(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON, June 18 (Reuters) - Germany utility E.ON has made a high-risk bet on fuel cells for distributed power, after entirely missing out on a solar boom in Europe's largest economy.
Solar has undermined peak wholesale power prices and in turn the economics of gas-fired power plants, compounding the problem for conventional utilities missing out on the subsidy-backed boom.
Gas-fired power is also hurting in Germany and across Europe because of weak power demand and high gas prices.
By contrast, small-scale distributed power - generated at the point of consumption - can tap government subsidies.
In terms of size, much larger and heavier fuel cells offer a better fit for a utility business model than roof-top solar.
Fuel cells can power buildings, factories and shopping centres in systems typically from 10-400 kilowatts (kW), compared with 2-4 kW for residential roof-top solar.
They generate an electrical current by a controlled chemical reaction between oxygen and steam and fuels such as natural gas or hydrogen.
Both need subsidies to overcome high upfront costs, support justified for fuel cells on the basis of more efficient fuel use than gas and coal power plants, and lower carbon emissions in the case of solar panels.
The main practical difference between the technologies is that solar power has zero fuel cost, while fuel cells are available around the clock.
E.ON reportedly invested more than $100 million in U.S.-based fuel cell company Bloom Energy, two weeks ago.
The company would not comment on the size of the deal.
That is not an insignificant sum, compared with E.ON's forecast for investment in growth areas this year of 4 billion euros ($5.34 billion).
The ultimate success of fuel cell technology will depend on cost-competitiveness, whether with the grid or other distributed and back-up power generation.
Chart 1: (page 45) goo.gl/CGl0B
Chart 2: (page 20) goo.gl/IOpm1
The boom in renewable power in Germany, and solar in particular, has wrong-footed utilities.
Germany's Trend Research in 2011 documented cumulative ownership of renewable energy assets by stakeholder group.
It found that private individuals owned two fifths of Germany's 53 GW of renewable energy capacity in 2010, while the "Big Four" suppliers owned 6.5 percent. (See Chart 1)
E.ON's generating portfolio in Germany is dominated by fossil fuels (12 gigawatts) and nuclear (5.7 GW), followed by 1.6 GW of hydro and just 0.2 GW of wind, with no solar power at all.
German solar power generation reached a 2013 high of 23.1 GW on April 24, compared with peak demand of just over 80 GW, Fraunhofer Institute data show.
Fuel cells have various niche markets in stationary (non auto) power generation.
For example they are a more reliable source of power than the grid, important for so-called mission-critical applications like data centres.
And they have soft advantages in back-up or off-grid power, for example creating less noise and having fewer moving parts than gas and diesel generation engines.
They may suit combined heat and power (CHP), which is attractive to policymakers because of a higher energy conversion efficiency and therefore lower carbon emissions than centralised power.
Ultimately, fuel cells could be used in tandem with solar panels: renewable power can split water to produce hydrogen, to drive a fuel cell generating heat and power, providing a storage option for renewable power which is so far barely explored.
And they are already cost-competitive with batteries, because of a longer lifespan.
But they are not competitive with grid power on an unsubsidised basis even after taking account of the lower transmission costs for distributed energy.
The cheapest incumbent is a gas-fired power plant with a capital cost of around $800 per kW.
A U.S. Department of Energy fuel cell R&D programme aims to reduce the capital cost of CHP fuel cell systems to $1,500 per kW by 2020.
E.ON's investment in Bloom Energy is about ramping up its exposure to distributed energy.
E.ON forecasts that by 2015 its discretionary (growth) investment would be "almost completely allocated" to distributed energy; renewables; and investments outside Europe. ("Capital Markets Day" E.ON, January 2013)
Such discretionary investment would total around 2.5 billion euros in 2015. (Chart 2)
The focus on decentralised power reflects low or negative gas-fired power margins in Europe.
E.ON has given little detail regarding its Bloom Energy investment, except to say that it fits within the "distributed energy" segment.
"Fuel cells are gaining a rapidly increasing share of the distributed generation markets in the US and Japan. This technology is commercially available and is already producing power for many leading American companies reliably and efficiently," it said in a press release on the investment.
"Their (Bloom Energy's) product is scalable in 100 kW steps and can be utilized in applications such as commercial office, retail and distribution warehouse buildings, hospitals, mission critical data centers, universities, and utility scale power generation."
Bloom Energy was founded in 2001 and has blue-chip customers including Apple and eBay, but has not yet reported a profit.
E.ON's bet on the company suggests how far it is prepared to go - and perhaps other utilities - to make up lost ground in distributed power.
$1 = 0.7496 euros Editing by Keiron Henderson