Statement of Robert R. Rose, Executive Director, US Fuel Cell Council

Testimony Before the Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means

April 19, 2007

Chairman Neal, Ranking Member English, Members of the Committee, I appreciate the opportunity to appear today to support a long-term extension of the investment tax credit for fuel cells.  The US Fuel Cell Council is a trade association of more than 105 members spanning all segments of our industry.  We support commercialization of fuel cells of all types and for all applications.  

Fuel cells are a family of technologies that generate power electrochemically.  Since there is no combustion, fuel cells are highly efficient with ultra low emissions.  Fuel cells can utilize a wide variety of fuels, with unexcelled environmental performance.  Overall, fuel cells deliver an exceptional combination of benefits to society.

Fuel cells can power an extraordinary range of applications, from battery replacements in consumer electronics, to backup and remote power generation, auxiliary power units, combined heat and power systems and high efficiency base load electrical generation.  They are also being developed for mobile power systems, specialty vehicles like forklifts and airport equipment, and for any vehicle that carries people, including transit buses and the family car. 

Fuel cells are meeting customer needs today in high-value niche markets, but as is so often the case with emerging technologies, their price limits their competitiveness in the larger marketplace.  Capturing fuel cells’ benefits for our society will require active public-private partnerships in all stages of development and demonstration and in preparing markets through financial incentives, infrastructure investment and removal of regulatory and economic barriers.

This committee has shown commendable leadership in approving a variety of tax incentives to encourage the deployment and early adoption of fuel cells and related infrastructure.  The value of that leadership to our industry cannot be overstated, and we thank you.

Building on that beginning, a long-term extension of the Sec. 48 fuel cell investment tax credit (ITC) is our highest priority before this Committee.  HR 550, introduced by Congressmen McNulty and Camp with strong, bipartisan support, captures the spirit of this need.  A long-term extension will provide support now for early adopters in the private sector, and also accommodate the reality of our industry -- that fuel cells are a family of technologies, with divergent commercialization pathways and time tables and an expanding product mix.

The US Fuel Cell Council reports that more than 30 products are available today, typically with guarantees, warranties and other commercial terms.  But U.S. sales were below $200 million in 2005, based on voluntary reporting.  A strong, stable and long-term investment tax credit will stimulate this nascent domestic industry by enlarging early markets. 

§         A long-term extension will increase production volumes and lead to lower costs. 

§         It will give customers experience with fuel cells, helping fuel cell developers improve their products based on that experience. 

§         The credit gives developers – and their investors -- confidence to build capacity. 

§         It also helps attract suppliers and their innovations – a matter of fundamental importance to our industry. 

§         And, of course, it creates jobs and strengthens the nation’s technological competitiveness. 

§         Finally, a long term commitment recognizes the evolution of the range of fuel cell technologies and products.

This Committee has long recognized the importance of federal tax policy in stimulating acceptance of advanced energy technologies, given energy’s crucial value to our economy and security.  Tax support for solar and other technologies dates back to the 1970’s.  It has taken time, but those industries are now deploying at a remarkable pace, and that exciting expansion will continue with the continued support of this Committee.  The fuel cell industry is at the threshold of a commercial expansion of its own, and also needs a steadfast commitment from government. 

Experience with the Investment Tax Credit

The fuel cell installation tax credit is less than two years old so Council members’ experience with this incentive has been limited so far.   The returns from 2006 will be the first to reflect use of the credit in the real world. 

While the nature of the credit does not allow us to link sales directly to the availability of the credit, customers have begun telling fuel cell companies that they intend to take advantage of the credit.  I can report anecdotally that more than 100 fuel cell units have been or soon will be installed by one energy services company in transactions involving the credit. 

Federal market support for fuel cells has been modest in the past and when it came, it was in the form of direct support to purchasers.  Both our industry and our markets are still adjusting to this new way of doing business.  The certainty provided by a long term extension would help immeasurably.  The purchase cycle can be as long as 18-24 months for some companies.  A long term extension will assure customers that the credit will be there when the units arrive.  We have every expectation that the credit will prove its worth during 2007 and beyond. 

Creative minds also are linking the federal credit with incentives offered by the States.  Indeed this combination of incentives – and not the federal credit alone -- has made the crucial difference for some companies in closing deals.  These companies estimate that closer to $3,000 per kilowatt is needed to fully open markets in all the States. 

Use of the credit also has been affected, frankly, by the difficulty in gaining a formal statement by the Internal Revenue Service (IRS) in response to technical questions about the credit and its application.  Perhaps it is because we are new at this.  But our industry sought the comfort of a formal statement from IRS about how the credit would work, similar to those produced by IRS in other cases. 

Our questions concerned the interplay between the ITC and other federal and state incentives; clarification of the subsidized energy financing / Industrial Development Bond (IDB) language, “placed in service” language, and application to lease arrangements; application of the credit to units like fork lifts and similar material handling equipment that are not fixed, but also are not “passenger vehicles;” and the availability of the credit in Puerto Rico.  These issues will be interpreted by the taxpayer for 2006, and as you might imagine this is the cause of some unease.

Thus a seemingly small thing, a mere matter of the lack of a few of paragraphs in the Federal Register, inadvertently has added uncertainty and confusion to a process that carries so much promise for fuel cell developers and users.

Recommendations

• The USFCC advocates an eight year extension of the tax credit.  This will provide certainty and stability for purchasers, stimulate cost reduction and supply chain interest, and send a positive signal to capital markets. 

• We encourage the committee to examine the adequacy of the current $1,000 per kilowatt cap which some companies report is insufficient to open markets nationwide for many fuel cell products. 

• We hope the committee will also signal the most inclusive interpretation for the credit.  This will address some remaining questions as to applicability in current markets and also assure that the credit achieves its intended purpose as the range of products and markets expands.
• We ask you clarify the ability to transfer or “trade” the value of the fuel cell ITC, so non-taxpaying entities may take advantage of the incentive, and to facilitate the formation of investment pools. 

• We request that eligibility be explicitly provided for systems located in US territories thus expanding the market and helping industry to respond to existing demand.  

The US Fuel Cell Council also recognizes and applauds Congressional interest in supporting the emerging hydrogen energy infrastructure, via proposals such as H.R.805. Incentives for hydrogen will help fuel cells enter important near term markets.  Hydrogen systems that serve niche markets in the short run can be made available to supply passenger vehicles a few years from now.     

The Energy Policy Act of 2005

The Energy Policy Act of 2005 provides an exceptional policy outline for fuel cells and supporting hydrogen infrastructure.  Yet more is needed if fuel cells are to achieve their commercial potential, and yield their benefit to society.  The most critical policy needs today are long-term tax incentives for fuel cell purchases, federal purchase programs and appropriations for research, development and demonstrations that live up to the promise of EPACT 2005. 

Tax Provisions Affecting Fuel Cells and Hydrogen

The Energy Policy Act of 2005 established an Investment Tax Credit for business property (Section 48) and a parallel Investment Tax Credit for non-business property (Section 25D), which provide the purchaser of fuel cell property a credit equal to the lesser of $1,000 per kW or 30 percent of the property cost. 

The Act also provided a credit for Alternative Fueling Stations (Section 30C), including hydrogen, limited to the lesser of $30,000 or 30 percent.

The Act provides Fuel Cell Vehicle Tax incentives (Section 30B), based on vehicle weight.

The U.S. Fuel Cell Council

The US Fuel Cell Council is the trade association of the industry, dedicated to commercialization of fuel cells in the United States.  Our membership includes producers of all types of fuel cells, major suppliers, automakers and their suppliers, universities and other research institutions, fuel cell customers, hydrogen and other energy providers, government agencies, nonprofit organizations, and allied trade associations.

Formed in 1998, the US Fuel Cell Council has grown to more than 105 members, who provide leadership on eight working groups focusing on all critical aspects of development, marketing and deployment and advocacy of fuel cell systems and related infrastructure for all members of the family of fuel cell technologies.  The USFCC annually sponsors a Congressional Fuel Cell Expo on Capitol Hill, scheduled this year for May 15 in the Cannon Caucus Room. 

State of the Industry

While the science of fuel cells was born in Europe in the 19^th Century, the first commercial fuel cells were made and purchased in the US, for the Gemini space program.  Advanced pre-commercial fuel cell cogeneration systems and the first fuel cell buses were deployed in the early 1990’s.  By the turn of the current century, systems were under active development for an extraordinary range of applications, from tiny battery replacements to multi-megawatt power systems, from boats to locomotives, from two-wheel vehicles to transit buses.

Several hundred U.S. companies and research institutions are working on fuel cells, and private investment continues to surpass government investment.   U.S. fuel cell companies reported employing more than 3,200 workers, and investing nearly $500 million in research.  These numbers are the best available, but they based on voluntary reporting and they significantly underestimate total investment and employment in the U.S.  Fuel cell activity is under way in nearly every state

There is an intense international competition to commercialize fuel cells.  The European Community and individual countries of Europe – including Iceland and Germany -- and in Asia, Japan, China and Korea, all have ambitious development programs.  Japan’s fuel cell research program has more than tripled since 1995.  Japan’s aggressive research program for power generation includes deployment of more than 1,250 units.  Japan has set ambitious fuel cell commercialization targets.

Meeting Customer Needs

Fuel cells are commercially available today in some markets, such as stationary base load power, goods movement, telecommunications and backup power or specialty power systems, where their unique benefits bring special value.  Full commercialization in all markets on an accelerated timetable will require collaboration between government and private industry, including a substantial public investment in research and development, demonstration and pilot programs, early commercial purchases, incentives for early adopters, and removal of market barriers.  The public investment in fuel cells needs to be no larger than traditional levels of support for other domestic energy technologies, and may be more cost effective.  The public benefit will far outweigh the cost.

Perhaps the most encouraging evidence to date of the commercial potential of fuel cells is the enormous investment the private sector has committed to the technology since 1995.  In short, there is a robust private effort already under way. 

As mentioned earlier, fuel cells are a family of technologies.  Each has unique technical issues and approaches to commercialization.  A comprehensive national strategy for fuel cells should address the unique requirements of the portable (micro), stationary and transportation markets and take advantage of the common elements that can be identified among the applications.

This undertaking will require careful consideration of shared infrastructure requirements, the design of research, development and demonstration (RD&D) efforts that offer generic benefits, and strategies that reflect the market entry sequence for the various fuel cell products.  It will also require investment in advanced feedstock and hydrogen carrier fuels and in improving technologies to make, store and transport these fuels.   Portable (micro) fuel cell products, for example, are expected to lead the way in commercialization of fuel cell consumer products and, according to the U.S. DOE, will help catalyze other markets. 

Education, training and customer acceptance are an important part of the effort, beginning in schools and extending to vocational and professional education and to the public. 

Summary

The current investment tax credit has begun to do its job even in its infancy, and our industry is grateful to you for your leadership.  We look forward to working with you and the Committee on these issues.