Bloom deal has big reward but 'high risk'

Bloom's 900 jobs put Delmarva customers on hook to pay

A state plan for a $1.40-a-month surcharge on Delmarva Power electric bills to help bring a Bloom Energy fuel-cell factory to Newark could create 900 direct jobs, hundreds of more potential supplier jobs and millions in economic development -- if everything goes according to plan, a new report by a consulting team finds.

Delmarva customers would pay an extra $113 million over 21 years, with a potential payoff of $300 million in annual economic development, the consultants say.

But Gov. Jack Markell's plan is filled with risks, the consultants said, most involving the linkage of incentives for Bloom to build the factory to higher electric bills Delmarva customers would be paying for 21 years.

In fact, the way the Delmarva deal is written now, ratepayers could be left on the hook to continue paying a surcharge for two decades even if the factory in Newark is never built, closes prematurely or never ramps up to full production and employment, the report prepared for the Public Service Commission says.

The project allocates risk in a way that is "highly favorable to the Project Company and unfavorable to ratepayers," the consultants wrote, noting that tens of millions of dollars are riding on what they viewed as a questionable business plan for sale of Bloom's fuel-cell generators in East Coast markets.

Markell attracted Bloom and its promise of 900 jobs at a fuel-cell factory on the old Chrysler site in Newark this summer under a plan that would provide Bloom with $18 million in direct state incentives and unspecified millions in subsidies gleaned from Delmarva Power electric customers. The Delmarva Power portion of the plan requires PSC approval.

In an interview last week, Markell said the consultants misinterpret the Delmarva end of the deal when they say it has no contractual obligation for Bloom to build the factory. But he said the state, Delmarva and Bloom are working to create a more iron-clad tie-in between the surcharge and the factory jobs.

Neither Bloom Energy executives nor the privately held firm's biggest venture investors would comment on the PSC consultant's specific criticisms.
But Markell and Collin O'Mara, state natural resources secretary, expressed confidence in the soundness of Bloom's prospects, saying their plan to use the Newark factory to expand production into East Coast markets is solid.

Markell said Bloom plans to share its financials, details on customers and business plans with PSC commissioners, some on a confidential basis.

This, he said, should be enough to reassure them that the risks identified by the consultants that Bloom might not meet its sales -- or employment -- goals will not come to pass.

The surest way to fail, Markell said, "is not to pursue the jobs in the first place."

Incentive package

Bloom, of California, makes electrical generators fitted with solid oxide fuel cells, which use natural gas to create an electrochemical reaction to produce energy, emitting fewer pollutants than burning the gas. "Bloom Boxes" are seen as a way to provide cleaner electricity directly where it is used -- say, alongside a large computer complex or factory. Bloom's products are in use throughout California, benefiting from sizable state subsidies to end-users.

Bloom is looking to expand east and boost production to drive down manufacturing costs. Bloom plans to build the plant on a portion of the razed Chrysler assembly plant, now owned by the University of Delaware.

The state's end of the economic development package is contingent upon Bloom employing 900 people within three years, and has a "clawback" clause obligating the taxpayers' money to be repaid should Bloom fail to hit job targets. State officials also hope Bloom suppliers will move in near the plant, bringing more jobs.

The PSC is now considering a second piece of the incentive package -- a contract and tariff on Delmarva electric customers to finance the installation by Bloom of two clusters of fuel-cell generators at Delmarva substations in New Castle County, which would help spur business at the factory.

The "Bloom Box" cluster plan is a key part of the overall incentive package cobbled together to bring the factory to Delaware, but does not have the same firm "clawback" elements as the pact for the $18 million in aid from the state Strategic Fund.
The 30 megawatts of power from the clusters would be sold onto the regional power grid. Delmarva would pay Bloom for credit toward its state renewable-energy requirements, and that would cost residential customers an average of $1.40 more a month for 21 years, the consultants wrote.

That's a total of $113 million in above-market power costs during the 21-year life of the project, a sum that would be more than offset by $300 million in annual economic development if the 900 jobs stick around, the consultants say.

But this, the consultants say, is anything but a sure bet.

There is a risk that the factory could be built but operate at a low level because of unfavorable business conditions, and that risk "appears to be high," the consultants wrote. And that would probably suppress employment at the factory, they wrote.

East Coast business conditions are less favorable for Bloom, the consultants said, because subsidies here are lower than in California.

If the factory closes prematurely, Bloom would be required to pay a termination fee to the state. But that fee would be a fraction of the amount that would continue to be collected by the surcharge on electric bills, the consultants wrote.

In the event of a bankruptcy, the state may not even get the termination payment because there's no security money put away for this purpose, the consultants said.

O'Mara disagreed with the consultants' worries about Bloom's prospects last week, saying the high price of energy, concerns about grid reliability and the desire for on-site sources of generation will create a market for Bloom's product here.

"We think it's going to be a sustainable business," O'Mara said.

But if the factory falters -- or is never built -- the contract with Delmarva would allow the electrical project and surcharge to go ahead as scheduled, the consultants said.

Markell said this was a misinterpretation and Bloom would come forth with additional ratepayer protections against this circumstance. Ratepayers, he said, "would in fact be made whole in the unlikely event the manufacturing facility is not constructed."

Cluster project

There is less uncertainty in the Bloom Box cluster deal, although the consultants also were troubled by ownership issues.

As long as the clusters are fully built out and operating with mostly Delaware-made Bloom Boxes, ratepayers would continue to pay the full subsidy on their electric bill. But if the clusters are broken and Bloom no longer makes replacement parts, Delmarva customers would still pay 70 percent of the surcharge, the consultants said.

O'Mara said in an interview that ratepayers would continue to pay for broken fuel-cell clusters until 2025, at which point the surcharge would be canceled if the clusters were broken. The surcharges paid through 2025 would provide a reliable source of revenue to back up the project's initial financing, he said.

Delmarva Power spokeswoman Bridget Shelton said ratepayers would still get value from the surcharge, even if the electricity were not flowing. It would continue to count against Delmarva's state-mandated renewable-energy purchase requirements, which require the utility to draw 25 percent of its power from renewable sources by 2025.

Delaware redefined natural gas-powered fuel cells as renewable this summer in an effort to attract Bloom. If the clusters were broken, their owner would be required to buy renewable-energy credits from other sources, such as wind farms, O'Mara said.

But while the 21-year revenue stream from the Bloom Box cluster project would boost Bloom's planned factory in Newark, Bloom would not maintain ownership of the electricity project, the consultants noted.

The company's plan "is to sell its sponsor equity stake to a third party, and to have an ongoing relationship" with the new owner regarding installation of the fuel-cell boxes and monitor them remotely.

The separation of Bloom from the cluster project concerned the consultants, because the owners of the electrical project "would not be responsible for the failure of the manufacturing plant to be built."

Markell's deputy chief of staff, Geoff Sawyer, said the names of the would-be owners of the electrical project are proprietary to Bloom, so he was unable to identify them.
Bloom officials declined to address the report in detail, but Chief Financial Officer Bill Kurtz said in an email that the company remained committed to building the factory quickly after PSC approval of the tariff.

The five PSC commissioners will consider the report going into its evidentiary hearing on Bloom on Oct. 18. Company officials are pressing for an expedited decision to take advantage of a federal investment tax credit for renewable energy that expires at year's end.

"We remain excited to expand our proven technology and business model to the east coast, and remain strongly committed to this project. We are addressing the outstanding questions raised in the PSC report with our partners, the State of Delaware and Delmarva Power and Light," Kurtz wrote.

Market concerns

The consultants stress the success of the factory hinges on Bloom's ability to sell its product in the Northeast. By lining up more orders, it will drive Bloom's prices down, they said.

The consultants worry about that because a limited number of states, such as Delaware, Connecticut and New York, offer subsidies for power generated by natural gas-powered fuel cells. This will help drive some business, but these subsidies have their limits, they wrote.

California's Self-Generation Incentive Program grants subsidies for alternative forms of energy installed directly where it is consumed. In 2010, Bloom and its customers claimed $215.8 million, about two-thirds of the entire fund.

"At bottom, it is very uncertain as to whether the market in the Northeast for Bloom Energy's fuel cells will be sufficiently robust to sustain a Bloom Energy manufacturing facility operating at its peak capacity," the consultants wrote.

Shu Sun, a fuel-cell analyst for Bloomberg New Energy Finance, said a typical Bloom customer buys a 500-kilowatt system. The annual production of the facility would be 80 megawatts worth of Bloom Boxes, so for the factory to operate at full capacity, Bloom needs to line up 160 contracts, Sun said.
"This seems to be a tall order," Sun said.

Bloom has been "extremely successful" raising funds, garnering $415 million in venture capital funding since 2002, including $100 million this March, said Brian Warshay, a smart-grid analyst for Lux Research in Boston. Well-established and deep-pocketed investors are betting on Bloom's long-term success, he said. One of Bloom's major investors is Kleiner Perkins Caufield & Byers, a leading venture capital firm in Silicon Valley.

But Warshay added, "I would not assume that Bloom is certain to be healthy and successful in the long-term. While it is definitely possible, and probably likely, that Bloom survives and excels in this emerging market, the struggling economy, abundant competition and Bloom's dependence on natural gas, it is not necessarily the most well-positioned company to experience dramatic long-term growth."

Kleiner Perkins spokeswoman Christina Lee declined to comment, referring questions to Bloom.

Markell said that when the consultant and PSC commissioners have access to the information on Bloom's business plan showing "the size of the market, their order book, where their sweet spot is in the market, their competitive position, that is a very significant way to address risks that have been raised."

Markell said he is confident that Bloom will not only build the manufacturing facility, but that "they've got a compelling plan in place to meet the expected output from the factory."

Even if the factory falters in later years, Delaware would still have reaped years of economic development benefits that would far outweigh the ratepayer investment, O'Mara said.

The authors of the report are New Energy Opportunities Inc., La Capra Associates Inc. and Birch Tree Associates L.L.C. Lead author Barry Sheingold of New Energy Opportunities is best known as the lead author of a report for the PSC staff that lent credibility to the Bluewater Wind offshore wind project in 2007, leading to PSC's approving Bluewater's 25-year power sale deal with Delmarva Power.

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