioning equipment is also 

needed to convert the direct current (DC) power produced by fuel cells into the U.S. 

standard 110 V, 12 A at 60 Hz power source (alternating current—AC) required by 

most residential and commercial users. This process, represented by the inverter box 

in figure 2, is approximately 96 % efficient, causing a slight dip in the overall 

efficiency of the fuel cell. 

B. Types of Fuel Cells 

Table 1 lists the different types of fuel cells. The primary difference between each is 

the type of materials used in the fuel cell stack to generate the chemical reaction 

(electrolyte) needed to make electricity. Not only do fuel cells emit fewer pollutants 

than other forms of energy generation, they also have the potential to use 50 % less 

energy than internal combustion engines and 30 % less energy than conventional 

gas-fired power plants.2 

 

2U.S. DOE (2003). 
8  II. Overview of Fuel Cells 

Table 1. Types of Fuel Cells 

Type Electrolyte 

Operating 

temperature 

(°C) 

Commercial 

applications Commercialization 

Proton 

Exchange 

Membrane 

(PEM) 

Solid polymer, 

protonconducting 

electrolyte 

50 to 90 Transportation, 

stationary, 

portable power 

Out of 1 900 small 

stationary fuel cells 

deployed as of 2003, 

75 % are PEM. 

Currently, Plug Power 

has installed over 400 

PEM stationary fuel 

cells for 

demonstration. 

Ballard has produced 

PEM fuel cells for 

cars and trucks over 

the last decade. 

Direct 

Methanol 

Solid polymer, 

protonconducting 

electrolyte 

40 to 100 Portable power, 

transportation, 

stationary 

Of the 3 500 portable 

fuel cells deployed so 

far, about 45 % are 

fueled with methanol. 

Solid Oxide Yttria-stabilized 

Zirconia 

800 to 1 000 Transportation, 

stationary, 

portable power 

25 % of the 1 900 

small stationary fuel 

cells deployed as of 

2003 are solid oxide. 

Phosphoric 

Acid 

Phosphoric 

acid 

190 to 210 Stationary More than 200 fuel 

cell systems have 

been installed 

worldwide, including 

at hospitals, hotels, 

and office buildings. 

Molten 

Carbonate 

Potassium 

carbonate 

630 to 650 Stationary Carbonate fuel cells 

for stationary 

applications have 

been successfully 

demonstrated in 

Japan and Italy. 

Sources: Breakthrough Technologies Institute, www.fuelcells.org/fctypes.htm; Cropper (2003) et al. 

C. Fuel Cell Applications 

1. Stationary (Residential Systems 1 kW to 20 kW Units, Target Cost <$1 000 per 

Kilowatt) 

Stationary fuel cells, as their name implies, generate power from a unit that remains 

in a single fixed location. Stationary fuel cells come in a variety of sizes. The smaller 

on-site stationary fuel cells (between 1 kW and 10 kW) may power a home, business, 

or stand-alone remote electric application such as a cell telephone tower. For 

example, Plug Power’s residential fuel cell generates approximately 5 kW of power. 

Since the technology is modular and easily permits units to be added together, such 

distributed power units can be used to power hotels, hospitals, or industrial 

establishments that require hundreds of kilowatts of power. The larger PEM 

stationary fuel cells generate between 50 MW and 200 MW of power and are more 
II. Overview of Fuel Cells  9 

suitable for central power generation. Any large consumer of electricity may use 

these fuel cells. One advantage of distributed on-site stationary fuel cells is the 

capability to sell any extra electricity that is generated but not consumed back to the 

“grid.” To compete with electricity coming from the grid, fuel cell power units have 

to cost less than $1 000 per kilowatt. 

2. Transportation (Target Cost <$50 per Kilowatt) 

Ballard fuel cells have powered buses in Canada since 1993. All the major 

automotive manufacturers have fuel cell vehicles under development and in testing 

right now—General Motors, Ford, Daimler-Chrysler, Honda, Toyota, Hyundai, and 

Volkswagen. To compete with the internal combustion engine, fuel cell power trains 

have to be made small, lightweight, and extremely cost effectively at less than $50 

per kilowatt—that is, more than 20 times cheaper than stationary units. 

Market penetration of fuel cells likely will begin in markets where cost sensitivity is 

not as great an issue as it is for vehicles. These new markets will include stationary 

distributed power units for commercial and residential electricity and micro fuel 

cells. It is widely speculated that the fuel cell vehicle will not be commercialized until 

2010 at the earliest.3

3. Portable Power (Electric Appliances <1 kW, Target Cost <$3 000 per Kilowatt) 

Miniature fuel cells will enable consumers to talk for up to a month continuously on 

a cellular phone without recharging. Fuel cells will change the telecommuting world, 

powering laptops and Palm Pilots and other personal digital assistants (PDAs) hours 

longer than batteries. Many of these miniature fuel cells will run on methanol, an 

inexpensive alcohol used in windshield wiper fluid. Since consumers pay more than 

$5 000 per kilowatt for rechargeable batteries with their limited run times, significant 

markets are expected to develop over the next 10 years, first for micro fuel cells 

where higher costs per kilowatt can be supported by the market, and then for 

stationary distributed power as the system cost point comes down to below $1 000 

per kilowatt. Stationary and micro-power fuel cells will serve to catalyze the building 

of a fuel cell manufacturing industry infrastructure that will be important to 

automotive uses, where far more stringent cost points and robust technology targets 

need to be met. 

 

3This estimate was provided by one of the companies involved in a partnership with the 

Advanced Technology Program on a fuel cell project. Section IV.C.2 contains a description of ATP 

and its role in fuel cell technology development. 

11

III. Drivers of Innovation in the Fuel Cell 

Industry 

The first subsection describes the historical drivers of innovation in the fuel cell 

industry. Much of this information is drawn from a book about the founding and 

subsequent development of Ballard Power, a well-known Canadian fuel cell 

manufacturer.1 The second subsection focuses on how public policy affects the 

development of fuel cell technology including federal energy R&D expenditures, 

public-private partnerships, environmental regulation, deregulation of energy 

markets, and the facilitation of standards. The third subsection explores the drivers 

of innovation for a single company, Mechanical Technology Inc. (MTI), and the 

subsequent creation and spin-off of Plug Power from that company. The sources for 

this material include interviews with three former and current Plug Power 

employees who were present at its founding.2 In addition, Plug Power’s 10-K 

Securities and Exchange Commission filings provided important financial 

information as well as verification of historical timelines. 

As a historical driver of innovation in the fuel cell arena, the role of the government 

space program cannot be minimized. The space program proved the first viability of 

fuel cell technology, albeit for limited application and at low power levels. On the 

other hand, the role of government in advancing the fuel cell from an expensive item 

with a single mission in outer space to a less expensive item with large-scale 

commercial applications on earth cannot be tied to a single government program. It 

is undeniable that in the 1980s fuel cell technology needed government funding to 

advance. However, it was not a single government program, agency, or company 

that is responsible for the PEM fuel cell innovation that occurred during this and 

subsequent periods. Certain programs have made key funding decisions or 

produced new forms of knowledge at key moments. Often, these funds or 

knowledge have been fortuitous enough to provide the impetus for private actors to 

continue their pursuit of the technology. Since large-scale commercialization of fuel 

cells is yet to come, the development of this technology is still a work in progress. 

 

1Koppel (1999). The material presented by Koppel was supplemented by interviews with 

Plug Power employees as well as the expertise and experience of one of the authors of this paper, 

Gerald Ceasar. 

2These employees are William D. Ernst, current Vice President and Chief Scientist; Glenn 

Eisman, former Chief Technology Officer; and Wayne Huang, former Director of Chemistry and 

Materials. 
12  III. Drivers of Innovation in the Fuel Cell Industry 

A. Historical Drivers of Innovation 

1. Early Fuel Cells 

During the first 100 years of fuel cell development, much of the innovation 

originated from small groups of scientists. In 1839, Sir William Robert Grove, a 

Welsh judge, inventor, and physicist, created the first fuel cell. He reacted hydrogen 

and oxygen at catalytic platinum electrodes in the presence of an electrolyte to 

produce electricity and water. The invention did not produce enough electricity to be 

useful, however. 

In 1889, Ludwig Mond and Charles Langer improved on Grove’s design to make the 

world’s first working fuel cell. They are also credited with originating the name “fuel 

cell.” However, they decided their device had little commercial application due to 

the high cost of platinum. 

In 1932, engineer Francis T. Bacon began his vital research into fuel cells. Early cell 

designers used porous platinum electrodes and sulfuric acid as the electrolyte bath. 

However, using platinum was expensive, and using sulfuric acid was corrosive. 

Bacon improved on the expensive platinum catalysts with a hydrogen and oxygen 

cell using a less corrosive alkaline electrolyte and inexpensive nickel electrodes. 

Bacon continued his work for three decades and eventually transferred his 

knowledge to the Pratt and Whitney Division of United Aircraft Corporation in 

Connecticut. This company subsequently became United Technologies Corporation 

(UTC), which is today one of the world’s largest manufacturers of fuel cells. 

2. GE and the PEM Fuel Cell 

Tom Grubb of General Electric (GE) explored fuel cell research in the early 1950s, 

and, in 1954, he developed the first PEM fuel cell. In the late 1950s, government 

funding began to affect fuel cell development. U.S. Army contracts provided 

$1.1 million in funding for GE’s fledgling PEM fuel cell program; ultimately, this led 

to work with the newly formed National Aeronautics and Space Administration 

(NASA) and the development of PEM fuel cells that powered several Gemini 

missions.3 

Typical of many technologies in the 1960s, fuel cell development accelerated with its 

selection as a technology for powering U.S. spacecraft. The GE fuel cells, using large 

amounts of platinum and pure gases, were very expensive to produce. Cost was not, 

however, an issue. Although GE spent $8.5 million of its own money over the 1960s 

and 1970s trying to develop fuel cells using cheaper materials, it ultimately stopped 

 

3Koppel (1999), p. 46. 
 III. Drivers of Innovation in the Fuel Cell Industry  13 

pursuing that research and instead sold the technology. During this period, the 

biggest improvement in GE’s fuel cells came from the adaptation of a new membrane 

known as Nafion from the DuPont Corporation. 

3. Drivers of Innovation in the 1980s 

In the 1970s and early 1980s, most government and industry money in the United 

States was spent on the development of phosphoric acid and ceramic electrolyte fuel 

cells. Los Alamos National Laboratory was the only organization conducting PEM 

fuel cell research, and its funding was very modest.4 In 1983, a Canadian company 

called Ballard Research (founded by Geoffrey Ballard; now Ballard Power), of 

Vancouver, British Columbia, received the first Canadian government grant for PEM 

fuel cell research. By this time, many of the GE patents related to PEM fuel cells had 

expired, thereby allowing the technology to be exploited by other companies. The 

advantage of PEM fuel cells over the other types was their ability to run on lowpurity hydrogen. Their biggest disadvantage was their cost, particularly for the 

Nafion membrane and platinum electro-catalyst. 

James Huff led the Los Alamos team that conducted PEM fuel cell research in the 

1980s.5 The Los Alamos group consisted of approximately a dozen people and had 

an annual budget of close to $1 million. About the same time that Ballard was 

starting its contract to build a fuel cell for Canada, researchers at Los Alamos and 

Texas A&M showed that the amount of platinum required for the fuel cell could be 

reduced by a factor of 10. Their work convinced the people at Ballard that a PEM fuel 

cell might become economically feasible. For the remainder of the 1980s, Ballard and 

Los Alamos watched each other’s progress; sometimes, breakthroughs by one group 

would encourage the other to keep pursuing this embryonic technology. 

By the mid-1980s, Ballard had produced continuous improvements in its fuel cell. 

Working with limited resources, the Ballard researchers came to believe that a 

shoestring budget had helped, not hindered, their early progress. Sometimes, small 

changes in one area precipitated substantial leaps in performance. For example, the 

flow field design to channel how hydrogen flows through a stack of cells to produce 

electricity used GE’s old parallel design. When Ballard changed its flow field pattern 

on the graphite plates that support the membrane electrode assembly, it achieved 

between two- and fourfold increases in performance in a few weeks’ time. Geoffrey 

Ballard observed this about PEM fuel cell technology: “It has been a very forgiving 

 

4Koppel (1999), p. 49. 

5Interestingly, James Huff was, in 1959, head of catalysts for the Allis-Chambers farm 

equipment company, which produced the first tractor to run on a fuel cell. 
14  III. Drivers of Innovation in the Fuel Cell Industry 

technology...the system gets simpler, not more complex—which is the other 

measure of a good technology.”6

Another hurdle that Ballard needed to cross in the mid-1980s was to reduce the cost 

of the membrane. A breakthrough occurred when a Ballard scientist obtained a piece 

of membrane developed by DuPont rival Dow Chemical in 1986. Dow had 

developed an experimental polymer membrane of its own which had lower 

resistance than Nafion. The new membrane produced four times as much power as 

the Nafion membrane.7 It proved to be a “eureka” moment for the Ballard scientists. 

When Ballard showed its progress to the Los Alamos scientists, the results convinced 

the latter that PEM fuel cells might be a potential power source for electric vehicles. 

This conclusion demonstrates the synergy of the parallel research efforts. It was Los 

Alamos research that had convinced Ballard that the platinum problem could be 

solved; now, Ballard research convinced Los Alamos scientists that the membrane 

could potentially produce sufficient power to operate a motor vehicle. 

Thus, the innovative drivers of PEM fuel cell research in the 1980s emerged primarily 

from two places, Ballard Research in Canada and Los Alamos National Laboratory in 

New Mexico. Each group worked with relatively few resources. All of Los Alamos’s 

money came from public funding, as did all of Ballard’s initial Canadian funding. 

Ballard eventually received private venture capital money in the late 1980s.8 

B. Public Policy as a Driver of Innovation 

1. Government Support of Energy R&D 

The rationale for government support of basic R&D is well known and widely 

accepted. Recent research also indicates that private companies underfund earlystage technology development R&D.9 Overall, the amount of federal R&D dollars 

devoted to energy R&D has steadily declined in real terms over the last 20 years 

(figure 3). 

 

6Koppel (1999), p. 86. 

7Ibid, p. 90. Dow Chemical and Ballard eventually collaborated on a joint venture, which 

is discussed more completely in section IV. 

8Koppel (1999), pp. 114–15. 

9Branscomb and Auerswald (2002). Early-stage technology development R&D is 

characterized as research that is more commercially advanced than basic research, but not yet at 

the point of product development. 
 III. Drivers of Innovation in the Fuel Cell Industry  15 

Figure 3. Federal R&D funding by budget function. Source: NSF (2002). 

Decaux (2003) finds that funding for R&D in alternative energy technologies is 

inadequate and inconsistent. She also finds that throughout OECD countries, overall 

energy R&D is declining and shifting from long-term to near-term projects. This 

trend has been exacerbated by utility deregulation. Her recommendations for an 

improved policy environment include providing direct incentives for energy R&D, 

targeting long-term projects, and clearly mapping the process from the technology 

drawing board to commercialization.10 While the Departments of Energy (DOE) and 

Defense (DOD) provide direct incentives for basic research and for demonstration 

projects, programs such as the Advanced Technology Program support Decaux’s 

recommendation of providing platforms for moving the technology from the 

drawing board to commercialization. 

2. Public-Private Partnerships and the Advanced Technology Program 

The U.S. Department of Commerce oversees ATP through the National Institute of 

Standards and Technology. ATP shares the cost of high-risk R&D projects with 

private companies in order to accelerate the development of innovative technologies 

for broad national benefit. 

 

10Decaux (2003). 
16  III. Drivers of Innovation in the Fuel Cell Industry 

ATP partners with companies of all sizes, universities, and nonprofits, encouraging 

them to take on greater technical challenges with potentially large benefits that 

extend well beyond the innovators—challenges they could not or would not 

undertake alone.11 ATP awards are selected through open, peer-reviewed 

competitions. The ATP selection process does not discriminate across technologies as 

long as projects meet the technical and economic criteria. This last point is important, 

because ATP has not favored one approach over another. It has funded research 

projects focused on PEM, Direct Methanol, and Solid Oxide fuel cell applications. 

ATP awarded its first fuel cell project in 1997. In 1998, ATP supported the 

development of premium power technologies through a competition focused on that 

technology area. The portfolio of 13 projects and $47 million in funding that emerged 

from this solicitation were aimed at accelerating the development of the technologies 

in step with the changes taking place in the ways electricity is generated and used—

distributed electric generation on site and free from the grid, and wireless portable 

power. Through the 1998 premium power solicitation, ATP became the first 

government agency to provide significant funding of R&D aimed at development of 

small, distributed, stationary power technologies such as fuel cells that could be used 

for generating electricity on site for homes and businesses. This continues to be a 

dominant theme in its most recent fuel cell awards. In the last two years, ATP has 

also emerged as a leading enabler of micro fuel cell technology that can meet the 

ever-increasing functionality and power needs of wireless electronics and, e.g., 

power a cell phone for a month before recharging. Overall, ATP has funded 25 

projects in the fuel cell area. Table 2 shows the total number of awards in fuel cell 

projects and the total amount of government and industry cost-share funds 

committed. 

Table 2. ATP’s 25 Fuel Cell Projects, 1997–2003 

Total number of active or completed projects 25 

Estimated ATP share of funding $60 million 

Industry cost-share of funding $54 million 

Total funding $114 million 

Source: Gerald Ceasar, ATP. 

The following section and table 3 provide a brief description of the knowledge 

gained from three early fuel cell projects from the ATP Premium Power Focused 

Program. These projects involved competing approaches to PEM fuel cells by Plug 

 

11ATP (2003). 
 III. Drivers of Innovation in the Fuel Cell Industry  17 

Power, Avista Labs,12 and H Power–Nuvera. Each company approached the market 

and its PEM fuel cell design from a different perspective, with the goal of meeting 

different needs in the short term: Plug Power targeted residential, mass market 

applications; Avista targeted off-grid, backup power and power quality; and the joint 

venture between H Power and Nuvera targeted telecommunications.13 The role ATP 

plays in the U.S. national innovation system is illustrated by these three projects. 

Each company is small and has limited funds to conduct longer-term research. ATP 

allows companies to conduct early-stage research development projects that might 

not otherwise be funded because the private venture capital market demands 

relatively short-term payback and may not adequately optimize technology 

development because of the extended time horizon needed for high-risk research.14

Table 3. Fuel Cell Case Study Compilation Chart 

Plug Power Avista H Power 

Amount of 

total funding 

$9 737 848 $3 224 510 $6 376 772 

Award period 2 years (5/99–5/01) 2.5 years (11/98–4/01) 2 years (1/99–1/01) 

Research 

focus 

High temperature 

membranes 

Modular, self-hydrating 

fuel cell cartridges 

Simplified one-piece 

membrane assembly 

and reformer integration 

Employee 

growth 

(1998–2003) 

22 to 339 7 to 45 50 to 135 

Target market 3 kW to 7 kW residential, 

on-grid applications 

Uninterrupted power 

source and remote, offgrid applications 

Backup and primary 

telecom power and 

residential units 

Initial public 

offering (IPO) 

status 

IPO completed in 

November 1999 

$58 million stock offering 

completed 10/13/03 

Avista Labs is now a 

privately funded 

Washington corporation 

with several venture 

capital funds as 

investors 

Plug Power buys 

company on 5/15/03 

Strategic 

partners 

DTI, General Electric 

Power Systems, Vaillant, 

Advanced Energy 

Systems, Engelhard, 

SRI, Polyfuel, Celanese 

UOP, Black & Veatch, 

3M, Airgas 

Nuvera, formerly Epyx, 

is focused on distributed 

and vehicle uses of fuel 

cell power systems 

a. Plug Power 

Plug Power of Latham, New York, was founded in 1997, and in six years has grown 

from 22 to over 300 employees. Plug Power’s early investors formed the company as 

 

12Avista Labs is an independent company, of which Avista Corp. is a minority 

shareholder. 

13Plug Power prospectus and company interviews, spring 2000. 

14David Morgenthaler, cited in Branscombe, Morse, and Roberts (2000), p. 107. 
18  III. Drivers of Innovation in the Fuel Cell Industry 

a joint venture between Detroit Edison (DTE) Energy Company, Michigan’s largest 

electric utility, and Mechanical Technology Inc., an early developer of fuel cell 

technologies. Now a stand-alone, publicly traded company, Plug Power added 

General Electric Company and Sempra Energy, a subsidiary of Southern California 

Gas Company, as major investors in 2000.15 Plug Power has built and deployed over 

400 PEM fuel cell systems to date, including GenSys prime power and GenCore 

backup power 5 kW units. 

The ATP-funded $9.7 million project allowed Plug Power and its partners 

(Polyfuel/SRI and Celanese) to attack the problem of carbon monoxide poisoning of 

the catalyst head-on by pursuing higher temperature polymer membranes, as well as 

by designing the fuel cell stack for higher operating temperatures.16 This is desirable 

because increased temperatures reduce the poisoning effect of carbon monoxide in 

the fuel cell systems. PEM fuel cells produce their fuel—hydrogen—by reforming 

common fuels such as natural gas and propane. However, this reformate fuel stream 

is contaminated with trace levels of carbon monoxide because the decomposition of 

hydrocarbons from the original fossil fuels is not 100 % complete. Fuel cells operated 

at lower temperatures with the current generation of polymer (i.e., Nafion) 

membranes are less robust, with as little as 50 μL/L of carbon monoxide shutting the 

system down. With the Celanese high-temperature, non-fluoropolymer membrane, 

which is chemically different from Nafion, Plug Power has succeeded in operating a 

PEM-based fuel cell system at temperatures above 150 °C, demonstrating 

20 000 μL/L carbon monoxide tolerance over a period of more than 5 000 h. This 

breakthrough should result in more reliable operation with simpler reformers and 

would also allow for more efficient use of the leftover heat and reduce the 

complexity and size of the overall system. 

b. Avista 

Avista Labs was created in 1996 as a full subsidiary of Avista Corporation, formerly 

Washington Water Power of Spokane, Washington, to commercialize new energy 

technologies. Making quick progress on its new responsibility, Avista Labs unveiled 

its fuel cell generator prototype at the International Fuel Cell Seminar in 1998. By 

March 2000, Avista was issued a comprehensive patent covering 162 claims for its 

PEM fuel cell power system. The summer of 2000 brought the first alpha test units to 

the field. Avista’s rapid development speaks to the need for innovation and timely 

financial support. Avista currently has fuel cells installed in over 80 locations in the 

United States and abroad, and counts among its customers major 

 

15PRNewswire, Plug Power press release, March 16, 2000. 

16Interview with Wayne Huang, Plug Power, April 2000. 
 III. Drivers of Innovation in the Fuel Cell Industry  19 

telecommunications providers, uninterruptible power system providers, government 

communication sites, utilities, and railroad suppliers. 

ATP funding came at a crucial time for Avista Labs. In 1997, the Fortune 500 parent 

company, originally Washington Water and Power (renamed Avista Corporation), 

was in the midst of a transition from the status quo guard of regulated power 

markets to the new deregulated markets. In preparation for deregulated power 

markets, Avista was involved in several research projects aimed at diversifying its 

value-added business units, including fuel cells. The new unit tasked with fuel cell 

development was Avista Labs, which started with only seven scientists and 

engineers, and a concentration on the design of modular PEM fuel cells. In 1998, 

Avista applied for and won an ATP award in the Premium Power Focused Program. 

The 2.5-year project began in November 1998 and allowed Avista Labs to pursue its 

unique technical approach toward the development of a commercially viable PEM 

fuel cell at a faster pace and with more flexibility than it otherwise would have been 

afforded. Avista Labs president Kim Zentz commented that “ATP allowed us to 

bring prototypes to decision makers much more quickly. Without ATP it would also 

have been much harder to prove the modular design concept.” 

Investors, including internal decision makers, require a “proof-of-concept” for new 

technologies before they are willing to fund the more costly product development 

phase. ATP funding helped Avista Labs prototype design ideas rapidly and speed 

up the cycle time of developing a new modular approach to PEM fuel cells. As a 

result of the more timely achievement of a proof-of-concept of modular fuel cells, the 

introduction of this technology to the residential market was accelerated by three 

years. ATP support filled the gap left by internal funding constraints and a lack of 

outside equity sources.17

Avista Labs engineers opted to take a different approach to PEM fuel cells using a 

modular, cartridge concept instead of a stack of cells.18 Cartridges can be replaced 

 

17Interview with Kim Zentz, President, Avista Labs, April 11, 2000. 

18In fuel cell architecture, there are two basic configurations for holding the membranes: 

the stack and the cartridge. In both designs, hydrogen must flow to one side of the membrane and 

air to the other, and multiple membranes are required. In stacks, the membranes are stacked 

together to achieve a particular output and power density. The membranes are usually separated 

by a complex set of precisely machined plates, made with minute channels that direct hydrogen, 

air, humidification, and cooling fluids to the membranes. This requires compressors, fans, and 

other balance-of-plant equipment. In the event of a failure of any one of the stack seals, equipment 

components, or membranes, the entire stack ceases to operate. 

In the Avista Labs cartridge system, the PEM membranes are housed within an 

inexpensive plastic cartridge that is air-cooled and self-humidifying. There are no pumps or 

compressors to fail. Hydrogen enters one side of the cartridge; air the other. The only moving part 
20  III. Drivers of Innovation in the Fuel Cell Industry 

without interrupting generation and can use the water produced in conjunction with 

fan-forced air to promote cooling and self-hydration. These features simplify system 

performance by reducing balance-of-plant to a minimum. The advanced cartridges 

incorporate embedded control functions to protect the membrane electrode 

assemblies from conditions leading to loss of life or failure. A simple, retractable 

ballpoint pen was the inspiration for the hydrogen valves, which where crucial to 

making the cartridge design workable. Using injection-molded, extremely cheap 

parts for the valves, Avista engineers developed cartridges that click into place and 

safely keep the volatile hydrogen fuel within the cartridge. The alpha test units 

incorporate these features and utilize leftover water from the reactions in the fuel cell 

to keep the membrane wet. This self-hydrating technology increases reliability, 

reduces maintenance, and is ultimately more consumer-friendly because cartridges 

last longer. Estimated to last for five years or more, the individual cartridges are easy 

to change and require no more skill than replacing a book on a bookshelf. 

Avista Labs is the only fuel cell developer that uses hot-swappable, modular power 

cartridge architecture. This patented technology offers high reliability. In part this is 

because it requires less balance-of-plant (Avista fuel cells have only one moving part, 

a high-efficiency fan) and also because any service needs can be accomplished 

quickly and easily by simply swapping out one cartridge for another, while the unit 

continues to create reliable power. 

c. H Power and Nuvera 

The H Power Company of Belleville, New Jersey, was founded in 1989 with the goal 

of commercializing PEM fuel cells. In 2000, the company employed approximately 70 

people at its Belleville R&D and manufacturing facilities, and 15 in its Clifton, New 

Jersey, administrative offices; it also maintained a project office at McClellan Air 

Force Base in Sacramento. H Power has a subsidiary company, H Power Enterprises 

of Canada, in Ville St. Laurent, Quebec, which employs an additional 50 people. On 

March 25, 2003, Plug Power purchased H Power in a stock-for-stock exchange. 

H Power was attempting to commercialize sub-kilowatt fuel cell systems for a 

variety of telecommunications and backup power applications. Typically, these 

products require a few watts to 1 kW of power. Sub-kilowatt systems are also 

suitable for many mobile applications involving light utility vehicles and auxiliary 

power units used in conjunction with other power-generating systems, e.g., on-board 

battery chargers in electric vehicles. 

 

is a high-efficiency fan. If a cartridge fails, the system shunts around it and continues to operate as 

before. The system automatically bypasses the cartridge with the problem and continues to provide 

power to the load. Cartridge replacement takes only a few seconds and requires no tools. 
 III. Drivers of Innovation in the Fuel Cell Industry  21 

The core innovation that H Power developed for the ATP project is a one-piece 

membrane electrode assembly which eases assembly and lowers cost. A new bipolar 

plate design improves the distribution of hydrogen fuel to the membrane and 

incorporates channels for cooling and hydrating the cell. The metallic plate design is 

projected to further reduce manufacturing costs and increase the reliability of the 

fuel cell stack. Work continues to improve the electrical performance and the 

corrosion resistance of the bipolar plates. 

H Power received two patents for work done during the ATP-sponsored project. 

These advances have allowed H Power to move more quickly into the alpha test 

phase for larger PEM fuel cell units, thereby reducing the time to market. H Power 

had success with smaller output units as demonstrated by a New Jersey Department 

of Transportation contract to replace solar-powered variable message highway signs 

with fuel cell power systems. The systems provide backup power for the state’s fleet 

of variable-message road signs. More than 60 of the systems have been deployed and 

operate daily. 

Nuvera Fuel Cells was formed in April 2000 when ATP-funded Epyx Corporation (a 

former subsidiary of Arthur D. Little, Inc.) merged with Italy’s De Nora Fuel Cells, 

SpA, and Amerada Hess Corporation, a leading U.S. East Coast energy company. 

Nuvera combines Epyx’s reformer process to produce hydrogen feed for fuel cells 

with De Nora’s leadership in electrochemical, membrane, and fuel cell technology. A 

5 kW fuel cell power system running on propane and specifically tailored to the 

needs of the telecommunications industry was designed and built. In March 2001, 

this first-of-a-kind unit was delivered to Verizon to test for powering a remote cell 

telephone tower. Such systems could be used in the future to provide primary or 

backup power for cell towers and telecom switch nodes that could benefit from onsite, reliable generation of DC electricity. 

3. Environmental Regulations 

Although the expected service life requirements and reformers in automotive and 

stationary residential applications are different, the PEM fuel cells at the heart of the 

systems are quite similar. Together, automotive and stationary applications of fuel 

cells have the potential to reduce U.S. carbon dioxide emissions by two-thirds.19

When powered directly by hydrogen, fuel cells produce only water vapor as a 

byproduct. Even when using fossil fuels, PEM fuel cells result, because of their 

greater energy conversion efficiency, in reduced organic and nitrous oxide emissions 

that cause air pollution, which is a leading cause of lung-related diseases and ozone 

 

19Lovins and Williams (1999). 
22  III. Drivers of Innovation in the Fuel Cell Industry 

depletion. Therefore, environmental regulations targeted at both automobiles and 

electricity generators have significant positive impacts on firms’ incentives to invest 

in fuel cell R&D. In fact, California’s zero emissions law has led virtually all car 

companies, even those initially skeptical of fuel cells, to consider PEM fuel cells.20

Notwithstanding these insights, as discussed above, there remains under-investment 

in energy-related R&D due to a high level of technical and business risk, as well as 

appropriability issues and shortened investor time horizons.21

Although the U.S. administration’s position on the reduction in greenhouse gases is 

uncertain, environmental regulatory policies may have relatively little direct impact 

on private investment in traditional electric utility production. Using event study 

analysis to examine 22 milestones, J. David Diltz found that events leading to the 

passage of the Clean Air Act Amendments in 1990 did not have a significant negative 

impact on investors’ perceptions of electric utilities.22 Combined, these factors 

suggest that environmental regulation has a positive impact on the demand for 

funds for investment and does not curtail the supply of investor funds. This is an 

important finding, as an increase in demand for funds accompanied by a decrease in 

supply could drive up investment costs and potentially lead to lower overall levels 

of investment. 

An area where the utility industry has been responsive is air quality regulation, in 

that almost all of the new-generation capacity built in the 1990s uses large gas 

turbines running on cleaner natural gas. The adoption of these large gas turbines by 

utilities was aided by the fact that the technology matured and the costs dropped 

around the same time that the regulations became effective. It is a matter of 

conjecture as to whether utilities might have been more willing to resist the 

regulations had a relatively inexpensive substitute not been available. This point 

notwithstanding, environmental regulations mandating a certain level of compliance 

are always subject to political pressures unless reasonable substitutes are available 

and the costs are not prohibitive. In terms of fuel cells, if, several years from now, 

there is increasing political pressure to reduce greenhouse gases and the price of 

delivering emission-free fuel cells is still substantially more than current emissionemitting technologies, how much will the body politic be willing to subsidize fuel 

cells, or other emission-reducing technologies, in order to reduce emissions? 

 

20The Economist (2001). 

21Appropriability refers to the ability of private firms to appropriate profits from their 

innovations. 

22Diltz (2002). 
 III. Drivers of Innovation in the Fuel Cell Industry  23 

An unintended consequence of the switch to natural gas turbines is that shortages in 

natural gas are occurring. The North American gas supply is now declining.23 This 

circumstance is troublesome, because many of the fuel cells being developed—

including Plug Power’s—reform their hydrogen from natural gas. 

Although environmental policy has, on balance, spurred investment in fuel cells, fuel 

cell sales are unlikely to be similarly aided. Any environmental benefits offered by 

PEM fuel cells are a public good for which consumers are reluctant to pay an extra 

premium. Scott Samuelsen of the University of California–Irvine and director of the 

National Fuel Cell Research Center confirms the difficulty of using the 

environmental benefits of fuel cells as selling points. “That [fuel cells] have no 

plumes of smoke, no turning parts, no 700-foot-high dams, and no noise to upset 

people is bound to go unnoticed.”24

4. Utility Deregulation 

The confluence of technological development and changes in economists’ thinking 

about so-called “natural monopolies” has led to a reevaluation of electricity 

regulation over the past 30 years.25 Of all the federal environmental and regulatory 

changes, deregulation of electric and natural gas markets has had the most 

significant impact on the economic viability of stationary PEM fuel cells.26 Such 

efforts are likely to have wide-ranging effects including a lowering of the nation’s 

core rate of inflation. Although such regulatory changes enable small businesses to 

compete against the large power companies, they have at the same time increased 

the degree of competition with alternative fuel technologies and thereby limit the 

total overall R&D dollars in the energy sectors because companies believe they 

cannot appropriate their full investment. 

The two most significant pieces of federal legislation in this regard are the Public 

Utilities Regulatory Policies Act of 1978 and the Energy Policy Act of 1992. The 

former promoted the use of cogeneration in independent power and industrial 

projects by exempting generators from federal and state regulatory control. This 

regulatory change was made in response to technological changes that allowed 

smaller scale generators to be combined with other applications that use the waste 

heat and energy from the generation process. The latter act promoted sweeping 

 

23www.simmonsco-intl.com/files/IP%20Week%20-%20London.pdf. 

24The Economist (2002). 

25Schiller (2001). 

26Berry (2000). 
24  III. Drivers of Innovation in the Fuel Cell Industry 

changes in the generation and transmission of electricity. When coupled with Federal 

Energy Regulatory Commission orders enacted in response to this piece of 

legislation, the number of independent generators exempt from regulation was 

expanded, all interstate transmission lines were made available at the same cost for 

all power generators, and all generators were required to make information available 

regarding their generating capacity. Although federal legislation affected interstate 

electric markets, individual state deregulation efforts promoted consumer choice and 

competition. Over half the states in the country have enacted retail competition plans 

to emulate those pioneered by Massachusetts, Rhode Island, and California.27

One impact of this deregulation is that utilities are no longer guaranteed to recover 

their fixed investment costs, which has prompted utilities to become more riskaverse and choose smaller investments. For example, before deregulation, the typical 

utility owned the power plants that generated the electricity for the customers in 

their defined service area. When utilities prepared long-range R&D budgets, they 

knew that if they wanted to reduce the costs of power, they needed to improve the 

productivity at their own power plants. Now that utilities can purchase cheaper 

power on the open market, the incentive to innovate their own power infrastructure 

is diminished. Decaux finds that this has contributed to the shift to short-term R&D 

projects.28 Deregulation may also have had a negative impact on utilities’ 

investments in emission-reducing technologies as well. Roberts reports that by 1997 

utilities had invested $894 million in energy-efficiency programs as compared to 

1992 projections of $2.7 billion.29 

5. Development of Standards 

In order to assess the total costs of fuel cells relative to current utility costs, 

consumers need a better understanding of the energy efficiency and potential 

savings of small residential fuel cell systems across the range of environmental and 

seasonal conditions. To help meet this goal, Plug Power is participating in a NIST 

testing program outside of the ATP project to investigate the energy content of 

various fuel sources, the electrical power and electrical energy generated by the fuel 

cell, and the thermal output of the fuel cell under a variety of different load-demand 

conditions. This program will provide purchasers with a realistic estimate of annual 

 

27See Joskow 2003 and 2001 for a discussion of the outcome of the California electricity 

crisis. 

28Decaux (2003). 

29Roberts (1999).
 III. Drivers of Innovation in the Fuel Cell Industry  25 

electrical energy output, thermal energy output, and fuel usage.30 In addition to 

electricity generation, the heat generated by this 5 kW unit will be captured to 

provide estimates of the space and hot water heating requirements that can be met 

by this system. These efforts continue NIST’s history of collaborating with DOE and 

industry to develop metrology and standards that define the energy efficiency of 

heat pumps, water heaters, gas furnaces, and other household appliances. 

A remaining regulatory hurdle with a major impact on the commercialization 

prospects of grid-connected stationary fuel cells is “net metering.” Typically in 

residential electricity generation, utilities meter the amount of electricity supplied to 

the grid separately from that pulled from the grid. Federal legislation requires only 

that utilities purchase electricity from independent generators at an “avoided cost” 

basis, which facilitates utilities’ use of separate prices for electricity flowing from 

house to grid and for electricity flowing from grid to house. In essence, owners of 

stationary fuel cells sell any excess power to the grid at wholesale prices. Yet should 

they need to purchase supplemental power from the grid, they must pay retail 

prices. 

C. Plug Power 

1. Drivers of Innovation for Fuel Cells at MTI and the Founding of Plug Power 

In 1961, two entrepreneurial engineers founded Mechanical Technology Inc. For the 

next three decades, this small company pursued government research contracts in 

the area of precision instruments and energy-related research such as flywheels. In 

the late 1980s, the company was carrying out research on the Automotive Stirling 

engine for DOE in a project managed by NASA.31 As this contract neared its 

conclusion, MTI tried to find new areas of system- and energy-related work to 

pursue, particularly since this program had employed many people. Because MTI’s 

Stirling engine used hydrogen as a working gas and MTI was involved in non airbreathing underwater propulsion studies, PEM fuel cells were seen as a promising 

next phase of research that utilized MTI’s core system expertise. 

In 1992, MTI received a $160 000 grant from the New York State Energy Research 

Development Authority (NYSERDA) to deliver a PEM fuel cell for hybrid electric 

 

30Interview with Mark W. Davis and A. Hunter Fanney, Heat Transfer and 

Alternative Energy Systems Group, NIST.

31The Stirling is an external combustion engine and, in that respect, is similar to a steam 

engine. Fuel is not critical; it can run on anything that produces heat. It was invented in 1816 by Dr. 

Robert Stirling, a Scottish minister, and for many years competed with the steam engine. The 

program was the result of federal concerns over energy availability. 
26  III. Drivers of Innovation in the Fuel Cell Industry 

vehicles. William D. Ernst, current vice president and chief scientist at Plug Power, 

developed and directed the project. Dr. Ernst originally led the team working on the 

Stirling engine projects and flywheel research. While MTI had significant systems 

and mechanical engineering skills, it lacked critical electrochemical fuel cell 

expertise. To remedy this, MTI, during the 1992–94 time frame, attempted to 

purchase a fuel cell stack from Texas A&M, H Power, and other places, but could not 

find a stack that was large enough for its purposes and that would perform to its 

specifications. Ballard would sell them a stack, but the price was prohibitive. At this 

point, Dr. Ernst decided to have MTI develop its own fuel cell stack and, in early 

1995, hired Wayne Huang. Dr. Huang brought to MTI critical expertise in 

electrochemistry and fuel cells. Previously, he had worked at the Los Alamos 

National Laboratory on fuel cell technology, where he learned the decal printing 

method from its inventor, Mahlon Wilson. Eventually, MTI licensed the decal 

printing technology from Los Alamos and started to build its own fuel cell stack. 

In 1995, the project work for NYSERDA led to a 30-month, $2 million contract with 

DOE to develop and build a stand-alone, proof-of-concept 50 kW PEM fuel cell 

system. Power of this magnitude would be comparable to a small gasoline internal 

combustion engine and would be an important first step in demonstrating that PEM 

fuel cell stacks could produce sufficient power for electric vehicle applications. This 

project was followed by several smaller demonstration projects with NYSERDA to 

continue work on fuel cells. As a result of these programs, Dr. Ernst received the 

Partnership for a New Generation of Vehicles award as part of a governmentindustry team for demonstrating the first fuel cell system that was run on reformed 

gasoline. Other pertinent awardees were from Epyx (Nuvera), Los Alamos National 

Laboratory, and Argonne National Laboratory. 

Other developments were concurrently unfolding in the energy industry to drive 

innovation in fuel cells. In particular, deregulation of energy markets was about to 

hit the electric utility industry. Deregulation meant that energy markets that were 

previously restricted to one regulated monopolistic supplier would now be opened 

up to competition. However, only markets for power generation were opened up to 

competition; power distribution was still considered a natural monopoly in a 

centrally distributed world. In theory, utility companies could no longer pass on bad 

business decisions to customers for reimbursement but instead would be held 

accountable for these decisions due to increased competition. In practice, problems 

emerged in certain deregulated markets, especially in California.32 During the 

 

32According to a Federal Energy Regulatory Commission investigation of Western energy 

markets, the staff “concluded that an underlying supply-demand imbalance and flawed market 

design combined to make a fertile environment for market manipulation” (FERC 2003). 
 III. Drivers of Innovation in the Fuel Cell Industry  27 

summer of 2001, the prices paid by utilities in that state for power surged in the 

newly deregulated spot power generation market, while those same utilities were 

prevented from raising prices enough to cover costs in the still-regulated power 

distribution market. Once revenue shortfalls threatened the utilities’ ability to 

borrow, the California governor intervened with a rescue plan—thereby 

demonstrating that electric power may be too much of a public good to ever be 

traded in a completely private market with little government intervention. 

Another effect of deregulation was to motivate companies to think of alternative 

business models. In particular, deregulation allowed utilities to sell power outside of 

their traditional service areas. Certain executives at Detroit Edison, a public utility, 

saw deregulation as an opportunity to expand business opportunities and convinced 

their board to pursue alternative energy strategies. One executive in particular, Gary 

Mittleman, saw MTI and its fuel cell capabilities as an attractive new business 

venture. This led to DTE’s investing in MTI and to the formation of Plug Power, 

LLC, with Gary Mittleman as its first CEO. 

The new management team embarked on a serious reorganization of MTI. In 1997, 

Plug Power was formed as a separate limited liability joint venture spin-off company 

owned by DTE Energy and MTI. Plug Power’s mission was to design, develop, and 

manufacture on-site electric power generation systems utilizing PEM fuel cells for 

stationary applications.33 Later, in 2000, MTI further diversified its fuel cell 

technology, creating another company called MTI MicroFuel Cells to develop small 

fuel cells for the portable electronics market, e.g., laptops, cell phones, and PDAs. 

2. Public-Private Partnerships and Their Impact on Accelerating Plug Power’s 

Fuel Cell Development 

Project managers at Plug Power understood the funding hurdle in acquiring the 

breadth and depth of R&D investment commitments needed to bring PEM fuel cells 

to market. The enormous expense, high technological risks, and long time horizons 

posed huge challenges for Plug Power. Federal funding opportunities that recognize 

that the development of new, high-payoff technologies is a risky proposition were 

particularly valuable. Through two cooperative agreements with ATP, Plug Power 

has been able to pursue next-generation PEM fuel cell technology and projects 

carrying more technical risk than private investors were willing to absorb. Dr. 

Wayne Huang, senior research engineer at Plug Power, commented that the research 

undertaken as part of the ATP project would have been set back by a “number of 

years” were it not for the awards. Private investors demanded that Plug Power 

spend a large share of its capital on the development of a manufacturing line for 

 

33Plug Power, Inc. (2003a). 
28  III. Drivers of Innovation in the Fuel Cell Industry 

more proven, first-generation technology and on making incremental improvements 

on initial products. The amounts the government expends on R&D projects like this 

are 20 to 50 times smaller than the amounts needed to establish even the initial 

manufacturing infrastructure. 

Under its first ATP award, Plug Power developed and demonstrated a PEM fuel cell 

stack running at above 150 °C using a novel high-temperature membrane. The 

advances in membrane electrode assemblies and fuel cell stacks solved the carbon 

monoxide poisoning problem, allowing for operation with 200 times higher than 

today’s carbon monoxide tolerances. This singular breakthrough will enable Plug 

Power to produce simplified PEM fuel cell systems. Such systems incorporate 

simplified reformers, simplified thermal and water management, and simplified 

systems integration. Through a new ATP award, Plug Power is developing a simpler 

fuel processor to work with the high-temperature stack developed under the first 

cooperative agreement. Since the processor is a separate component from the fuel 

cell stack, this ATP award is a completely separate project from the high-temperature 

membrane project. 

Through its acquisition of H Power, Plug Power has acquired the research outputs of 

a third ATP-funded research project. A small company focused on small PEM fuel 

cells for remote telecommunications applications, H Power used ATP support to 

engineer an integrated, simplified membrane electrode assembly for PEM-type 

stacks running on propane. Subsequent to this acquisition, Plug Power has 

introduced one of the first fuel cell products for the telecommunications market. The 

GenCoreTM5T is designed to provide extended-run backup power specifically for 

the telecommunications industry in the demanding outside plant market. This 

application is a direct hydrogen fuel cell enabling potential future products in the 

cable broadband and uninterruptible power supply industries.34 Plug Power has 

additional ongoing work with DOD, NIST, NYSERDA, the Texas Railroad 

Commission, and other government agencies. In addition to performance of 

research, the outputs of these projects include consumer testing and development of 

standards and validation. 

 

34Plug Power, Inc. (2003b). 
29

IV. Knowledge Creation and the Use of 

Intellectual Property in the Fuel Cell Industry 

This section focuses on knowledge creation within the fuel cell industry. The first 

two subsections briefly discuss the historical roles of government and universities, 

respectively, in fuel cell knowledge creation. The third subsection focuses on current 

government programs designed to create knowledge in the fuel cell arena. The 

section concludes with a discussion of the dynamics of the fuel cell innovation arena, 

presenting economic concepts of knowledge creation and applying these to the 

current intellectual property environment within the fuel cell industry. 

A. Historical Government Support for Knowledge Creation in PEM 

Fuel Cells 

Since the early 1960s, government programs have significantly influenced the 

development of fuel cells. A notable initiative was a series of contracts to purchase 

working fuel cells for the U.S. space program. Since operating performance was 

important but cost was not, the recipient companies were able to develop technology 

without proving its commercial feasibility for terrestrial markets. Ballard Power 

started with a Canadian government contract to build a PEM fuel cell. Another 

example of government funding is the DOE-sponsored effort, which started in the 

1960s and continues to the present day, to develop large Molten Carbonate and Solid 

Oxide chemical plant-type systems for central utility electricity generation.1

Throughout the 1980s, much of the U.S. Government research money on small fuel 

cells focused on the Phosphoric Acid fuel cell rather than the PEM fuel cell. 

However, Los Alamos and General Motors formed a major engineering development 

partnership in 1988 and worked together for nearly eight years to perfect a PEM fuel 

cell and improve fuel processing.2 Through the partnership, which also involved 

Dow Chemical and Ballard Power, Los Alamos developed diagnostic equipment for 

single fuel cells, stacks, and other components. These high-quality measurements 

made possible further developments in PEM fuel cells, including operation of a 

10 kW demonstrator. Delphi Corp. currently is assembling a 150-person team to 

advance the General Motors–Los Alamos fuel cell concept. Much of the diagnostic 

 

1DOE was established in the 1970s under the Carter administration, but the programs 

began in agencies that eventually became part of DOE. 

2Los Alamos National Laboratory (2002). 
30  IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry 

equipment developed by Los Alamos to test fuel cell performance is employed by 

Plug Power and other firms to test their fuel cells.3

Los Alamos created another piece of new knowledge through its discovery of how to 

operate PEM fuel cells on impure hydrogen fuel. Traces of carbon monoxide in 

hydrogen fuel, which are generated in processing liquid fuels such as gasoline or 

methanol, reduce fuel cell performance. By forcing low levels of air into the fuel feed 

stream, Los Alamos researchers removed the carbon monoxide catalytically within 

the cell, allowing fuel cells to run as well on contaminated hydrogen as on highly 

pure hydrogen. Though this development is far from a perfect solution, it did help to 

open the way for the use of PEM fuel cells with realistic hydrogen fuel feed streams 

derived from the processing of liquid fuels. 

B. University Support of Fuel Cell Research 

Historically, universities have conducted significant amounts of R&D for certain 

scientific disciplines related to the area of fuel cells. Table 4 shows the amount of 

historical R&D spending by universities in 1980, 1990, and 1999 in disciplines related 

to fuel cell research, including electrochemical, mechanical, polymer, ceramic, fluid 

flow and controls engineering, physics, chemistry, and materials science. 

Table 4. Total University R&D Spending in Nine Scientific Disciplines Related to Fuel Cell 

Research for the United States and Selected States 

1980 1990 1999 

State 

Dollars 

(millions) Rank

Dollars 

(millions) Rank

Dollars 

(millions) Rank

Total U.S. 1 003 – 3 196 – 4 668 – 

California 138 1 384 1 652 1 

Georgia 39 7 142 7 201 8 

Illinois 43 6 126 8 203 7 

Maryland 84 4 271 3 315 2 

Massachusetts 117 2 274 2 305 3 

Michigan 28 11 96 10 171 10 

New York 100 3 252 4 297 4 

Ohio 34 9 122 9 178 9 

Pennsylvania 39 8 154 6 254 6 

Texas 50 5 183 5 290 5 

Source: NSF (2003). 

 

3The parameters that affect fuel cell performance include fuel, electrical load, thermal 

load, and environmental conditions. The types of tests used to measure the effects of the 

parameters on fuel cell performance include steady state, thermal load, and transient and start-up 

test (Davis 2002). 
 IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry  31 

It is difficult to present reliable conclusions about the relative quality of various 

university research efforts. Based on the anecdotal evidence collected for this study, 

Case Western Reserve, Texas A&M, Ohio State, Rensselaer Polytechnic Institute, and 

California–Irvine are some of the academic institutions that conduct significant 

amounts of fuel cell research. 

C. Government Support for Knowledge Creation in Fuel Cells 

(Outside of the Advanced Technology Program) 

In his 2003 State of the Union address, President Bush called for a significant increase 

in research for the hydrogen economy and fuel cells. Specifically, President Bush 

announced a $1.2 billion hydrogen fuel initiative for developing the technology for 

commercially viable hydrogen-powered fuel cells to power cars, trucks, homes, and 

businesses. His hydrogen fuel initiative includes $720 million in new funding over 

the next five years to develop the technologies and infrastructure to produce, store, 

and distribute hydrogen. Combined with the FreedomCAR (Cooperative 

Automotive Research) initiative, President Bush proposed a total of $1.7 billion over 

the next five years to develop hydrogen-powered fuel cells, hydrogen infrastructure, 

and advanced automotive technologies. 

1. Department of Energy 

Several government agencies currently support fuel cell research and the generation 

of new knowledge. The largest supporter in terms of research dollars is the 

Department of Energy. DOE supports fuel cell research through two separate 

departments.4 The Office of Fossil Energy supports the development of hightemperature ceramic-based fuel cell systems, which operate on natural gas. This 

program primarily supports the development of Solid Oxide and Molten Carbonate 

fuel cells. Much of that work is done through the Solid State Energy Conversion 

Alliance, a partnership between DOE, the national laboratories, and industry. 

The other part of DOE performing fuel cell research is the Office of Energy Efficiency 

and Renewable Energy. This office supports research in the PEM fuel cell area. It also 

manages the FreedomCAR project, which is a partnership between DOE and a 

consortium of U.S. automakers. FreedomCAR supports the development of PEM fuel 

cell technology for automotive applications. 

Table 5 shows the distribution of research dollars for total hydrogen research, which 

is divided between fuel cell applications and infrastructure. 

 

4U.S. DOE (2003), p. 46. 
32  IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry 

Table 5. Total DOE R&D Funding for Hydrogen, Fuel Cell, and Infrastructure 

Development (thousands of dollars) 

Application FY 2002 FY 2003 FY 2004 (request) 

Fuel cell applications, total 46 482 55 300 77 100 

Transportation systems 7 466 6 400 7 600 

Distributed energy systems 5 500 7 500 7 500 

Fuel cell processor 20 921 24 700 19 000 

Stack component R&D 12 595 14 900 28 000 

Technology validation – 1 800 15 000 

Infrastructure applications, total 29 092 42 081 87 982 

Production and delivery 11 148 11 760 23 000 

Storage 6 125 11 325 30 000 

Infrastructure validation 5 696 10 000 13 160 

Safety 4 486 4 786 16 000 

Education 1 437 2 000 5 822 

Total 75 574 97 381 165 082 

Source: DOE Hydrogen, Fuel Cells and Infrastructure Technologies Program. 

Based on the requests for funding in FY 2004, the Bush administration supports 

significant investment in the hydrogen economy. The total amount of requested 

funding for FY 2004 exceeds the 2003 figure by 70 %.5 Hydrogen production and 

delivery and hydrogen storage are slated for 100 % and 200 % increases in funding, 

respectively. On the fuel cell application side, stack component R&D and technology 

validation are the gainers. A key item to conclude from table 5 is that the Bush 

administration has increased support for the building blocks of the fuel cell 

technology such as the stack and technology validation as well as the supporting 

hydrogen infrastructure while freezing the amounts that support the actual building 

of fuel cells. 

2. National Institute of Standards and Technology 

NIST, which develops standards and measurements for a broad range of products 

and technologies, contributes to the creation of knowledge in the fuel cell industry 

through its Residential Fuel Cell Test Facility. NIST built this facility to accomplish 

three goals: (1) accelerate the widespread commercialization of fuel cells in building 

applications; (2) provide consumers with accurate, easy-to-understand information 

on the financial costs and benefits of fuel cells; and (3) provide feedback to fuel cell 

manufacturers on the overall performance of fuel cell systems under varying 

environmental, thermal, and electrical load conditions. 

 

5Ultimately, Congress granted $158 million for FY 2004 and the president has requested 

$190 million, which would represent a doubling of funds in only two years. 
 IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry  33 

NIST plays a key role in the development and commercialization of new technology. 

Not only must new standards be developed for new technologies but often the 

equipment and tests needed to measure the standards must be developed as well. 

For fuel cells, NIST will develop a methodology for determining the seasonal 

performance of residential and small commercial fuel cell systems. This 

methodology will aid the purchaser of a residential fuel cell in determining the 

economic impact of such a system. NIST will supplement the efforts of many 

consensus standards, such as those of the American Society of Mechanical Engineers 

(ASME) and the American National Standards Institute (ANSI), with a test 

procedure and rating methodology that accounts for any change in performance as a 

function of environmental conditions, electrical load, and thermal load. The fuel cell 

used by NIST in its test facility was purchased from Plug Power. Section V.B.5 

provides a more specific description of Plug Power’s role in developing fuel cell 

standards. 

3. Department of Defense 

The U.S. Department of Defense supports fuel cell demonstration and development 

in two separate programs. One program is the Fuel Cell Demonstration Program 

managed by the U.S. Army Construction Engineering Research Laboratory 

(USACERL) to demonstrate that small fuel cells can work in the field. USACERL’s 

specific tasks include installing turnkey packages, devising site criteria, screening 

DOD candidate installation sites against selection criteria, evaluating viable 

applications at each candidate site, coordinating fuel cell site designs, installation 

and acceptance of the power plants, and performance monitoring and reporting. 

Although the program initially focused on Phosphoric Acid fuel cell systems, PEM 

fuel cells are now the program’s main focus, with over 20 PEM installations (more 

than half from Plug Power) established in the last two years with no concurrent new 

deployments of Phosphoric Acid fuel cells. 

The second DOD program is the Defense Advanced Research Projects Agency’s fuel 

cell research conducted under the Advanced Energy Technologies Program.6 The 

current program, Palm Power, is focused on projects that will produce electric power 

in the field for individual soldiers or small groups of soldiers. The program is 

developing compact fuel cell and thermal-to-electric energy conversion technologies 

and is primarily focused on 20 W to 500 W portable power systems using Solid 

Oxide fuel cell systems that can perform under military conditions and run on jet 

fuel. 

 

6www.darpa.mil/dso/thrust/matdev/advancet.htm. 
34  IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry 

D. Intellectual Property in Fuel Cells 

Older science-based industries such as semiconductors, pharmaceuticals, and 

chemicals developed extensive knowledge markets over the years. These markets are 

characterized by intra-firm knowledge generation through R&D activity and by interfirm knowledge trading through licensing and cooperative R&D. 

In the relatively new industry of fuel cells, the market for knowledge is less 

developed than in more mature industries. Because the technology base is relatively 

unexploited compared to more mature technologies, a certain “land grab” mentality 

exists in terms of patenting activity. Since it is difficult to determine which patents 

will prove most valuable in the long term, the incentive is to patent often. Fuel cell 

makers employ two strategies that maximize value in their knowledge generation 

process. First, they create proprietary products that integrate many different 

processes into a single unit. Then, they patent many of the processes and integration 

strategies. In addition, the process of building the fuel cell and integrating its 

components creates a lot of tacit knowledge that companies accumulate and use to 

differentiate themselves and their products from the competition. 

It is helpful to divide the fuel cell industry into three types of companies. There are 

the fuel cell makers, which integrate components around a fuel cell stack. This 

category includes companies such as Ballard, Plug Power, and UTC Fuel Cells. 

Second, there are the fuel cell component makers, which make components such as 

the membranes and catalysts. This category includes companies such as Johnson 

Matthey, DuPont, 3M, Gore, and Englehard. Finally, there are the large 

manufacturers that hope to sell fuel cells in their predominant power, automotive, 

and portable electronic device markets. This category includes companies such as GE 

and General Motors. 

Figure 4 illustrates the patenting activity of five fuel cell makers. This figure shows 

that Ballard and UTC have generated the most patents—not surprisingly, as they 

have been patenting much longer than has Plug Power. Overall, each of these three 

companies is now averaging between 10 and 20 of the new patents granted each 

year. To put that in perspective, the whole fuel cell area only produced an average of 

60 patents a year through the 1970s, 1980s, and early 1990s. 
 IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry  35 

Figure 4. Number of full cell patents held by five selected fuel cell 

companies. Source: U.S. PTO (2003). 

Table 6 shows the patenting activity of the fuel cell component companies and 

downstream distributors. 

Table 6. Fuel Cell Patents of Selected Companies 

Company 2003 2002 2001 2000 1999 1998 1997 

Pre1997 

California Institute of 

Technology 5 7 

3M 2 6 5 3 3 

Avista 1 5 1 2 

Daimler-Chrysler 1 2 1 1 

Delphi 4 3 1 

Dow 1 3 1 

DuPont 1 1 1 0 2 2 1 

Energy Conversion 

Devices 1 2 3 

Ford 5 3 3 

Fuel Cell Energy 2 6 1 1 1 5 

Gore 0 2 5 3 1 

Grafttech 4 1 

H Power (now owned by 

Plug Power) 4 3 2 1 1 

Honda 7 9 7 2 1 4 

Hydrogenics 2 1 1 1 

IdaTech 4 5 1 

Johnson Matthey 2 3 1 2 3 2 

Manhattan Scientifics 1 1 

Matsushita 4 3 1 1 

0

50

100

150

200

250

300

UTC Fuel Cells Ballard Plug Power Avista MTI MicroFuel

Cells
36  IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry 

Company 2003 2002 2001 2000 1999 1998 1997 

Pre1997 

Mitsubishi 3 1 

Motorola 2 6 3 3 1 1 1 

Nissan 2 3 

Nuvera 2 4 2 

OMG 1 1 4 2 1 1 

Proton Energy Systems 4 2 2 1 

Sanyo 2 3 1 

Stuart Energy Systems 

(Canada) 4 2 2 

UOP, LLC 2 2 3 

Source: Hydrogen & Fuel Cell Investor newsletter. 

The overall business strategy of fuel cell makers has been to develop strategic 

partnerships with both component suppliers and downstream distributors. This 

strategy makes sense from a practical standpoint, because large companies dominate 

both upstream supplier and downstream distribution markets. What has emerged 

from these interlocking strategic relationships is that each fuel cell company 

concentrates its intellectual property strategy around its core area of expertise. For 

example, figure 5 shows the distribution of Plug Power’s fuel cell patents by 

component area. The plate, stack, and water management components account for 

56 % of the company’s total patents. These three areas also represent the core of Plug 

Power’s technical expertise. 

Figure 5. Plug Power’s distribution of patents by fuel cell component 

area. Source: Plug Power. 

In the fuel cell industry, it is difficult to find data on the size of the licensing market 

for fuel cell technology. What is known is that fuel cell companies often license 

Plate - 28 %

Stack - 15 %

Water management - 13 %

Algorithms - 9 %

Miscellaneous mechanical - 9 %

Membrane unit - 8 %

Electronics - 7 %

Thermal management - 4 %
 IV. Knowledge Creation and the Use of Intellectual Property in the Fuel Cell Industry  37 

technology from the national laboratories and universities. Celanese received an 

exclusive license to Case Western Reserve’s high-temperature membrane and, in 

turn, has licensed the technology to Plug Power for stationary applications. 

Based on data from 13 ATP fuel cell projects, three companies reported that some 

portion of the technology for their ATP project was licensed from a government 

national laboratory; one company reported that a portion came from two 

universities; and another reported that a portion came from a small private 

company.7 Of the three companies that reported receiving their technology from a 

national lab, one reported that some of its technology also came from a large 

company, and another reported that some of its technology came from a second 

national laboratory. The main conclusion that can be drawn from this admittedly 

limited sample is that private firms use the knowledge generated by national 

laboratories. Moreover, one of the best methods to diffuse publicly generated 

knowledge is to have that knowledge embedded in a commercial product such that 

it can enter the marketplace.8

Firms do license technology when appropriate. However, until the fuel cell industry 

begins to deliver significant volumes, the demand to license technology is low. What 

has emerged is a significant degree of cooperative R&D and joint marketing, since a 

fuel cell involves several technologies and will ultimately need to be sold in mass 

markets such as the car and the home. 

Despite the lack of profits and revenue to date, it appears that fuel cell companies are 

creating “moats” around their technologies. In other words, as fuel cell technologies 

evolve and become more commercially viable, it appears that fuel cell companies 

want to protect their intellectual property position with the broadest patenting 

claims available. Therefore, as commercial markets expand, each company will be in 

a better position to license its technology or use its patent portfolio as a bargaining 

chip in a cross-patenting negotiation. 

 

7Information on ATP’s Business Reporting System may be found at 

www.atp.nist.gov/eao/ir-6491.pdf. 

8Jaffe (1997). 

39

V. Technological Innovation Leads to 

Commercialization of Stationary Fuel Cells 

Technologies often face obstacles in moving from the lab to the marketplace. At its 

inception in the late 19th century, the electric industry was not particularly efficient. 

However, the incumbent technology, kerosene oil for lighting, was even more 

inefficient. As more uses of electricity were developed, economies of scale in 

production emerged and the price of electricity dropped. The average capacity of 

generation units rose from 80 MW in 1920 to 600 MW in 1960, and to 1 400 MW in 

1980. Electric industry production began on a more or less equal footing with the 

incumbent technology, and only through growth in scale was it able to achieve 

technical and price dominance. In contrast, the computers of the 1950s competed 

against only rudimentary technologies such as the abacus or crude mechanical 

adding machines. Therefore, due to clear technological dominance, computers faced 

fewer obstacles in gaining marketplace acceptance. 

The path from lab to marketplace for fuel cells is likely to be more arduous than 

those followed by either of these technologies. Fuel cells may not benefit from 

virtuous cycles enjoyed by electricity and computers. For electricity, it was a matter 

of initial adoption activity. Once electrification took hold, inventions run on 

electricity emerged in the marketplace, and the demand for electricity rose. This 

justified building larger electric plants, which produced cheaper electricity, which in 

turn made electricity an increasingly viable source of power. In computing, Moore’s 

Law drove the whole process. As computers became faster and cheaper, more 

applications could be “computerized,” which led to increased demand for 

computers. 

Fuel cells face a rather difficult challenge as they enter the marketplace, since they 

appear to offer only a novel way of producing electricity and face stiff competition 

from an efficient technology that continues to receive a tremendous amount of 

investment. Therefore, fuel cells must overcome a much higher set of marketplace 

hurdles than either electricity or computers in order to gain commercial acceptance. 

This section contains a review of the different actors and forces that exist within the 

fuel cell industry. These forces have played key roles in creating the incentive for the 

private sector to invest in PEM stationary fuel cell technology and affect the ultimate 

commercial success or failure of the technology as PEM fuel cells are brought to 

market in the near future. The first subsection presents a schematic of the industry 

and the forces driving innovation and adoption. The second subsection reviews the 
40  V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells 

likelihood of commercial success and those areas that might help or hinder their 

ultimate acceptance in the commercial marketplace. 

A. Analytical Framework 

Figure 6 presents a schematic of the forces driving the innovation and adoption of 

stationary PEM fuel cells. The incentive for firms to dedicate resources to R&D of 

stationary fuel cells is affected by a variety of factors. These include the degree of 

difficulty of the research problem, the likelihood of commercial success, government 

policy, rivalry among PEM fuel cell developers, competition with alternative 

technologies for distributed generation of electricity—including other fuel cell 

technologies—competition with large-scale electricity generators, the availability of 

key resources, and the economic power of key resource providers. 

Figure 6. Forces driving stationary fuel cell innovation and adoption. 

B. Likelihood of Commercial Success 

Fuel cell companies face serious hurdles in attempting to achieve commercial success 

in the market. The following subsections present an overview of financial findings 

regarding fuel cell companies, followed by a brief discussion of five areas affecting 

the commercialization of fuel cells—platinum, hydrogen, consumer issues, target 

markets, and alternative energy forces. The discussion concludes with an outlook for 

the future. 

Industry Competitors

Plug Power, Nuvera, UTC, 

Ballard, Toshiba

Alternative Green 

Technologies

Micro-turbines, 

Solar, Wind, 

Alternative Fuel Cell 

Technologies

Government Policies

Science and Technology 

Policy, Environmental Policy, 

Energy Deregulation, 

Standards

Alternative NonGreen Technologies

Coal-Fired Electricity 

Generation, Gas-Fired 

Electricity Generation

Inputs

Platinum, 

Hydrogen, 

Funding

Consumers

Residential 

Applications, 

Commercial 

Applications, 

National Security 

Issues 
 V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells  41 

1. Financial Overview 

Table 7 shows the gross revenues of U.S. and Canadian fuel cell companies for the 

years 2001 and 2002. Table 8 shows the amount of R&D expenditures, net assets, and 

net cash flow for the same years. Total revenues rose from $128 million to $218 

million—an impressive 60 % increase. However, as table 8 shows, the total R&D 

expenditures for 2002 for those same companies totaled $260 million, or almost $40 

million more than their total revenue. A positive trend is suggested by the fact that 

the ratio of R&D expenditures to gross revenues dropped considerably, decreasing 

from 1.7 in 2001 to 1.18 in 2002. 

Table 7. Gross Revenues for Selected Fuel Cell Companies (thousands of U.S. dollars) 

Company Country 2002 2001 

Ballard Canada 90 937 36 204 

FuelCell Energy United States 41 231 26 179 

Quantum United States 23 403 23 358 

Hydrogenics Canada 15 840 7 418 

Global Thermoelectric Canada 14 207 9 918 

Plug Power United States 11 818 5 742 

Dynetek Industries Canada 8 174 6 128 

Stuart Energy Systems Canada 5 052 6 255 

Proton Energy Systems United States 4 714 2 968 

H Power United States 2 576 3 643 

Fuel Cell Technologies Canada 709 443 

Media Technologies United States 192 - 

Astris Energi Canada 94 17 

Energy Visions Canada 50 141 

Palcan Fuel Cells Canada – – 

Snow Leopard Canada – – 

Total 218 997 128 414 

Source: PricewaterhouseCoopers (2003). 

Fuel cell companies continue to rely heavily on government and industry research 

contracts for a significant proportion of their total revenues. The percentage of gross 

revenues from contract research, as opposed to product sales, increased from 35 % to 

43 % between 2001 and 2002.1

As table 8 shows, total assets decreased $195 million from 2001 levels. The cause was 

a swing in net cash flow from a surplus of $215 million in 2001 to a deficit of 

$121 million in 2002. The largest contributor to the switch in net cash flow was the 

dismal equity environment for speculative capital in 2002, as shown in table 9. 

 

1PricewaterhouseCoopers (2003), p. 4. 
42  V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells 

Table 8. R&D Expenditures, Total Assets, and Net Cash Flow for Selected Fuel Cell 

Companies (thousands of U.S. dollars) 

R&D expenditures Total assets Net cash flow 

Company Country 2002 2001 2002 2001 2002 2001 

Ballard Canada 113 736 77 197 917 803 959 319 96 459 (40 325) 

FuelCell Energy United 

States 

6 806 3 108 289 803 334 020 154 375 182 116 

Quantum United 

States 

32 657 26 687 57 163 32 815 173 3 

Hydrogenics Canada 3 761 2 337 90 677 107 633 (644) (80) 

Global 

Thermoelectric 

Canada 14 850 9 744 77 588 92 196 (34 476) 50 885 

Plug Power United 

States 

40 289 60 600 108 683 151 374 (26 390) (4 864) 

Dynetek 

Industries 

Canada 2 676 1 449 31 295 33 603 (7 399) (4 602) 

Stuart Energy 

Systems 

Canada 11 019 8 864 85 746 102 111 (1 226) (10 846) 

Proton Energy 

Systems 

United 

States 

8 793 6 500 176 502 181 868 14 578 477 

H Power United 

States 

18 905 13 466 73 752 105 350 (7 723) 38 129 

Fuel Cell 

Technologies 

Canada 1 592 2 505 5 209 4 954 (418) 1 274 

Media 

Technologies 

United 

States 

4 161 4 251 66 894 69 894 37 3 114 

Astris Energi Canada – – 421 112 154 3 

Energy Visions Canada 678 678 167 1 377 (482) 461 

Palcan Fuel 

Cells 

Canada 315 240 584 145 165 6 

Snow Leopard Canada 115 134 56 981 22 (22) 

Total 260 353 217 938 1 982 343 2 177 752 (121 545) 215 723 

Source: PricewaterhouseCoopers (2003). 

Table 9 shows the breakdown of cash flows by activity. Fuel cell companies continue 

to lose significant amounts of their net worth, as demonstrated by the increase in 

overall losses from operations from $199 million to $337 million between 2001 and 

2002. Cash flow from financing dropped considerably from $615 million in 2001 to 

$158 million in 2002. 

Table 9. Cash Flow by Activity (thousands of U.S. dollars) 

Cash flow 2002 2001 

From operations (337 562) (199 990) 

From investing 57 330 (196 192) 

From financing 158 687 611 905 

Total (125 545) 215 723 

Source: PricewaterhouseCoopers (2003). 
 V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells  43 

A number relevant to the near-term viability of fuel cell companies is their burn rate. 

For 2002, the average cash burn rate (cash plus short-term investments over 

operating cash flow) for the companies listed in tables 7 and 8 was 3.5 years. Six of 

the companies had an average cash burn rate of less than one year.2 

2. Platinum/Catalyst Issues 

One issue surrounding the commercial viability of fuel cells is their reliance upon 

precious metals as a catalyst. Borgwardt finds this to be a critical obstacle. 

Comparing projections of future platinum supply based on past trends to the 

amount of platinum required to replace the current U.S. automotive fleet with fuel 

cell–powered vehicles, the author concludes that “fuel cells alone cannot adequately 

address the issues facing the current U.S. system of road transport.”3

There are several factors that suggest this view may be overly pessimistic. First, as 

Borgwardt notes, the historical trend is declining global prices and increasing global 

annual output of platinum ore. Second, compared to known global reserves of 47 500 

tons of platinum, fuel cells currently use about 25 g.4 Taken together, these facts 

suggest that the long-term elasticity of supply may be sufficient to meet future 

demands as fuel cells experience commercial success. Other tempering factors are 

based on current research efforts to decrease the usage of platinum in each fuel cell 

and examine alternative catalysts. There has been remarkable recent success in the 

first area, with a 100-fold decrease in the usage of platinum. This decrease has in turn 

helped to reduce the cost of platinum in a PEM fuel cell used to power an automobile 

from $30 000 to around $150. 

DOE industry consultants have recently found that, although large fuel cell demand 

may drive higher platinum prices in the short run due to a lack of short-term supply, 

the price will likely return to its long-term mean as more mines come into operation. 

These short-term price spikes may result from either short-term real supply rigidities 

or hold-up issues resulting from South Africa’s near-monopoly position in known 

platinum reserves.5

3. Hydrogen 

A key advantage that stationary fuel cells have relative to other commercial 

applications of fuel cells is as a ready-to-use initial hydrogen source. Although 

 

2PricewaterhouseCoopers (2003), p. 6. 

3Borgwardt (2001). 

4Ibid. 

5Carlson (2003). 
44  V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells 

direct-to-hydrogen methods are not currently economically viable, most residential 

and commercial sites are connected to a natural gas network. Stationary PEM fuel 

cells can therefore reform hydrogen from the natural gas supplied through existing 

networks. This allows residential applications to avoid the costs hydrogen networks 

faced in automotive applications. In fact, Lovins argues that there are important 

strategic complementarities between automotive and stationary applications of PEM 

fuel cells in the area of hydrogen reformation.6 Direct hydrogen automobiles could 

use reformers located alongside either home- or work-based stationary fuel cells as 

hydrogen sources. This would not only provide a convenient source of hydrogen but 

would also allow increased automobile efficiency, as automobiles would not have to 

carry on-board reformers. To meet this challenge, Plug Power has formed a 

cooperative agreement with Honda to use Plug Power’s residential fuel cell system’s 

reformer as the basis for a home hydrogen refueling station for fuel cell–powered 

automobiles. 

4. Consumer Issues 

While changes to the regulation of utilities have contributed to the viability of the 

distributed generation business model, there are a number of customer-driven 

factors affecting this transition. Consumer demand for greener technologies and 

technologies that increase national energy security are not accompanied by actual 

willingness to pay for increased costs of energy produced with these technologies. If 

a public consensus were to develop that the benefits of accelerating the use of fuel 

cells are significantly large, then it might be appropriate to consider public policies of 

tax credits or other incentives to encourage the rapid adoption of fuel cell 

technology. 

Several demand-pull factors affect the potential commercial success of PEM fuel cells 

in residential applications. For example, fuel cells must meet residential electrical 

and thermal loads; their reliability must be equal to or better than grid-connected 

service; the volume and footprint of fuel cells and reformers must match current 

heating, ventilation, and air conditioning systems; they must comply with current 

building and product codes; and they must have low noise levels. Critical to 

providing electricity cost competitive with the grid is the achievement of total fuel 

cell system cost well below $1 000 per kilowatt with reliable, inexpensive operation 

over the 20-year life that consumers expect from stationary energy appliances. 

The need for high-quality, uninterruptible power already exists in certain banking, 

computing, and medical applications. High-quality electricity is also needed by 

 

6Lovins (2003). 
 V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells  45 

industries that employ microprocessor electronics for process control. The paper, 

chemical, textile, and automotive sectors are a few examples of sectors where 

electrical disturbances due to voltage sags, spikes, and outages can cause significant 

losses to manufacturing productivity. The modularity, low noise production, and 

cogeneration opportunities make PEM fuel cells nearly ideally suited for building 

applications outside of these niche markets. The excess heat from the fuel cells can be 

used for heating and air conditioning. The ultra-pure water produced as a byproduct 

and joint production of hydrogen offers further complementarities between fuel cell–

generated power and certain applications such as semiconductors. Lovins and 

Williams report that such applications may provide an initial entry opportunity for 

fuel cells,7 particularly as conventional heating/air conditioning systems are replaced 

either due to age or the need to reduce chlorofluorocarbon emissions. 

A final important step for fuel cells to become acceptable in the marketplace is the 

ability of consumers to purchase and be able to interconnect products from different 

vendors. For example, if a consumer buys a Hewlett Packard printer, he or she wants 

to be able to connect it to a Dell computer. The same applies to fuel cells. 

5. Target Market and Strategic Actions 

The residential consumer is Plug Power’s eventual target market. To promote 

customer collaboration, Plug has 130 systems installed in the field in demonstration 

programs. To penetrate the market rapidly and obtain an advantage over 

competitors, Plug Power has pursued a series of joint ventures and agreements with 

partner companies. 

A huge hurdle for a small technology company is how to sell the product once it is 

developed. Plug Power has addressed this challenge by partnering with GE’s Power 

Division, a leading maker of turbines and power plants for the central utility 

business. GE’s MicroGen unit became the exclusive licensee of Plug Power PEM fuel 

cells below 35 kW in most of the United States.8 The addition of a large manufacturer 

of household energy appliances to distribute and service the residential fuel cells was 

a huge step forward for Plug Power. Both brand recognition and the fleet of GE 

technicians to service products after the sale will greatly accelerate market 

acceptance and reduce the time to commercialization. Subsidiary distribution deals 

are now being pursued with local utilities. For example, GE MicroGen has signed an 

agreement with NJR Energy Holdings Corp. of Wall, New Jersey, and Flint Energies 

of Warner Robins, Georgia, to be the first two distributors for GE MicroGen’s line of 

 

7Lovins and Williams (1999). 

8DTE has the rights to sell in the Midwest. 
46  V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells 

residential and small commercial-sized fuel cell systems.9 In addition to these 

distribution channels, DTE retains marketing rights to sell the Plug Power units in 

several Midwestern states. Timing these agreements before commercial release of a 

product also allows for additional field testing of pre-commercial units, again 

accelerating the time to market for a tested, robust product for residential use. 

On the technical side, Plug Power has sought to leverage its PEM technology with 

complementary systems. The German-based Celanese, the supplier of the hightemperature membranes used in Plug’s first ATP project, subsequently signed an 

agreement to develop a high-temperature membrane electrode unit exclusively for 

Plug Power’s stationary applications.10 The unit consists of membranes, electrodes, 

and gas diffusion layers and forms the heart of the fuel cell stack. It is also the key to 

increasing operating temperatures. Higher temperature stacks operating in the 

150 °C range, up from 90 °C, ensure more reliable, carbon monoxide–tolerant 

operation, allow for better cogeneration efficiencies for heating air and water, and 

reduce the complexity and cost of the fuel processor due to the removal of the final 

carbon monoxide clean-up steps. An April 2000 agreement with Vaillant, also based 

in Germany, will capitalize on these higher temperatures by integrating a 

combination furnace and hot water heater. PEM fuel cells produce electricity at 

approximately 35 % efficiency, with the other 65 % of the energy in the fuel exiting as 

heat or exhaust gas. The addition of a cogeneration unit can capture the heat energy 

that would otherwise be wasted and raise the overall energy efficiency to as much as 

85 % to 95 % by utilizing this excess heat. The efficiency gains through cogeneration 

offer environmental benefits amounting to an estimated halving of home and office 

energy costs. 

Plug Power has also signed an agreement with Advanced Energy Systems to 

develop power conditioning equipment for its fuel cells. The partnership gives Plug 

Power a 28 % stake in Advanced Energy Systems and provides the right to selfmanufacture or outsource the power electronics production.11 Power conditioning is 

important for fuel cells because they produce low-voltage DC, which must be 

inverted to AC for home and office use. The goal of the agreement is to provide 

quicker product development for specific Plug Power fuel cell needs. 

To establish a foundation in fuel processing, Plug Power purchased the leading-edge 

technology of a European company, Gastec, and acquired its employees. To further 

 

9PRNewswire, GE press release, December 1, 1999. 

10PRNewswire, Plug Power press release, April 18, 2000. 

11PRNewswire, Plug Power press release, March 16, 2000. 
 V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells  47 

its technology base, Plug Power has signed agreements with Engelhard Corporation, 

based in Iselin, New Jersey, to provide advanced catalysts for the fuel reformers.12

Natural gas and propane are catalytically converted into hydrogen, which is then 

used as the fuel to make electricity. Improved catalysts can have an impact on overall 

efficiency, thus lowering the operating costs for an installed fuel cell since less fuel 

will be needed to produce the same amount of hydrogen. 

This series of agreements and technical collaborations shore up Plug Power’s 

technology position in each of the three main areas of a fuel cell: fuel processors, fuel 

cell stack (membrane and associated assembly), and power conditioning equipment. 

In each case, the collaboration may speed the development of a total package, 

commercial-ready, residential fuel cell. 

6. Alternative Energy Forces 

Fuel cells share a common set of benefits with all distributed generation 

technologies. These include the avoidance of electric transmission losses and the 

need for a grid, investment in new distribution capacity, and the avoidance of the 

financial risks associated with investment in large central generating facilities. 

Swisher notes that fuel cells also have a number of advantages relative to green and 

traditional distributed generation technologies.13 Photovoltaic generation has 

capacity costs comparable to pilot study–produced fuel cells, yet produces electricity 

during fewer hours per year and has lower peak load availability. While wind 

turbines may have lower costs than fuel cells, they face siting constraints. These 

constraints arise either due to their negative visual impact, noise, or a lack of wind 

resources. Wind turbines’ viability as a distributed generation option is limited by 

these factors, and it therefore fails to avoid distribution costs. 

Traditional distributed generation approaches such as reciprocating engines, small 

turbines, and micro-turbines have lower costs than fuel cells. These approaches are 

currently used primarily as backup power. As primary power sources, however, 

they will likely face regulatory constraints on environmental, safety, and land use 

grounds. These technologies are cousins to that used in aircraft propulsion engines 

and would likely face difficulties with building codes and noise restrictions. Further, 

such projects would likely face utility regulations from which they have been 

insulated as backup-only power sources. Swisher believes that even gas turbines will 

face significant air quality difficulties under the existing Clean Air Act. Further, few 

alternative fuel cell technologies are as well suited for residential applications. Of 

 

12PRNewswire, Plug Power press release, June 6, 2000. 

13Swisher (2002). 
48  V. Technological Innovation Leads to Commercialization of Stationary Fuel Cells 

competing technologies, only PEM and alkaline fuel cells operate at ambient 

temperatures. This allows the rapid start-up demanded in residential and 

automotive applications. PEM fuel cells currently enjoy significant advantages 

relative to alkaline-based systems in terms of reliability. 

7. Outlook 

The regulatory environment is promoting the development of a distributed energy 

strategy, which has taken on added import due to heightened security concerns. The 

significant advantages of fuel cells over both renewable and nonrenewable energy 

sources have led The Economist to note that “it is clear that the electricity industry 

will be turned on its head by fuel cell ‘micro power’ units that are about to come on 

the market.”14 It is also apparent to The Economist that the PEM fuel cell is “the most 

promising type” of fuel cell for automotive and residential applications. 

Companies that work with public sector agencies can undertake riskier research 

agendas encompassing a broader scope. The Plug Power example described in this 

report illustrates how companies can leverage technical achievement through publicprivate partnership agreements. 

 

14The Economist (2001). 
49

VI. Conclusions 

The following conclusions can be drawn from this study. 

A. Drivers of Fuel Cell Innovation 

Government 

Early drivers of U.S. fuel cell innovation were the space and defense 

programs. Since the 1980s, the Department of Energy has been the 

primary source of funds for fuel cell research both in basic research and 

in financing prototypes and demonstration projects. 

National laboratories, in particular Los Alamos in the early days, 

continue to drive innovation in fuel cell research. State programs such as 

the New York State Energy Research and Development Authority 

provide significant support through research grants and demonstration 

projects. 

In November 2001, in response to recommendations within the National 

Energy Policy, DOE organized a meeting of 50 visionary business leaders 

and policymakers to formulate a National Hydrogen Vision. In March 

2002, DOE followed up with a larger group of over 200 technical experts 

from industry, academia, and the national laboratories to develop a 

National Hydrogen Energy Roadmap. The Roadmap contains clear 

technical and commercial goals that must be met in order to achieve a 

hydrogen-based economy by 2030. 

Starting in 1998, the Department of Commerce’s Advanced Technology 

Program awarded the first of 25 fuel cell projects as fuel cell 

commercialization prospects improved. ATP provides cost-share funds 

for high-risk R&D projects with commercial potential, thereby bridging 

the funding gap between basic science and product development. 

Environment and Deregulation 

Fuel cells have been marketed as an emission-free technology. However, 

there are questions about using fuel cells as a means to reduce carbon 

emissions, particularly when one considers that the most economical 

methods for generating hydrogen produce carbon dioxide. 
50  VI. Conclusions 

Deregulation of energy markets spurred utility companies to pursue 

alternative business strategies. Detroit Edison created Plug Power, a 

leading maker of stationary fuel cells, partially as a response to 

deregulation. 

Long-term R&D by utility companies has dropped as a result of the 

decoupling of the power generation business from the power distribution 

business by utilities in many states. 

Expenditures 

Since the early 1980s, federal R&D expenditures on energy dropped in 

real terms from $6 billion in 1980 to $1.5 billion in 2001 (constant 1996 

dollars). 

This trend may be changing particularly in the area of fuel cells, which 

President Bush has specifically targeted for a $1.7 billion increase in 

funds available for research over the next five years. 

B. Innovation in the Energy Sector: Knowledge Creation, Diffusion, 

and Exploitation 

Knowledge Creation 

A significant amount of fuel cell research is funded by government but 

conducted by private firms or universities. 

Private firms aggressively patent in the United States. After averaging 

about 60 fuel cell patents a year from the early 1980s to the late 1990s, the 

number of fuel cell patents granted per year has recently almost doubled. 

In 1999, universities conducted over $4.6 billion of R&D in the scientific 

disciplines related to fuel cells. 

Market Structure 

Fuel cell makers such as Plug Power, Ballard, and Nuvera fit the criteria 

of a small or medium-sized enterprise, but they need access to a large 

firm’s capital and to their markets. 

Since fuel cells are at a pre-commercialization stage, large firms such as 

automobile, utility, and energy companies pursue fuel cell opportunities 

with some firm-sponsored R&D but also through strategic alliances with 

the fuel cell makers. 
VI. Conclusions  51 

U.S. fuel cell makers have strategic alliances with international firms to 

market their products and use them as partners for demonstration 

projects (e.g., Vaillant uses Plug Power fuel cells in a German 

demonstration project). The fuel cell makers include international firms 

in their strategic relationships with suppliers (e.g., Plug Power has 

teamed with Celanese to create a high-temperature membrane). 

C. Public Policy for Innovation in Fuel Cells 

Market Development 

There are limited tax incentives for fuel cells at the federal and state 

levels. The fuel cell tax credits that are available are not large enough to 

affect the decision to purchase a fuel cell. 

Government procurement of fuel cells has been limited to this point. 

At this stage of commercial development, demonstration programs 

appear to be the most effective method for government to spur the 

commercial development of fuel cells. The cost of fuel cells must be 

reduced before tax policy or government procurement can be justified as 

a means for spurring their introduction to the marketplace. 

Public-Private Partnerships 

In July 2003, DOE awarded a total of $96 million in 24 new awards in 

support of the president’s FreedomCAR and Hydrogen Fuel Initiative. 

These new projects include research in advanced fuel cell technology for 

vehicles, buildings, and other applications. In particular, the projects on 

hydrogen storage technologies support DOE’s priority to develop 

methods to safely store hydrogen to enable at least a 300-mile vehicle 

range—a critical requirement for successful vehicle commercialization. 

The recipients of these awards have pledged an additional $40 million in 

cost sharing, bringing the total value of these projects to $136 million. 

ATP awarded three new fuel cell projects in September 2004, bringing the 

total number of fuel cell projects awarded by ATP since 1997 to 25. The 

recipients of these awards have pledged an additional $51.1 million in 

cost sharing, bringing the total value of these projects to $109.3 million. 

Development of Standards 

The National Institute of Standards and Technology, which develops 

standards and measurements for a broad range of products and 

technologies, will perform a vital public good function through its 
52  VI. Conclusions 

Residential Fuel Cell Test Facility. This program will provide purchasers 

with a realistic estimate of annual electrical energy output, thermal 

energy output, and fuel usage. 

In addition to practical operating standards, a more long-term question 

involves safety issues involving both fuel cells and particularly 

hydrogen, which can be very dangerous. The role of government is 

extremely important. 

Commercialization Prospects 

The National Hydrogen Roadmap describes the period from 2003–15 as 

the technology development phase; decisions on commercialization may 

not occur until 2015. However, the prospect for commercialization of fuel 

cells for portable applications or backup systems appears to be much 

sooner, with some electronics firms talking about late 2004 or 2005. 

The financial situation confronting fuel cell makers is precarious. Several 

firms have burn rates of less than a year. Their near-term survival 

depends on continued access to equity markets. 
53

About the Authors 

John M. Nail is an economist in the Advanced Technology Program’s (ATP’s) 

Economic Assessment Office. His general research interests include the economics of 

innovation, patenting, and venture capital. He spoke at a conference on military fuel 

cell applications held in Arlington, Virginia, in September 2004 and presented a 

paper on the commercial outcomes of ATP projects at the 2003 Western Economic 

Conference in Denver, Colorado. Before joining ATP, he conducted economic 

analyses of legal and regulatory matters, assisted in expert witness testimony 

involving price-fixing in the sports apparel and prescription drug markets, and 

developed an economic valuation of employee stock options. Dr. Nail holds a Ph.D. 

in economics from the University of North Carolina; his areas of expertise include 

health care economics, industrial organization, and applied financial economics. 

Gary Anderson is an economist in the ATP Economic Assessment Office. His 

professional experience includes teaching at the undergraduate and MBA levels, as 

well as consulting for business and international organizations. His research includes 

work on technology transfer, spillovers from technology, and the economics of 

innovation. He served this past year as a member of the ATP Electronics and 

Photonics Selection Board, which reviews fuel cell applications. He presented a 

paper on differences in technical innovation between small and large firms in ATP at 

the 2004 American Statistical Association meetings. Dr. Anderson has lived in 

Mexico and Indonesia, and has traveled throughout Europe and Asia. He has a Ph.D. 

in economics from the University of Maryland. 

Gerald Ceasar is a program manager for the ATP Electronics and Photonics 

Technology Office, and led the Premium Power focused program. His current areas 

of interest include advanced power technologies, photovoltaic applications, fuel 

cells, advanced batteries and ultra capacitors, and thin-film large-area electronics. He 

has a nascent interest in molecular electronics materials and device technologies that 

look beyond CMOS silicon and that utilize nano- and self-assembly molecular 

technologies. He joined ATP in 1994, after a career in industry at BP America and 

Xerox in a variety of research management and technical positions. Earlier, he was an 

assistant professor of chemistry at the University of Rochester. Dr. Ceasar earned his 

Ph.D. in physical chemistry from Columbia University and held postdoctoral 

fellowships at Cal Tech and Oxford University sponsored by the National Science 

Foundation and NATO, respectively. He has authored over 80 research papers that 

have been published or presented at professional meetings and holds several 

patents. 
54  About the Authors 

Christopher J. Hansen was most recently an intern at ATP and is now a doctoral 

candidate in economic geography at Oxford University. He is a member of the 

research team at the Oxford Institute for Energy Studies, focusing on electricity 

regulation and supply issues in developing countries. His current research evaluates 

how liberalization of the Indian electricity market will enable new technology 

adoption, specifically the use of distributed electricity generation (e.g., wind-diesel 

hybrid systems). He may be contacted at chris.hansen@oxfordenergy.org. Mr. 

Hansen holds a bachelor’s degree in nuclear engineering from Kansas State 

University and a master’s in technology policy from the Massachusetts Institute of 

Technology, where he worked in the MIT Laboratory for Energy and the 

Environment. 
55 

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About the Advanced Technology Program 

The Advanced Technology Program (ATP) is a partnership between government and private 

industry to conduct high-risk research to develop enabling technologies that promise significant 

commercial payoffs and widespread benefits for the economy. ATP provides a mechanism for 

industry to extend its technological reach and push the envelope beyond what it otherwise would 

attempt. 

Promising future technologies are the domain of ATP: 

Enabling technologies that are essential to the development of future new and 

substantially improved projects, processes, and services across diverse application areas; 

Technologies for which there are challenging technical issues standing in the way of 

success; 

Technologies whose development often involves complex “systems” problems requiring a 

collaborative effort by multiple organizations; and/or 

Technologies that will go undeveloped and/or proceed too slowly to be competitive in 

global markets without ATP. 

ATP funds technical research, but it does not fund product development that is the domain of 

the company partners. ATP is industry driven, and that keeps it grounded in real-world needs. 

For-profit companies conceive, propose, co-fund, and execute all of the projects cost shared by 

ATP; these projects often include universities, and other nonprofit organizations. 

Smaller firms working on single-company projects pay a minimum of all the indirect costs 

associated with the project. Large, “Fortune 500” companies participating in single-company 

projects must pay at least 60 % of total project costs. Participants of joint venture projects pay at 

least half of total project costs. Single-company projects can last up to three years; joint venture 

projects can last as long as five years. Companies of all sizes participate in ATP-funded projects. To 

date, nearly two out of three ATP awards have gone to individual small businesses or to joint 

ventures led by a small business. 

Each project has specific goals, funding allocations, and completion dates established at the outset. 

Projects are monitored and can be terminated for cause before completion. All projects are selected 

in rigorous competitions that use peer review to identify those that score highest against technical 

and economic criteria. 

Contact ATP for more information: 

On the Internet: http://www.atp.nist.gov 

By e-mail: atp@nist.gov 

By phone: 1-800-ATP-FUND (1-800-287-3863) 

By writing: Advanced Technology Program, National Institute of Standards and 

Technology, 100 Bureau Drive, Mail Stop 4701, Gaithersburg, MD 20899-4701