Bloom Starts To Deliver On the Hype

Bloom Energy y a new program that sells electricity created by their fuel cells, rather than the fuel cells themselves. In my opinion, this is an extremely important event. It eliminates the two biggest obstacles for Bloom and for distributed generation in general:

1) Capital Expense: There's only one business that owns expensive assets and sells electricity, and that's the utility industry. No other self-respecting business-owner wants to become a utility. It's a capital-intensive and low-margin model that only works when the government grants you monopoly status. Instead, the average business-owner (as well as home-owner) would like to see their utility bill go down. By taking on the capital expense and getting paid back slowly over time, Bloom is essentially turning their product from an equity into a bond. It's not as lucrative as selling capital goods, but it's the only way to get to the scale that Bloom needs to achieve in order to get their unit production costs down. Now a business owner (or University campus or municipal government) can buy cleaner electricity without having to plunk down millions of dollars up-front. That widens the potential market enormously.

2) Durability Risk: The legacy of the fuel cell industry has been scarred by examples of systems that didn't last. Any purchaser of a Bloom Box has to take on the risk that the device will fail, a risk that most potential buyers want to have no part of. By selling electricity instead of fuel cells, Bloom Energy takes on that risk itself. It's a model that most startups don't have the ability to pull off, but Bloom might be able to, thanks to its relatively deep pockets (compared to the average fuel cell company). There's also an element of cosmic justice to it: Bloom is investing its own capital resources in the credibility of its product. The fact that it's bringing along a couple of legitimate financial investors in the project (Credit Suisse and Silicon Valley Bank) only adds to the confidence that the new model can instill in potential customers.

I'm sure that when KR Sridhar founded Bloom, he didn't expect to become an independent power producer. But the fact that the company is willing to pivot its model in order to increase the potential market speaks volumes for the acumen of Sridhar and his colleagues. The obvious parallel is First Solar, which created a development division just to buy modules from the parent company. By doing so, it transformed from a company that could manufacture a few hundred Megawatts of PV into a company that will make almost 3 Gigawatts by the end of next year. And in the process, First Solar has dramatically reduced its cost of production. If Bloom is able to emulate even a smidgen of First Solar's success, its shareholders will be very happy.

So what's next for Bloom? Its long term business challenge is now to reduce production costs at the same rate that incentives (like the California Self Generation Incentive Program and the federal Investment Tax Credit) are withdrawn--an inevitability in my opinion. The company is now in a race to make its product cheap enough to go subsidy-free before the subsidies themselves disappear. The easiest method of cost reduction for any product is to increase the scale of manufacturing. Today's announcement will--in one stroke--enable that to happen.