hydrogen fuel cell vehicle infrastructure: analyzing...
TRANSCRIPT
Kwasie, Marcellin, Mora Sojo, Wolkon, 1
Maryellen Kwasie, Jean-Pierre Marcellin, Fernando Mora Sojo, Ben Wolkon
Sustainability Lab, Spring 2015
May 14, 2015
Hydrogen Fuel Cell Vehicle Infrastructure: Analyzing Barriers to Investment and Entry to
Support Stakeholder Collaboration
EXECUTIVE SUMMARY:
The widespread adoption of sustainable alternative fuels often requires a massive infrastructure initiative,
involving key stakeholders with different interests and agendas. The automotive industry currently faces
such a challenge in seeking to develop viable markets for hydrogen fuel cell vehicles (HFCVs). HFCVs are
electric drivetrain, zero-direct emissions vehicles, in which electricity is generated by an onboard fuel cell.
The exhaust contains only water, without CO2 and other trace emissions. The benefits of HFCVs include,
but are not limited to, reduced carbon footprint of consumers, reduced air pollution in cities, and faster
fueling time with longer range than current battery electric vehicles.1 The automotive industry has invested
billions of dollars into designing, manufacturing, and marketing HFCVs. Nonetheless, there is a hurdle that
these companies, potential consumers, and other stakeholders have to overcome before HFCVs can have
an impact, and that is a lack of supporting hydrogen fueling infrastructure.
Problem Statement:
For over 15 years, numerous parties have researched and analyzed the feasibility of HFCVs, exploring
business cases and financial models that attempt to posit a solution. However, the expected returns on
investment under traditional business models are too low for the project to attract most potential investors
and distributors, especially given the levels of risk involved. In particular, potential negative cash flows
from Operation and Maintenance (O&M) during the first several years of the project create a high risk for
financial insolvency.2 The complexity is further compounded by the economic impact of constructing
additional refueling stations and the uncertainty surrounding the pace at which HFCVs would enter the
automotive market, providing non-steady positive growth in utilization as new stations enter. While
multiple models can mathematically illustrate a “good business case”, they do not cover the real the “who”
and “how,” mechanics that require a more in depth assessment and sensitivity analysis of the barriers to
entry of different stakeholders.
Thus, this Sustainability Lab project focuses on the barriers that new station entrants face to investing in
infrastructure. It further examines various financial scenarios and addresses the aforementioned infeasibility
of expanding infrastructure development. Ultimately, it aims to present suggestions on how to evaluate and
combat the collective hurdles that prevent the deployment of a hydrogen refueling infrastructure by
isolating and analyzing levers that can motivate or dissuade stakeholder collaboration.
1 A portfolio of power-trains for Europe 2 NREL, CDP #30: Infrastructure Maintenance, Innovation for Our Energy Future
Kwasie, Marcellin, Mora Sojo, Wolkon, 2
Methodology:
Our team first broadly investigated the problem space and the existing body of research that analyzes the
HFCV infrastructure problem. We then address the necessity of hydrogen infrastructure and utilize Porter’s
Five Forces framework to articulate the considerations potential new entrants assess before investing.3 We
then address key operational and financial considerations that would preclude investment, including
discussion of a financial model that illustrates the financial uncertainty that investors consider when
evaluating investment in HFCV infrastructure. Lastly, this paper offers a handful of recommendations and
suggestions for framing stakeholder engagement that can be applied to future infrastructure initiatives
aiming to garner investor support in the coming decade.
I. Infrastructure as a Necessity for the Success of HFCVs
The development of hydrogen infrastructure lies at the intersection of commercial value and public good.
Still, it faces an agency issue: New infrastructure entrants need to be confident that a market for HFCV
fueling exists before they will invest in infrastructure; potential HFCV customers need to know that
infrastructure exists before they purchase HFCVs. We argue that the problem is not so circular. Rather,
infrastructure is an essential precursor to an HFCV rollout, for the following reasons:
· First, access to refueling infrastructure is a critical factor in a customer’s decision to invest in new
automotive technology. The absence of infrastructure is a barrier to a purchase; its presence offers
a commitment to customers that they will have access to refueling through the life of the product.4
· Second, a critical mass of stations inspires sales. The
value of sales as a function of available stations in the early
stages of a new automotive technology follows an S-curve,
with limited initial infrastructure inspiring limited sales,
followed by a critical inflection point of available stations that
supports growth in sales. A basic S-curve is reflected in
Figure 15. While, mathematically, the S-Curve shape takes
many forms, in this project we aim to engineer successful
adoption such that the S-Curve does not lead to collapse or
flatten, representing slow growth and limited market share.6
Infrastructure supports HFCV sales, which then support more
infrastructure, yielding a reinforcing loop which creates value
for the overall HFCV producing automotive industry.
· Third, dollars invested in additional subsidies for HFCVs do not adequately overcome the absence
of infrastructure without extraordinary and extreme expense. Instead, there is a tipping point such
3 Michael Porter “The Five Competitive Forces That Shape Strategy” https://hbr.org/2008/01/the-five-competitive-
forces-that-shape-strategy 4 Interview with John Sterman
5 Carey, John and Martin C. J. Elton, When Media Are New: Understanding the Dynamics of New Media Adoption and Use, 27 6 Interview with Automotive Industry Expert
Figure 1. Basic Technology
Adoption S-Curve
Kwasie, Marcellin, Mora Sojo, Wolkon, 3
that every dollar invested in infrastructure produces more sales than every dollar invested in a
subsidy to the price of a single vehicle.
In the automotive industry, buyers are committing to a long-term investment of a vehicle and require
confidence that there will be fueling options available in their vicinity. Infrastructure must come first. While
this dynamic could change for other industries or investments, it is essential to identify this hurdle in the
hydrogen infrastructure system. Further, one station represents <1-5% of the vehicles on the road given our
model’s long term expected ratio of approximately 250 vehicles for every station. Therefore, it may be a
more impactful lever to maneuver in promoting HFCV adoption than the reverse. This begs the questions:
Who takes on the risk? And who pays?
II. Hurdles to Investment in Infrastructure: New Entrant Perspective
Inspiring infrastructure investment requires motivating potential investors to enter the market. When
analyzing the problem of developing infrastructure for alternative energies, we first framed the problem in
terms of “Porter’s Five Forces”7. The five forces circumscribe the competitiveness, and often attractiveness,
of entering a market. These forces are identified as: Bargaining power of suppliers, threat of substitutes,
threat of new entrants, bargaining power of buyers, and internal competition. For example, in terms of
mapping this framework onto the nascent hydrogen infrastructure industry, suppliers would be considered
the hydrogen companies ultimately selling hydrogen to stations, whose power may allow them to extract
value through high pricing. New Entrants would be the other station owners or alternative energy stations
that may enter the market with time and reduce margins for providers. Substitutes could be other forms of
alternative energy, or conventional energy sources, between which customers can choose to increase their
own utilities. Buyers would be the customers coming to the station for hydrogen, whose bargaining power
may allow them to extract value through reducing revenues. These five forces are at the forefront of each
potential entrant’s mind when deciding whether or not to enter a new industry, in this case the hydrogen
fueling industry.
One interesting feature of the case with developing infrastructure is that the primary beneficiaries of the
infrastructure may not actually be the new entrants themselves, especially the first movers. Instead, the
market entrants play a critical role in providing value for a host of other key stakeholders, who may be
uninvolved in the development of that infrastructure. Those key stakeholders should then analyze the five
forces from the perspective of the potential investors in infrastructure to determine how to minimize barriers
to entry at each force. For example, in the case of hydrogen infrastructure, one major stakeholder is HFCV
producers. Likely as a result of a huge regulatory push toward low emissions automotives, the automotive
industry has invested in the development of HFCVs for decades. However, this industry can only extract
value from those investments if infrastructure is developed. As a result, the automotive industry should
utilize a five forces framework from the perspective of the potential station owners to consider how they
can help the infrastructure entrants capture value or mitigate risk among each of the forces.
Naturally, financing is the issue at the forefront of each infrastructure investor’s mind. Invariably, cost of
investment in infrastructure and the owner of that cost or bearer of that risk are essential considerations. In
7 Michael Porter “The Five Competitive Forces That Shape Strategy” https://hbr.org/2008/01/the-five-competitive-
forces-that-shape-strategy
Kwasie, Marcellin, Mora Sojo, Wolkon, 4
fact, if HFCV infrastructure will rely on a station model, this means it will rely on a network of potentially
small and disjointed entrants to bear the risk, the high investment price tag, and the low guarantee of
increased or compensatory revenues. For example:
· Margins for gasoline sales are extremely low, often 5%, with the overwhelming majority of profits at a
gas station coming from the sale of convenience items.8 Investing in hydrogen infrastructure, if it does not
generate additional sources of income to the retailer, will only reduce the cash flows of the business.
Incentivizing potential investors to invest in infrastructure requires identifying ways of allowing them to
capture a share of the economic value it would generate, which implies disrupting the standard model of
purchasing and reselling fuel in the short term.
· Despite the fact that the automotive industry has invested billions of dollars in HFCV technology,
potential distributors may have the perspective that they are internalizing all of the risk with the end user,
especially if they have to invest $1-2M in a station that may have few users for the first 5 years.910 This
perception of bearing risk must be mitigated in order to get increased buy-in of potential investors.
· Even if potential distributors are interested in investing, they may face financial and organizational
realities that eliminate their ability to invest. For example, convenience stores, 60% of which are owned by
small families, only generate about $50,000 in annual revenues and may only operate for 5 years before
being acquired.11 While they have the organizational freedom to invest in a $1-2M hydrogen station, they
lack the funding and the timeline to do so. Inversely, large, publicly held convenience store chains may lack
the organizational freedom to take risks on investments in new infrastructure projects, limiting their ability
to contribute to infrastructure rollout. Therefore, convenience store conglomerates (i.e. groups that own
more than 100 fuel retailing locations), either privately or publicly owned, constitute a more likely investor
as they have more organizational autonomy and their investment horizon is better aligned with a project of
this nature. However, even these “most likely” investors lack the financial incentives to make such a risky
infrastructure investment that may offer no short- or long-term value-add to their organization.
Ultimately, the foregoing highlights how stakeholders must align on their agendas and distribute returns
appropriate to the relative risks being taken by different parties. As potential entrants in hydrogen
infrastructure are essential to the rollout of stations (and to automotive industry returns), they may, at
minimum, need to be compensated for the risk they perceive they are taking on and, at maximum, need to
be contractually guaranteed a steady stream of income for taking on the risk of distributing hydrogen.
III. Financial Considerations and Analysis
A rigorous analysis of the financial concerns allows us to more specifically isolate two financial barriers
that are critical to understand and address in the development of an infrastructure project. The first barrier
8 NACS: Motor Fuel Sales
http://www.nacsonline.com/Research/FactSheets/Motor%20Fuels/Pages/MotorFuelSales.aspx 9 NREL Hydrogen Station Cost Estimates http://www.nrel.gov/docs/fy13osti/56412.pdf 10 Hydrogen Generation & Infrastructure and Alternative Vehicles Compared 11 Interview with Automotive Industry Expert
Kwasie, Marcellin, Mora Sojo, Wolkon, 5
concerns profitability and value generated for parties that invest in the infrastructure project.12 The case of
hydrogen infrastructure illustrates how the underlying assumptions used to model profitability, or even
solvency, outcomes have a dramatic effect on the value proposition of that investment to an investor. This
volatility in perceived value should be evaluated by key stakeholders in determining and engineering their
strategy to inspire investment in infrastructure.
The uncertainty surrounding the roll out of both the HFCVs and the refueling infrastructure they require,
as well as around the economics of hydrogen (e.g. production costs, distribution costs, price received by
the retailer, fiscal incentives, financing options) makes the exercise of evaluating a potential investment in
refueling infrastructure a significantly complex one. To address this, we have developed a financial analysis
tool that helps estimate the net present value (NPV) of investing in a station relative to the time at which
the investment is deployed. The model allows the user to control for the subsidies and tax breaks provided
by the government, potential synergies, different financing mechanisms and other relevant considerations
detailed below.
Exhibit 1 shows a sensitivity analysis of the NPV of a station that comes into operation relative to the retail
price received by the retailer and the discount rate under our base scenario. (Essentially, this price is the
compensation that the retailer would require for each kg of hydrogen sold, regardless of who pays for it.)
The main assumptions underlying our base scenario are presented in Exhibit 2.
One key insight that stands out from the model is that early entrants in hydrogen infrastructure incur the
most losses, potentially barring future investment to spread. We see this in Figure 2, which illustrates the
hydrogen sales (kg) per station for the first 7 years after initial infrastructure investment based off of figures
provided by the model. Note that the
initial sales (depending on the related
price of hydrogen and required costs) may
be insufficient to cover the risk of
investment and may even be negative.
We believe this result can inform the
conversation on mitigating collective
hurdles and is further explored in our
recommendations section.
The second barrier to success hinges on
the alignment of investor incentives. It is essential that the beneficiaries of the project are able to align the
incentives of other critical stakeholders and investors with their own long-term incentives. Specifically, if
not financially engineered correctly, the incentives of other potential financial investors could be misaligned
with the rollout agenda of the automotive industry. It is important to understand the relationship between
value creation and value capture within the system. If the party creating the value is not able to capture it,
it will have little incentive to execute its role, even if this would be beneficial for the system as a whole.
For instance, the fueling stations would create significant value by a) allowing vehicle owners to fuel their
vehicles, b) increasing the sales of HFCV vehicles due to the effect that the network has on the attractiveness
12 Oak Ridge National Laboratory, Status and Prospects of the Global Automotive Fuel Cell Industry and Plans for
Deployment of Fuel Cell Vehicles and Hydrogen Refueling Infrastructure
0.00
20000.00
40000.00
60000.00
80000.00
100000.00
0 2 4 6 8
kg H
2 S
old
per
Sta
tio
n
Years from Infrastructure Rollout
Figure 2. Projected H2 Sales per Station Over
Time
Kwasie, Marcellin, Mora Sojo, Wolkon, 6
of the technology, and c) promoting sustainable technology. The value created by the stations is thus
distributed among the stations themselves, vehicle owners, the automotive industry and society. If the
stations are not able to capture enough value, the network will not be deployed and the value will not be
created. Therefore, it is important to find ways in which the value can be redistributed within the system,
allowing stations to capture a share that would guarantee the development of the infrastructure. In theory,
a competitive market naturally redistributes value through the system based on willingness to pay.
However, in practice the value may never be created to distribute if those most responsible for its execution
are not adequately guaranteed payback for taking on the initial risk.
For example, HFCV producers would benefit most from a viral spread of hydrogen stations and distribution.
Ideally, the investment in and success of a handful of critical distributors would inspire widespread private
investment in hydrogen infrastructure. The expanded presence in hydrogen infrastructure would reassure
potential HFCV customers that they will never be in a situation where they need to refuel and cannot gain
access. Widespread private adoption allows customers to maintain their existing automotive behaviors and
expectations of the refueling experience for the life of the vehicle. From the perspective of the HFCV
producers, the more infrastructure, the better for supporting HFCV sales. Thus, HFCV producers in the
automotive industry should support an investment mechanism that promotes the rapid, thorough spread of
HFCV infrastructure required to support non-linear growth HFCV sales.
Investors outside of the automotive industry may prefer investment outcomes that counter the automotive
industry’s HFCV infrastructure rollout agenda. We see this on both the new entrant level and the private
investor level. Both the new station entrants and financial investors that support them want to see high,
constant returns on their investment. However, if the success of these investee stations inspires other
stations to enter the market, those new entrants may capture some of the market value that the investors
initially intended their own investees to capture. The initial investees’ sales growth will decline briefly due
to the new market entrant capturing value. In other words, total market revenues will be temporarily static
when new stations enter, reducing revenue per station before demand picks up. This dynamic is at the heart
of a balancing loop: An increased number of hydrogen vehicles per station results in increased hydrogen
station profitability, which increases hydrogen station entrants, resulting in increased total number of
stations in the market, which then decreases the number of hydrogen vehicles per station in the short term
or pushes retail hydrogen prices down, which diminishes the profitability of the stations, and so on.13 Then
there is a time lag between the introduction of stations and the increased presence of HFCV vehicles. The
greater the time lag, the greater the volatility in the system from the perspective of a new station entrant,
who must be convinced that investing in infrastructure will result in increased revenues from servicing
HFCVs. This scenario presents investors with volatile short-run returns, while it presents the automotive
industry with increasing infrastructure and sales, causing a disconnect in incentives that may hinder rollout.
Therefore, to accelerate the dissemination of hydrogen infrastructure, the automotive industry should make
sure that the initial investors in hydrogen infrastructure have profit motives that align with the motives of
the automotive industry with respect to the rollout.
Revisiting the discussion of the five forces, the first barrier to a successful rollout is most directly affected
by the availability of substitutes and power of customers, which may prohibit a new entrant from opening
13 2007 DOE Hydrogen Program Merit Review Diagram
Kwasie, Marcellin, Mora Sojo, Wolkon, 7
a station. The initial investors in infrastructure will face a high degree of market risk and volatility from the
availability and pricing of more conventional fueling substitutes. This will also inform the degree of
bargaining power that customers have with hydrogen investors and distributors. This second barrier is most
directly informed by the stakeholders’ attitudes toward new entrants and internal competition. For example,
from the perspective of the automotive industry, more new entrants and more internal competition is better
for the rollout of infrastructure and the sales of HFCVs, while any one individual entrant may be dissuaded
by this landscape. Both scenarios illustrate how key stakeholders such as the automotive industry need to
inform their methods for instigating and inspiring investment in infrastructure with these considerations.
IV. Potential Resolutions to Hurdles
As delineated in previous segments, there are a number of hurdles surrounding the deployment of
alternative fuel infrastructure, and an industry analysis can help to highlight where those hurdles exist. Our
findings have shown that an overarching theme in the question of infrastructure rollout is that of value
creation and value capture. Specifically, we have asked if the stakeholders that are creating value by
financing and constructing hydrogen fuel infrastructure are the same ones that would ultimately derive
economic value from revenue streams resulting from the infrastructure. If hydrogen fuel infrastructure were
to be deployed in the same manner that traditional petroleum gasoline infrastructure has been constructed,
then the fuel retailers would be creating value by implementing the fueling infrastructure, while the auto
industry (which would sell more HFCVs) and general public (which would have an increased confidence
in driving HFCVs) would reap the benefits. The environmental benefit that hydrogen-fueling infrastructure
would serve is also of note, for reasons that will be explained later in this section.
Based on our analysis, the greatest obstacles to implementing hydrogen fueling infrastructure are financial
barriers, as the present paradigm does not allow for the value creator to be the value capturer, especially
given the low financial returns on a hydrogen fueling project and high uncertainty surrounding revenue
streams. However, alterations to the model can both reduce this uncertainty and increase financial returns
on a project. Potential resolutions, which can act independently or in conjunction with the issues we have
highlighted, are as follows:
1. Auto Industry Funding of Fueling Infrastructure
As previously mentioned, the auto industry – specifically early-mover companies – is poised to capture an
important share of the value generated by the hydrogen fueling infrastructure through the sale of HFCVs.
It is in the industry’s best interest, and not necessarily in that of traditional fueling retailers, to support the
financing the infrastructure rollout. Compounding this evidence is the prior financial analysis that many
fuel retailers cannot afford to implement the infrastructure. Without sufficient support from other parties
and in the absence of significant barriers to entry from a technological or operational perspective, early
movers into the hydrogen fueling infrastructure industry will likely be the ones that incur the greatest losses,
given the initially low number of vehicles on the road, whereas later entrants will be able to benefit from
the hypothetical abundance of existing hydrogen-fueled vehicles on the road, sustained partially by the
early entrants. Therefore, it is possible that a cross-industry partnership, consisting of multiple automakers
entering the HFCV market, could be formed to make the necessary but less lucrative initial capital
investment, and then jointly benefit once technology improves and more HFCVs are on the road. In
Kwasie, Marcellin, Mora Sojo, Wolkon, 8
summary, first movers will likely face the greatest financial losses, and thus industry-wide collaborative
efforts may be necessary to mitigate this risk.
2. Government Funding, Tax Credits, or Subsidies
Government funding, tax credits and subsidies are all highly uncertain. Still, when they are implemented,
they provide a central regulatory architecture around which industrial opportunities flourish. For example,
California serves as a rare case study on progress in the deployment of hydrogen fueling infrastructure and
use of HFCVs; this is largely a result of government programs to invest in hydrogen fueling. In 2003,
President Bush offered $1.2 billion towards hydrogen technology research and funding, and California was
ready to utilize these funds due to the prior formation of a state coalition of automakers, oil companies and
state agencies known as the California Fuel Cell Partnership (CAFCP).14 In 2012, California Governor Jerry
Brown issued an executive order directing state agencies to support the commercialization of zero-emission
vehicles, and CAFCP released publications outlining necessary steps towards HFCV commercialization.
Finally, in 2013, Governor Brown signed Assembly Bill 8 (AB 8) into law, which provided funding for at
least 100 hydrogen stations with a commitment of up to $20 million per year from the Alternative and
Renewable Fuel and Vehicle Technology Program.15
In addition to these initiatives, there are several notable federal incentives that have promoted, or are
currently promoting, investment into hydrogen infrastructure including:
· Fuel Cell Motor Vehicle Tax Credit, providing up to $4,000 for the consumer purchase of light-duty
fuel cell vehicles.16
· Hydrogen Fuel Excise Tax Credit, providing up to $0.50 per gallon for hydrogen that is sold to operate
a motor vehicle.17
· Hydrogen Fuel Infrastructure Tax Credit, providing up to 30% of the cost of hydrogen fueling equipment
placed into service.18
The existence of these programs has allowed hydrogen fueling infrastructure to develop in regions that can
take advantage of the incentives and have a market conducive to the sale of HFCVs. It is notable that the
discussion of value creation and value capture ties into an environmental argument at this juncture, given
the fact that incentives are by definition government-created value. It is the constituents served by the
government that ultimately capture the value of having zero-tailpipe emissions vehicles. An understanding
of this concept can serve as the foundation for a public policy argument towards investment in hydrogen
fueling infrastructure. Still, such programs are not expected to be sustained as part of a long term strategy
and do not exist in most states. They must be designed to catalyze adoption of alternative fuels and value
creation for constituents, without creating a dependence on the programs for the industry to sustain. Further
still, involving, if not relying on government introduces another tradeoff between the incentives of the
14 Jerry Soverinsky, “Fuel For Thought,” NACS, September 2014 15 http://cafcp.org/getinvolved/stayconnected/blog/governor_brown_signs_ab_8 16 Internal Revenue Service, “Qualified Fuel Cell Motor Vehicle Credit at a Glance” http://www.irs.gov/Credits-&-
Deductions/Individuals/New-Qualified-Fuel-Cell-Motor-Credit 17 IRS Publication 510, Excise Taxes http://www.irs.gov/pub/irs-pdf/p510.pdf 18 US Hydrogen & Fuel Cell Fiscal Incentives
http://www.ballard.com/files/PDF/White_Papers/Fiscal_Incentives_WP_-_Revised_041111.pdf
Kwasie, Marcellin, Mora Sojo, Wolkon, 9
primary stakeholders (the automotive industry) and the incentives of this new class of stakeholders. The
more stakeholders that are introduced with variance in their agendas and negotiative power, the more the
primary stakeholders may have to concede to exact the infrastructure initiative. Therefore, government
collaboration can offer an extraordinary, often essential partnership to execute an infrastructure initiative,
but central stakeholders should systematically analyze and value the tradeoffs to their own agenda that may
be critical in securing collaboration.
3. Synergies With Stationary Off-takers
Although public investment into hydrogen fueling infrastructure would help to close the gap between value
creation and value capture, this accomplishment could be furthered by properly aligning incentives in the
private sector in order to create returns on investment into the infrastructure. One of the most significant
barriers to infrastructure implementation is the vast uncertainty surrounding the revenue streams that would
result from the sale of hydrogen fuel. Scaling the adoption of HFCVs will occur in uncertain volumes over
an undetermined period of time after the infrastructure is deployed, and therefore it is difficult to quantify
the sales of hydrogen fuel and the resulting financial returns. One way to address this issue would be to
deploy hydrogen infrastructure such that it would supply fuel to not only automobiles but also stationary
sources, such as convenience store buildings and other structures near fueling locations. This, of course,
would require many buildings and communities to re-outfit to use hydrogen as an energy source. Still, if
suppliers of hydrogen fuel were able to sell the fuel to buildings at a price point equal to or lower than the
price of traditional energy (and possibly have this price subsidized by either the auto industry or government
entities), then revenue streams from hydrogen fuel would be more predictable to a significant degree.
4. Partnerships With Private and/or Public Entities
Aside from synergies with stationary energy off-takers, there are partnership opportunities in which the sale
of hydrogen fuel can be facilitated, thereby strengthening the case for investment into infrastructure. Some
potential targets for these partnerships could be highly regulated private entities, such as grid service
companies or the taxi industry, as change can be influenced through both private incentives and government
pressure to induce these groups become consumers of hydrogen fuel. If a fleet of taxis within a certain
geographical radius begins using hydrogen fuel, then certainty towards the revenue of a fueling station in
that area could be modeled in order to attract investors. Other fleets of vehicles, such as delivery vehicles
or government fleets, could be potential targets for a transition into HFCVs. The crucial component to this
solution is that it highlights the strength of combining the first three solutions. A significantly stronger
outlook for hydrogen fueling and HFCVs would exist if the auto industry could co-invest in the
infrastructure, supported by various levels of government, and achieve synergies with stationary energy
users and other private establishers of revenue certainty.
Conclusion:
This project involved looking at a problem today and identifying ways in which a traditional paradigm
could be altered to create a future solution for a sustainable good. Hydrogen fuel today faces hurdles such
as low margins and return on investment in infrastructure, which creates a challenge in garnering private
investment, particularly from traditional fuel distributors. Investors in hydrogen fueling infrastructure need
Kwasie, Marcellin, Mora Sojo, Wolkon, 10
to be compensated for the substantial risk they are taking in funding a project with uncertain returns, but
the individual payoffs are not defined. Our group has identified several solutions to this current paradigm,
all of which involve the mobilization of stakeholders to align incentives in a way that make sense for both
private investment and government buy-in. These solutions involve: co-investment from across the
automotive industry to mitigate losses in the early years of commercial HFCVs; engagement of fuel retailers
for participation; investment and synergies with stationary buildings; government subsidization of what is
arguably a highly beneficial public good; and, identification of other private and public partnering
opportunities. This new mobilization will both strengthen returns and mitigate risk on investment into
hydrogen fueling infrastructure, creating a pathway for the entry of this good into the market at a faster
pace than what is presently expected under existing circumstances, and creating an opportunity for a strong
carbon mitigation strategy in the automotive industry.
Kwasie, Marcellin, Mora Sojo, Wolkon, 11
Exhibit 1: Sensitivity analysis of net present value (all values presented at the time of investment)
Net present value ($ ‘000) of a station established in Year 0
Price to retailer
($/kg) 5 10 15 20
30% -1988 -973 4 974
25% -2272 -1017 171 1346
20% -2716 -1080 429 1918
15% -3506 -1163 908 2943
10% -5438 -1137 2360 5794
Net present value ($ ‘000) of a station established in Year 1
Price to retailer
($/kg) 5 10 15 20
30% -2045 -873 250 1363
25% -2333 -910 429 1754
20% -2784 -964 703 2347
15% -3588 -1034 1205 3406
10% -5572 -977 2730 6369
Net present value ($ ‘000) of a station established in Year 2
Price to retailer
($/kg) 5 10 15 20
30% -2100 -816 403 1610
25% -2392 -848 589 2010
20% -2850 -896 873 2347
15% -3588 -1034 1205 3406
10% -5572 -977 2730 6369
Net present value ($ ‘000) of a station established in Year 3
Price to retailer
($/kg) 5 10 15 20
30% -2146 -788 485 1744
25% -2442 -817 675 2145
20% -2905 -859 964 2755
15% -3736 -911 1497 3854
10% -5830 -798 3157 7028
Net present value ($ ‘000) of a station established in Year 4
Price to retailer
($/kg) 5 10 15 20
30% -2181 -780 512 1784
25% -2480 -806 703 2184
20% -2949 -844 996 2796
15% -3795 -887 1541 3909
10% -5950 -745 3271 7195
Dis
co
un
t R
ate
Dis
co
un
t R
ate
Dis
co
un
t R
ate
Dis
co
un
t R
ate
Dis
co
un
t R
ate
Kwasie, Marcellin, Mora Sojo, Wolkon, 12
Net present value ($ ‘000) of a station established in Year 5
Price to retailer
($/kg) 5 10 15 20
30% -2213 -781 509 1773
25% -2515 -804 702 2172
20% -2991 -837 998 2786
15% -3852 -872 1556 3916
10% -6071 -701 3362 7324
Exhibit 2: Main assumptions
Vehicles and
Stations
Units Yea
r 0
Year
1
Yea
r 2
Yea
r 3
Yea
r 4
Yea
r 5
Yea
r 6
Yea
r 7
Yea
r 8
Yea
r 9
Year
10
Vehicle on the
road
Vehic
les 780 1590 2390 4095 5735 7335 9005
1062
5
1220
5
1403
0
1583
0
Growth %
103.
8%
50.3
%
71.3
%
40.0
%
27.9
%
22.8
%
18.0
%
14.9
%
15.0
%
12.8
%
Total vehicles
(EOP)
Vehic
les 1560 3180 4780 8190
1147
0
1467
0
1801
0
2125
0
2441
0
2806
0
3166
0
Vehicle sales Vehic
les 1560 1620 1600 3410 3280 3200 3340 3240 3160 3650 3600
Sales Growth
rate
% 4% -1%
113
% -4% -2% 4% -3% -2% 16% -1%
Stations Statio
ns 11 17 21 29 40 54 67 81 94 108 123
New stations Statio
ns 11 6 4 8 11 14 13 14 13 14 15
Vehicles per
station
Vehic
les 71 94 114 141 143 136 134 131 130 130 129
Economics Unit
s
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Year
8
Yea
r 9
Year
10
Hydrogen
economics
Delivered
hydrogen cost
$/kg 7.0 6.7 6.8 7.0 7.2 7.3 7.5 7.7 7.8 8.0 8.2
Vehicle
consumption
Kg/car/year Kg 250 250 250 250 250 250 250 250 250 250 250
Ramp-up % 100
%
100
%
100
%
100
%
100
%
100
%
100
%
100
%
100
%
100
%
100
%
Miles/car/year Mile
s
1500
0
1500
0
1500
0
1500
0
1500
0
1500
0
1500
0
1500
0
1500
0
150
00
1500
0
Other station
assumptions
Operating and
maintenance
costs (per year)
$k 250 250 250 250 250 250 250 250 250 250 250
Dis
co
un
t R
ate
Kwasie, Marcellin, Mora Sojo, Wolkon, 13
Station
capacity
kg/d
ay
200 200 200 200 200 200 200 200 200 200 200
Cash from WC % 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3
%
0.3%
Investment,
financing &
Other
Capital costs
(CAPEX)
$k 1000 1015 1039 1065 1090 1115 1141 1167 1194 122
2
1250
Expansion
factor
% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Expansion
trigger
(Utilization)
% 85%
Infrastructure
subsidies
$k 200 200 200 200 200 200 200 200 200 200 200
Tax rate % 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%
Synergies (%
of revenues) % 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5
%
0.5%
Inflation % 0.1% 1.5% 2.4% 2.5% 2.3% 2.3% 2% 2% 2% 2% 2%
Other Assumptions and definitions
Station
Max # of stations 10000 1/
Investment life (years) 12
Reinvestment 100% 2/
Ramp-up
Revenues 50% 3/
SG&A Ramp-up 50% 4/
Subsidies & Taxes
Infrastructure
Amount ($k) 200 5/
Years 12 6/
Marginal tax rate 35%
Tax exemption
Percentage 100% 7/
Years 10 6/
Financing
Percentage financed 25% 8/
Interest rate 3% 9/
Term 12
Capacity expansion
Expansion factor (Investment) 25% 11/
Expansion trigger (Utilization) 85% 11/
Capacity growth to investment ratio 2 11/
Kwasie, Marcellin, Mora Sojo, Wolkon, 14
Capacity growth rate 50%
Increase in SG&A 0% 12/
Synergies
From Existing operators (% Revenues) 0.50%
Cap ($M)
190
13/
Competition effect
Station trigger 1 3000 11/
Effect 1 5% 11/
Station trigger 2 6000 11/
Effect 2 15% 11/
Other
Cost of equity 20% 14/
Weighted Average Cost of Capital 15% 14/
Long term growth rate 1% 11/
Cash from WC (% Revenues) 0.3% 15/
Notes
1 There are approximately 10,000 stations in the Pacific USA, given that California accounts
for 71.5% of the vehicle fleet in the region we have decided to cap stations at 10000
United States Census Bureau
http://thedataweb.rm.census.gov/TheDataWeb_HotReport2/econsnapshot/2012/snapshot.hrm
l?STATE=39&COUNTY=ALL&x=17&y=6&IND=%3DCOMP%28C2%2FC3*1000%29&
NAICS=447
National Association of Convenience Stores
http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_2013/Pages/StatisticsDef
initions.aspx
2 Reinvestment relative to initial investment. Requires validation.
3 We assume it takes station 6 months to reach its full capacity
4 We assume that on the first year of operations companies only incur a percentage of their
usual SG&A expense
5 Only given once per station
6 Time during which the policy is in place, starting at year 0
7 Percentage decrease on the tax rate applied
8 Percentage of initial investment, requires validation
9 Assumptions based on conditions of loans received by Murphy USA INC, CST Brands INC
and TravelCenters of America LLC
10 Only used when Loan Type = Balloon, precise percentage requires validation
11 Requires validation
12 Based on the 2014 estimated average SG&A per location for Murphy USA INC (0.8%) ,
CST Brands INC(7.7%) and TravelCenters of America LLC(4.2%), we assumed that no
SG&A increase is necessary to increase capacity at current levels
S&P Capital IQ
13 The synergies obtained by developing the project with existing operators are caped at
US$63M which is equivalent to 15% of the industries combined SG&A, considering only
Kwasie, Marcellin, Mora Sojo, Wolkon, 15
Murphy USA INC, CST Brands INC and TraveCenters of America, which represents 0.6%
of their combined revenues, all data for 2014. To eliminate the CAP set it at a very large
number
S&P Capital IQ
14 Based on the analysis of comparable companies Murphy USA INC, CST Brands INC,
TravelCenters of America LLC and Tesla Motors INC and a Debt/Equity ratio of 1/3
S&P Capital IQ
15 Average of the 2011-2014 period for Murphy USA INC, CST Brands INCand TravelCenters
of America LLC
S&P Capital IQ
Definitions
Subsidies & Taxes
Infrastructure: Subsidy given at the time of the initial investment, acts as a reduction on the CAPEX
Tax exemption: Acts as a reduction on the tax rate applied to the company
Capacity expansion
Expansion factor (Investment): Percentage of original investment required as additional CAPEX for the
expansion of capacity
Expansion trigger (Utilization): Utilization level at which an investment in capacity expansion is performed
Capacity growth to investment ratio: Multiplier of capacity expansion percentage resulting from a 1% pf
additional investment
Synergies
From Existing operators (% Revenues): Synergies (cost savings) from involving an existing gas station
operator into the project as a percentage of the revenues generated by the hydrogen operation
Competition effect: As more stations enter the market profitability decreases, in this case we are
assuming the stations would compete on price
Station trigger 1: Number of stations at which competition starts affecting the price
Effect 1: Percentage decrease in price as a result of increased competition
Station trigger 2: Number of stations at which competition intensifies its negative effect on price
Effect 2: Percentage decrease in price as a result of increased competition+H83:H119
Inflation: Forecast from the IMF' World Economic Outlook Database, April 2015
Vehicle fleet
Total fleet size, 2014: National Automobile Dealers Association: ANNUAL FINANCIAL PROFILE OF
AMERICA’S FRANCHISED NEW-CAR DEALERSHIPS, 2014
Vehicles: EIA: Annual Energy Outlook 2015