Hydrogen Fuel Cell Vehicle Infrastructure: Analyzing ...mitsloan.mit.edu/actionlearning/media/documents/s-lab-projects/... · and “how,” mechanics that require a more in depth

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


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


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


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


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


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


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


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


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


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.


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


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


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


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


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



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


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/


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


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

Documents

Hydrogen Fuel Cell Vehicle Infrastructure: Analyzing ...mitsloan.mit.edu/actionlearning/media/documents/s-lab-projects/... · and “how,” mechanics that require a more in depth