Another high profile datacenter goes Bloom

Is the success of fuel cell power tied directly to the cost of natural gas?
Written by David Chernicoff, Contributor

After this summer’s announcement from eBay that its new datacenter was running on 100 percent fuel cell generated energy provided by equipment from Bloom Energy, it looked like the fuel cell business was really moving forward.

The announcement Wednesday that financial services giant JP Morgan Chase was installing a pilot 500kW Bloom energy datacenter power system at its Delaware site, looks to further cement the acceptance of the fuel cell as a standard energy supply for datacenters.

Bloom Energy’s fuel cells generate electricity by a chemical process from liquid natural gas. To those of a certain age, the only exposure they will have had to fuel cell technology would be the aborted Apollo 13 mission in April of 1970. The Apollo spacecraft relied on fuel cells that combined oxygen and hydrogen to generate electricity and when one of the oxygen tanks ruptured, the fuel cell was unable to continue its function to supply critical electrical power to the Apollo 13 mission.

Unlike the technology used in the Apollo missions, the fuel cell technology that Bloom uses doesn’t need highly volatile liquid oxygen to function, but it does have to deal with the potentially volatile market for the price of natural gas.

In the US, natural gas prices are close to historic lows, making power provided from natural gas, and hence fuel cells, an inexpensive alternative.

But a large part of the reason for the low cost is the abundance of natural gas supplies in the US as a result of technologies such as fracking; which in many places is a political hot potato. I have, to a degree, an internal look at this part of the business, due to having formerly owned a large property, which has a gas lease from companies doing fracking in my home state of Pennsylvania.

When drilling companies were aggressively pursuing mineral rights and drilling gas wells in Pennsylvania, starting about six years ago, the wellhead price for natural gas was in the $13 per million BTU (British thermal unit) range. This made the relatively expensive fracking process an economically feasible action, and in many places in the Marcellus Shale formation, wells were being drilled at a furious rate.

But while it can be a demand driven business, it’s also a cost sensitive one. As recently as April 2012, prices from natural gas had dropped under $2 per million BTU (prices are currently in the mid-$3 range). This low cost is what makes electrical power generation from natural gas an attractive proposition.

Especially since natural gas fired power plants are actively replacing traditional coal-fired facilities due to its cleaner nature in terms of environmental impact.

Image: US Energy Information Administration

So when you combine the drop in the price of natural gas with the very vocal political fallout surrounding the issue of fracking, you can see why "exergy" exploration companies have started to back away from the continued exploitation of the remaining (and huge) natural gas supply available in the US, because of both the cost and political capital involved.

As energy utilities have brought natural gas powered plants online they have been able to offer lower cost, longer-term energy contract to their commercial customers. But it is one thing to sign a contract with price guarantees with a utility and completely another thing to actually invest in your own power generation infrastructure in the way eBay has done with its latest facility.

In 2013, the price per million BTUs has been as low as $3.33 and has high as $4.17. Go back two years and the price can be seen to have as much as doubled. So if you invest in your own generation facilities you can only guarantee the actual cost of production and delivery; the potential complication is that the cost of fuel could vary wildly.

This type of cost is not a normal part of the equation in factoring the expense of datacenter energy, but it is a significant one if you choose to go the fuel cell route.

While it is unlikely that natural gas prices will reach the heights of 2008 in the next five years, the prices of gas has been steadily increasing since last year’s lows and a spike in demand could easily drive prices up once again; a blessing to those deriving income from gas leases, but a potential stake in the heart for companies dependent on low cost natural gas.

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