LONDON, — Environmental issues and associated technology breakthroughs have created an alternative energy investment sector already worth more than $20 billion, according to Bruce Jenkyn-Jones of Impax Capital Corp, an Environmental Technology fund.

Some $17 billion of this is in listed fuel cell firms, which have enjoyed share price growth of 125-1000 percent over the past 12 months.

"Fuel cells are leading alternative energy and environmental technology as a whole into the mainstream investment arena and this means cheaper capital for the sector," Jenkyn-Jones told an IQPC Fuel Cells Week conference in London two weeks ago.

Fuel cells use hydrogen as a fuel to create an electric current between electrodes, producing power with far less pollution than traditional burning of fossil fuel.

Though they remain costly to make and face some daunting technological development barriers, their potential is causing a big stir among investors.

Companies such as Proton Energy Systems already produce commercially viable hydrogen converters and fuel cell energy stores for back up power and premium electricity users.

These are customers who need to be especially sure of uninterrupted power supplies, and do not mind paying for it.

Domestic power plants and other more everyday static applications will probably come next -- with a bit of nudging from tough international targets on global greenhouse gas emissions.

But the automotive sector is where the investors expect a real bonanza.

California Boost

Fuel cell market leader Ballard Power Systems has a raft of development deals with major motor manufacturers, and it reckons fuel cells vehicles are destined to become a $180 billion industry.

The FCV cause received a major boost early in October, when California stuck to its target for 10 percent of zero and low emissions vehicles to be sold in the state by 2003, rejecting pleas from auto producers for a delay.

"More cars are sold in California than in many developed countries and this (ruling) is now a really key driving factor," says Joan Ogden, Research Scientist at Princeton University's Center for Energy and Environmental Studies.

Some 40 million vehicles are registered in California. Industry estimates say 10 percent of 2003 sales would amount to around 20,000 vehicles.

Ogden says public buses and other fleet vehicles will be the first to be made in commercially viable quantities, given that the lack of a hydrogen refuelling infrastructure is less of a barrier for them.

"Centrally refuelled fleet markets are large enough to buy down the cost of hydrogen fuel cell vehicles in a decade of mass production," she said.

According to Jeffrey Ng, European Automotive and Industrial Specialist at Citibank in London, the fuel cells industry has seen $6 billion to 8 billion of corporate investment sunk into it so far, along with $4 billion to $5 billion from "pure play" fuel cell listings, and a further $2 billion in unlisted companies.

This looks low compared with more than $10 billion pumped into Internet hopefuls in first quarter 2000 boom alone, according to PricewaterhouseCoopers data.

More Funds In The Market

But the balance is starting to tip.

Hydrogenics, a Canadian maker of fuel cells for use in harsh environments, came to market on Friday last week.

Four or five others are preparing IPOs now, including Europe's first fuel cell IPO ZeTek Power. Another six to eight will probably go in the next six to nine months, and there are an unmeasurable number of smaller groups with only a dozen or so employees at present.

All of these are looking for investors, but it does not look as if they will have much trouble finding them.

A step change in investor interest in fuel cells and other ET stocks was sparked by a blaze of publicity around the fizzing IPO of Plug Power in November 1999.

That ardour apparently was undampened by Plug's spectacular fall from grace this year when the group, which targets a market for residential fuel cell power plants, had to rein back breakeven forecasts.

Jenkyn-Jones's Impax has $35 million under management. Merrill Lynch said last week its $290 million New Energy Technology Fund for listed and unlisted companies launched at the end of August was already oversubscribed.

And earlier in October, new economy energy backer Nth Power Technologies Inc, whose first venture capital vehicle fund was worth $63 million, closed a second at $120 million saying it could easily have raised twice as much.

Fuel Cell Bubble?

So will there be, as with the Internet boom, good money thrown after some terrible investments?

"Definitely," says Citibank's Ng.

"There's going to have to be a pretty long and fairly painful education process for a while."

Retail investors thinking of taking a punt on fuel cell stocks might stop and wonder where they would be if they had bought Plug Power at $150 a share in March.

The stock now trades at around $25, still a fair premium on its $10 float price, but one set of badly burned shareholders has brought a class action lawsuit against it for making "materially false and misleading statements" about its supply contract position.

"With fairly small free floats and small institutional hold positions the volatility is set to remain," says Ng.

"Some companies are now probably going to be tempted to go to market a bit too early, and remember that with fuel cells we are talking about substantive commercialization still three, four or five years away…"

Story by Andrew Callus for Reuters News Service, © 2000 Reuters Limited. All rights reserved.

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