Bloom Energy: It's the Economics, Stupid

In the past few days, numerous stories have focused on Bloom Energy’s technology, its costs, and whether its technology will eventually arrive in the home. In many ways, all of these stories have missed the forest for the trees.

Bloom Energy’s value proposition boils down to one simple statement: customers are virtually guaranteed to save money.

Consider: at least in California, customers can buy a Bloom box for between $700,000 and $800,000 or so, and generate electricity for about 9 to 10 cents per kilowatt-hour (with about 9 cents per kWh going to the costs of the Bloom Box versus and additional 5 kWh to pay for the fuel, natural gas, according to Lux Research). Versus a utility cost of between 13 and 14 cents per kWh, customers should be able to pay back the cost of the Bloom Box in between 3 to 5 years. This has all been well reported.

But for some reason, Bloom has not called a great deal of attention to its service contract, which covers the cost of maintenance and upgrades. How long will the individual fuel cells last before they need to be replaced? To a customer, it doesn’t matter. How many fuel cells will need to be replaced over the life of its server? Again, it’s an irrelevant question. If something breaks, Bloom fixes it, for free. If something needs replacing, Bloom takes care of it. It’s why so may top-tier companies were on stage backing Bloom.

A customer like Wal-Mart needs an ironclad guarantee before it can
commit to a new technology. Coca-Cola, Federal Express, Google, and
Staples are no different. But Bloom is selling them an on-campus power source that the
company is virtually guaranteeing will pay for itself in as little as
three years, and will last through ten. What’s not to like?

What’s the downside risk? Two far-fetched possibilities, in my mind:
first, that the price of electricity will decrease, invalidating the
investment, and two, that the Bloom fuel cells will crumble back into
powder before the warranty has expired. Neither seems likely.

It’s worth pointing out that a number of companies compete with Bloom in
the solid-oxide fuel-cell space: the U.K.’s Ceres Power began
production late last year, and Australia’s Ceramic Fuel Cells is also
selling units to customers. In the U.S., ClearEdge is ramping toward
production, as is Acumentrics. But in KR Sridhar, Bloom has the sort of
charismatic, slightly arrogant chief executive that Silicon Valley types
seem to adore.

Also somewhat lost in the shuffle: Bloom’s green-power credentials are a
bit flimsy. Solid-oxide fuel cells produce carbon dioxide, and Bloom’s
server produces 773 pounds of CO2 per megawatt-hour. According to state
emissions data compiled by the EPA’s
eGrid database (and sourced by Forbes,
in a nice examination of the numbers behind Bloom) the electricity
produced by California’s own grid is 540 pounds/MWH – substantially less
than the CO2 output generated by the Bloom technology. Only when you
move a Bloom box out of California does its green credibility reemerge;
New York’s grid, for example, generates 828 lb/MWh. A state like
Arizona, which most likely would embrace solar, generates 1,158 lb/MWh.

Ironically, California’s electricity prices are some of the highest in
the nation, so the Bloom servers make less sense outside of the Golden
State’s borders.

There’s also something to be said for the simplicity of what Bloom is
selling. Solarbuzz.com
surveys the price of solar modulators, batteries, inverters,
regulators each month, and derives a price for a typical installation.
For a pair of 50-kilowatt solar arrays (individually priced at about
$313,710) a 100-kilowatt solar array would total about $617,000,
slightly less than a Bloom server. However, the price in kWh is also
higher — 25.03 cents per kWh, under perpetually sunny skies — because a
solar panel can’t produce power during the night.

But the Solarbuzz survey also can't always take into account the
variance in solar exposure, retail prices, taxation, and rebates, among
other factors — variables that a CFO would have to factor in. And there's the space savings, too: even across
the sprawling campuses of corporate Silicon Valley, a roof-mounted solar
array might not be able to power an entire building.

Incidentally, potential customers might want to take a look at Bloom’s
temperature tolerances. The Bloom servers can withstand temperature
ranges of 0 degrees to 40 degrees centigrade – just 32 degrees to 104
degrees Fahrenheit. In San Jose, where temperatures barely
topped 100 last year, only a record heat wave would push the Bloom
box over its limit. (I'm assuming cold weather would be less of an
issue, since a Bloom box should be able to be installed indoors, where a
vent could disburse the carbon dioxide.)

But even though an “extreme weather kit” is available (an umbrella?) the
temperature limitations would seem to rule out Sacramento, where the
Sacramento Municipal Utility District already offers its customers
shares in a solar array it operates. And doesn’t a constant, home-grown
supply of power make the most sense during a heat wave, when brownouts
are common? In retrospect, February was a great time to launch: not too
hot, not too cold.

But for the customer, the bottom line is the bottom line.

I spoke with T.J. Rodgers, an engineer, chief executive of Cypress
Semiconductor, and a Bloom board member, where I asked about the service
contract. Does it matter if a fuel cell fails? What does the service
contract say? “It doesn’t matter,” Rodgers said. “All I pay for is the
fuel.”

If they were smart, Bloom’s sales executives will use the same line in
future contracts. I overheard Scott Sandell, a partner with New
Enterprise Associates and a Bloom board member, telling another VC that
Bloom soon hopes to sign a contract with a customer that will “make the
company”. Sandell also pointed out, publicly, that Bloom’s costs have dropped by more than 25 times since 2004, with the implications that they’ll drop further.

In some ways, whether or not Bloom can ever lower the price low enough to install a home unit is irrelevant. What’s important is that it can meet the demand from its enterprise customers, and avoid running into manufacturing glitches. (We still don’t know where Bloom manufactures its fuel cells.)

Bloom’s pitch should be that its servers are like buying a
luxury car: with all scheduled maintenance guaranteed, plus a warranty,
all customers have to supply is the fuel.

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