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Making choices about hydrogen

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Making choices about hydrogen:
Transport issues for developing countries

Edited by Lynn K. Mytelka and Grant Boyle

© United Nations University, 2008

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the United Nations University or IDRC. IDRC shares non-saleable digital rights to this volume.

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Library of Congress Cataloging-in-Publication Data

Making choices about hydrogen : transport issues for developing countries /
edited by Lynn K. Mytelka and Grant Boyle.
     p. cm.
  Includes bibliographical references and index.
  ISBN 978-9280811551 (pbk.)
  1. Hydrogen—Developing countries. 2. Fuel cells—Economic aspects—
Developing countries. 3. Proton exchange membrane fuel cells—Costs.
I. Mytelka, Lynn Krieger. II. Boyle, Grant.
TP359.H8M35 2008
333.79′68—dc22                                                            2008023200

Contents

Tables and figures

Tables

Figures

Contributors

Ibrahim Abdel Gelil is the director of the Environmental Management Program in the College of Graduate Studies at Arabian Gulf University, Bahrain. He also holds the Sheikh Zayed Bin Sultan Al Nahayan academic chair at the university. He was previously CEO (1997–2002) of the Egyptian Environmental Affairs Agency (EEAA). Between 1994 and 1997 he chaired the Egyptian Organization for Energy Planning (OEP), the government agency responsible for energy policy planning and analysis and promotion of energy efficiency. In addition he has served on the boards of many national agencies, including the World Energy Council, the National Specialized Councils, the National Council of Natural Resources and Environment and the Egyptian Academy for Science and Technology. He has authored and co-authored more than 60 national and international publications. E-mail: ebrahimas@agu.edu.bh.

Anthony O. Adegbulugbe, a professor of energy planning and economics, holds a PhD in nuclear materials engineering with a minor in energy and power systems from the Massachusetts Institute of Technology (MIT). He was a member of the national and G77 countries' negotiating team at the Conference of the Parties (COP) of the UN Framework Convention on Climate Change (UNFCCC) that negotiated technology aspects of the Kyoto Protocol, the clean development mechanism and technology transfer. Dr Adegbulugbe served as director of the Centre for Energy Research and Development of the Energy Commission of Nigeria between 1992 and 2005. He is presently the special adviser on energy matters to the President of Nigeria. E-mail: Anthony_adegbulugbe@yahoo.co.uk.

Adeola Adenikinju holds a PhD in economics. He is an energy economist, and was the special assistant to the special adviser to the president on energy matters. He is an associate professor and principal research fellow at the Department of Economics, University of Ibadan, Nigeria.

Yasuko Baba graduated in mathematics from the College of Arts and Sciences, Tokyo Women's Christian University. She then joined the Institute of Space and Aeronautical Science at the University of Tokyo, where she developed control, guidance and safety operation systems for space vehicles. Later she moved to its Faculty of Engineering and then to Keio University, where she is involved in test projects of electric and fuel-cell vehicle fleets, evaluating energy efficiency and environmental effects. For that purpose, she developed analytical tools for well-to-wheel energy evaluation and vehicle dynamic simulation models.

Grant Boyle served as the associate project coordinator of the UNU Hydrogen & Fuel Cells project from 2004 to 2006. Prior to that he was programme associate at the UNU Institute of Advanced Studies in Japan, where he conducted policy research on energy and the environment. He holds a master's degree in environmental planning from the School of Community and Regional Planning at the University of British Columbia, Vancouver. E-mail: GrantBoyle@rogers.com.

Rodrigo Aleixo Brito de Azevedo teaches at the Universidade Estadual de Mossoró, Brazil. He has an MSc in tropical agriculture from the Universidade Federal de Mato Grosso and a DSc degree in phytotechnics from the Universidade Federal de Viçosa, Brazil.

Steven Chalk is the deputy assistant secretary for renewable energy in the Office of Energy Efficiency and Renewable Energy (EERE) at the US Department of Energy in Washington, DC. He is responsible for managing the government's research, development and commercialization efforts for clean and renewable energy technologies. Prior to this he managed the EERE's Hydrogen and Fuel Cell Technologies Program where he oversaw President Bush's five-year, $1.2 billion research investment in hydrogen production, delivery, storage and fuel cells. Mr Chalk holds a BSc in chemical engineering from the University of Maryland and an MSc in mechanical engineering from the George Washington University.

Evandro L. Dall'Oglio is a chemistry lecturer at Universidade Federal de Mato Grosso in Cuiabá, Brazil. He has MSc and DSc degrees in chemistry from the Universidade Federal de Santa Catarina in Florianópolis, Brazil.

Gabriel F. de Scheemaker, a member of Shell Hydrogen's global leadership team, helped to create Shell Hydrogen eight years ago and now manages and develops Shell's Asia-Pacific activities within the hydrogen and fuel-cell industry, based in Tokyo. He is responsible for Shell Hydrogen's investments in private and public companies, and four venture capital funds. Prior to joining Shell Hydrogen he worked in Shell's Exploration and Production, Oil Products and Chemicals businesses, and, based in London, served as vice president in Shell Capital. E-mail: gabriel@scheemaker.nl.

Kevin Fitzgibbons is the director of science and technology at the Canadian Department of Foreign Affairs and International Trade. At the time of writing he was executive director of the Office of the National Science Advisor in the Privy Council Office of the Government of Canada. From 1991 to 2004 Kevin worked as a strategic planning and policy analyst at the National Research Council of Canada. He has a master's degree in political economy from l'Université de Montréal. E-mail: kevin.fitzgibbons@international.gc.ca.

Remco J. F. Hoogma is a senior adviser at the Netherlands Innovation and Sustainability Agency, SenterNovem. He holds a first degree in chemistry and a PhD in social sciences. His thesis dealt with processes of environmental technology innovation, in particular in the transport sector. His current assignment is as secretary to the public-private Platform on Sustainable Mobility. E-mail: r.hoogma@senternovem.nl.

Hisashi Ishitani is a professor in the School of Media and Governance at Keio University. He received his PhD in electrical engineering from the University of Tokyo, after which he joined the Institute of Space and Aeronautical Science and later moved to the Faculty of Engineering at the University of Tokyo. He joined Keio University in 2002. His research interests are focused on control engineering, energy and environmental issues, especially evaluation and policy promotion of energy conservation technologies and CO2 emission reduction. The latter includes CCS, renewable energies and FC and EV technologies. E-mail: ishitani@sfc.keio.ac.jp.

Fatimah Kari is a senior lecturer in the Faculty of Economics and Administration at the University of Malaya, where she is head of the Department of Applied Economics.

Kuroki Yusuke currently works in the Vehicle Body Planning and Design Group, PV First Product Development Division, Nissan Motors. He received his BSc from the Faculty of Engineering at the University of Tokyo and an MSc degree from the Graduate School of Engineering at the same university.

Lun Jingguang is a professor at Tsinghua University, Beijing, PRC, and the national coordinator of the GEF-UNDP-China fuel-cell bus cooperation project.

José M. Marta is an economist teaching at the Universidade Federalde Mato Grosso in Cuiabá, Brazil. He has a DSc degree in energetic systems planning from the Universidade de Campinas, Brazil.

Boni Mehlomakulu is the deputy director-general for research, development and innovation in the South Africa Department of Science and Technology (DST). Prior to that she was director of resource-based industries at the DST, from which position she led the process of formulating the National Hydrogen and Fuel Cell Technologies Research, Development and Innovation Strategy. Prior to joining the DST, Dr Mehlomakulu, who received her PhD in chemical engineering from the University of Capetown, was a scientist and then senior scientist at Sasol's Technology Research and Development Unit. E-mail: boni.mehlomakulu@dst.gov.za.

James Miller heads the hydrogen fuel-cell research programme at the US Department of Energy's Argonne National Laboratory in Chicago, Illinois. He is responsible for a research programme involving 60 scientists and engineers working on fuel cells, hydrogen and advanced batteries. He has over 30 years' experience in developing advanced batteries for electric and hybrid vehicles, hydrogen storage materials and fuel cells for automotive applications and distributed power. He has served on numerous review panels for the National Research Council and the US Department of Energy, and has been a participant in the fuel-cell activities of the International Energy Agency. He served as conference chairman for the Second International Symposium on Hydrogen in Matter (ISOHIM-2), and was the recipient of the 1998 Department of Energy Fuel Cell Program Award. He holds a PhD in physics from the University of Illinois, and an MBA from the University of Chicago. E-mail: millerj@cmt.anl.gov.

Ming Pingwen is the director of the Fuel Cell R&D Center and leader of the PEMFC Group at Dalian Institute of Chemical Physics (CAS), PRC. His research focuses on the analysis and optimization of fuel-cell system design and integration. E-mail: pwming@fuelcell.com.cn.

Maureen Appel Molot is a distinguished research professor and former director of the Norman Paterson School of International Affairs (NPSIA) at Carleton University, Ottawa. She headed the public policy research programme of AUTO21, a National Centres of Excellence initiative, for seven years and continues her involvement with AUTO21 as a researcher. She has a BA and an MA from McGill University and a PhD from the University of California at Berkeley. Dr Molot is the founding co-editor of the Canada Among Nations series and author of numerous papers on the Canadian and North American auto industries. E-mail: maureen_molot@carleton.ca.

Abiodun S. Momdu holds a master's degree in technology management. He served as the technical assistant to the special adviser to the President on energy matters. He is currently a research fellow at the Centre for Energy Research and Development, Obafemi Awolowo University, Ile-Ife, Nigeria, and also a PhD candidate in the Technology, Planning and Development Unit of the same university.

Lynn K. Mytelka, former director of UNU-INTECH, is a professorial fellow at its successor institute, UNU-MERIT, where she manages its hydrogen fuel-cell project, and an honorary professor in economic development at Maastricht University. Prior to joining UNUINTECH she served as director of UNCTAD's Division on Investment, Technology and Enterprise Development, on leave from her post as professor at Carleton University, Ottawa, where she is currently a distinguished research professor and carries out collaborative research on Canada's hydrogen fuel-cell clusters. Professor Mytelka received her PhD from the Johns Hopkins University School of International Affairs (SAIS). E-mail: Lmytelka@cs.com.

Rajah Rasiah is a professor of technology and innovation policy in the Faculty of Economics and Administration, and deputy director of the Asia-Europe Institute, University of Malaya. From 2001 to 2004 he was senior researcher at UNU-INTECH (now UNU-MERIT) in the Netherlands. Prior to that he served as dean of the Faculty of Economics and Business at Universiti Malaysia Sarawak (1999–2000). Professor Rasiah received his PhD in economics from Cambridge University, UK. E-mail: rajah.rasiah@gmail.com.

Rupert Solomon Olaitan Samuel is a chemical engineer with 29 years of industrial experience. After receiving his master's degree in chemical engineering, he worked at the Ajaokuta Steel Project and then joined the Nigerian National Petroleum Corporation in 1978, where he managed production at several petrochemical plants within the NNPC group. He assumed his present position as manager of production at Eleme Petrochemical Company (EPCL) in 2000. E-mail: olaitanr@yahoo.co.uk.

Michèle Sato teaches at Universidade Federal de Mato Grosso, Cuiabá, Brazil, and at Universidade Federal de São Carlos, Brazil. She is a UNESCO consultant and a JICA expert. Dr Sato has a MPhil degree in environmental education from the University of East Anglia, UK, and a DSc in ecology and natural resources from the Universidade Federal de São Carlos, Brazil.

Shiroyama Hideaki is a professor of public administration at the Graduate School of Law and Politics and Graduate School of Public Policy, University of Tokyo. He studies the policymaking process in Japan, international administration and its implementation at the national administration level, and environmental and safety policy, especially focusing on the interface between science and technology and politics.

Célio Spindola is an economist with a MSc degree in economics. He worked in the Department of Economics at the Universidade Federal de Santa Catarina, Brazil, until his retirement.

Paulo Teixeira de Sousa Jr heads the joint UNU-UFMT Pantanal Regional Environmental Programme in the Centro de Pesquisa do Pantanal and is a professor of chemistry at the Universidade Federal de Mato Grosso in Cuiabá, Brazil, where he has served as research pro-vice chancellor since 2001. He has a master's in organic chemistry from the Universidade de Sao Paulo and a PhD in organic chemistry from the University of East Anglia, UK. E-mail: Teixeira@cpd.ufmt.br.

Ágúst Valfells received his PhD in nuclear engineering from the University of Michigan in 2000, and CS in mechanical engineering from the University of Iceland. He headed a programme for better fuel use at the National Energy Authority of Iceland from 2004 to 2005. Currently he is teaching engineering at Reykjavík University. E-mail: av@ru.is.

Yarime Masaru is an associate professor in the Department of Human and Engineered Environmental Studies in the Graduate School of Frontier Sciences, University of Tokyo. He previously worked as a research associate at the Research Center for Advanced Science and Technology of the University of Tokyo and as a senior research fellow of the National Institute of Science and Technology Policy (NISTEP), Japan. Dr Yarime holds a BSc and an MSc in chemical engineering from the University of Tokyo and the California Institute of Technology respectively, and a PhD from the University of Maastricht's Joint MERIT-UNU INTECH Programme in Economics and Policy Studies of Technical Change. E-mail: yarime@k.u-tokyo.ac.jp.

Preface

Recent technological advances in the application of hydrogen fuel cells in the transport sector have drawn considerable attention and increased funding from both public and private sources over the past decade. The International Energy Agency (2005: 35) estimates that about US$1 billion per year is currently being invested in public hydrogen and fuel-cell research, development, test vehicles, prototype refuelling stations and demonstration projects, as compared to the total annual public budget for energy research, development and demonstration of around US$8 billion.

While still in the early stages of development and costly in comparison to conventional vehicle propulsion and fuel technologies, hydrogen and fuel cells offer a promising solution to address growing concerns about the transport sector's dependence on oil and its impact on climate change. Although a vigorous debate over the speed with which this will take place is under way, governments have begun to engage in serious discussions on codes and standards for the application of what some see as the leading edge in a new technological revolution.

Like earlier "disruptive" technologies – the replacement of sails by steam power or horses by the internal-combustion engine – hydrogen and fuel-cell technologies will affect a broad range of sectors and have significant social, economic and environmental impacts. How to manage a transition to the application of hydrogen and fuel cells in the transport and energy sectors is not at all clear.

In the importance of their science base, patent intensity and systems embeddedness, hydrogen and fuel cells resemble other new-wave technologies – information, communications and biotechnology, for example – in the challenges they pose to use and diffusion in developing countries. Most developing countries were singularly unprepared to deal with these earlier waves of new technologies, and the "technological divides" and "knowledge and infrastructure gaps" to which they gave rise are still with us decades later. Yet this need not have been the case. To avoid the problem of exclusion, however, we must pay more attention from the outset to building the local knowledge base and creating the networks that would enable developing countries to set priorities and make policy choices on an informed basis.

In November 2005 UNU took a first step to lay the foundation for access to information flows, networking and local capacity building when it held an international conference in Maastricht on "Hydrogen Fuel Cells and Alternatives in the Transport Sector: Issues for Developing Countries". The conference was designed to raise awareness of emergent hydrogen and fuel-cell technologies and enhance long-term transport and energy decisionmaking in developing countries. It brought together 35 leading experts from business, government and research organizations in both North and South to review progress in the application of hydrogen and fuel cells in the transport sector and identify key issues for developing countries.

This book is a product of the information exchange and learning processes that began at that meeting and led subsequently to the holding of a side event at the fifteenth session of the UN Commission on Sustainable Development in May 2007. It reflects the continuing debates over hydrogen, fuel cells and their alternatives, and addresses the growing need for a continuous stream of information on new research, innovation strategies and policies.

There are many different types of fuel cells. Alkaline fuel cells (AFCs), for example, were developed in the 1960s to provide on-board electrical power in the US Apollo and space-shuttle programmes. Solid oxide fuel cells (SOFCs) are being commercialized in industry and used for stationary power. It is primarily the proton-exchange-membrane (PEM) fuel cells that were developed for mobile uses.

Fuel cells reverse the long-known process of electrolysis, which uses energy to split water into its components. Instead, fuel cells use a fuel supply to combine hydrogen and oxygen, thus generating an electric current. In the PEM fuel cells that are the current focus of research in applications of this technology in the transport sector, the process is electrochemical and involves an ion-exchange polymer membrane as the electrolyte and electrodes of a fine metal mesh on which a platinum catalyst is deposited. The PEM fuel cell can thus convert hydrogen directly into electricity without combustion or moving parts.

In hydrogen fuel-cell vehicles (HFCVs) the process is virtually pollution free. But the overall utility of HFCVs in reducing greenhouse gases globally depends upon the way the hydrogen itself is produced. If this takes place through renewable processes that are carbon-neutral, such as coupling solar or wind power to electrolysers that split water molecules into hydrogen and oxygen, the overall impact will be significant.

Technologies such as these, however, are only now being developed and tested, and they face challenges concerning cost and efficiency in the production, distribution, storage and utilization of hydrogen. Currently the most common and cost-effective way to produce hydrogen is through natural gas steam reforming, which reduces the subsequent impact of this new technology on the environment on a well-to-wheel (WtW) basis.

But if a country already produces natural gas, would it not be simpler in the short term to convert from petroleum to natural gas, as buses and taxis in New Delhi have done? Alternatively, would the investment costs in putting a CNG system in place be amortized if hydrogen fuel-cell technology were to become available within the next 15–20 years? And what should be taken into consideration by countries that do not have natural gas? How might they choose between alternatives such as public transport and the automobile or fuels such as ethanol and biodiesel? This volume provides some of the tools needed by decisionmakers to deal with such issues, but the effectiveness of these tools depends critically upon a continuous flow of information.

The large number of hydrogen fuel-cell prototype vehicles, from two-wheelers to cars and buses, already plying the roads in over a dozen countries are accelerating the learning process in the development and use of these technologies. The European Union, for example, is engaged in fuel-cell bus trials in several cities, and foresees that 20 per cent of transport fuel will come from hydrogen by 2020. Japan has a demonstration programme with 60 vehicles and 10 refuelling stations, and has plans to commercialize 5 million fuel-cell vehicles by 2020. The United States is undertaking research and development leading to specific performance targets and a commercialization decision in 2015. Over 100 vehicles and 17 fuelling stations are being tested in the state of California alone. However, the high cost of these demonstration projects has limited the participation of developing countries in this learning process.

A number of lessons have begun to emerge from the experiences shared at the Maastricht conference and the subsequent UNCSD event. There is a need to understand better the technology and its relationship to alternatives. Research, increased knowledge flows and strengthened domestic capacity in science and public policy will be essential in evaluating choices about the development and application of hydrogen fuel cells in the developing world. It has also become evident that information ex­change, learning and capacity building will have to be started sooner than was the case in new-wave technologies of the recent past. Creating public awareness through demonstration projects that take advantage of key events, such as Canada's Hydrogen Highway planned for the 2010 Winter Olympics and fuel-cell bus demonstrations planned for the World Cup in South Africa, provides some opportunities. Lastly, it is clear that assessing the challenges and the timeframe involved in acquiring, using and adapting hydrogen and fuel cells in the transport and energy sectors, and choosing among alternatives in meeting current goals in the interim, require not only information about the technology itself, but about the multiplicity of pathways, policies and programmes being implemented elsewhere and the varied contexts in which these are achieving their goals. Knowledge flows and networking will thus be critical components in the ability of developing countries to participate fully in the future development of a hydrogen economy and its benefits.

An outline of the volume

The book is divided into four parts. Part I deals with hydrogen and fuel cells as a disruptive technology. Its focus is on the debate over how soon hydrogen fuel-cell vehicles might become commercially available and whether this will require a considerable amount of new investment in basic research and development, thus pushing the date for commercialization further into the future. The section brings to bear a multiplicity of perspectives on these issues: historical comparisons with the internal-combustion engine and its infrastructure of roads and refuelling stations, and the interplay between enterprise strategies and government policies then and now (Mytelka); the current approach of Japan as it "returns to basics" (Ishitani and Baba) and of the United States, which has set firm targets for moving towards commercialization by the year 2020 (Chalk and Miller); and lastly the role of oil companies in the provision of infrastructure for the hydrogen economy (de Scheemaker).

Part II examines alternative energy sources and their consequences for economic, social and environmental sustainability. It stresses the need to consider the availability of domestic resources in making choices among alternatives, and to take a long-term learning perspective in choosing technological paths for the short term. A wide range of energy and transport options are addressed in this section. On the choice of fuels these include traditional approaches such as the conversion of bus and taxi fleets to CNG (Boyle), the learning about and increased attention to environmental and equity considerations that has taken place in Brazil as a result of its experiences with ethanol, applied in the development of biodiesel and flex-fuel engines (Teixeira de Sousa et al.), and the need to begin to diversify the energy portfolio in oil-exporting countries (Samuel).

Making choices also involves new considerations on the transport side. A basket of changes, for example, is available to reduce pollution in the Egyptian transport sector. Some of these, moreover, provide the basis for learning about hydrogen without expending the financial resources needed to engage in fuel-cell bus testing now (Abdel Gelil). Iceland, renowned for the extensive use it has made of geothermal energy for heating and electricity generation, now faces choices as it reflects upon the ways to reduce dependence on petroleum for its fishing fleets, cars, buses and planes (Valfells).

Part III looks at the automotive industry, one of the key actors in the transport sector, and presents a set of three contrasting experiences in dealing with an industry undergoing disruptive changes. The chapter on Japan, the world's leading producer of hybrid vehicles, uses data on patenting by Japanese automotive firms to illustrate the diversity of technological trajectories currently being pursued by these companies (Yarime, Kuroki and Shiroyama). Canada, a leading producer of hydrogen fuel cells for the transport sector, has a large automobile production capacity, all of which is owned by multinational corporations. Currently it is not involved in research or production of hybrid vehicles. It faces choices in how to proceed in the use of fuels and types of vehicles in the automotive sector that parallel those in Brazil, China, Mexico, South Africa and other large automobile and auto-parts producers in the developing world (Molot). Malaysia, which has invested heavily in the development of a national automobile company but has not created and enforced policies to stimulate domestic producers to deal with the growing pollution problem at home, has nonetheless developed a hydrogen roadmap that includes major investments in hydrogen and fuel-cell research and development unrelated to its national automobile industry as a potential user of such research (Kari and Rasiah).

Part IV looks at strategies and roadmaps with respect to hydrogen fuel cells and alternatives. Not all countries have developed an explicit strategy for hydrogen and fuel cells, as the United States and Japan have done (see Part I). In the Netherlands, for example, the focus is less on hydrogen per se than on the process of exploring energy alternatives that could enable the country to achieve a set of longer-term goals implicit in the notion of a sustainable energy system. The energy transition process, as it is called, is currently under way, and steps in this process and the various learning experiments that are being undertaken in each of its modules are described here (Hoogma).

Among developing countries, a small number have developed policies and strategies with explicit references to the development of hydrogen and fuel cells. China, for example, has three main programme areas in which the focus is on strengthening capacity in fuel-cell development and its application in the bus and automobile industry, which ranks high among contributors to urban pollution (Ming, Lun and Mytelka). The South African strategy, on the other hand, is concerned more with equity issues related to the provision of off-grid energy supply through the use of existing resources and technologies, such as the production of hydrogen through coal gasification or co-generation in a new pebble-bed nuclear reactor and the continued South African role in the supply of platinum, a major input into fuel cells (Mehlomakulu).

Developing a strategy and giving effect to it are not, however, linear processes. In Canada, for example, strategic planning documents have been prepared by various provincial governments, industrial firms or their associations with specific interests in research, development and commercialization of fuel cells for the transport and stationary power industries, and efforts to develop a federal strategy have been made. Prolonged discussion ensued, and changes in government appear to have put this strategy on hold (Fitzgibbons). The Nigerian case presents a similar story. A national policy on science and technology, adopted in 2005, made specific references to the development of the nation's energy resources on a self-sustaining basis and the need to strengthen existing research and development capacities in order to bring this about. A renewable energy master plan that includes hydrogen was under development, but the specific strategy and policies for its implementation had not yet been adopted when a change in government took place (Adegbulugbe, Adenikinju and Momodu).

The chapters in this volume offer many insights into the process of thinking about hydrogen, fuel cells and alternatives and the issues that the emerging hydrogen economy poses for developing countries. These are summarized in a concluding chapter (Mytelka).

Lynn K. Mytelka
Grant Boyle

REFERENCES

International Energy Agency (2005) Prospects for Hydrogen and Fuel Cells, Paris: IEA/OECD.

Acknowledgements

Initiating the process that led to this book was not self-evident. We thus greatly appreciate the early support and encouragement of then Nigerian Minister of Science and Technology, the Honourable Turner Isoun, and the International Development Research Centre (IDRC) in Canada at a time when others stressed that it was "too soon" for developing countries to be concerned about hydrogen fuel cells.

The Maastricht conference itself grew out of a collaboration between three UNU centres: the Institute for New Technologies (UNU-INTECH) in Maastricht, the Environmental and Sustainable Development Programme (UNU-ESD) in Tokyo and the Geothermal Training Programme (UNU-GTP) in Reykjavik. It also benefited from the support of the UNU Rector's Fund for Collaborative Research. For their financial and moral support we are very grateful.

Many of our colleagues and several of the PhD students at the UNU have also contributed to the work of the Hydrogen Fuel Cell Project at UNU-INTECH and its successor UNU-MERIT. We would like to thank Luc Soete, UNU-MERIT director, who has been a friend of the project since its inception, Rene Kemp for his help in thinking through transitions, Ad Notton, who supplied us with access to a vast array of research resources, Wangu Mwangi, who made our project visible on the net, Rhadika Bhuyan, who contributed to that process by working on the Hydrogen Fuel Cell Exchange, our prototype monthly newsletter, and Saurabh Arora and Marc Dijk, whose research helped tell the automobile story. We would also like to thank colleagues from elsewhere: Dr Rose Kiggundu (CGIAR-ILRI), Dr Saeed Parto, Professors Maureen Molot and Masaru Yarime, Ambassador Werner Coralles of Venezuela and Dr Franco Babir (UNIDO-ICHET), who joined us as rapporteurs, commentators and chairs during the conference itself, and Jean-Marc Coicaud and Ramon Ray of the UNU New York office, who provided essential support in the preparation of our side event at the UNCSD meeting.

Acronyms

Part I
Hydrogen and fuel cells: An ongoing debate

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Introduction

Since the mid-1990s the emergence of a hydrogen economy and the speed with which this will arrive have been vigorously debated. The debate has mainly been carried on among policymakers and oil and gas, automobile, fuel-cell and renewable energy firms in the countries of the North, where policies and the technological competences and competitive practices of firms have played a central role in shaping both the debate and the direction of technological change during this period. Part I looks at this debate as it relates to the development and commercialization of hydrogen and fuel cells in the transport sector.

For developing countries the current debate highlights the uncertainties involved in making choices about hydrogen and fuel cells in planning the development of their transport sector. As a disruptive technology, dominant designs for the production, storage and distribution of hydrogen have not yet been established. Nor have performance characteristics been achieved that would make hydrogen proton-exchange-membrane (PEM) fuel cells competitive with the internal combustion engine. Yet costs are coming down and the efficiency and durability of hydrogen fuel cells (HFCs) are improving. How to deal with competing arguments that push the hydrogen economy into the longer term (2050) and those that place its advent in a shorter-term perspective (2020) is one key issue for developing countries today as they explore their options for the design of national energy, environment and transport policies.

The chapter by Mytelka sets out a framework for understanding this debate and applies it to two historical cases – oil and the internal-combustion engine – where many of the issues raised in current debates over fuels and fuel cells first emerged. One of these was the need for further basic research to make the early gasoline-based internal-combustion engine competitive with the alternatives of its day. The extent to which further basic research will be needed before commercialization of hydrogen fuel-cell vehicles is feasible parallels this earlier concern. A second is the speed with which progress is made in bringing down the cost of hydrogen production, storage and transportation and of the hydrogen fuel cells themselves. The Ishitani and Baba and the Chalk and Miller chapters engage in a discussion of these issues; they also highlight the importance of broad-based public participation in such debates and the creation of public-private partnerships in developing the codes and standards that the commercialization of hydrogen fuel-cell vehicles will require at both national and international levels. At present, only a very few developing countries are participating in this process.

A third issue of concern to developing countries, where transport and refuelling infrastructure of all sorts still needs to be built, is the chicken-and-egg problem that arises with respect to hydrogen infrastructure. This results from the need to coordinate a large number of different actors, both public and private, and the uncertainties surrounding the choice of hydrogen delivery system: at the pump or through decentralized modes such as hydrogen to the home – an innovative design still in its infancy. From a business perspective, the chapter by de Scheemaker takes the position that in the shorter term using existing infrastructure will be more cost-effective. It also argues for a demand-driven approach in which public policy helps to create the market for hydrogen, to which the private sector would respond by building the necessary infrastructure. Although the chapter notes that the hydrogen economy is still some 20 years away, it points to the importance for developing countries of learning from the experiences of developed countries in building hydrogen infrastructure and the need to begin a process of designing their own hydrogen roadmaps.

1
Hydrogen fuel cells and alternatives in the transport sector: A framework for analysis

Lynn K. Mytelka

Introduction

In the mid-1990s, fuel cells came to be regarded as a promising technology in the transport sector. Barely 10 years earlier they were hardly on the technological horizon and the idea of a fuel-cell vehicle was only a glimmer in the eyes of a few visionaries. By the end of that decade fuel-cell vehicles were being touted as the wave of the near future. Yet today that horizon appears to have receded. How can we explain such radical shifts in perceptions with regard to this emerging technology?

To argue that we have simply returned to reality after a period of "hype" neither enables us to assess the realism of the former nor serves to explain the pessimism of the latter. This chapter thus begins by presenting a framework to help analyse the process of technological change and plan for it better. The framework sets out a number of broad factors that have tended to shape the speed and direction of technological change.

Of critical concern in this chapter and the book as a whole are the issues that these changes raise for developing countries, particularly in "new-wave technologies" such as information and telecommunications, biotechnology and the technologies that underlie the emerging hydrogen economy. These are identified throughout this chapter.

The chapter then establishes a baseline for the analysis of non-linearity that has marked the development of hydrogen fuel-cell vehicles (HFCVs) since the 1990s. It does so by using the framework to explore the emergence of a dominant design for the internal-combustion engine (ICE) and the subsequent evolution of automobile technology based on this motive force. Going beyond technological constraints, this chapter pays particular attention to the institutional and economic considerations that led to the dominance of gasoline over electric-powered vehicles. The co-evolution of technology in the oil industry is also discussed, as this is raised today in connection with the speed at which hydrogen can be provided to support HFCVs.

The chapter then applies the approach to analyse the emergence and development of proton-exchange-membrane (PEM) fuel cells across two periods – the "turning-point years" from 1994 to 2001 when a steep rise in interest and activity took place, and a period of questioning and renewed debate in the "questioning years" that began in 2002. It identifies a number of factors that affected the speed with which HFCVs were moving towards commercialization in each period. In this context, it includes a brief review of alternatives to hydrogen as a fuel in HFCVs and of alternatives, such as hybrid vehicles, to the fuel-cell vehicles themselves. This lays the basis for an introductory discussion on the theme of choice-sets and priority setting that continues throughout this book.

A framework for the analysis of technological change

Models of broad-based technological change frequently referred to in the literature as technological revolutions (Utterback, 1994; Freeman and Perez, 1988; Perez, 2002) traditionally distinguish three phases in the emergence and development of a technology. The first is the period in which the new technology emerges, product innovation is intense and product variety widens. This is followed by a transitional phase during which competition in the marketplace or performance standards set by law lead to the establishment of a dominant product design (Utterback and Abernathy, 1975) and open opportunities for standardization and mass production.1 The third phase is that of the mature technology. Innovation continues to take place, but incrementally along the established technological trajectory.

With hindsight, the history of the internal-combustion engine appears to have followed such a linear path, as did other mechanically based technologies of the past. But such an approach misses the many "inducement mechanisms and focusing devices" (Rosenberg, 1976) that shaped the branching points in these technological trajectories over time (Dosi, 1988). Most of this earlier literature also failed to take into account the context within which these selection mechanisms operated, and this has had particular ramifications for technological choice and the effectiveness of technology transfer to developing countries (Stewart, 1977: 22–29; Mytelka, 1985, 2004).

New-wave technologies such as information and communications technologies (ICTs), biotechnology, nanotechnology and hydrogen-based technologies, moreover, have three defining features that differentiate them from these earlier industrial technologies: their science base, patent intensity and systems embeddedness. These differences suggest that the forces and factors shaping the pattern of technological change are also likely to differ, as will their impact on developing countries. In both deepening our understanding of innovation in earlier mechanical technology and providing a predictive tool to analyse the process of technological change in new-wave technologies, a more systems-oriented approach is thus needed.

This chapter applies an innovation systems approach to analyse the establishment of the internal-combustion engine in the automotive industry of the early twentieth century, and the emergence of hydrogen fuel cells as a possible successor as that century drew to a close. Its focus is on the firms and other actors which, together with the institutions and policies that influence their innovative behaviour and performance, bring new products, new processes and new forms of organization into economic use. At the core of an innovation system are the flows of knowledge and information that link economic actors and provide both a stimulus to and the support for innovation. Underlying the "system of innovation" approach is an understanding of innovation as an interactive process and a reconceptualization of firms and other actors as learning organizations embedded within a broader institutional context (Nelson and Winter, 1982; Freeman, 1988; Lundvall, 1988). Institutions in this sense are not formal structures or organizations but "sets of common habits, routines, established practices, rules or laws that regulate the relations and interactions between individuals and groups" (Edquist, 1997: 7) and thus "prescribe behavioural roles, constrain activity and shape expectations" (Storper, 1998: 24). Habits and practices such as these are learned behaviour patterns, marked by the historical specificities of a particular system and moment in time (Mytelka, 2000). Over time, therefore, their relevance may diminish as conditions change. Policies, whether tacit or explicit, can speed up or retard this process by setting the parameters within which actors in the system make decisions about innovation.

For developing countries, the characteristics of new-wave technologies themselves will shape opportunities and constrain choices over the short and longer term. Anchored in the sciences, the knowledge base of new-wave technologies has developed less as the result of incremental change along a single technological trajectory than through a combination of several distinct trajectories with significantly different scientific roots. These diverse roots, however, increasingly share a common platform – that of working at the nano-level of photons and genes.2 As a result, the research laboratory has become central in the discovery and development of new products and processes based on new-wave technologies.3

Earlier models of technological change based on experience with industrial technologies have traditionally distinguished between innovation in products and in production technologies, and generally regarded these as sequential processes (Utterback and Abernathy, 1975). This allowed for a more incremental process of catching up. New-wave technologies, however, tend to fuse product and process innovation at the experimental stage – that is, in the laboratory. The importance of systematic research, and the centrality of the research laboratory that this implies, puts developing countries at a disadvantage.

The products of new-wave technologies are also combinatorial. On the input side, the ability to develop such products and establish a "dominant design" in industries growing out of new-wave technologies has depended upon innovations from across a wide range of scientific and industrial domains. On the output side, these are rarely stand-alone products. Systems integration is so common a feature of new-wave technologies that they have often been described as "generic" technologies. These characteristics favour research systems with a wide range of knowledge bases. Yet few developing countries have such capabilities at present.

A number of consequences for the pattern of competition flow from the high costs and risks inherent in science-based innovation, the combinatorial nature of new-wave technologies and the systems-integrated nature of their products. These add to the difficulties faced by developing countries in catching up.4

Size and scale, for example, remain critical in the manufacture of products based on new-wave technologies, and these are radically changing the nature of competition in industries in which these technologies are applied. Historically, incremental changes that enhance the manufacturability of products and economies of scale in production have been critical in reducing costs and speeding technological diffusion, and they remain important despite the greater role that science plays in new-wave technologies. It would be misleading, therefore, to assume that technological knowledge "acquired and accumulated in crude empirical ways, with no reliance upon science" would not continue to play a role (Rosenberg, 1982: 143), as it did in the refinement of products and manufacturing processes in earlier waves of technological change.5 Once again, however, new-wave technologies exhibit a variation on this theme in several ways.

The combinatorial nature of products based on new-wave technologies and their integration into the products and processes of other technological systems open the way for larger firms to play a more prominent role than in the past in shaping the technological trajectory and the speed with which new-wave technologies are incorporated into the production process. The cascade of products flowing from the application of microprocessors and lasers to audio-visual equipment, for example, has been shaped by only a handful of large firms and their partners (Delapierre and Mytelka, 2003). The application of biotechnology in the pharmaceutical sector has followed this pattern, and one would expect something similar to emerge in the development of fuel-cell technology.

Strategies of knowledge generation and appropriation that privilege larger firms are also playing a more significant role in new-wave technologies than in earlier mechanical technologies. In this, they resemble those few science-based industries of the past – chemicals, petrochemicals and later pharmaceuticals6 – whose relatively high research and development (R&D) costs were partly amortized through patenting. Though patenting might, under other circumstances, strengthen the role of small innovative firms, new-wave technologies do not exhibit the traditional Schumpeter (1939) pattern of industrial dynamics in which innovation gives rise to a high rate of new firm entry in a variety of new industrial segments and the gradual replacement of incumbents by newcomers. Consolidation is more often the case.

Size has also been an important element in the appropriation of knowledge that enabled established firms to remain dominant. In the application of biotechnology to pharmaceuticals, for example, ever-larger pharmaceutical firms have been able to appropriate new knowledge through in-house R&D, a high level of patenting activity, mergers and acquisitions and partnerships of various sorts, including the development of knowledge-based networked oligopolies (Mytelka, 2001). For developing countries, the success of efforts to develop uniform intellectual property rules at the global level7 has broadened the scope of patents, inevitably narrowing the path around an invention and limiting opportunities for innovation locally. Extending the duration of patent lives under such agreements adds to this problem by significantly reducing the commercial incentives to engage in reverse engineering – the classic form of knowledge spillover that contributed so significantly to rapid development in Asia in the last decades of the twentieth century. This, too, has disadvantaged developing countries in their ability to catch up and keep up with a moving frontier.

Moving an innovation from laboratory to the market, moreover, increasingly requires partners, and a pattern of precocious partnering for R&D as well as standard setting has developed in industries based on ICTs (Mytelka, 2001) and biotechnology (Mytelka, 2003). This, in turn, has given rise to changes in the nature of competition in the emergent and transitional phases of these technologies. In contrast to the arm's-length firm-to-firm competition characteristic of earlier waves of technological change, in industries based on new-wave technologies competition takes place among networks of firms bound to each other through a variety of alliances. Few firms from the developing world are partners in these knowledge networks (Kim and Nelson, 2000; Verspagen, 2005).

The emergence of knowledge-based networks that extend across borders and industries has stimulated a pattern of oligopolistic market competition on a global scale. Unlike traditional oligopolies based on the statics of cross-licensing and market sharing, however, knowledge-based networked oligopolies involve collaboration in the creation of new knowledge and control over its evolution. They are dynamic, seeking to shape future technological trajectories as opposed to merely rigidifying the status quo. Through mutual forbearance and attention to the market strategies of rivals, oligopolistic competition among these knowledge-based networks may accelerate the process of technological diffusion at the same time as it structures the form and direction that technological change takes. This was evident in a variety of segments within the ICT sector, and how such competitive processes unfold will undoubtedly affect the speed with which fuel-cell technologies are applied in the automotive sector.

The third characteristic that new-wave technologies share is their systems embeddedness. This has a bearing on both the speed and the direction of technological change. The combinatorial nature of their products and their embeddedness in complementary technological systems, for example, require a high level of systems integration and large-scale investments in new infrastructure as part of the process of establishing a dominant design. Most developing countries, as the experience with telecommunications technologies from the telephone to the internet has shown, do not have access to the capital needed to build such infrastructure and thus face relatively long-term lags in access to the benefits of new-wave technologies.

The further development and diffusion of these technologies are shaped by two other sets of constraints emanating from the economic and social systems in which they are also embedded. Because of the uncertainties and systems embeddedness in new-wave technologies, successful innovation processes are highly interactive. This opens channels for critical flows of knowledge and information, and assists in coordinating the development of new infrastructure where it is needed. When such coordination involves changes in the habits and practices of consumers and producers, facilitating interaction may require the creation of systems-level intermediary organizations (van Lente et al., 2003). Traditionally, public policies have thus played a role in stimulating the emergence of such intermediaries in addition to shaping the parameters within which decisions about innovation are made by actors in the system.8 This can be expected to alter the pace of change significantly, especially in new-wave technologies where research and infrastructure costs are high and there is a need for extensive dialogue and coordination.

New-wave technologies are by definition disruptive. In the genesis and emergence of such technologies there is always some degree of discontinuity in infrastructure and institutions, and thus a need to learn new ways of doing things and unlearn habits and practices of the past. The more embedded a technology is in other systems, the higher the risks to enterprises in their development and diffusion and the greater the resistance to change. Market forces alone, therefore, often fail to stimulate and support an innovation process when coordination requirements are high. The relative weight between the different parametric considerations that affect the speed and form of technological change can, however, be shifted through a broad range of government policy initiatives, in the absence of which transition periods may be longer, more difficult and more costly.

The basic contours of the approach taken here in analysing the time horizon available to developing countries before the next wave of technology bursts upon them are graphically represented in figure 1.1, and

Figure 1.1 New technologies and developing countries

can be summed up in the following terms: the pace and direction of technological change are largely a function of the speed with which a dominant design emerges, costs are reduced and systemic constraints are removed.

Each of these broader variables can be further decomposed. For example, the speed with which a dominant design emerges in new-wave technologies will probably depend upon the availability of finance for research and on technological integration. Both the speed at which a dominant design emerges and its movement down the cost curve in industries based on these technologies will also depend on the formation of alliances through which standards can be set and the closer coordination needed for technological integration can take place. This will permit the development of economies of scale and scope which are prerequisites to cost reduction. Policy can play a major role in removing the constraints flowing from systemic embeddedness by altering the trade-offs between the relative costs and risks of "preservation versus innovation" for the enterprise and the consumer.9

In the following two sections this framework is applied to analyse the pace and direction of technological change in the adoption of the internal-combustion engine and HFCVs.

Shaping technological change: The internal-combustion engine

The emergence of the modern automobile can be dated to 1885, when the first vehicle propulsion by an internal-combustion engine was developed in Germany simultaneously by Karl Benz and Gottlieb Daimler, and patented by the latter (Graedel and Allenby, 1998). The hand-crafted automobiles of this period, however, were luxury products – "the playthings of the wealthy few" (Utterback, 1994: 127). By 1906, more than two decades after the first automobiles had appeared in Europe, the total number of such vehicles being produced across the whole of Western Europe each year was only 50,000 (Hoffman and Kaplinsky, 1988: 74). By that time, however, the gasoline-fuelled internal-combustion engine had emerged as the dominant design in motor cars.

There was nothing inexorable about the internal-combustion engine's victory over steam power and electricity in the motor vehicles of the twentieth century. Why it triumphed was certainly not due initially to its superior technology, if superiority is measured by power, efficiency or reliability. Nor was the infrastructure in place to smooth the introduction of faster-moving vehicles or long-distance driving. When compared with electric vehicles there were many trade-offs to consider. For example, although the range of electric vehicles before batteries needed recharging was far lower than the range between refuelling stops, the fuel in internal-combustion engines was itself a problem and led to frequent stalling. Compared to electric trucks, ICE-powered vehicles were also more expensive and their use required more extensive organizational changes as well as significant modifications to existing habits and practices, notably in the delivery service sector. Normally this would have implied a considerable resistance to change. How then do we explain the speed with which the gasoline-powered ICE became the dominant design in motor vehicles? Why did a decades-long difference emerge in its establishment as the leading technology in the passenger-car market and in the market for commercial vehicles?

A chronology of key technological changes that gradually increased the flexibility, power and dependability of the ICE is only a starting point, since "Technical superiority resided not simply in the physical properties of the individual technologies but in the contexts and systems in which motor vehicles were embedded" (Mom and Kirsch, 2001: 491). How that environment is perceived and defined, how the range of choices is delimited and how parameters are set within which these choices are made are critical factors in pushing and pulling new technologies along or applying the brakes.

The transitional period, for example, was marked more by changes in production processes and organizational structures than by substantive technical changes in the internal-combustion engine, though a number of innovations were introduced to increase engine power and make driving a motor vehicle easier.10 The major production innovation, for which the era is better known, was the adoption of automatic materials transfer in the manufacture of the Ford Model T. This speeded up the flow of parts and their assembly, making mass production a reality (Best, 1990). By 1914 the Ford assembly line alone was capable of producing 300,000 vehicles per year and the price of cars dropped dramatically (Hoffman and Kaplinsky, 1988: 74). Techniques of mass production were subsequently adopted elsewhere. Daimler-Benz, for example, was in the forefront among European producers. The transition period drew to a close when the Model A was introduced in 1928, followed shortly by the V.8 engine series. Organizationally, the corporate model came to dominate the industry, beginning with the incorporation of General Motors (GM) in 1908 and a few months later its acquisition of Buick.11 Other companies soon followed suit.

Despite their many technological shortcomings, between 1908 and 1927 some 15 million Model T Fords were sold. Yet this was also the period in which gasoline-powered commercial vehicles were vigorously challenged by electric trucks (Mom and Kirsch, 2001). The latter had displaced horse-drawn wagons for short-haul transport from railheads. Like the horse-drawn wagon, the electric delivery van was inserted into a broader context, that of the "service economy" in which local department stores, breweries and other manufacturers participated as a means to win customer loyalty in urban areas. In this market, internal-combustion engines were too costly to operate, since the principal advantage of such vehicles was their greater range between refuelling stops. Operating over a larger range and with less downtime while customers opened packages, inspected goods, tried on merchandise or tapped kegs were critical in amortizing the higher initial price of the gasoline-fuelled internal-combustion engines which powered these vehicles. At the time, moreover, neither the power nor the reliability of these trucks was sufficient to challenge the trains that dominated the long-haul market. It was not until these trucks could provide universal service across both markets that they posed a real challenge to the electric vehicle. Even then the choice was not based solely on technological strengthens or even the habits and practices of the service economy, which would later be forced to change, but on errors in competitive strategy that weakened the electric vehicle (EV) as a vehicle of choice. The ability of EVs to compete in medium-haul markets, for example, was seriously weakened by the strategy of electric generating stations, notably in the United States, to monopolize the supply of electricity by integrating downstream to garages where electric cars and trucks could recharge their batteries. The alternative was to change batteries, a practice adopted at various times in Europe but one that never took hold in North America. Many of these factors reappear in the context of challenges to and pressures for the use of hydrogen fuel cells in the transport sector, as will be seen in the next section.

The continued development and widespread use of the automobile powered by an internal-combustion engine in the post-transition period were for many years constrained by a number of other systems within which it was embedded. One of these was the system of refining fuels, including the development of catalytic-cracking processes (Freeman, 1982: 62): improvements in the anti-knock quality of the fuel, expressed as its octane number, and higher extraction of gasoline from the same quantity of petroleum through the use of heat, pressure and catalysts to rearrange the molecules of economically less important distilled fractions.

Mechanical innovations designed to solve the problems of carburation, valving and ignition could only go so far in making engines more efficient. This was because further improvements in engine design could not succeed in generating power and reliability in the absence of better-quality fuels. Why did the oil industry not move more quickly to improve fuel quality? Here again, one of the critical issues was how oil companies perceived their role and framed the problem. Petroleum-refining technology was an adaptation of earlier coal-oil processes and as such was based on thermal cracking. As the car market developed, the oil industry framed the problem as one of a potential fuel shortage. Its objective thus became the extraction of more gasoline from existing refineries. This was done by developing a continuous process of thermal cracking. The anti-knocking properties of tetraethyl lead were known12 and it was being added to gasoline in the 1920s. But this did little to raise the compression ratio of automobile engines or increase their efficiency. It was not until demand for higher-quality fuels from the emerging aviation industry rose that research began in earnest to build the chemical knowledge needed to develop a continuous process of catalytic cracking and raise the octane levels of refined oil. The research was undertaken in the mid-1930s by a consortium put together by Standard Oil of New Jersey. The consortium spent US$15 million over three years to produce more refined oil which made possible higher compression ratios that increased engine power and eliminated stalling.

The second constraint on the continued growth of the automobile industry was the infrastructure upon which it depended, notably a distribution network for gasoline and a system of paved roads and highways. Standard Oil, which had been founded in the United States in 1865, was innovative in locating its refineries near railroad lines and planning oil shipments so that railroad companies could make up daily oil trains. Investments in pipelines to link oil fields with refineries and railroads were undertaken later. Some usable infrastructure was thus in place when the sale of automobiles began in earnest. Roads were another matter, since the competition with railroads for long-distance travel had favoured the latter during the nineteenth century. Public financing of roads and highways was an important factor in the widespread development of a road network after the First World War.13

In the "mature" phase, technological progress was slow and took place along an incremental technological trajectory marked by trade-offs between power, efficiency and fuel economy. These are often attributed to consumer preferences. In the decades before the oil crisis in 1973 an overall reduction in mechanical novelty and variety resulted, although options proliferated (Abernathy, 1978). Changes that did occur in production processes, moreover, led to such dedicated systems that opportunities for further innovation were significantly reduced.14 As the problem of emissions was slowly recognized, the solution was reconceptualized within this nexus and strategies of preservation rather than innovation resulted. "It is not that automotive technologies haven't improved; it's that the improvements have been geared towards delivering power, not efficiency" (Fischetti, 2002: 42). The choice of an incremental path that favoured preservation over innovation can be illustrated by the evolution of carburettor and fuel-injection systems and the adoption of the catalytic converter.

Efficient operation of gasoline spark-ignition engines, for example, depends on the air-fuel mixture. Ensuring that the mixture is delivered to the combustion chamber well atomized and at exactly the right ratio of air to fuel can be carried out by a carburettor or a fuel-injection system.15 The camshaft, a century-old mechanism that opens and closes the engine valves which let the fuel-air mixture into the combustion chambers and release exhaust gases, is still the dominant design. "A spinning shaft, it moves levers that open and close valves approximately 100 times per second in a fixed pattern" (ibid.: 46). This wastes fuel. Electronic controls have been introduced that allow some valve control, for example to open valves only partway when little power is needed, but a real breakthrough would be to substitute electromechanical activators for the camshaft. These would provide software-driven control for each valve. Unfortunately current technology is not yet able to do this without excessive wear, engine noise and vibration (ibid.). Gasoline direct injection and digital microprocessors to control fuel and injection systems and spark advance are only the latest improvements designed to preserve the mechanical base of this ageing system.

The problem of emissions was recognized as early as the 1940s. By the mid-1960s motor vehicles were creating 86 million tonnes of pollutants per year, most of which was carbon monoxide. Unburned fuel, nitrogen oxides, sulphur oxides, particles and lead compounds made up the rest. As in other cases, the habits and practices of the actors and the way they framed the solution have meant a lengthy race to the bottom, as automobile manufacturers adopted the catalytic converter rather than undertaking more radical change. In 1965 the state of California adopted the first legislation to control exhaust products. The US federal government adopted identical laws two years later.

The initial reduction in carbon monoxide and unburned fuel emissions was undertaken by modifying carburation, using a leaner mixture and modifying ignition timing. This reduced compression ratios, but these would increase again with some refinement in combustion-chamber designs to allow faster burning of the fuel (Somerscales and Zagotta, 1989). Sulphur oxides and lead compounds were to be eliminated from the fuel. With the reduction in federal hydrocarbon and carbon monoxide emissions standards in 1975, the catalytic converter – an end-of-pipe solution that reduced the need for further innovation – rapidly became the dominant design in dealing with the emissions problem over the next

Figure 1.2 Development of the internal-combustion engine

few decades (ibid.; Newcomb and Spurr, 1989). Figure 1.2 illustrates the incremental development path of the internal-combustion engine since its application in the transport sector.

Consumers have always placed a high value on dependability in choosing a car. But other preferences have loomed large at various moments in time. The oil price shocks of the 1970s seem to have marked the 1981 preference structure, with its emphasis on fuel economy (table 1.1). Six years later, however, fuel economy was of least importance to the consumer and price had, along with dependability, become the prime concern. In the latter half of the 1990s safety replaced both fuel economy and price as the second most important buying preference. This change in preference was accompanied by a rise in sales of SUVs and other large vehicles.

Despite the brief blip in consumer preferences for fuel economy, in terms of the trade-off between efficiency, power and pollution, consumers and producers alike have joined forces over this 20-year period in the

pursuit of power. This is reflected in data from the US Environmental Protection Agency which show that since the 1980s horse power has increased by 84 per cent, "allowing vehicles to accelerate faster even though they have gotten heavier", at the expense of fuel efficiency (Fischetti, 2002: 41–42). Emissions have thus remained a problem and, as automobile sales rose in the developing world and Eastern Europe, the internal-combustion engine came increasingly under fire in international milieux as a significant and growing source of environmental damage.

Rather than engine efficiency, emissions and energy concerns are thus driving the move away from the gasoline-powered internal-combustion engine. Through regulatory policies, tax incentives and financial support for R&D, attention was focused primarily in two directions, neither of which has produced the required magnitude of change. The electric vehicle floundered in the continued technological problems of battery storage and the consumer preference for rapid acceleration and refuelling (Neufville et al., 1996). Its successors, hybrid cars such as the Toyota Prius and Honda Insight, have only recently been commercialized and others only began to appear in 2005. Despite their newness, moreover, they are clearly an intermediary solution based on incremental improvements to older models. Alternative fuels such as ethanol are still in dispute and currently make only a small dent in the overall pollution problem, especially where they provide only 10 per cent of the fuel.

We have thus reached a classic point in the evolution of technological trajectories – the exhaustion of the current technological paradigm. Is the next wave of technological change upon us?

Policies, promises and practices: The application of hydrogen fuel cells in the transport sector

Although a first working fuel cell was demonstrated by a Welsh scientist, Sir William Grove, in 1839, it was not applied for over a century. This contrasts with the internal combustion engine, whose principles were known in the seventeenth century and applied in the eighteenth century to pump water from coalmines. Not until some 200 years later, however, was it used to power a moving vehicle. But within only a few more decades, the ICE had become established as the dominant design in the automotive industry (fig. 1.2). While the genesis of modern fuel-cell technology and its application in the automotive industry have moved more quickly than was the case with the internal combustion engine, it is still too early to say whether it will emerge as the dominant design in motor vehicles.

Fuel cells reverse the long-known process of electrolysis, which uses energy to split water into its components. Instead they use a fuel supply to combine hydrogen and oxygen, thus generating an electric current. The first PEM fuel cell was developed in the 1950s by General Electric (GE) for the US space programme and provided electrical power on board the Gemini spacecraft in the 1960s. Thereafter, however, GE sold its PEM fuel-cell business and concentrated its work during the 1970s and 1980s on fuel cells with a phosphoric acid electrolyte, oriented towards stationary power. Phosphoric acid fuel cells were the preferred area for research on fuel-cell technology throughout this period, although some work on PEM fuel cells did continue, based initially on a Nafion membrane developed and patented by DuPont and applied in a variety of chemical manufacturing processes.16

Partly because of its potential for miniaturization and thus use in mobile equipment, the military maintained a residual interest in the PEM fuel cell. In the early 1980s Ballard, a Vancouver-based Canadian startup then working on lithium batteries, won a Canadian Department of National Defence (DND) tender to produce a "low-cost" PEM fuel cell that could run on impure hydrogen produced by reforming a liquid fuel like methanol (Koppel, 1999: 63–64). The first Ballard cell was based on the old GE fuel cell, but replaced its polystyrene resin membrane with a Nafion membrane and the GE flow-field plates made of niobium by sheets of graphite with carefully machined fine grooves on the electrode side of each plate (ibid.: 77). Both of these innovations and the development of a special manifold to distribute the gases (ibid.: 80) were then patented. In two years Ballard succeeded in developing an eight-cell stack that produced 130 watts, considerably higher than the 50–100 watts specified in the DND contract (ibid.: 86). By mid-1986 it had succeeded in creating a 12-stack version capable of producing 280 watts. The DND awarded Ballard a second contract for further development. If changing the flow-field design had quadrupled performance in the first phase of its development, finding a new membrane17 would result in yet another major jump. Over the next five years Ballard built ever more powerful and smaller PEM fuel-cell stacks.

By 1993 the first Ballard fuel-cell bus was plying the streets of Vancouver and Daimler-Benz and Ballard had agreed on a joint venture, to which Daimler committed $35 million over four years. In 1994 Daimler-Benz had its first New Electric Car (NECAR) on the road, a boxy cargo van whose passenger space was largely taken up by 12 stacks, collectively generating 50 kilowatts (kW) and producing 60 hp, and tanks holding compressed hydrogen. But technological progress was accelerating (fig. 1.3). Two years later, NECAR II had smaller, lighter stacks and could

Figure 1.3 Development of the fuel-cell engine

go at 110 mph, and by November 2000 DaimlerChrysler's NECAR V was a five-passenger Mercedes-Benz A-class vehicle with a powerful 75 kW engine and an on-board methanol reformer. It produced no exhaust emissions.

The turning-point: 1994–2002

The year 1994 was a major turning-point in the emergence of the PEM fuel cell as the prime contender to replace the internal-combustion engine. The dramatic rise in patenting is one indicator. Normally, there is a considerable time lag between research and patenting. But an online search of the US Patent Office database reveals that the number of transport-related fuel-cell patents rose dramatically from 204 in the period 1991–1995 to 732 in the years 1996–2002.18 Data provided by the US Office of Technology Policy (2003: 3, 23) similarly show a sharp rise in patenting activity in the "automotive fuel cell patent family", from some 20 per year in 1994 to 60 in 1998 and 180 in 2001, and strong patenting activity in the "hydrogen storage patent family" from 1996 onward. The investments in research that led to this patenting activity accelerated the speed with which new technologies moved from the drawing boards to prototypes, and augured well for the pace at which technological solutions might be found for existing problems.

Over these years every major automobile company announced programmes to develop fuel-cell vehicles and built alliances and/or created the in-house capability to do so. In 1997 Daimler-Benz took a 25 per cent stake in Ballard and was later joined by Ford, with a 13.5 per cent share, and by Shell working to develop the fuel for new generations of fuel-cell cars. General Motors and Toyota, partners in electric car development, began working on a fuel-cell car in 1999 and GM later also developed a partnership with Millennium Cell for this purpose. Other automobile companies also joined the race: Honda and Nissan, working initially with Ballard fuel-cell stacks; Hyundai and BMW, using stacks produced by International Fuel Cells; and Renault and Fiat, working closely with Nuvera Fuel Cells.

A proven concept, performance capabilities, the accelerating pace of technological change, competition among rivals and a shortening time horizon all played a role in the rapid turnaround from scepticism to action on the part of automobile manufacturers. By 1996 the concept of a PEM fuel-cell engine had been proved, and the speed with which the Ballard-DaimlerChrysler-Ford alliance moved down its learning curve was simply remarkable. In addition to DaimlerChrysler, other auto makers were moving rapidly down their learning curves and engaging in systems integration. In a relatively short time Honda, for example, moved from its first FCV, a hydrogen-fuelled vehicle with energy stored in metal hydrides, motor power of 49 kW and the ability to seat only two passengers, to its FCV4 in 2000 – a hydrogen-fuelled car with hydrogen stored under high pressure in tanks at 35 MPa, motor power of 60 kW and the ability to seat four people and still have space for luggage. Both vehicles used Ballard fuel-cell stacks. Unlike the prototypes and concept cars of a few years earlier, limited road testing of this new generation of FCVs – an important step towards commercial production – was envisaged within a few years.

Little doubt remained that fuel cells powered by hydrogen or methanol would be far more energy efficient than gasoline cars and also more environmentally benign (US Office of Technology Policy, 2003; Ogden, Williams and Larson, 2004). It increasingly became evident, moreover, that they would be able to match the performance of internal-combustion engines; and an ultra-capacitor to store energy, already commercially available on Honda cars, would provide the extra power for starts and passing that had turned consumers away from traditional electric cars. With fewer moving parts, the fuel-cell engine would outlive the internal-combustion engine and have the added advantages of an electric drive train to deliver power to the wheels and software to provide the car with "drive by wire" control that eliminates the need for the mechanical systems traditionally used for steering, power and braking (Williams, 1994; Swoboda, 2002: 10).19

By the late 1990s the main question was no longer whether fuel cells could supplant the internal-combustion engine as the dominant design in the automobile industry, but rather when this would be likely to occur. Although some articles continued to place the time horizon for commercialization far into the future (Freedman, 2002), most writers in the field had begun to talk of 2020 (US Office of Technology Policy, 2003), and as the millennium drew to a close some were suggesting that PEM fuel-cell vehicles would be commercialized as early as 2010. That allowed very little time for auto makers to learn, innovate, design and mass manufacture such a radically new product.

Was this hype or reality? Like other research-intensive industries of the 1960s and 1970s, as the pace of technological change accelerated, so too did the pressure to form alliances through which consensus on a dominant design and common standards could be forged and systems integration could be rapidly pursued. Two broad alliances emerged in this period.20 Fundamentally different in construction, the first was centred on Ballard and modelled itself on a structure existing in the information and technology sector, where networks formed around rival component solutions and their producers, such as Intel in microprocessors or Microsoft in software. The second centred on General Motors and adopted a design typical of the biopharmaceutical sector, where large final-assembly firms are at the core of networks composed of smaller, vertically integrated companies. Rival networks such as these characterized the emergence of a dominant design in the development of the VCR, computer disks and a variety of telecommunications equipment, but the timeframe, infrastructure investments and costs to the consumer and society were far lower than they are likely to be in the development of a fuel-cell vehicle.

Within these alliances, all producers remained flexible in the types of fuel cells they produced, tailoring these to their customers. Ballard Power Systems, for example, initially focused on direct-methanol PEM fuel-cell technology that would not require an on-board reformer, but also supplied hydrogen fuel cells to its clients on demand.21 Nuvera Fuel Cells, which estimated that it would still take some 20 years before a hydrogen society came into existence, stressed that "Until that time, we must turn to alternative innovations to solve the world's growing energy demand. Hydrocarbon-fuelled fuel-cell systems offer one such solution."22 Nonetheless, although specialized in gasoline-fuelled FCs with metallic stack architecture, Nuvera worked with its partners and customers to produce other types of fuel cells as well. The absence of a dominant design as fuel-cell technologies began to emerge did not then seem to be a serious impediment to realizing a commercializable FCV.

Each of these alliances pushed forward its own agenda with regard to several critical choices. Paramount among these was the choice of fuel, as it is linked to the choice of engines, fuel-cell design and the need for either an on-board reformer or an on-board fuel storage system.23 Costs, technological complexity, regulatory pressures and time to market are major factors affecting trade-offs here. But the choice of fuel is also systems embedded, and the availability of infrastructure and social acceptance as well as the habits and practices of auto manufacturers and oil producers and refiners can be expected to shape the parameters within which a decision about fuel will be taken. As DaimlerChrysler's vice president for research and development argued, "The most important unresolved issue with fuel cell vehicles is not the fuel cell, it's the fuel" (Financial Post, 2002).

The choice of fuel in this period was mainly focused on three alternatives: hydrogen, methanol and gasoline.24 Curiously, the initial choice of fuel by core members of the two broad alliances whose influence was paramount in shaping competitive pressures at the time has since changed. Chrysler, for example, began with gasoline as its preferred fuel. Following its merger with Daimler-Benz, however, it switched to methanol, and in parallel began work on the development of a more innovative technology based on sodium borohydride, better known in its laundry powder version as borax.25 GM, which began with hydrogen and a radically new car concept, became the major proponent of gasoline fuel cells (Truett, 2001) and characterized its 1999 partnership with Toyota and Exxon-Mobile as a means "to speed the development of a clean hydrocarbon fuel for FCVs [and] an important bridge to a pure hydrogen infrastructure".26 Some might question, however, whether continued use of hydrocarbon-based fuels is a bridge or a barrier to a radically new technology.

Hydrogen faced the greatest hurdles in establishing itself at the outset as the preferred fuel for FCVs. For example, it had an image problem to overcome, as some still emphasize its explosive potential if stored as a gas. But a number of solutions to the distribution and on-board storage problems were already commercially available. These derived from earlier experiences with liquefied and compressed natural gas (LNG and CNG), and demonstrated the safety of hydrogen in these two forms.

Some hydrogen-powered fuel-cell vehicle prototypes stored hydrogen on board under high pressure in canisters made of lightweight, high-strength material such as aluminium wrapped with carbon fibre. Hydrogen-powered FCVs are environmentally friendly, but the complementary technologies needed to ensure well-to-wheel environmental sustainability, cost-efficient hydrogen production and the infrastructure for delivering hydrogen at the pump or to the home were in their infancy. The infrastructure costs of building a distribution network from scratch, moreover, were very high.27

Towards the end of the 1990s public-private sector alliances emerged as the basis for concerted efforts to develop the necessary fuelling infrastructure. One of these was the California Fuel Cell Partnership (CFCP) in the United States. DaimlerChrysler and its partners were among the founding members in April 1999; 18 months later, GM and Toyota joined. Another was the European Union's Fifth Framework Programme. The Ecological City Transport System project, ECTOS, began in March 2001 and ran until February 2005. It involved "creating a hydrogen infrastructure and demonstrating fuel cell buses in Iceland's capital, Reykjavik, in the first large-scale, real-world trial of converting to a hydrogen infrastructure" (US Office of Technology Policy, 2003: 53).28 Given the need for more research and testing, while most acknowledged that hydrogen fuel-cell vehicles were the wave of the future, many turned to intermediate solutions to deal with the fuel and fuelling problems.

Methanol, derived from natural gas, represented a middle road. It has a higher octane number, allowing for higher compression ratios and hence greater thermal efficiency compared to gasoline engines. Its well-to-wheel energy consumption is also lower than that of gasoline, although tiny amounts of carbon monoxide and oxides of nitrogen are produced by the operation of the reformer and small amounts of evaporative emission may come from the fuel tank (International Energy Agency, 1999: 23–27; Williams, 1994: 24). Many of the complementary technologies, such as processes for the production of methanol from natural gas and the distribution of natural gas, already exist, and a number of countries with important automotive markets have significant natural gas vehicle fleets.29 Thus countries that "have natural gas distribution grids can introduce it as a vehicle fuel relatively easily, but nations without such infrastructures will find them very costly to establish" (International Energy Agency, 1999: 23). The choice of methanol, however, will lead to heavy investment costs in countries where natural gas is not readily available, the installed methanol production capacity is weak and the distribution network limited or non-existent – a strong negative factor for many developing countries.30

Considerable progress has been made in using methanol to power fuel cells. Small on-board methanol reformers, for example, are already installed in test vehicles and high-compression canisters for on-board storage have been developed and tested. Methanol is also a close substitute for gasoline in the pattern of refuelling and the distance between refuelling stops, thus catering to current consumer habits and practices.31 The methanol option also continues the pattern of dependence on hydrocarbons, and fails to achieve the zero-emission promise of HFCVs from well to wheel.

From the environmental perspective, the life cycle of gasoline is even less optimal. Nor does the choice of gasoline improve fuel security in the short to medium term,32 unless it is accompanied by expanded exploration and development.33 However, by minimizing the problems of both systemic embeddedness in an existing fuel-distribution network and social embeddedness in the preference of both oil companies and consumers to preserve older products, existing infrastructure and traditional habits and practices with respect to rapid refuelling at a multitude of existing fuelling stations, gasoline was the least disruptive of the choices. If speed to market is the goal, then a gasoline-powered fuel-cell car might also give the appearance of being a rational choice, at least in the short term. But appearances in the GM case were deceiving, and after years of trying to develop a small on-board gasoline reformer, General Motors seems to have abandoned this option – but not before Nissan and Renault followed suit, fearing that a gasoline-powered fuel-cell car could become the American standard, at least in the medium term (Associated Press, 2001).

While gasoline is no longer high up on the list of fuelling choices for fuel-cell engines, this is not because a consensus had emerged on the dominant design for a hydrogen fuel-cell vehicle. On the contrary, by the turn of the century HFCVs were being pushed off centre stage and gasoline was showing signs of a comeback, this time as part of the impact that hybrid vehicles were beginning to have on the nature of competition in the industry and the matrix of choices available to enhance energy efficiency and reduce greenhouse gases (GHGs).

From the mid-1980s to the mid-1990s Toyota slowly expanded its research on electric batteries and motors. This is reflected in rising patenting levels in this family of activity, which rose from under 25 in the pre-1994 period to 50 in the year 2000 (Kuroki and Yarime, 2003).34 Triggered by California's35 effort to reduce pollution levels quickly through the adoption of stringent emissions rules that no existing internal-combustion engine could meet, Toyota's research on hybrid vehicles moved into high gear. From under 30 in 1994, the number of Toyota hybrid patents jumped to nearly 200 in 2000 (ibid.). In 1997 Toyota introduced the first gasoline-electric hybrid vehicle. Its performance characteristics would not have tempted an American buyer any more than earlier electric motors had done. This early version of the Prius was sold only in Japan, but four years later Toyota was ready with a car that matched the preferences of its American clientele.

Once introduced into the American market in 2001, the hybrid vehicle changed the rules of the game. Able to meet emissions standards of the future, with the performance characteristics of pure gasoline engines and the advantage of substantial fuel economy, the Prius became the car to beat. Within a year Honda's version of a hybrid went on sale in the United States, followed by Ford and others.36 Wedded to heavy, gasguzzling sport utility vehicles (SUVs), to Americans the hybrids seemed like a godsend in a period of rising oil prices.

This is the context within which increasing R&D investment by American and Japanese auto companies in the period from 1996 to 2001 must be interpreted. In the United States, investment by the formerly sluggish automobile industry amounted to some $18.4 billion in R&D in 1997, higher than any other manufacturing sector in the that country (US Office of Technology Policy, 2003: 3), and R&D investments by Japanese vehicle makers rose from an average of US$11.8 billion in the period 1990–1995 to $14.7 billion in 1996–2001 (ibid.: 33). Governments also announced programmes of R&D funding for the development of FCVs and supported consortia to work on complementary technological systems. The US government, for example, established its Freedom CAR Partnership between the Department of Energy and the US Council for Automotive Research composed of General Motors, Ford and Daimler-Chrysler. Although its stated primary objective was to promote the development of hydrogen as a fuel for cars and trucks, much of the research undertaken through this programme addressed improvements in existing ICE-based technologies that would increase fuel economy and engine performance, and the new ICE programmes put in place during this period will not end until 2012/2013 (Truett, 2001: 39). In Japan, as seen above, research was heavily focused on the development of a strong electric motor capability, and this became the basis for the lead taken by Toyota in the commercialization of hybrid cars later in the decade.

The debate continues

At issue in determining the pace with which a dominant design emerges in a disruptive technology are the interests and preferences of both producers and consumers, the systems embeddedness of the technology and the role of public policies in shaping the parameters within which these decisions will be made. The interplay between government and business has been particularly important in shaping the process of arbitrage between innovation and the preservation of established ways of doing things that has been taking place with regard to HFCVs in the first decade of the twenty-first century. As Carlota Perez (2002: 26) pointed out:

Each technological revolution, originally received as a bright new set of opportunities, is soon recognized as a threat to the established way of doing things in firms, institutions and society at large . . . while competitive forces, profit seeking and survival pressures help diffuse the changes in the economy, the wider social and institutional spheres where change is also needed are held back by inertia stemming from routine, ideology and vested interests.

Under these circumstances it would be highly unusual if technological trajectories were strictly linear. The current period is no exception. By 2002 both government and business had became increasingly outspoken in dampening down the expectation of a rapid move to HFCVs. GM's top management pushed openly for incremental innovation along established trajectories and Elizabeth Lowery, GM's vice president for environment and energy, told the Globe 2002 Conference on Business and Environment that "gas and diesel powered cars would not disappear for another 50 years". Her explanation for this far-distant frontier was a lack of current consumer demand for alternatives to fossil-fuel-powered vehicles: "customers don't want to make trade offs" (Financial Post, 2002). But as innovation-based competition across a wide range of consumer goods illustrates, consumer tastes are not immutable.

The next year, the European Union's High Level Group created with a view to formulating "a collective vision on the contribution that hydrogen and fuel cells could make to the realisation of sustainable energy systems in the future" (European Union, 2003: 5) reported in favour of short- and medium-term efforts to "improve the efficiency of fossil-based technologies and the quality of fossil-based liquid fuels" (ibid.: 21–22). In June 2003, at the EU conference on "The Hydrogen Economy. A Bridge to Sustainable Energy" at which this report was launched, the United States and European Union agreed to collaborate for the purpose of accelerating the development of hydrogen as an energy source. At the same time, however, conference documents reflected a subtle shift in the time-frame within which it was expected that commercialization of hydrogen fuel cells would take place. Moreover, although President Bush had announced an increase in funding for the hydrogen economy in his State of the Union message in January 2003, of the $1.7 billion in funding over the next five years only $720 million would involve new funding (ibid.: 5).37 The US-inspired International Partnership for the Hydrogen Economy (IPHE), which held its first ministerial meeting in November 2003, was similarly off to a slow start in tackling the key issues that appeared to be holding back the emergence of hydrogen as the new energy source and the application of HFCVs in the transport sector. Over the following 18 months its focus was on the development of common codes and standards to facilitate a transition and the preparation of an IPHE roadmap to shape that process in a coordinated manner. But if the problems were more fundamental and required major investments in frontier research, the IPHE partnership did not appear to be the vehicle through which this would be done.

The European Union's Sixth Framework Programme reflected a similar view of the timeframe and activities needed to reach the hydrogen economy. Within this programme the focus was on the production of cleaner fuels, though not necessarily hydrogen, and on early preparatory work in the organization of fuelling distribution systems. Most of the funds were thus spent on producing clean hydrogen and rich synthesis gas from methanol, preparing for the hydrogen economy by using the existing natural gas distribution system, studying supply options across Europe's regions, setting standards, engaging in major fleet demonstration projects and supporting the Hydrogen Technology Platform Secretariat. Of the subprogrammes relevant to the hydrogen economy, only "hydrogen end use" involved new research: @5 million for work on a direct-hydrogen internal-combustion engine, @12.6 million in research funding for solid oxide fuel cells used in stationary power plants, @8.8 million for power-train development for direct HFCVs in cars and auxiliary power units in trucks and @5 million to study stack designs and high-temperature polymer-electrolyte-membrane fuel cells.

In 1994 an article in MIT's Technology Review noted that "Serious pursuit of the fuel-car option will require a major redirection of U.S. automotive R&D" (Williams, 1994: 28). Since then, the data show that governments continue to underfund research on hydrogen fuels and fuel cells, and have done remarkably little to change incentive structures for producers or consumers. This has sent very strong signals to the automobile companies that real competition, for the foreseeable future, will be in established markets. Auto companies such as Ford thus emphasize that they are "actively engaged in the development of four promising future alternatives to today's gasoline engines including clean diesels, gasoline-electric hybrids, hydrogen internal combustion" and hydrogen fuel-cell vehicles (Ford, 2005). Three of the four alternatives preserve the internal-combustion engine as the core technology and two support continued movement down a hydrocarbon-based fuel trajectory. Similarly, in April 2004 GM and Ford announced a $720 million investment to design and build an all-new, fuel-saving, six-speed front-wheel-drive automatic transmission which "is expected to offer up to four percent improvement in fuel economy over traditional 4-speed automatic transmissions available in today's front-wheel-drive cars" (General Motors, 2004). If figures recently released by the US Environmental Protection Agency (EPA) on fuel economy trends in the United States are to be believed, model year 2005 vehicles were estimated to average 21.0 miles per gallon (mpg), which is 5 per cent below the fleet average fuel economy peak value of 22.1 mpg reached in 1987 (US Environmental Protection Agency, 2005). The new GM-Ford transmission, even if it does function as expected, will not even return average fuel economy figures to those of nearly 20 years ago.

With attention directed elsewhere, the pace at which a dominant design is emerging in the development of hydrogen fuel-cell vehicles appears to have slowed down; but for how long?

Many of today's debates are reminiscent of those that took place in the early decades of the gasoline-powered ICE (discussed earlier). The qual­ity and ability to deliver the hydrogen that would be needed if HFCVs were to take off are one such example. Hydrogen proponents, however, see arguments over infrastructure as red herrings. Ballard's former CEO, Denis Campbell, noted that "U.S. industry currently produces 50 million to 60 million tons of hydrogen per year, so it's not like there's no expertise in handling hydrogen out there" (Ashley, 2005: 57). But Herbert Kohler, vice president of body and power-train research at Daimler-Chrysler, argues that "Fifty to 60 percent of the problems we have with our fuel cells arise from impurities in the hydrogen we buy from industry" (ibid.). Looking back to the early days of the ICE-powered automobile, however, the developed world seems particularly well endowed with hydrogen refuelling stations, some 60–70 of which are operating in Japan, the European Union and the United States at a point in time when there are no commercial vehicles yet on the road. Is the cost of new fuelling infrastructure way beyond our means, or is it, as Ballard's CEO pointed out, considerably less than what is being spent on infrastructure by ICT firms around the world?

Business scepticism about the speed with which some of the remaining technical problems will be resolved, such as reducing the costs of hydrogen storage, curiously echoes the situation facing auto makers in the 1920s, which found themselves up against the traditional research habits and practices of oil companies that continued to focus on increasing the quantity of gasoline being produced rather than improving its quality. With regard to the high costs of on-board hydrogen storage, Bill Reinert, national manager for Toyota's advanced technology group, was quoted as saying: "I'm less than hopeful about reducing costs sufficiently and I'm quite pessimistic about solving hydrogen storage issues . . . high volume production could be 25 years off" (ibid.: 52). Yet both government and business are investing far less than is needed to deal with this problem. In January 2005, for example, General Motors and the US government's Sandia National Laboratories launched a programme to develop metal hydride storage systems based on sodium aluminium hydride. Only US$10 million is to be invested in this research over a four-year period: this is too little, and perhaps even too late. Delft University and the Colorado School of Mines have already developed a lab version of a hydrogen hydrate storage system in which hydrogen is trapped in molecular-size cavities in ice and a "promoter" chemical, tetrahydrofuran, stabilizes the gas hydrate under far less extreme pressure than is currently the case: 1,450 versus 36,000 psi. Theoretically this should make possible the storage of 6 kg of hydrogen in about 120 kg (120 litres) of water, increasing the range of fuel-cell vehicles to that of gasoline-powered internal-combustion engines and substantially reducing costs (ibid.: 55).

There are also a number of new technologies under development that appear to have the potential to cut costs dramatically. Hitachi Maxwell, for example:

used technology for synthesizing ultra-small particulate magnets – technology created during the company's development of magnetic tape – to uniformly deposit oxide particles a mere one nanometer in diameter on a substrate . . . when the deposited particles reach one nanometer in size, their reactivity increases dramatically. Consequently, if this new catalytic material is used in combination with platinum as the catalyst in a fuel cell, for example, the catalyst performs just as well as a pure platinum catalyst even though the amount of rare metal used has been decreased. (Japan Journal, 2005)

Poly Fuel, a small company in Mountain View, California, announced the creation of a hydrocarbon polymer membrane that reportedly cut in half the price of DuPont's Nafion material, while 3M has boosted catalytic activity by creating nano-textured membrane surfaces covered with tiny columns (Ashley, 2005: 53–54).

Building consensus/setting priorities

While clearly there remain many problems to be solved in producing, distributing and storing hydrogen, it is unclear whether any of these requires a major scientific breakthrough.38 If they are more like the "knocking" problem that reduced the power and reliability of the internal-combustion engine early in its history, it should be possible to refocus research efforts on the issue of consistency in the production of high-grade hydrogen. As pure hydrogen was not required for earlier industrial uses, a change in the habits and practices of hydrogen producers will be needed.

What we find, however, is that although research on hydrogen fuel and fuelling problems is still continuing and research funding is once again on the rise, the focus on fuels in a period of dramatically high oil prices is being redefined away from critical hydrogen issues and towards short-and medium-term considerations by both business and government. Research funding for "cleaner" hydrocarbon-based fuels has thus increased, and investments in natural gas production and infrastructure are growing. To compensate for the relatively limited contribution of these initiatives to overall pollution abatement, the range of acceptable fuels has been widened to include alternatives, such as ethanol and biodiesel, for use in modified internal-combustion engines, making the ICE engine less environmentally damaging. The need to reduce pollutants in the environment further also led to the introduction of government-funded incentives to stimulate the purchase of hybrid vehicles; but neither higher taxes on gasoline nor higher insurance premiums on SUVs were introduced as part of a coherent package of incentives that might change existing consumption patterns. Instead, competitive pressures are reinforcing efforts to extend traditional technologies by stimulating the rapid entry of newcomers into the market for hybrid cars and focusing attention on the need to bring out hybrid SUVs with the performance characteristics of the originals. As auto companies move down this alternative trajectory, they make it easier for consumers to hold on to old habits and practices and salve their consciences by buying green.

In terms of priority setting in both the North and the South, this review of options raises a number of critical questions.39 Should we embark on building hydrogen fuelling stations now, or should we wait until new complementary reforming or electrolysing technologies are available to use the natural gas, water and electricity that already come into homes and workplaces, thus saving considerably on investments in infrastructure? Who will make such decisions, and how will they be made? If we do take this giant step forward into a hydrogen economy, what kinds of hydrogen storage systems, especially in vehicles, would be socially acceptable? One possible future scenario involves research currently under way on the absorption of hydrogen into solid compounds such as metal hydrides or in nanotubes.40 But these technologies are not yet proven. Should we thus adopt an intermediary technology; and if we do attempt to reduce levels of pollution by using methanol or reformed gasoline, would this slow down the pace of realizing the ultimate goal of a hydrogen economy? And how would developing countries deal with the set of sequential new technological investments this would require?

Historically, moreover, rapid movement down the cost curve through standardization and the creation of economies of scale did not take place until a dominant design had emerged. Will the fuel-cell car be different? There are some indications that it will differ. For fuel-cell manufacturers, for example, dual-use technology – transport and stationary power – has been essential. Will it be easier to set standards and develop a dominant design for stationary power based on hydrogen fuel cells, and should this be pursued more vigorously than the application of hydrogen fuel cells in the transport sector? How would this reflect needs and priorities in the developing world?

With respect to fuel cells and the transport sector, however, we have far too little information on costs to evaluate this process. This gives rise to still other questions.

If the future is still "hydrogen" should we wait until all pieces of the system are in place, or do environmental considerations force us to take action now? If the latter, how might we build a path today that does not compromise change in the future? With regard to the transport sector, can multiple solutions – gasoline, methanol and hydrogen, for example – coexist and be developed without wasteful investment? This is a problem of significant importance for current choices in the developing world. Would investment in gasoline reform in the North keep the market for petroleum buoyant and reduce incentives for change?

This book explores the many trade-offs to be considered in dealing with the above questions. In making choices in both North and South, three of these appear to be of particular importance in the country cases studied here:

• the cost and complexity of short-term versus longer-term horizons with respect to emissions reduction, energy security and infrastructure investment

• the impact of these choices on industry structure, competition and prices

• the incentives and constraints that present choices will create for capacity building which bridges the gap between development and global change, and for innovation in the future.

Policies will clearly have a major impact in shaping the parameters within which the choices between trade-offs will be made. Given the social, economic and environmental consequences that flow from each of these choices, dialogue between stakeholders will be needed to build awareness of the potential consequences. A dialogue of sorts has developed within the European Union as it builds its hydrogen platform, but the dominant voices in the dialogue are reluctant to champion radical change. For this to take place, governments in the North will have to take a more proactive stance in "promoting the new" and create the kind of "public knowledge goods" that have largely been missing in the rapid development of alliances and high rate of patenting. A better understanding of costs, standardized testing procedures and vetted empirical studies are the foundations upon which serious social reflection and consensus building can be created.

Notes

1. Carlota Perez (2002: 30) divides this phase into two: the full constellation of new industries, technology systems and infrastructure, followed by the full expansion of innovation and market potential deriving from the technological revolution.

2. Michael Best (2001: 133) has distinguished four technological periods characterized by diminishing critical size dimensions: the mechanical, electrical, electronic and nano-levels (ranging from 10 to 10–12 metres, megahertz to terahertz/sec or in photonics 10–12 bits/sec).

3. For a more thorough discussion of new-wave technologies and their impact on technological catch-up in developing countries, see Mytelka (2004).

4. The remainder of this section draws upon Mytelka (2003).

5. Indeed, "we routinely fly in airplanes the optimal designs of which are achieved by fairly ad hoc, trial-and-error processes because there are no theories of turbulence or compressibility adequate to determine optimal configurations in advance. Extensive testing and modification based upon test results are still required" (Rosenberg, 1982: 143).

6. The chemically based pharmaceutical industry was a latecomer in this process; much of the attention of biochemists and microbiologists in the 1920s and 1930s was, in fact, focused on hydrocarbon chemistry in the petroleum sector, and it was there that most innovations took place. Catalytic cracking in a fully continuous flow process, for example, drew together five of the major oil companies, two process technology firms and the set of German chemical companies which formed the IG Farben cartel into a collaborative R&D project that Chris Freeman (1982: 62) describes as "one of the largest single programmes before the atom bomb".

7. All countries that are members of the World Trade Organization (WTO) are obliged to implement its Trade Related Aspects of Intellectual Property (TRIPS) agreement, with only a few years' grace for developing countries.

8. See, for example, the large number of such intermediaries created by the European Commission to stimulate research, innovation and competitiveness of European industries growing out of new-wave technologies (Mytelka, 2001).

9. Eventually it might be possible to develop a formal model of this approach. For the moment, however, it is used heuristically as the analytical framework in which to analyse the factors and forces affecting the pace at which technological change is taking place in the development and diffusion of fuel-cell technology in the automotive industry.

10. These included synchronized transmission for easier gear shifting, air-cooled engines, the Ricardo cylinder head, the mechanical fuel pump and the automatic choke.

11. Over the next decade, the General Motors Corporation (GM) took over the Olds Motor Company, the Oakland Motor Company, Cadillac and the Chevrolet Motor Company. It integrated backwards with the acquisition of Fischer Body and created an in-house research group (Chandler, 1964).

12. In the early 1920s Harry Ricardo had led a study that identified tetraethyl lead as a suppressant of knocking. His engineering consultancy firm also noted, as early as 1923, that ethyl alcohol was in some respects a better fuel and could be produced using renewable resources, thus solving the problem of future gasoline shortages as well as reducing pollution. See Compton (1982).

13. This was done through the US policy of federal aid to the states, initiated in 1916, and through annual registration fees and taxes on motor vehicles and motor fuel.

14. The impact of this on the ability of the "big three" US firms to compete with the flexible production systems introduced by the Japanese became the subject of considerable attention in the 1980s, and led to the establishment of the CAMI (GM-Suzuki) and NUMMI (GM-Toyota) plants and the link between Ford and Mazda (Womak, Jones and Roos, 1990).

15. Most of these systems were first innovated in the late 1920s in mechanical form and later updated electronically.

16. Nafion was a polymer developed by DuPont and used in chemical processes such as industrial-scale electrolysis of sodium chloride to produce chlorine and chlor-alkali (Yarime, 2003).

17. Initially this involved working with Dow Chemicals on a membrane it was developing, and in the 1990s creating an in-house team to develop a proprietary membrane of its own.

18. For a detailed analysis of patenting on electric, hybrid and fuel-cell technologies by Japanese automobile manufacturers, see chapter 10 in this volume.

19. "The Autonomy", GM's concept car presented in Detroit in 2002, was highly innovative in its design and showed the large number of new possibilities if "form follows function"; see The Economist (2002).

20. Other alliances, such as that between Hyundai and its partners, are too small to affect this process and have tended to ally with one or the other of these two broad alliances in dealing with these major choices.

21. See the Ballard Power Systems website at www.ballard.com.

22. Statement by Roberto Cordara, president and CEO, on the Nuvera website at www.nuvera.com.

23. A close linkage between fuel and engine type had also characterized the internal-combustion engine, but the development of the flex-fuel engine in Brazil and its diffusion have made it possible to refuel with a wide range of alternatives – gasoline, ethanol, other bio-based fuels and blends.

24. Others, such as the hydrogen-on-demand Natrium fuel-cell vehicle developed by DaimlerChrysler using borax, were also in the pipeline.

25. Step on the throttle and a 20 per cent solution of sodium borohydride "is pumped past a catalyst made of ruthenium. This strips the hydrogen out of the compound and feeds it to the vehicle's fuel cell stack. The used slurry is then stored until it is time to refuel, when it is pumped out while a fresh batch is loaded" (The Economist, 2002). The reformer was built by Millennium Cell. The hydrogen-on-demand process eliminates onboard hydrogen storage and reduces dependency on fossil fuels. To the extent that it is widely available, it improves fuel security.

26. See www.gm.com/company/gmability/adv_tech/700-partners/index.html.

27. For an interesting business perspective to this problem, see chapter 4 in this volume.

28. Chapter 9 in this volume presents the results of this programme and current Icelandic policies with regard to the utilization of hydrogen in the transport sector.

29. Italy, Argentina, New Zealand, the Russian Federation and the United States (International Energy Agency, 1999; table 5.4 in this volume).

30. For a broader discussion of such choices see chapter 5 in this volume.

31. Although "the energy content of a unit volume of methanol is half that of gasoline, the fuel-cell car would be more than twice as efficient" (Williams, 1994: 23).

32. This is a particularly important consideration in a post-9/11 world or where the stabilization of oil prices depends on Saudi Arabia's ability to increase oil output – something that is now being put into question.

33. Suggestions that this be carried out along the Californian coast or in the Arctic have been under fire until recently.

34. For a closer look at Toyota and other Japanese auto-manufacturer strategies, see chapter 10 in this volume.

35. Toyota was already a major player in the California auto market when the California Air Resources Board approved new emission standards requiring that 2 per cent of the vehicles offered for sale in the state in 1998 would have to be zero-emission, with this rising to 10 per cent by 2003.

36. On 24 December 2002 the Wall St Journal reported that GM and Toyota had decided to "gear up to produce hybrid gasoline-and-electric versions of sport utility vehicles and pick up trucks". Clearly GM is still running scared after earlier efforts to produce and sell electric vehicles.

37. As of May 2005 the bill which would have authorized these funds had still not left the Senate for a conference between Senate and House of Representatives to harmonize the two versions of this bill (White House, 2005).

38. For other views on this issue see chapters 2 and 3 in this volume.

39. Many of these issues are explicitly discussed in chapters 2–4 and 13 in this volume.

40. Based on a discovery by Iijima, a Japanese scientist at NEC, and published in Nature in 1991.

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2
The Japanese strategy for R&D on fuel-cell technology and on-road verification test of fuel-cell vehicles

Hisashi Ishitani and Yasuko Baba

Introduction

The research, development and demonstration (RD&D) activities of PEM-type fuel cells and their applications in both stationary co-generation systems (the term co-generation systems is used to mean combined heat and power systems, usually abbreviated as CHP) and fuel-cell vehicles (FCVs) have been accelerated in the last five years in Japan, as a result of strong governmental interest and support as well as close cooperation between the government and related industries. These activities were initiated by a government committee, the Policy Study Group on Fuel Cell Commercialization, organized within the Ministry of Economy, Trade and Industry (METI) at the end of 1999. Based on studies in this committee, and its intermediate report issued in January 2001, all RD&D activities related to PEM fuel cells have been carried out along a recommended framework. The report clearly identified a timeline for long-term RD&D procedures and the roles of key players – government, industry and academia – in different development stages, i.e. basic preparation and verification, market initialization and take-off and diffusion in the market.

According to the recommendations of the study group, a new organization, the Fuel Cell Conference of Japan (FCCJ), was created by relevant industries in March 2001, and various programmes or activities have been planned and carried out through related organizations. Among them, verification tests of FCVs and FC co-generation systems in real-use conditions started in 2002 and continued until March 2006. The outputs of these verification tests were analysed and results will be reflected in future plans to promote more market-oriented R&D together with basic research work to improve the reliability and lifetime of FC stacks.

This chapter begins by reporting on the key messages of committee reports, including the background, objectives and incentives of FC RD&D activities in Japan, the supporting organizations and stakeholder roles. It then outlines the FCV demonstration programme, including hydrogen supply stations and current demonstration results.

Governmental initiatives and strategy for RD&D in FC technology

Worldwide enthusiastic promotion of RD&D in fuel-cell technologies is driven by issues related to road vehicles:

• local and regional environmental issues, especially air pollution by emissions

• global warming by CO2 emissions

• energy security issues, dependence on oil resources and energy conservation

• severe international competition to keep the R&D initiative in PEMFC technology and its applications.

Among these drivers, there are some differences between regions. In Japan the last point – the need to build internationally competitive industries, especially in car and electric manufacturing – is important and draws the attention of politicians and government.

Prior to governmental actions, Japanese car makers had been developing and demonstrating various FCVs since 1996 (fig. 2.1), competing vigorously with the aggressive efforts of DaimlerChrysler. Stimulated by the worldwide interest in and activities related to FCVs, in December 1999 METI set up the Policy Study Group on FC Commercialization as an advisory committee on PEMFCs for automotive and stationary use for the director-general of the Agency of Natural Resources and Energy.

The group consists of representatives from universities, automobile, electric and electronic manufacturing industries, NGOs, the media, energy industries (electricity and gas utilities), industrial associations, related non-profit organizations, national institutes and membrane manufacturers. The objectives of the committee were identified as:

• to understand the current state of PEMFCs and its significance as a future technology

• to identify issues or barriers in promotion or commercialization

Figure 2.1 Trends in FCV development in Japan

• to recommend strategy to overcome those issues, and propose RD&D policy for FCVs and FCs to the government.

After a year of intensive discussions and consulting with various related industries and organizations, including the US Department of Energy (DOE), DaimlerChrysler, General Motors and Ballard, the committee issued its intermediate report in January 2001, including a strategy for FC R&D in Japan. The report (METI, 2001) covers the following areas:

• merits and importance of FC realization and promotion, current status of technology level and its understanding, relevant industries (domestic and overseas) and governmental actions in the United States

• technical, economic and institutional barriers

• strategy to overcome those issues: identifying the role of government, industries and research areas, RD&D plans by development phases, short term to long term, and strategy by issue areas.

In spite of high expectations for FC commercialization, the actual technical and economic issues and barriers to its realization and promotion were well understood and identified in the report. These were summarized as:

• improvement of performance in the FC module

• cost reductions

• refuelling and supply systems (infrastructure)

• resource limitation and disposal

• software infrastructure, e.g. codes, standards and regulations

• social acceptance

• education of FC engineers.

For each category a detailed study was made and presented in the report, but the first three were most critical. As for required R&D, four areas were identified (fig. 2.2), among which the first two were considered most critical. These items are continually reviewed in the committee, and the results are reflected in the R&D support budget.

Naturally, the current high cost of FCs is regarded as one of the most serious barriers to commercialization, together with the required technical performance improvements (fig. 2.2) to narrow the gap between the current technology level and future targets (fig. 2.4). The committee also clarified the cost target for FC systems in FCVs to be competitive with conventional gasoline IC engines is ¥5,000/kW, which matches the US DOE target ($45/kW).1 This implies the necessity for further cost reductions by a factor of 100 times compared to the current cost. As for stationary use, the target cost is high compared to transport, although the required lifetime for stationary FCs is much longer. The target was estimated at ¥100,000 for 1 kW of output, which is a common target around

Figure 2.2 Targets of technology R&D of FCVs

the world. This implies a further cost reduction by a factor of 10, as well as further performance improvements in efficiency, reliability and longer lifetime.

After reviewing the current status, the METI (2001) report proposed a strategy to overcome barriers to FC commercialization. The strategy clearly identified the role of each key player, i.e. industry, government and research. It also identified short-term and long-term scenarios and three development phases (fig. 2.3). The approach can be summarized as:

• scenario setting for FC realization and RD&D planning through development phases and a short- to long-term strategy

• base preparation and technology verification (until 2005)

• initial introduction (2005–2010)

• penetration (after 2010)

• role of government, industry and research

– industry: R&D for commercial products, market realization, establishment of a fuel supply infrastructure in the penetration phase

– government and institutes: basic research, basic R&D, support for the establishment of new standards and regulations, support for infrastructure arrangements in the initial introduction phase

– research and academic area: education, basic R&D.

Figure 2.3 Scenario for commercialization and promotion of FCVs

As shown in figure 2.3, the first phase is regarded as the period for establishing the regulatory and technical R&D base, and demonstrating key technologies. The following activities were expected:

• establishment of test and evaluation methods for FC safety and reliability

• standardization and overview of existing regulations for FCVs

• education to strengthen human resources

• standardization of fuels

• fleet tests to verify technical and economic issues, and demonstration for public acceptance

• evaluation of well-to-wheel efficiencies and environmental impacts for available fuel paths

• fleet tests and demonstration of hydrogen stations.

Finally, the committee went so far as to set an "expected target of market introduction", shown in table 2.1 (accumulated numbers), with the note that "this is an expected target to realize positive PEMFC market

Figure 2.4 Target of FCV system performance and timing

introduction in appropriate time". These very challenging and ambitious numbers became famous worldwide, stimulating a wide range of people who were interested in these technologies. However, it was well recognized that the target was quite ambitious and would be continually reviewed according to the status of development. The target numbers were authorized by the Energy Council, and introduced into national energy saving and CO2 reduction guidelines. The required performance levels for cells for FCVs to be competitive with conventional ICE vehicles are summarized in figure 2.4.

FCCJ activities by industry

In the METI (2001) report, the committee recommended establishing a new inter-industrial coordinating organization, the Fuel Cell Conference of Japan. This was founded in March 2001 by related industries, and became very active in carrying out the identified role of industry in promoting FC commercialization for both FCVs and stationary use. The objectives of the FCCJ are to identify specific issues in the commercialization and widespread use of FCs, submit policy proposals to the

Figure 2.5 Relation and position of FCCJ

government to resolve the issues, and thus to contribute to FC commercialization and promotion, establishing FC industries in Japan.

Companies and industrial organizations active in developing FC technologies (e.g. fuel-cell, membrane and catalyst manufacturers, gas and electric utilities, automotive makers and petroleum companies) showed interest in joining the FCCJ. However, its scope was restricted to direct-hydrogen PEMFCs. DMFCs (direct-methanol FCs) were excluded because mobile DMFC was regarded as being almost in the market introduction phase.

Since then the FCCJ has kept in close and frequent contact with METI and its related bodies, including NEDO (the New Energy and Industrial Technology Development Organization), but has accepted no financial assistance from the government. The position and relation of the FCCJ with regard to METI and its subsidiary organizations are summarized in figure 2.5. The FCCJ works as a coordination body between activities and interests of both government and industry. The number of members of the FCCJ has increased rapidly, reflecting the strong interests and expectations of related industries (table 2.2).

Two working groups, the Technological Development Planning Working Group and the Commercialization and Public Acceptance Working Group, were organized within the FCCJ and work to propose, assist

and support government actions, reflecting industry's requests to the government.

Technological Development Planning Working Group

Major achievements of this working group include:

• consolidated summarized requests to the national annual R&D budget regarding FCs and FCVs

• developed a roadmap for R&D of FC-related technologies, and reviewed constantly

• identified necessary conditions for FC promotion and commercialization

• investigated the foreign situation, especially US R&D activities

• communicated with outside organizations, e.g. the US DOE and the state of California.

An example of the roadmap for FCV technology is shown in figure 2.6, which is distributed by the policy study group.

Commercialization and Public Acceptance Working Group

This working group cooperated with outside organizations, and especially supported government tasks to identify and clear concerns in government-reviewed codes and regulations related to FC and FCV commercialization. The group consists of four subgroups: codes and standards, regulation and control, fuel selection and demonstration cooperation. Cooperating with government, the FCCJ regulation and control subgroup identified 28 concerns to be defined and reviewed by corresponding agencies. As a result, the government decided to review the identified regulations and solve the problems, by either revision or modification of interpretation of the regulations, by the end of 2003 in order to prepare for FCV commercial use (via a leasing system) from 2005,

Figure 2.6 Roadmap for R&D of FCV technology

the METI FCV and hydrogen station demonstration project from 2003 and the initial market introduction of small co-generation units using FC stacks from 2005. This WG has also cooperated with actual operational organizations in verification tests continuously over the last five years.

Major outcomes of the working group can be summarized as follows.

• Requesting the government to review regulations that may hinder FCV commercialization.

– Submission to the vice ministers meeting (02/3.29).

– Submission to "request to review 6 articles, 28 items related to FCV promotion" to the governmental coordination meetings across ministries regarding FCs.

– In response to this request, the cabinet secretary announced the review programme.

– Cooperation to arrange industries' organization to respond to the review.

• Cooperating with FC and FCV verification (fleet) tests, and participating in actual planning and execution.

– Cooperate in executing organizations by sending committee members.

– Submit base plan for the verification tests.

– Propose framework for the next phase verification tests after 2006.

• Cooperating with international standardization activities.

– Participation in ICE/TC105, ISO/TC197 and ISO/TC22/SC21.

– Coordinating the organizations (JEVA, ENAA and JEMA) acting as mirror committees to these standardization bodies within Japan.

• Investigating well-to-wheel energy efficiencies of related fuel chains.

After five years of activity, the FCCJ finished its first term in March 2006 and decided to continue further FC promotion activities for another five years as the second phase. The group reviewed past activities and identified remaining R&D themes and further activities to be stressed.

Governmental activities

Along with the promotion of activities on the industry side, the government has also promoted the importance of RD&D in FC technologies to politicians. The prime minister of Japan showed deep interest and support for such activities. Responding to the strong initiative by the prime minister, the Fuel Cell Project Team of Senior Vice Ministers was formed in May 2002, consisting of three vice ministers from METI, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) and the Ministry of Environment (MOE). The project team recommended the following expansion measures:

• basic scientific R&D

• demonstration

• public acceptance

• regulations and standards

• incentives for introduction.

The ministries responsible tried to respond to these recommendations, cooperating with industry as described above. Most of the tasks were finished by, or being continued at, the end of the 2005 financial year.

Among these tasks, review and revision of standards and regulations were regarded as the most urgent. A director-level task force from six ministries was formed in May 2002, and in October it released a roadmap for reviewing 28 regulations by 2005. It pointed out typical concerns and identified government agencies in charge (abbreviations are spelled out in the list of acronyms at the front of this volume), which are summarized as follows.

• High-pressure gas storage (METI/NISA/ISD)

– gaseous hydrogen (GH) and liquid hydrogen (LH) tanks for vehicles and refuelling stations

– valves and regulators for these applications.

• Vehicle certification processes (MLIT/RTB)

– vehicle certification for safety, emissions and fuel economy.

• Restricted passage and protection of tunnels (MLIT/RB).

• H2 storage capacity in residential areas (MLIT/HB).

• Fire hazards/protective measures at refuelling stations and parking garages (FDMA).

• Safe use of small stationary units at residences (FDMA).

• Safe connection with power grids (METI/NISA/EPSD).

Industry was also made responsible for providing technical data for "technical validation for government review", and the corresponding FCCJ WG fully cooperated with this request. As a result, three areas and their responsible organizations were identified and allocated to solve those concerns.

• New technical standards for tanks used at above 35 MPa (JARI, JAMA, etc.).

• New technical standards for hydrogen refuelling stations (PEC, PAJ, JGA, etc.).

• New technical standards for safe installment and operation of small powered FC unit(s) at residential houses (JIA, JEMA, JGA, etc.).

Subsequently, the government established the following work scheme and review schedule.

• NEDO five-year project – Safe Production and Utilization of Hydrogen FY2003: ¥4.55 billion (US$39 million)

– safety requirements on production, storage, transport and supply systems for vehicles and infrastructures (GH and LH)

– long-term effects of hydrogen on materials

– development of new technologies which make the use of hydrogen safer and more effective.

• Technical data derived from the above project were compiled in 2003 in time for the review process by government agencies in 2004.

• Some other agencies established their own projects outside NEDO.

Apart from codes and regulations within Japan, participation in international standardization related to hydrogen and FCV safety and quality/performance was also regarded as important to ensure international consistency in future technology. The FCCJ has coordinated with the JEVA, ENAA and JEMA, which are acting as member bodies of the International Electrotechnical Commission (IEC)/ISO standardization activities (fig. 2.7). This coordination is considered especially necessary to maintain the consistency of Japanese technology among the different ISO technical committees.

As for RD&D activities, METI, responding to requests from industry through the FCCJ, allocated an increased budget from 2002 to 2005; an exception among a general decrease in the total budget. The total budgets (in billions) for RD&D activities from 2002 were ¥18.5 (2002), ¥30.7 (2003), ¥32.9 (2004), ¥35.4 (2005) and ¥35.9 (2006), reflecting strong expectations and interest in FCV technology and commercialization.

Figure 2.7 Scheme for international C&S activities

Figure 2.8 Scheme of PEFC system demonstration project

FC and FCV demonstration activities

Outline and stationary FC demonstration

As for FC and FCV demonstration, the government started verification tests for both stationary FC systems and FCVs with hydrogen refuelling stations from 2002. The METI PEFC Demonstration Project was allocated 10 per cent of the total budget for FC-related R&D, primarily to support installation of infrastructure and FC stack systems. The scheme of the project is shown in figure 2.8; the part related to FCV testing with hydrogen infrastructure was named the Japan Hydrogen and Fuel Cell project (JHFC). The JHFC was originally a three-year programme that started in 2002, but it was extended in 2005 and has only recently finished.

The general objectives of the JHFC project were to:

• prove validity and soundness of the PEMFC technologies selected

• evaluate total energy efficiency and fuel versatility

• acquire data for codes, standards and regulations

• identify issues in real-use conditions and in operation

• increase public awareness of FC technologies.

Although stationary FC co-generation systems will come into the market prior to FCVs due to higher cost allowance, there are severer requirements for durability and more complex reformer systems, as well as competition with alternative co-generation systems. In spite of these difficulties, gas companies eagerly promoted a demonstration programme, cooperating with several FC stack manufacturers. In the first three-year demonstration programme, 33 FC co-generation systems were installed and evaluated in real-use conditions, and improved continuously by the manufacturers. The scope is summarized as:

• 1 kW FC unit for residential use

• 5 kW FC unit for business use

• sites spread all over Japan, including Hokkaido and Kyushu Island

• all units integrated into existing power grids without reverse flow

• unit operating information linked to central data-processing centre.

Among the 33 systems, two units were operated on pure hydrogen and naturally showed better performance at sites. All others have reformers, operating on various fuels. It was interesting that within two years overall FC system efficiency was improved by 15 per cent on average, and utilization of electricity and hot water was also improved by a similar level. The results showed that even with rather low heat demand in the Japanese climate, the FC co-generation system could reduce resource consumption and CO2 emissions compared with conventional alternative systems. Durability has also much improved. After this experience, the government started a large-scale stationary fuel-cell demonstration project to supply subsidies for FC system purchases from 2005. In this project, within only one year more than 500 units had been installed, and it seems the diffusion phase of this technology has just started in this area.

JHFC FCV demonstration project

The JHFC project, the FCV and hydrogen infrastructure part of the programme, has drawn more public attention due to the popularity and expectation of FCVs and hydrogen infrastructures. The goals of the project were to:

• show the energy-saving effect (thus CO2 reduction and energy efficiency) of FCVs and hydrogen stations

• show how FCVs and hydrogen stations have a beneficial effect on the environment

• acquire useful data to develop codes, standards, regulations and laws for the safety and other issues of FCVs and hydrogen stations

• raise public awareness regarding FCVs and hydrogen stations

• clarify issues to be solved to promote the widespread use of FCVs and hydrogen stations.

The major features of the project were:

• extensive FCV demonstration study in Japan

• concurrent operational study of hydrogen stations with different types of fuels and different reforming methods

• METI subsidy for garages and hydrogen stations

• project management by a non-profit public association, acquiring test results from participants.

Figure 2.9 Car makers and FCVs participating in JHFC

Six car makers participated from the initial year, and two others and one bus manufacturer joined after 2003, as shown in figure 2.9. They all supplied test FCVs to the project, which are used to verify fuel economy regularly on assigned routes, and sometimes exhibited for demonstration events. The Japan Automotive Research Institute (JARI) organized a working group of car makers to plan and execute vehicle tests, data analysis and vehicle performance evaluation. In addition one bus was operated as a city bus on a normal service line in Tokyo for 15 months, and eight buses were operated daily during the Aichi Expo to connect two sites for six months in 2005. These demonstrations very effectively showed the new technology to the public.

From the initial year, 2002, several oil and fuel retail companies operated hydrogen refuelling stations: Cosmo Oil (gasoline reforming), Nippon Oil (naphtha reforming), Showa Shell Sekiyu and Iwatani International (LH storage), Japan Air Gases (methanol reforming), Nippon Sanso and Tokyo Gas (LPG reforming) and Nippon Steel Corporation (LH production from COG). Kurita, Shinanen and Ito-Chu Ene (alkaline electrolysis), Idemitsu (kerosene reforming), Pubcock Hitachi (city gas reforming) and Tsurumi Soda (off-site H2 storage) joined in 2003. Further, in 2005 two hydrogen stations were built by Toho Gas and Nippon Steel, which participated in the JHFC for bus operation at the Aichi Expo. One of these stations reforms hydrogen from city gas on site. The other is operated by a steel company, providing pure hydrogen separated from COG (coke-oven gas) by PSA (pressure swing adsorption) at the steel plant, and carried by compressed hydrogen containers. These two systems were selected as the final station constructions in the JHFC as potentially efficient hydrogen-producing paths under Japanese conditions. As shown in figure 2.10, 10 hydrogen refuelling stations were built around the western part of Tokyo, intentionally focusing on small areas considered important in future commercialization.

Major specifications of supplied H2 are:

• gas composition: H2 > 99:99 per cent, CO < 1 ppm, O2 < 2 ppm, CO2 < 1 ppm, N2 < 50 ppm, HC < 1 ppm

• supply pressure: high pressure 35 MPa; low pressure 25 MPa

• capacity: Type A – 5 cars in series (35 Nm3 × 5 = 175 Nm3); Type B – 5 cars a day (35 Nm3/vehicle); Type C – 1 bus a day (175 Nm3/bus).

According to the objectives of the JHFC, the following data were collected from test cars throughout the project.

• Fuel economy – test conditions, drive pattern (speed, range etc.) and refuelling (station, quantity, time, etc.) records.

• Driving performance – reliability, acceleration, starting ability and response and maintenance.

• Environmental impact – noise, H2 leakage and emissions.

• Reference for standards – H2 safety issues.

These data were carefully investigated and evaluated, not only by individual car makers but within JHFC working groups. The results were shared by all participants, as the vehicles were still in the test and development phase and common problems and responses may be helpful for further R&D.

In the test period, total run distance of the test passenger cars and hydrogen consumption reached over 84,000 km and 1,390 kg respectively. For the bus operation at the Aichi Expo site, more than 1 million people experienced the high performance of FC buses, and the total run distance was over 127,000 km, consuming 11.4 tonnes of hydrogen.

At the end of 2005 data were summarized and evaluation results were openly reported to the public. During the period, energy consumptions of other types of vehicles, i.e. internal-combustion-engine vehicles (ICEVs) and hybrid electric vehicles (HEVs), with equivalent grades were also evaluated for comparison. As the energy consumption of a vehicle depends heavily on drive cycle, fuel economies for every five minutes were evaluated for all running tests, assuming that average speeds represent primary driving conditions. Figure 2.11 shows comparison results, which verify that the fuel economy of FCVs is better than that of equivalent conventional vehicles for most speed ranges. Impacts of air conditioning and performance gaps among vehicles also clarified the technological potential of FCVs. It was interesting that there were significant improvements in average fuel economy in the last two years of evaluation even

Figure 2.10 JHFC hydrogen stations

Figure 2.11 Fuel economy of various types of vehicles for the same drive conditions

though the top-class performance remained almost the same. This suggests that even in one year the technology gap was reduced significantly, and that vehicle system technology may achieve levels acceptable to the market. However, reliability, durability and cost are not mentioned here. This kind of quantitative evaluation for the most advanced FC technology is quite rare, and will contribute to further cooperation in R&D among stakeholders. However, this analysis also showed that the technology is still in the pre-market phase, and cooperation is required more than competition to realize acceptable FCVs.

Well-to-wheel analysis

The actual efficiency of hydrogen reforming from various hydrocarbon fuels is also evaluated in the JHFC project, although some stations cannot reach the target efficiency due to insufficient demand from FCVs. For technology evaluation, potential performance of existing technology was also studied. These evaluation results were also reported openly in March 2006. Overall well-to-wheel (WtW) energy resource consumption and CO2 emissions for various alternative vehicles were studied in an overall efficiency study group organized in the JHFC in order to give unbiased and transparent information to judge the current status, significance and/or effects of the technology. The mandate of the study was to evaluate WtW energy efficiency and CO2 emissions for various fuel paths and drive trains, focusing on hydrogen FCVs, under Japanese conditions, especially those of well-to-tank (WtT), reflecting data and knowledge obtained through the JHFC project.

It was also intended to provide a reliable and authorized database for such WtW analysis in Japan, bringing together all available expertise and knowledge. Members of the study group came from universities, research institutes, related industry associations (cars, gas, electric power, oil), the FCCJ, the World Business Council for Sustainable Development (WBCSD) and the JHFC, as well as researchers experienced in life-cycle assessment (LCA), so that the results could act as firm and acceptable standards for Japanese WtW research. Over three years, available reference data, especially those for WtT paths, were collected from published materials or actual study reports open to the public, and evaluated. The resultant data were summarized in the JHFC database. And together with the TtW (tank-to-wheel) investigation and test data, a final WtW analysis was made in March 2006. The study group hosted a workshop where results were discussed in detail with experts from the United States and the European Union.

Figure 2.12 shows an example of WtW energy consumption and CO 2 emissions for FCVs (with various fuel paths) and conventional ICEVs for a Japanese drive cycle by a compact passenger car. All WtT process

Figure 2.12 An example of results of well-to-wheel analysis

Figure 2.13 Comparison of ICEVs and FCVs by well-to-wheel analysis

data are based on the reference data, and compared with verified test data in the analysis. Triangles and crosses in the graph show corresponding results using actual and expected data by the current technology performance. Although there are gaps in some fuel paths, verified data generally match well, and this analysis was confirmed by the JHFC data.

Figure 2.13 shows examples of WtW paths for energy efficiency. From the figure, it can be concluded that even using hydrocarbon fossil fuels to produce hydrogen, some FCVs will be more efficient than any other alternative vehicles existing or under consideration, including diesel hybrid vehicles. However, in this figure target FC stack efficiency is assumed as 60 per cent – a 10-point gap from the current status. This means that further efficiency improvements are required to justify the technology, but the results also show that the target value is reasonable.

Remaining issues and further R&D plans

With these intensive activities to verify and promote FC technology over the past five years, it has been widely recognized that fuel cells are still in the developing phase and may need more time to be competitive in the market. However, it is again verified that this technology can be a very promising long-term option for CO2 reduction and energy conservation for both the transportation sector and household energy use. It is also confirmed that the most critical issues to be pursued for the moment are hydrogen storage and durability and cost reductions in FC stacks. As for hydrogen infrastructure, i.e. hydrogen production and distribution, there are many problems to be solved, but compared with the major issues in FC stacks the technical hurdles in this area are comparatively low, except for cost reductions and hydrogen storage materials.

With those considerations, the government asked industry to pay attention to basic research, "back to the basics", with a focus on the basic mechanisms in the deterioration of the membrane or catalyst within FC stacks during operation. METI established two national laboratories, the Polymer Electrolyte Fuel Cell Cutting-Edge Research Center (known as FC3) and the Laboratory for Hydrogen Material R&D; METI intends to maintain the present size of its RD&D budget for FC-related technologies, and some of this will be put towards these two national laboratories through NEDO. The FCCJ has also recognized basic issues, and organized a special committee in 2005 to identify basic R&D areas to be solved over the next five years. The committee established several working groups with expertise from member companies, and each group discussed every issue in detail and clarified quantitative targets required for further R&D or commercialization. Issues included:

• polymer electrolytes, MEA (membrane electrode assembly) and catalysts, and specification for automotive use

• on-board hydrogen storage, practical targets for specifications and a roadmap to attain them

• on-board materials for hydrogen treatment: brittle failure mechanisms, R&D for materials and durable and inexpensive equipment regarding hydrogen tanks and piping etc.

• R&D for polymer electrolytes and MEA for stationary-use FCs

• cost reductions and reliability improvements for FC cogeneration systems

• hydrogen production, distribution, reliability, safety and cost reductions.

Results of these activities reflect industry's needs for further R&D for commercialization, and in some cases quantitative targets for commercialization have been identified.

As for demonstration projects, a further plan called JHFC2 kicked off in May 2006. Efforts will build on the stations created in the past JHFC, but in order to expand public acceptance in areas outside Tokyo it is now planned to build new hydrogen stations in the Nagoya and Osaka areas. City buses will operate around Aichi international airport, and passenger FCV fleet tests under severer use conditions are now being planned to clarify deterioration qualities under real operation. Some other niche areas for FC utilization, like bicycles and wheelchairs, will be promoted. For outreach activities the importance of educating opinion leaders and decisionmakers by providing unbiased information is strongly recognized. The significance and necessity of long-term R&D and appropriate expectations for outcomes are also recognized.

Finally, the Council of Science and Technology, under the Cabinet Office, issued the Third Science and Technology Basic Plan in March 2006. Within the plan, the council identified essential research and development issues for eight prioritized areas, including energy, and further indicated strategically focused science and technology areas which should be strengthened in the next five years. In the energy area, FC technology, FCVs and stationary-use FC systems are all assigned as essential research areas; and FC stacks, hydrogen distribution/storage and FCVs are identified under strategically focused science and technology. Related ministries, such as METI, the MLIT and MOE, will promote further RD&D activities in due time.

FCVs still face many significant challenges, whereas stationary-use systems are now entering commercialization. Indeed, many hydrogen infrastructure technologies already exist, and the promotion of hydrogen networks is becoming increasingly popular around the world. However, the lack of FCV supply to use such infrastructures is a major hurdle. Some attempts are being made to utilize excess hydrogen for stationary use through small-scale hydrogen networks. Japanese fleet tests, while significant, are still restricted to narrow areas and support a limited number of vehicles. The balance and timing for FCV commercialization should be carefully considered for future promotion and planning.

Note

1. For details on the progress made in cost reductions in 2005, see chapter 3 in this volume.

REFERENCES

Baba, Yasuko and Hisashi Ishitani (2005) "A Comprehensive Tool to Evaluate Well to Wheel Efficiency of Vehicles Using Complex Fuels, Keio University, Japan", paper presented at International Battery, Hybrid and Fuel Cell Electric Vehicle Symposium and Exhibition 21, Monaco, April.

Ishitani, H. and Y. Baba (2006) "Well to Wheel Analysis for Fuel Cell Vehicles in Japanese Conditions", paper presented at International Battery, Hybrid and Fuel Cell Electric Vehicle Symposium and Exhibition 22, Yokohama, October.

Ishitani, H., Y. Baba, K. Endo, S. Tange and N. Ogino (2005) "Well to Wheel Analysis in JHFC (Japan Hydrogen and Fuel Cell) Project", paper presented at International Battery, Hybrid and Fuel Cell Electric Vehicle Symposium and Exhibition 21, Monaco, April.

JARI (2006) "Annual Report of the FCCJ Project for FY2005", March, Tokyo: JARI (in Japanese).

JARI Well to Wheel Efficiency Analysis Report, will be published soon.

METI (2001) "Strategy for Technology R&D of PEM Fuel Cell and Hydrogen Utilization", report by Policy Study Group of Fuel Cell Commercialization, Ministry of Economy, Trade and Industry, January (in Japanese).

3
The US Hydrogen Fuel Initiative

Steven G. Chalk and James F. Miller

This chapter reviews the progress made in research and development under the US Hydrogen Fuel Initiative. Technical progress is measured against a set of quantitative objectives, and a number of the targets have been met earlier than anticipated. However, hydrogen cost and availability and fuel-cell durability and cost are formidable challenges still to be solved. While further research remains important, attention is also now being given to manufacturability and market transformation activities in anticipation of commercialization.

In his 2003 State of the Union address, President Bush announced the $1.2 billion Hydrogen Fuel Initiative to reverse America's growing dependence on foreign oil (shown in fig. 3.1) and improve the environment by developing the technology needed for commercially viable hydrogen-powered fuel cells. Through partnerships with the private sector, the president's Hydrogen Fuel Initiative seeks to develop the hydrogen and fuel-cell technologies needed to make it practical and cost-effective for Americans to choose hydrogen-powered fuel-cell vehicles by 2020. In support of President Bush's initiative, the Department of Energy (DOE) is leading a comprehensive and focused research and development programme to overcome the technical and economic barriers to a hydrogen economy.

Because hydrogen can be produced from diverse domestic resources, the initiative will dramatically improve America's energy security by significantly reducing the need for imported oil. At the same time, it is a key component of the president's clean air and climate change strategies.

Figure 3.1 US domestic oil production and petroleum use in transportation

Hydrogen-powered fuel cells decouple carbon from power generation and emit only water vapour (i.e. zero criteria pollutants). The DOE has planned and is executing a balanced research portfolio for developing fossil, nuclear and renewable-based hydrogen production and delivery technologies. Hydrogen from coal will be produced directly by gasification – not coal-based electricity. For hydrogen from coal to be viable, research in carbon capture and sequestration technologies must also be successful. The ultimate goal is a hydrogen economy based on carbon-neutral fossil, nuclear and renewable energy resources.

US Hydrogen Program

The DOE Hydrogen Program, which includes the Offices of Energy Efficiency and Renewable Energy (OEERE), Fossil Energy (OFE), Nuclear Energy, Science and Technology (ONE) and Science (OSC), emphasizes research, development and validation of fuel cells and hydrogen production, delivery and storage technologies for transportation, distributed generation and portable power applications. The programme seeks to enable an industry commercialization decision on fuel-cell vehicles and fuelling infrastructure by 2015.

The OEERE coordinates the programme and conducts research and development on fuel cells, hydrogen production, delivery, storage, analysis, infrastructure and safety, codes and standards, with an emphasis on production of hydrogen from distributed natural gas and from renewable resources. The OFE is focused on low-cost, novel and advanced coal-based hydrogen production and delivery technologies. The ONE's emphasis is the commercial-scale production of hydrogen using heat from a nuclear energy system. The OSC fosters revolutionary advances in hydrogen production, delivery, storage and conversion technologies to increase fundamental understanding of hydrogen's interactions with materials. Recently, 70 new projects were selected by the OSC, at $64 million over three years, to address novel materials for hydrogen storage, membranes for hydrogen separation and purification, designs of catalysts at the nano scale, solar hydrogen production and bio-inspired materials and processes. In addition, the Department of Transportation (DOT) works with the DOE in conducting safety analyses and testing of hydrogen-related processes and equipment, as well as implementing a comprehensive safety testing and evaluation programme for hydrogen fuel cells.

Hydrogen production

Four DOE offices are engaged in research on hydrogen production technologies. The OEERE is developing technologies for producing hydrogen in a distributed manner from natural gas and liquid renewable fuels and by electrolysis of water, and is developing centralized renewable production options that include water electrolysis using renewable power (e.g. wind, solar, hydroelectric, geothermal), biomass gasification, photo-electrochemical and biological processes and high-temperature solar thermochemical cycles. The OFE is focused on advancing the technologies needed to produce hydrogen from coal-derived synthesis gas, including co-production of hydrogen and electricity as well as carbon sequestration. The ONE is developing commercial-scale production of hydrogen using heat from a nuclear energy source. The OSC's basic research programme is emphasizing fundamental understandings of bio-inspired materials and processes, photo-induced water splitting, catalysis, membranes and gas separation.

In the transition to the hydrogen economy, hydrogen can be produced in a "distributed" fashion at the refuelling station by reforming natural gas and renewable fuels like ethanol utilizing existing delivery infrastructure to meet initial lower volume needs with the least capital investment. Fuel reformers would not require a substantial hydrogen transport and delivery infrastructure. Research and development is under way to lower the capital, operating and maintenance costs and improve the efficiency of distributed hydrogen production technologies. This approach has the advantage of eliminating the need for new hydrogen delivery infrastructure investment while vehicle demand is low. A fuel-cell vehicle running on hydrogen produced from natural gas would emit 25 per cent less net carbon emissions than a gasoline hybrid electric vehicle and 50 per cent less than conventional internal-combustion-engine vehicles on a well-to-wheel basis. However, natural gas is not a long-term strategy because of concerns about limited supply and the demands of other sectors. As vehicle market penetration expands, it justifies greater industry investment in large-scale, carbon-neutral hydrogen production and delivery infrastructure based on coal, nuclear and renewable resources.

Goal, objectives and key challenges

The programme goal is to develop low-cost, highly efficient hydrogen production technologies from diverse domestic sources, including fossil, nuclear and renewable sources, as shown in figure 3.2. Specific objectives are listed below.

Figure 3.2 Hydrogen production pathways in the US Hydrogen Program

• By 2010 reduce the cost of distributed production of hydrogen from natural gas to $2.50/gge (per gallon gasoline equivalent) (delivered, un-taxed) at the pump.

• By 2015 reduce the cost of distributed hydrogen production from biomass-derived renewable liquids to $2.50/gge (delivered, untaxed) at the pump.

• By 2010 verify distributed grid-connected water electrolysis at a projected delivered hydrogen cost of $2.85/gge.

• By 2015 verify renewable central hydrogen production at a projected cost of $2.75/gge delivered.

• By 2015 reduce the cost of hydrogen produced from biomass to $1.60/gge at the plant gate ($2.60/gge delivered) by developing reforming technologies for gasification processes.

• Develop advanced renewable photoelectrochemical and biological hydrogen generation technologies. By 2015 verify the feasibility of these technologies to be competitive in the long term.

• By 2015 develop high-temperature thermochemical cycles driven by concentrated solar power processes to produce hydrogen with a projected cost of $3.00/gge at the plant gate ($4.00/gge delivered).

• By 2015 have ready to operate a zero-emissions, high-efficiency co-production power plant that will produce hydrogen from coal along with electricity.

• Demonstrate the commercial-scale, economically feasible production of hydrogen using nuclear energy by 2017.

In 2005 the hydrogen cost target was revised to a range of $2.00–3.00/gge of H2 at the pump in 2015, as shown in figure 3.3. This target is inde-

Figure 3.3 Hydrogen production cost targets

pendent of the pathway used to produce hydrogen, and accounts for the energy efficiency of the gasoline hybrid vehicle and the fuel-cell vehicle on a cost-per-mile basis. The target provides a yardstick against which the commercialization potential of different hydrogen production technologies can be measured.

Recent progress and technology status

Hydrogen production using reforming of natural gas is approaching its target of $3.00/gge for hydrogen at the pump (5,000 psi). Recent progress indicates a projected cost of $3.60/gge for hydrogen produced from natural gas, delivered and untaxed, while co-producing electricity at $0.08/kWh. This is down from approximately $5.00/gge prior to 2003. Other production and delivery technologies are in various stages of development.

In terms of specific recent accomplishments, the programme has achieved the following.

• Designed two distributed natural-gas-to-hydrogen production and dispensing systems expected to produce 5,000 psi hydrogen at a cost of $3.00/gge, based on a fourfold reduction in pressure swing adsorber cost, improved fuel processing via steam methane reforming and development of an efficient and compact autothermal cyclic reformer.

• Achieved 2,000 psi hydrogen production in a planar electrolysis stack.

• Developed new electrolysis system designs with 40–50 per cent part count reduction.

• Developed a new design for electrolysis systems with potential for achieving a hydrogen production cost of $2.85/gge by 2010.

• Evaluated alkaline and proton-exchange-membrane electrolysis technologies for high-pressure operation.

• Completed the criteria-based screening of over 200 potential solar-driven high-temperature thermochemical cycles, down-selected to four groups of cycles (volatile metal, metal oxide, sulphate and sulphuric acid) and initiated research on these cycles. The zinc oxide cycle high-temperature (~1,800°C) reduction step to zinc metal was demonstrated in the laboratory.

• Conceptual design documents were completed for pilot-scale thermochemical cycle experiments (200 kW high-temperature electrolyser experiment and 500 kW sulphur-iodine thermochemical process experiment).

• Initiated an International Partnership for the Hydrogen Economy global project on solar-driven high-temperature thermochemical cycles for hydrogen production, with solar energy research groups from Switzerland, Germany, France, Israel, Spain and the United States.

• Durability of 760 hours (up from 100 hours in 2003) was demonstrated with a new gallium phosphide nitride material producing hydrogen via photoelectrochemical technology.

• Oxygen tolerance in photolytic biological hydrogen production from water was increased by 40–50 per cent.

Future plans

The programme will continue to focus on distributed natural gas and renewable liquid reforming, distributed electrolysis, biological and photoelectrochemical processes, central biomass reforming, solar high-temperature thermochemical cycles and hydrogen separation technologies. In addition, a hydrogen utility working group will be established to increase collaboration with electric utilities on electrolysis technology development. High-temperature electrolysis systems will be evaluated for higher-efficiency operation. The sulphur-iodine cycle chemical component reaction sections will be operated individually prior to integrated laboratory-scale system operation in 2008. The number of solar-driven high-temperature thermochemical cycles under consideration will be reduced to four or fewer cycles for development. A database on photoelectrochemical materials will be developed to allow material data sharing among researchers. And standardized testing protocols for photoelectrochemical materials will be established for validating efficiencies and permitting functional comparisons between materials.

Hydrogen delivery

Hydrogen must be transported from point of production to point of use. It must also be compressed, stored and dispensed at refuelling stations or stationary power facilities. Due to its relatively low volumetric energy density, transportation, storage and final delivery to the point of use can result in significant cost and energy inefficiencies. The programme is focused on developing technology to reduce the cost and increase the energy efficiency of hydrogen delivery. Research efforts are focused on delivery infrastructure analysis, lower-cost pipelines, lower-cost off-board storage at refuelling stations, liquid carriers, lower-cost and more energy-efficient liquefaction and more durable and reliable compression technology.

Goal, objectives and key challenges

The programme goal is to develop hydrogen delivery technologies that enable the introduction and long-term viability of hydrogen as an energy carrier for transportation and stationary power. Specific objectives are listed below.

• By 2007 define criteria for a cost-effective and energy-efficient hydrogen delivery infrastructure for the transition and long-term use of hydrogen for transportation and stationary power.

• By 2010 reduce the cost of hydrogen transport from central and semi-central production facilities to the gate of refuelling stations and other end users to <$0.90/gge of hydrogen.

• By 2010 reduce the cost of compression, storage and dispensing at refuelling stations and stationary power facilities to <$0.80/gge of hydrogen (independent of transport).

• By 2015 reduce the cost of hydrogen delivery from the point of production to the point of use in vehicles or stationary power units to <$1.00/gge of hydrogen in total.

In order for hydrogen to become a major energy carrier, the total delivery cost must be substantially reduced. If hydrogen was a major energy carrier transported in large volumes and there was a pipeline infrastructure of the nature of the current natural gas infrastructure, the total cost of hydrogen delivery could be in the order of $2.00/gge with existing technology. The long-term goal for delivery is $1.00/gge of hydrogen. Therefore, significant technology development is needed.

• Pipelines: resolve hydrogen embrittlement concerns with steel pipelines, reduce capital costs by developing new steel compositions and/or welding and installation techniques, and develop composite pipelines with reduced capital costs.

• Compression: develop more reliable and durable hydrogen compression technology for pipeline transmission and refuelling stations.

• Storage: develop lower capital cost off-board storage vessel technology; confirm the technical feasibility and adequate availability of hydrogen geologic storage.

• Liquefaction: dramatically reduce the capital cost and increase the energy efficiency of hydrogen liquefaction.

• Carriers: determine if a novel solid or liquid carrier might be suitable for hydrogen transport or off-board storage.

Recent progress and status

Current costs for the transport of hydrogen, with the exception of that transported through the very limited number of hydrogen pipelines, are $2.00–9.00/gge of hydrogen. This is based on transport by gaseous tube trailers or cryogenic liquid trucks, and is very dependent on amounts and distances. Pipeline transport costs are significantly lower, but are also very dependent on distance and amounts. These transport costs do not include the delivery costs associated with compression, storage and dispensing at the point of use. These additional costs could be as high as $2.00–3.00/gge of hydrogen.

Specific recent activities and accomplishments include the following.

• Development of H2A delivery component and scenario modelling tools, which include the current costs of hydrogen delivery using pipelines, liquid trucks and gaseous trucks.

• Formation of a pipeline working group which cross-cuts all the pipeline research projects, enabling more efficient and effective pipeline research.

• Membership on the EC Naturalhy Project Strategic Advisory Committee, focused on the use of existing natural gas infrastructure for the co-transport of natural gas and hydrogen, thereby avoiding global duplication of research.

Future plans

The programme will expand hydrogen delivery infrastructure analysis to include carrier technology approaches, more comprehensive regional and other geographic-specific aspects and more in-depth transition analysis. It will also initiate additional research focused on compression, off-board storage, high-pressure tube trailers and liquefaction.

Hydrogen storage

Hydrogen storage continues to be a key enabling technology for the advancement of hydrogen and fuel-cell power technologies in transportation, stationary power and portable power applications. Activities focus primarily on R&D of on-board hydrogen storage systems that will allow for a vehicular driving range of 300 miles or more. In addition, hydrogen storage systems are targeted for off-board applications such as hydrogen delivery and refuelling infrastructure, and interface technologies for the refuelling of hydrogen storage systems on vehicles.

The National Hydrogen Storage Project is organized as shown in figure 3.4. Three centres of excellence and 15 independent projects were initiated in 2005. The centres are a collaboration between multiple university, industry and federal laboratory partners, representing a concerted, multi-disciplinary effort to research and develop hydrogen storage materials. Planned funding totals $150 million over five years. Independent testing and analysis of promising approaches are also under way.

The Hydrogen Storage Systems Analysis Working Group was formed in 2005 to coordinate systems analysis work across the storage subprogramme and aid in assessing technologies on a systematic basis in terms

Figure 3.4 Organization of the US Department of Energy Hydrogen Storage Project

of life-cycle cost, performance, energy efficiency and environmental impact. The group meets semi-annually, with monthly interim progress meetings.

Goal, objectives and key challenges

Technical and cost targets are shown in table 3.1. On-board hydrogen storage approaches under investigation include advanced metal hydrides,

carbon-based materials and other high-surface-area sorbents, chemical hydrogen storage, low-cost and conformable tanks, compressed/cryogenic hydrogen tanks and new materials or processes, such as clathrates and conducting polymers. Compressed/cryogenic tanks, metal hydrides, high-surface-area sorbents and carbon-based materials constitute on-board reversible hydrogen storage systems because hydrogen regeneration or uptake can take place on board the vehicle. For chemical hydrogen storage approaches as well as certain metal hydrides, hydrogen regeneration is not possible on board the vehicle; thus these systems must be regenerated off-board.

R&D for advanced metal hydrides is focusing on light element, advanced complex hydrides; destabilized binary hydrides; intermetallic hydrides; lithium amides; and other reversible hydrides. Chemical hydrides are focused on novel boron chemistry (boron hydrides, aminoboranes, polyborane anions) as well as advanced concepts for chemical hydrogen storage, regeneration chemistry and life-cycle analysis. Carbon-based materials are targeting absorbents such as hybrid carbon nanotubes, conducting polymers, metal organic frameworks and other novel carbon-based materials. In addition, novel materials such as clathrates and glass microspheres are being investigated.

Recent progress and status

The current technical status, shown in figure 3.5, is based on estimates provided by developers and the R&D community. Because it is often difficult to estimate system-level weight and volume when research is still at the stage of materials development, the current status data will be revisited periodically. However, it is clear that none of the current systems meets the combined gravimetric, volumetric and system cost targets for either 2010 or 2015.

Significant progress was achieved in 2005 in metal hydrides, chemical hydrides, carbon materials and compressed-gas tanks. Specific recent accomplishments include the following.

• Metal hydrides.

– Completed lab-scale experiments identifying alane (AlH3, theoretical materials-based capacity of 10 wt per cent) as a promising candidate with potential to meet 2010 targets. Lowered the desorption temperature of the as-received α-AlH3, which ranged from 175–200°C to 100–150°C (6–7 wt per cent hydrogen evolved) by mechanically milling the material with an LiH dopant (Brookhaven National Laboratory and Sandia National Laboratories).

– Achieved 5.5 wt per cent reversible hydrogen storage through the development of a destabilized Mg-modified Li-imide material (San-

Figure 3.5 Current technical status of hydrogen storage technologies and targets

dia). Demonstrated over 100 cycles of use of this material and characterized loss of activity over the period due to a combination of material loss and material degradation.

– Developed and demonstrated LiBH4/Mg(X) as a class of promising high-capacity destabilized systems, with partial to complete reversibility demonstrated for X = H, F and S (LiBH4/MgH2 ~ 9 wt per cent at 350°C). However, these systems also display slow kinetics; future work will focus on enhanced reaction rates in nano-scale materials (HRL Laboratories).

• Chemical hydrogen storage.

– Developed and demonstrated ethyl-carbazole-based and similar organic liquid carriers with hydrogen storage capacities of 5.0–6.9 wt per cent (Air Products & Chemicals).

– Discovered non-metal, non-precious metal and general classes of transition metal catalysts for releasing hydrogen from ammonia-borane, which has a potential material hydrogen storage capacity of 19.6 wt per cent (Los Alamos National Laboratory, Pacific Northwest National Laboratory, University of Pennsylvania and University of Washington).

– Discovered that ammonia-borane in inorganic scaffolds leads to increased kinetics of hydrogen release with no borazine formation; showed ~6 wt per cent hydrogen storage at low temperatures (Pacific Northwest National Laboratory).

– Demonstrated hydrogen release from a hetero-atom containing "organic hydride" (Los Alamos and University of Alabama).

– Demonstrated a coupled reaction with potential hydrogen storage capacity of >6 wt per cent (Los Alamos).

• Carbon-based materials and sorbents.

– Using theory, designed fullerene derivative/metal hybrids with the potential to store >8 wt per cent at room temperature (National Renewable Energy Laboratory – NREL).

– Optimized synthesis and purification processes to produce metal-doped single-walled nanotubes reproducibly, with 2–3 wt per cent and 2.9 wt per cent demonstrated at an independent test facility (NREL).

– Developed polyaniline-based conducting polymers for hydrogen adsorption to test claims of ~6 wt per cent materials-based hydrogen storage capacity (University of Pennsylvania).

– Determined that the binding energy for hydrogen zinc oxide corner units in metal organic frameworks increases the overall sorption enthalpy from 4.1 kJ/mol to 6.1 kJ/mol by changing the organic linker (Cal Tech).

– Incorporated boron into carbon materials, demonstrating greater than threefold improvement in hydrogen adsorbed at ambient temperature (from <0.2 to 0.7 wt per cent) (Pennsylvania State University).

• Compressed and cryogenic tanks.

– Completed preliminary optimization of low-cost 10,000 psi tanks to achieve 1.3 kWh/kg specific energy. Identified approaches with potential to lower cost from $18/kWh to $10/kWh.

– Completed design of cryo-compressed tank system with potential to meet 1.2 kWh/L.

• Testing and analysis.

– Completed independent test capabilities at Southwest Research Institute and preliminary validation of facility for sorbent materials.

– Formed storage systems analysis working group and completed baseline independent analysis of sodium alanate system.

Future plans

Following a report by the National Research Council (NRC), the DOE centres of excellence address the report's emphasis on the importance of storage and its recommendation to "shift . . . away from some development areas towards more exploratory work", as well as the recommenda­tion that "the probability of success is greatly increased by partnering with a broader range of academic and industrial organizations" (National Research Council Committee on Review of the FreedomCAR and Fuel Research Program, 2005). A thorough review of the centres of excellence was conducted in 2006 to develop lessons learned and apply them to other areas of the Hydrogen Program, as advised by the NRC. Continued funding at a low level for compressed hydrogen/cryogenic tanks emphasizes cost reduction and novel conformable designs. In addition, it is recognized that materials-based solutions will require low-cost, conformable tanks and would benefit from current R&D in this area. A major milestone in 2006 was the go/no-go decision on R&D for single-walled carbon nanotubes (SWNTs). The DOE decided to discontinue R&D on pure, undoped SWNTs for vehicular hydrogen storage applications. This decision was based on a previously established criterion that pure, undoped SWNTs had not met: achieving 6 per cent weight hydrogen storage at room temperature. However, there were certain areas of carbon nano-tube research, such as metal-doped materials, that warranted additional R&D investment. In addition, an independent analysis of cryo-compressed tanks was conducted in 2006 to determine gravimetric and volumetric capacities as well as cost.

The R&D planned on metal hydrides will focus on the development of high-capacity materials, including complex hydrides, destabilized binary hydrides, alane, intermetallic hydrides, modified lithium amides and other new materials, using theory and combinatorial methods to increase the efficiency of materials identification and screening. The R&D planned on chemical hydrogen storage focuses on three "tiers" of R&D: borohydride-water, novel boron chemistries and innovation beyond boron such as liquid carriers. In the area of carbon-based materials, the planned R&D will focus on breakthrough concepts for storing hydrogen at room temperature, such as hybrid metal/carbon nanotubes and metal/fullerene hybrids, aerogels, nanofibres, metal organic frameworks and conducting polymers. A workshop on fundamental theory/modelling for hydrogen storage will be conducted in collaboration with the OSC, and closer collaborations with basic research activity are planned.

Fuel cells

Fuel cells are an important enabling technology for the hydrogen economy and have the potential to revolutionize the way the nation is powered, offering cleaner, more efficient alternatives to the combustion of gasoline and other fossil fuels. Fuel cells have the potential to replace the internal-combustion engine in vehicles and provide power in stationary and portable applications because they are energy-efficient, clean and utilize non-petroleum-based fuels.

The programme supports R&D of polymer-electrolyte-membrane fuel cells (PEMFCs), including fuel-cell stack components, fuel processors for stationary applications and balance-of-plant components. Transportation applications (direct-hydrogen fuel cells for vehicles) are the primary focus of the programme, since substituting domestically produced hydrogen for petroleum-based fuel in light-duty vehicles will significantly reduce US dependence on foreign oil, diversify energy resources and reduce pollution and greenhouse gas emissions. PEMFCs are currently the technology of choice for light-duty vehicles because they have fast-start capability and operate at low temperatures. The programme also supports stationary power, portable power (direct-methanol fuel cells) and auxiliary power unit applications.

Goal, objectives and key challenges

The goal of the DOE programme is to develop and demonstrate fuel-cell power system technologies for transportation, stationary and portable applications. Key objectives of the programme, to be achieved by 2010, are to develop the technology base for the following.

• A durable, direct-hydrogen fuel-cell power system for transportation with a 60 per cent peak efficiency and a cost of $45/kW if mass produced (and by 2015 a cost of $30/kW).

• A distributed generation PEM fuel-cell system operating on natural gas or liquefied petroleum gas that achieves 40 per cent electrical efficiency and 40,000 hours durability at $400–750/kW.

• A fuel cell for consumer electronics (<50 W) with energy density of 1,000 Wh/L.

• A fuel-cell system for auxiliary power units (3–30 kW) with a specific power of 100 W/kg and a power density of 100 W/L.

The DOE is working closely with its national laboratories, universities and industry partners to overcome critical technical barriers to fuel-cell commercialization. Cost and durability are the major challenges; size, weight and thermal and water management are also problematic. The programme continues to focus on materials, components and enabling technologies that will contribute to the development of low-cost, reliable fuel-cell systems. To address the key barriers of fuel-cell cost and durability, five new projects were initiated in 2005 at a cost of $13 million over three years.

Targets, which vary by application, have been established for fuel-cell cost, efficiency, durability, power density, specific power, transient response time, start-up time and emissions, among others. The DOE multi­year research, development and demonstration plan was updated in 2005: the major changes in the fuel-cell section of the plan were the removal of the target tables for on-board fuel processors resulting from the decision in August 2004 to discontinue those activities; the addition of target tables at the component level (membranes, electrocatalysts, membrane electrode assemblies, bipolar plates) to support the shift from systems development to R&D at the component level; and the addition of a hydrogen fuel-quality table.

Membrane electrode assemblies (MEAs) are the core of the fuel-cell stack and require excellent performance and very high durability to achieve automotive cost and performance targets. The DOE is working with industry to develop low-platinum, high-temperature (operation up to 120°C for transportation applications and up to 150°C for stationary applications) and low-humidity MEAs in parallel with high-volume manufacturing processes to meet cost targets. The DOE is pursuing advanced membrane R&D to improve durability and tolerance to feed-gas impurities, increase performance at low relative humidity and lower cost. Advanced catalyst R&D is targeting improved performance and lowered cost using low- or non-platinum catalysts.

Recent progress and status

Significant progress was achieved in 2005 in catalyst development, membranes and bipolar plates. Specific recent accomplishments include the following.

• Durability testing at steady-state conditions and simulating a vehicle drive cycle, and characterized MEAs in situ by polarization curves and electrocatalyst surface area measurements (Los Alamos National Laboratory).

• Developed a membrane that can be mass produced, with conductivity comparable to Nafion, durability of >4,000 hours and, when incorporated into an MEA, platinum loading that is lower than the DOE's 2010 target (3M).

• Organized and conducted a workshop on fuel-cell operation at sub-freezing temperatures; demonstrated survivability for 40 sub-freezing cycles down to −40°C using cloth gas diffusion layers (Los Alamos National Laboratory).

• Completed the first phase of round-robin fuel-cell testing as part of the US Fuel Cell Council's efforts to develop single-cell testing protocols (Los Alamos National Laboratory).

• Demonstrated 20-fold improvement in Pt mass-specific activity of PtRe/Pd/C and Pt/Au/Ni/C catalysts over commercial Pt/C catalysts (Brookhaven National Laboratory).

Figure 3.6 Estimated costs of 50 kW fuel-cell systems in high-volume production of 500,000 units per year

• Developed and validated an automotive fuel-cell system model, specifically targeting humidification systems and operation at sub-freezing conditions to guide the development of technical targets (Argonne National Laboratory).

• Identified the significant changes to the catalyst size and structure within an MEA after cycling and long-term fuel-cell operation using advanced microstructural characterization techniques (Oak Ridge National Laboratory).

Two key measures of fuel-cell progress are the cost for automotive fuel cells and the electrical efficiency for stationary fuel cells. Figure 3.6 illustrates the progress in fuel-cell cost reduction. For transportation applications, the 2005 estimated cost for high-volume mass production of a hydrogen-fuelled 80 kW automotive fuel-cell system was $110/kW. This cost reduction was the result of increased power density, advancements in membrane materials, reductions in both membrane material cost and amount of membrane material required in the fuel cell, enhancement of specific activity of platinum catalysts and innovative processes for depositing platinum. For stationary systems, the 2005 target of 32 per cent electrical efficiency at full power was met for a natural gas or propane-fuelled 50–250 kW stationary fuel-cell system.

Future plans for fuel-cell R&D

As recommended by the NRC (2005) report, the programme continues to increase government funding for high-risk R&D that can lead to breakthroughs in fuel-cell materials and component designs that lower costs, improve durability and increase reliability. The 2006 budget em­phasized R&D on fuel-cell stack components (membranes, catalysts, bipolar plates, MEAs, etc.) while also supporting R&D for stationary fuel processors, balance-of-plant components and technical analyses.

Cost and durability of stack components continued to be a key focus of the research programme in 2006. Focus on characterization, evaluation and analysis to provide insights into fuel-cell operation, especially characterization of behaviour that leads to performance decay and failure, was emphasized. Additional research projects on high-temperature, low-humidity membranes were initiated. A solicitation ($17.5 million available over five years) was issued for development of high-temperature (≤ 120°C), low relative humidity (25–50 per cent RH) polymer-electrolyte-type membrane materials suitable for use in a PEMFC. A second solicitation, with a broader scope, was released in 2006 to provide up to $100 million over four years for fuel-cell R&D in several topic areas: improved fuel-cell membranes, water transport within the stack, advanced cathode catalysts and supports, cell hardware, innovative fuel-cell concepts, effects of impurities on fuel-cell performance and durability, and stationary fuel-cell demonstrations involving international and intergovernmental partnerships. The workshop on operation of fuel cells at sub-freezing temperatures, mentioned above, identified technical challenges and R&D needs related to start-up and operation of fuel cells at these low temperatures. Research in 2005 also helped to define problems and issues associated with cold-starts and the freeze-thaw cycle, which, combined with the workshop results, will help inform a focused R&D effort to address these issues.

Safety, codes and standards

The federal government is in a unique position as a neutral third party to catalyse and coordinate the work of professional societies, trade associations and national/international organizations in development of codes and standards. The aim is to facilitate the creation and adoption of model building codes and equipment standards for hydrogen and fuel-cell systems in commercial, residential and transportation applications and provide technical resources to harmonize the development of international standards. In parallel, the focus for hydrogen safety is the development and implementation of practices and procedures that will ensure safety in the operation, handling and use of hydrogen and associated systems, and support the development of appropriate codes and standards. In 2006 the International Code Council (ICC) ad hoc Committee for Hydrogen Gas completed development of new hydrogen safety requirements (and modifications to existing requirements) for incorporation in the 2006 editions of the International Building Code, International Fire Code and International Fuel Gas Code. These revisions incorporated all current data for high-pressure hydrogen storage and pressure relief devices. In addition, the DOE partnered with the Department of Transportation to advance an international effort to develop an R&D roadmap for a global technical agreement for hydrogen fuel cells, and to implement adoption of the agreement by 2010. Hydrogen education development is also planned to serve the needs of multiple target audiences, including state and local government officials, safety and code officials and local communities where hydrogen demonstrations are located.

Infrastructure and technology validation

Testing and demonstration are essential for both fuel-cell vehicle and hydrogen infrastructure technologies to refocus research and validate laboratory progress and "readiness" for commercialization. The DOE awarded $170 million for "learning demonstrations" that target testing, demonstration and validation of hydrogen fuel-cell vehicles, infrastructure and interfaces for complete system solutions. These 50/50 cost-shared projects bring together automobile and energy companies to demonstrate fuel-cell vehicles and refuelling infrastructure; their activities will identify "real-world" issues that will provide feedback to the R&D programme. These "learning demonstrations" will involve two generations of vehicles, compliance safety plans, methods to enhance the development of codes and standards and education and training campaigns. Such real-world projects are critical to help guide and refocus R&D activities.

Partnerships

Transitioning the current petroleum fuel supply infrastructure to a hydrogen infrastructure will require extensive public-private cooperation due to the magnitude of technology challenges, costs, associated regulatory codes and standards and anti-trust issues. Under the FreedomCAR and Fuel Partnership, the DOE is collaborating with the US Council for Automotive Research (DaimlerChrysler, Ford and General Motors) and five major energy companies (BP, Chevron, ConocoPhillips, ExxonMobil and Shell) to help identify and evaluate technologies that will meet customer requirements and establish the business case. The programme's technical and economic targets, created using input from technical teams of research managers from the DOE and the automotive and energy industries, represent customer requirements and the business case necessary for widespread commercial success. The technical teams meet regu­larly to identify key critical barriers, update established roadmaps in each technology area and review research progress. Ultimately, it is industry which will primarily invest in building the automotive and energy infrastructure for the hydrogen economy. However, there is significant investment risk until hydrogen and fuel-cell technologies meet customer requirements and become economically competitive in the marketplace. Therefore, federal investment in high-risk R&D is necessary to address the critical technology barriers which reduce this risk. Much of the hydrogen research is cost-shared by academia and industry, reducing the costs to the taxpayers and indicating the private sector's commitment to the development of the hydrogen economy.

International collaboration is also a key element. The International Partnership for the Hydrogen Economy (IPHE), established in 2003, consists of 16 member nations and the European Commission. The IPHE provides a mechanism for partners to organize, coordinate and implement effective, efficient and focused international research, development, demonstration and commercial utilization activities related to hydrogen and fuel-cell technologies. It is a forum for advancing policies and common technical codes and standards that can accelerate the cost-effective transition to a hydrogen economy. Coordination through the IPHE will leverage scarce international RD&D funds, thereby reducing the cost of the hydrogen and fuel-cell research programmes of the IPHE partners through information sharing that facilitates efficiencies in their research and demonstration programmes.

Looking towards the future

The Department of Energy is looking to the future. To increase the chances of success, it is partnering with the Department of Commerce and other federal agencies to plan a manufacturing R&D effort for the hydrogen economy. This activity will focus on ensuring that hydrogen products can be made in an economically viable manner in large quantities such that they will conform to design specifications, performance functionality, codes and standards, safety requirements and customer requirements.

REFERENCE

National Research Council Committee on Review of the FreedomCAR and Fuel Research Program (2005) "Review of the Research Program of the Freedom-CAR and Fuel Partnership, First Report 2005", Washington, DC: National Academies Press, available at www.nap.edu/books/0309097304/html/.

4
Passion, purpose and partnerships: Building the hydrogen infrastructure

Gabriel F. de Scheemaker

Introduction

The EU Hydrogen and Fuel Cell Technology Platform has concluded that early European markets could become established between 2007 and 2010 for fleet vehicles and portable fuel-cell applications, while large-scale stationary applications could achieve commercialization by 2015 and European mass-market transport applications before 2020 (European Union, 2005). Indeed, given the right support there could potentially be 1–5 million fuel-cell vehicles (FCVs) by 2020 globally, growing beyond 100 million between 2030 and 2040.

In short, a fully fledged hydrogen economy could be just over two decades away. But if we do not start today, 10 years from now it will still be two decades away. After all, the transition to mass production will require a massive overhaul of the energy infrastructure, and the success of this will depend entirely on significant public policy developments and funding.

Developing a hydrogen economy therefore requires visionary leaders – both in government and in business – who are passionate about making it happen; who can focus and keep their resolve. As a long-term solution to a long-term problem, it will require highly sophisticated levels of cooperation, coordination and commitment.

Hydrogen today – A snapshot

For an energy company, dealing with hydrogen is of course nothing new. Shell has over 40 years' experience of using hydrogen in its refineries, where it handles more than 7,000 tonnes a day as part of a drive to produce ever-cleaner and better-performing traditional fuels. A dedicated unit, Shell Hydrogen,1 was established in 1999 as a global business in order to pursue opportunities related to hydrogen and fuel cells in transport and distributed power applications. Its aims are threefold: first, to supply hydrogen in the most cost-effective way possible, in whatever form the markets want it; secondly, to support the development of technical solutions required to convert primary energies to hydrogen; and thirdly, to stimulate the development of technologies that will advance a hydrogen economy. It operates hydrogen stations in all the major hydrogen markets, and believes hydrogen can become an important element in the future energy mix, along with the cleaner traditional fuels and important advances such as modern biofuels and gas-to-liquids components.

In 2003 the very first publicly accessible hydrogen refuelling station in the world opened in Reykjavik, Iceland.2 And since then various hydrogen stations for fuel-cell vehicles have opened, some as part of the Clean Urban Transport for Europe (CUTE) initiative – for instance in Amsterdam and Luxembourg.

In North America an "East Coast corridor" is being built, starting with a station in Washington, DC. This showcases the first hydrogen dispenser fully integrated at a regular retail gasoline station in the United States. A combined hydrogen/gasoline site, it demonstrates to people that hydrogen is nothing special: they can walk up to the pump, touch it and see hydrogen refilling taking place while they are refilling their own gasoline cars. In November 2007 the corridor was extended, with a station in the city of White Plains, New York.

On the West Coast, the California Fuel Cell Partnership, some 20 partners including automotive and energy companies, fuel-cell developers and government, not only operates an extensive public programme of events, but has opened a state-of-the-art facility serving 55 FCVs. Up to three new projects are now planned to open in 2008.

In Asia the Japan Hydrogen and Fuel Cell demonstration project (JHFC) has 12 refuelling stations serving 59 FCVs. The Ariake station that Shell operates is probably the most utilized hydrogen station in the world, having already serviced 2,000 vehicles from nine different auto manufacturers.

In China, following a feasibility study with Tong Ji University and two local Chinese partners, Shell has shared knowledge and expertise to help build Shanghai's first hydrogen station. Completed in 2007, it is the first step to establishing a cluster of hydrogen stations, with over 1,000 Chinese FCVs planned by 2010.3

And finally in India, which has chosen a strategy of focusing first on the cheaper and simpler hydrogen internal-combustion engines, Shell has embarked on a feasibility study with Indian car companies such as Mahindra and Mahindra to make hydrogen available at integrated retail stations – hydrogen supply points that will form a hydrogen infrastructure no different from that required by future fuel-cell vehicles.

All this indicates that the industry will be able to bring hydrogen-powered FCVs to the point where both vehicles and fuel are attractive and affordable. Indeed, a clear vision of the road ahead is emerging. It is therefore time to take the next step; and that means implementing more realistic scenarios. Continuing to serve a handful of vehicles from single sites will not move us forward.

Lighthouse Projects – The bridge to commercialization

The fastest and most cost-effective way to do this is via Lighthouse Projects – clusters of consumer-friendly retail sites where over 100 hydrogen vehicles from different car companies are served by more than four hydrogen stations. Operated by two or more energy companies and involving fleet owners, they would be run on a semi-commercial basis in international collaboration with government as public-private partnerships. As such, they will not only attract industrial commitment but also generate a critical mass of researchers and entrepreneurs, accelerate best practice and give confidence to the financial community.

Lighthouse Projects will thus play a crucial role in bridging the gap between the current demonstration projects and commercialization – a stepping-stone to a full commercial infrastructure rollout. They will obviously be much more efficient to run than the current stand-alone retail stations. They can also escalate in scale and sophistication, progressing from clustered integrated retail stations to clusters connected through corridors, as the infrastructure is steadily filled in.

By focusing initially on a limited number of Lighthouse Projects in North America, Western Europe and North-East Asia, we can build and test the strategies, disciplines and incentive mechanisms needed to coordinate activities for the next phase of development and enable the industry to grow. In fact, failure to do so could have serious consequences.

First, there is a real danger that if efforts are not focused, government funding and industry attention will become hopelessly fragmented, with valuable time being lost through duplication and reinventing the wheel. This is entirely possible – we have already experienced the issue of infra­structure "earmarks"4 in the United States; while in Europe there will be a strong push from all 25 individual member states to site activities in their own countries. But if the next move sees groups of five or six vehicles scattered in 100 locations around the world, we will end up going nowhere fast. Together, we need to work out where the early markets will be.

The second danger is that even if we get over the technology and mass-production hurdles for FCVs, we will run into a huge infrastructure "utilization hurdle" that significantly increases hydrogen supply costs. A series of scenarios, resulting from an internal Shell study of the rollout of vehicles and fuel infrastructure in a major metropolitan area, demonstrates this point clearly. In one, retail stations are located in areas and sites which do not stimulate good additional demand for FCVs and experience low facility utilization. In others, however, there is closer coordination with vehicle manufacturers on their anticipated customer needs and with local authorities on effective site development; and this is further exploited with effective utilization of facilities by realistic Lighthouse Projects. The result? A much clearer alignment of capacity with anticipated demand and more cost-effective matching of customer interests.

The model showed, not surprisingly, that a coordinated infrastructure rollout, which makes good use of existing manufacturing and retail assets, realizes much lower fuel supply costs – by up to a factor of two! The alternative is higher hydrogen fuel prices, which will simply discourage vehicle purchase. There is therefore a great need for mechanisms like larger-scale Lighthouse Projects which encourage coordination between governments and vehicle and fuel suppliers so that the industry can grow from its pre-commercial beginnings to the next phase of early commercial development.

But little can be achieved in isolation. We need international collaboration – substantial public-private partnerships, with a clear focus on commercialization. These will not only attract industrial commitment, but also accelerate best practice, attract investors, create markets and generate a critical mass of entrepreneurs. After all, it is the presence of sophisticated venture capitalists that transforms an opportunity into reality: attracting and providing capital and good management; nurturing start-up companies and linking them through the value chain; lobbying informally on the industry's behalf; and handsomely rewarding investors and entrepreneurs, thereby attracting future capital. In short, keeping their eyes firmly on the commercial ball.

Venture capital funds will support and accelerate economic activity wherever Lighthouse Projects and hydrogen power plants are being developed. One can see such funds in action in North America and Europe, where they play an active role in a wide range of projects and technology ventures. A New Energy venture capital fund has been set up in China, funded by a combination of large Chinese entities, such as the Science and Technology Commission of the Shanghai municipality, and multinational companies like Goldman Sachs and Shell. This fund will be co-managed by London-based Conduit Ventures,5 which also managed the modest but successful hydrogen and fuel-cells fund Conduit I, and Chinese partners.

Flagship energy systems – Integrating CO2, power and mobility

Of course, a hydrogen economy is not simply about transportation. With central production being the most economic route to supplying hydrogen at the pump, we should also accelerate experimenting with hydrogen-powered power plants and large-scale fuel cells. Initially using hydrogen turbines, these flagship energy systems could use Shell's proprietary gasification process to convert (carbon-intense) fossil fuels such as coal and produce hydrogen and CO2 of high purity. In one large, integrated energy complex, hydrogen could be applied to generate low-emission power, hydrogenation of crude oil in refineries and hydrogen for transportation purposes, while CO2 could be captured and stored, and in some cases could be used to enhance oil recovery. After resolving significant technical hurdles, this would be the next big step towards a new energy system based on hydrogen.

Hydrogen stations will be hydrogen supply points, but not just to fuel-cell vehicles. Micro-grids will also supply hydrogen to residential fuel cells, efficiently producing heat and power for domestic use. Metal-hydride cartridges can be exchanged here to power clean two- and three-wheelers, be they equipped with fuel cells or, initially, hydrogen internal-combustion engines. Stations will exchange or recharge hydrogen-based energy cartridges for portable and hand-held devices. The availability of 100 kW fuel-cell vehicles will give new meaning to distributed power generation, with their mobile power generator and energy storage devices flexibly deployed to refuel at home and also to power both residences and workplaces – wherever humans are active.

This will reduce the size of the energy infrastructure's required overhead and put to good use all power generating capacity, of which half is now dormant at any moment in time. Indeed, a new energy infrastructure based on hydrogen will not only introduce significant savings in the use of energy and capital investments, but it will reduce a nation's medical bill by providing a cleaner environment, thereby freeing up even more capital.

But let us come back from the future and concentrate on finding pathways to get there. Current activities and investment in creating a hydrogen economy focus on the developed areas of the world: mainly North America, Western Europe and Japan. Does this mean that developing countries will take a back seat?

Issues for developing countries

Shell's recently issued "Global Scenarios to 2025" (Shell, 2005) includes trends for demography and energy demand growth. The world's population is likely to increase by 50 per cent in the first 50 years of the twenty-first century – from about 6 billion to about 9 billion. Some regions, however, will become more populous faster than others. This analysis shows that, despite net migration of about 2 million people each year into the developed countries, their share of the global population will steadily fall.

In Asia, population growth of 1.3 billion will also not prevent a slight decline (about 2 per cent) in its share of the world population. Meanwhile Africans – despite HIV/AIDS – will increase their share by nearly a third, from nearly 14 per cent to about 20 per cent of the world's population.

On a country-by-country basis, the shift in population share is noteworthy. For example, consider China growing from 1.28 billion in 2000 to 1.4 billion in 2050; and compare that with India, growing from 1.02 billion (i.e. 20 per cent fewer people than China) to 1.53 billion (i.e. nearly 10 per cent more people than China). The Russian Federation's population, on the other hand, is expected to decline by one-third within the same time period. In general terms, the developing world population is projected to increase from 81 per cent of the world total in 2005 to 84 per cent in 2025 and 86 per cent in 2050.

Previous scenarios observed a clear trend in urbanization, most notably in the developing world. This trend shows no signs of abating. In developed regions 75 per cent of the population already live in urban areas, and this is expected to rise to 80 per cent by 2025. In developing countries, however, the shift is much greater: from 43 per cent of people in 2005 to 54 per cent by 2025.

What makes this shift so significant is not the percentage rise, but the rise in total population in developing countries. This means that while the rural population will stay approximately the same, cities will have to absorb all the growth in the world's population. This will put increasing pressure on local capacity to provide clean water, housing and food – not to mention education, healthcare and other services or public goods. This will, in turn, put increasing pressure on energy provision.

Growth depends on energy; and if the energy industry does not rise to the low-carbon challenge, it could stand in the way of world economic growth.

Developing countries and hydrogen

A fit between this "highest tech" of mobility and energy technologies and the often "low-tech" reality of developing countries may be closer than is first apparent. In fact, in some areas it actually makes a lot of sense. It must be remembered that the predicted timeline for the hydrogen economy is long – it is at least 20 years away for developed countries. Developing countries can then implement it after developed countries have taken out the initial flaws – and having spent billions of dollars doing so.

New energy systems will develop from clusters, and hydrogen is particularly efficient in urban areas. These relatively low infrastructure investments will not only bring clean mobility, but clean energy as well. Indeed, in 20 years' time the same amount of primary energy may transport someone over twice the distance – or, more pertinently, transport twice the mass – but with a significantly reduced environmental footprint.

Developing countries have another advantage: legacy assets often obstruct the deployment of new technology. Countries with little legacy technology embedded in their current energy infrastructure can actually leapfrog those with much more, skipping one or more generations of technology.

Could a new energy infrastructure based on hydrogen and fuel cells – developed over, say, a 30-year period – be the tool to modernize and diversify emerging economies and promote inclusive growth? A new industry, however, requires the presence of not just a healthy small and medium-sized enterprise sector, but an enabling environment characterized by political stability, property rights, rule of law, the right investment climate, financial services and products, and a transparent and stable legal infrastructure.

Designing a hydrogen roadmap

Hydrogen is a long-term solution to a long-term problem, but if we do not start today, it will remain a long-term solution. While developed countries are implementing Lighthouse Projects, how can developing countries move towards a hydrogen economy?

This is a difficult question and the author does not know the answer. However, we do know where to start, and this is by designing a hydrogen roadmap integrating all the expensive lessons that the developed countries have learnt.

What are these? Well, one thing is clear: the vehicle is on the critical path and the volume must go up – it is a condition for successful rollout. An effective component supply chain is therefore essential for vehicles and other applications to move down the cost curve towards mass production. This means giving component suppliers a realistic outlook on activity and investment levels over future years, while applications achieve the necessary performance and attractiveness criteria.

From a fuel provider's perspective, hydrogen distribution from central production must be developed as early as possible in order to address the issues of supply and distribution logistics. As developing countries will probably roll out later, and therefore with less uncertainty, they should be able to deal rapidly with relatively high volumes.

Then there is the public response. This can vary enormously – from enthusiastic to fearful – depending on how effectively public engagement has been conducted locally and how politicized the subject has become. For example, in communities like Iceland,6 where support and desire have been built up over several years, implementation was swift. In Washington, DC, however, where the hydrogen project was originally greeted with both community and regulatory suspicion, significant delays and budget overruns resulted.

A hydrogen roadmap should therefore address public awareness and education as early as possible, so that there is a fertile ground of public support and regulatory experience when take-off does eventually become possible. Otherwise, progress will suffer long and unnecessary delays. This means informing key decisionmakers and future customers about the long-term benefits and near-term realities of hydrogen, fuel-cell systems and related infrastructure. We also need to work out a clear customer value proposition and address the barriers to social acceptance – town planning, health and safety issues, risk assessments, etc.

This will not only facilitate market acceptance and manage expectations, but help create the necessary human capital – researchers, technicians and engineers. It means establishing qualification guidelines for trade and industry, and engaging industry associations to coordinate and step up this activity.

But it is not just the public who need to have confidence in hydrogen, it is also investors. They need to see both a transparent legal infrastructure and a stable environment. For example, what will regulations, codes and standards look like, and what permits will be required? What taxes will this industry face and in what form? What incentives will be put in place and for how long? A government's public commitment that hydrogen vehicles will not attract taxes for, say, the next 25 years will go a long way in stimulating development and attracting activity, probably without missing out on net fiscal revenue. Also, we should not lose the opportunity to develop and apply incentives to reduce CO2 emissions in the broader policy arena.

In short, there must be a clear line of sight to normal – competitive – commercial operation in order to build confidence in hydrogen's long-term viability. It means having a coherent framework of incentives and regulations that crosses different countries – reducing risk and "friction", and providing a focus for industry development. Clarity on fiscal and other long-term economic incentives is therefore essential for establishing credibility – stimulating infrastructure investment, building up vehicle demand and establishing supply chains – while the economies of large-scale production build up. Naturally, these incentives will be structured to reduce as progress allows, but it must be clear how this will happen.

Intellectual property rights are crucial for encouraging new technology and protecting investment in R&D, while discouraging broad claims which can delay development. IP rights should be considered in the context of internal – particularly American and Japanese – patent practices.

CO2 – A big business opportunity

During the early rollout stages of hydrogen as a transportation fuel it will mainly be made from natural gas, which will be available from existing hydrogen production facilities, such as refineries and gas production sites. When FCV penetration takes off, new production facilities will be built – mostly in the form of semi-central production sites – but still using natural gas and coal as feedstock.7

Central manufacturing is not just the lowest-cost method to deliver hydrogen to the customer at a retail site, but it will also enable up to 90 per cent carbon capture and sequestration, heralding the "clean" hydrogen phase. For quite some time hydrogen and CO2 will be two sides of the same coin, so we need to set targets for the latter and create incentives for its capture and storage. Shell is capturing and storing CO2 in demonstration projects now, but still needs to see if it can be done on a larger scale. It will take a decade to test the carbon-capture technology. According to Shell's CEO, Jeroen van der Veer, "And then we have to work things out with governments so we can make it [economically] worthwhile, because right now if you capture CO2, you don't get credit for it, which just isn't logical. A unit stored should be the same as a unit saved" (US News & World Report, 2007). Yet even without sequestration, there are modest CO2 advantages to using hydrogen thanks to energy efficiency improvements. Natural gas and coal will not be replaced by renewables as feedstock until the turn of the century, and there are important reasons for this.

Solar and wind generally produce electricity, but it will be many years before non-fossil power is able to meet all electricity demand. Indeed, by 2050 it is estimated that 50 per cent will still be generated from fossil resources. There are therefore strong arguments for using renewables directly for electricity instead of converting the electricity to hydrogen, which is less energy-efficient.

However, in certain regions and at certain times the excess electricity from renewables can sensibly be converted to hydrogen. We may see this first after wet seasons and on islands, such as Iceland or Tasmania. "Green" hydrogen will thus develop from locations which particularly favour renewables. Ultimately, and in regions where electricity demand is already mainly supplied by renewables, more and more may be used to produce hydrogen. It may take 30–50 years before improvements in conversion efficiencies shift this paradigm.

Effective hydrogen roadmaps

Above all, hydrogen roadmaps must underline the importance of a clear, coordinated focus on commercialization by all relevant parties. In fact, it is essential if we are to attract investors and convince them that a hydrogen economy can be not only cost-effective but highly profitable – the carrot for all entrepreneurs.

The author believes that 80 per cent of individual roadmaps have common content, and that an institution such as the United Nations University can play a vital role in building a template for hydrogen roadmaps. The main players in this fledgling industry are certainly keen to support this effort by communicating the latest lessons learnt. They are equally keen to develop relationships with their industrial partners of the future, augmented by visionary investors and funds managed by firms that are expert in the hydrogen and fuel-cell industry.

As with many of the issues that are facing developing countries, the creation of a new energy infrastructure will not be easy. But with passion, purpose and partnerships, we will surely find a way.

Notes

1. See www.shell.com/hydrogen.

2. For a discussion of Icelandic New Energy and the ECTOS project see chapter 9 in this volume.

3. For additional information on the hydrogen infrastructure in China see chapter 15 in this volume.

4. By "earmarks" is meant politically motivated conditions to incentive schemes, for instance favouring certain regions, technologies and collaborations that industry would normally not have chosen.

5. See www.conduit-ventures.com. Conduit Ventures is regulated by the UK Financial Services Authority.

6. See chapter 9 this volume.

7. On coal gasification and hydrogen in South Africa see chapter 17 in this volume.

REFERENCES

European Union (2005) Strategic Overview, European Hydrogen and Fuel Cell Technology Platform, June, available at www.hfpeurope.org.

Shell (2005) "Global Scenarios to 2025 – The Future Business Environment: Trends, Trade-Offs and Choice", Shell International, available at www.shell.com/scenarios.

US News & World Report (2007) "On the Record: Jeroen van der Veer", 27 August.

Part II
Making choices about hydrogen and fuel cells for sustainable transport

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Introduction

Population growth, urbanization and industrialization are driving a significant increase in private automobile ownership in the developing world. Urban pollution has thus risen dramatically in many of these countries, and ways to reduce the use of petroleum in the transport sector are now high on the agenda. So, too, is the need to rethink earlier transport strategies which consciously or inadvertently created incentives for the choice of private motor vehicles over public transportation systems for urban, regional and long-distance transport. For oil-producing countries, the present situation provides a windfall for those exporting crude. But the future is uncertain and will require some new thinking. This part of the book takes a closer look at these broad issues, with particular emphasis on how countries are making choices about alternative fuels and disruptive energy technologies such as hydrogen and fuel cells, alternative uses for oil and gas and alternative strategies for the transport sector.

Growing urban pollution and the impact of CO2 on climate change have led to a chorus of conflicting views on the use of "cleaner" fuels in the transport sector. Initially attention focused on the introduction of natural gas, especially in fleets of urban vehicles. The conversion of buses to CNG in New Delhi and other cities in the developing world was heralded as a great triumph in this respect. But the costs of conversion are prohibitive in those countries where natural gas is not available or easily accessible.

Rising demand for oil and gas, moreover, has led developing countries to invest further in the expansion of oil and gas production. But this provides few incentives for oil companies in the developing world to add value to oil and gas through downstream processing into petrochemicals or more innovative uses, and it does little to change existing consumption patterns worldwide, even with oil at US$100 per barrel.

One response to this recommitment to a carbon-based economy was the shift in focus to renewable fuels such as ethanol. With the successful elimination of subsidies for the production of ethanol from sugarcane and the development of flexible-fuel engines, Brazil emerged as the world's leading producer of bio-ethanol. Many developing countries are following suit. The Renewable Energy Division of the Nigeria National Petroleum Corporation, for example, has created an automotive biomass ethanol programme based on sugarcane and cassava.

Ethanol production, however, has generated increasing criticism on a number of counts. First is the impact that a growing market for biofuels can have on land-use patterns, notably the destruction of forests to provide space for crops that can be used as feeder stock for ethanol production, such as sugarcane and palm oil, and the tendency towards intensive plantation agriculture in their production. Second are the distortions that subsidization of either ethanol production and/or ethanol use creates in the incentives to grow food crops, such as maize (corn) and soyabeans, for use in ethanol production. Both a glut in the supply of ethanol and upward pressure on food prices have resulted. Third are the questionable energy gain and pollution reduction that result from the carbon-based inputs such as fertilizers used to grow the corn, the carbon dioxide emitted by the yeast to convert the cornstarch into sugar and the use of coal or natural gas to create the steam that drives the distillation process.

Although the production of ethanol from sugarcane has some environmental advantages over corn, to promote sustainable development in social and economic as well as environmental terms Brazil has invested in the development of new technology for the production of biodiesel. Petrobras, Brazil's state-run oil company, began marketing biodiesel in late 2007 and will open three new biodiesel plants in March 2008. Ten additional plants are scheduled to be built by 2012, bringing biodiesel capacity from the current 48 million gallons to 225 million gallons a year.1 In addition to being a clean technology, biodiesel opens new opportunities for smallholders to enter this market through the production of a wide variety of feeder stocks. Production decentralized to local and regional levels has the added advantage of reducing the costs of long-distance transportation for plantation-grown sugarcane, the main feeder stock for ethanol production in that country. China, the world's third leading producer of ethanol after Brazil and the United States, has now abandoned future ethanol projects that use food feedstock in favour of jatropha cultivation that does not compete with food crops, while firms in the United States and Canada are turning to research on cellulose-feedstock-processing technology which can use waste products or grasses that can be grown on low-grade soil.

The potential introduction and widespread use of disruptive technologies such as hydrogen and fuel cells add yet another dimension to the issues surrounding the choice of fuels and alternative transportation policies. The uncertainties surrounding the date for the likely commercial introduction of hydrogen and fuel-cell vehicles shape the long- versus short-term parameters within which developing countries must make choices about the continued use of existing fuels and transport modes, moving into transitional technologies such as CNG or ethanol that would require substantial investments or taking a leap into an uncertain hydrogen future.

A number of countries are giving these issues considerable thought, and what seems to be emerging is a variety of new energy and transport options that take a broader, more flexible and longer-term perspective. Diversification of energy portfolios, modes of transport and points of entry into a hydrogen economy are illustrative of this change and show how it is possible to maximize learning and positive development impacts along with reducing greenhouse gases (GHGs). Iceland and Egypt provide two interesting examples.

Some 70 per cent of Iceland's energy needs are met by thermal and hydropower. To cut GHG emissions still further, Iceland is exploring the use of excess electric power to generate hydrogen through electrolysis and then reacting the hydrogen with CO2 and CO emissions from aluminium smelters and other heavy industry in that country to produce synthetic hydrocarbon fuels. Synthetic fuels produced in this fashion are carbon-neutral and thus have an advantage over synthetic fuels produced from carbon-based inputs such as coal that would require carbon sequestration technologies still in their infancy (see part IV of this volume).

Making choices about pollution abatement in the transport sector often pits speed against longer-term learning and development advantages. Egypt is avoiding dichotomies such as these by creating an integrated transport strategy. Egypt already has extensive experience in the production of hydrogen through both electrolysis and natural gas reforming. Along with its natural gas distribution network, the country has a good foundation for a later move to hydrogen. Egypt is also a manufacturer of buses, and with the proper incentives could use this set of local energy resources and capabilities to reduce urban pollution significantly. From this perspective, Egypt chose CNG bus demonstration projects for Cairo over the much more costly and not immediately commercializable hydrogen fuel-cell bus demonstration projects, such as those under way in Iceland, China and Brazil. The decision to build a long-term sustainable transport sector has thus led Egypt to lay the basis for hydrogen and fuel-cell technologies in the future by maximizing learning from related technologies in the present.

Note

1. See www.biofuels-news.com/news/petrobas_10.html.

5
Alternative transport fuels in developing countries and implications for approaching hydrogen

Grant Boyle

Introduction

Hydrogen and fuel cells appear to be a promising solution for developing and developed countries alike. Developing countries suffer from far greater transport pollution problems, and are projected to overtake OECD countries in greenhouse gas emissions in the next two decades. Oil dependence is on the rise in many of these countries as they move away from "traditional biomass" energy resources into fossil fuels, particularly in transport, and many developing countries are interested in participating in the commercialization of new technologies.

However, in the short term hydrogen fuel cells do not typically emerge as the best solution for meeting environmental goals. For example, higher emissions standards for conventional ICE vehicles and higher-quality gasoline and biofuels such as Ethanol and biodiesel are relatively lower-cost solutions that can be taken over the short term to reduce urban air pollution, and these standards are likely to come into effect in many developing countries in the coming years, as chapter 6 in this volume illustrates. Similarly, better efficiency standards for conventional vehicles, including hybridization, and improved public transport and demand management are key solutions for reducing greenhouse gas emissions and oil dependence in developing countries. In terms of industrial development opportunities, the market for ethanol and biodiesel blending in gasoline and diesel presents an immediate opportunity for many developing countries. In this regard, over the short term interest from these countries in hydrogen and fuel cells will be driven primarily by longer-term technology and sustainable energy planning rather than by short-term goals associated with oil dependency, air pollution or emerging greenhouse gas reductions – a point raised in chapter 8 in this volume. Still, it is important for developing countries to monitor hydrogen development and map their engagement strategically.

A useful source of guidance for understanding the role of hydrogen and its potential opportunity and path of emergence is the experience that developing countries have had with alternative fuels thus far. There is already a wealth of experience to draw upon, as some of the largest and most successful alternative fuel programmes to date have taken place in the South. This chapter provides an overview of the policy drivers of alternative transport fuels, the status of commercial alternative fuels in developing countries and a framework for understanding the key mix of conditions that have tended to catalyse the deployment of these fuels in developing countries to date.

Drivers of alternative transport fuels in developing countries

About 95 per cent of transport fuel demand in the world is met by oil. Alternative fuels like compressed natural gas, liquefied petroleum gas, ethanol, biodiesel and electricity comprise only niche markets in both developed and developing countries, but are receiving increased attention for a number of reasons: local air pollution, greenhouse gas emissions, oil dependency and imports, and industrial innovation and employment.

Local air pollution

Increased local air pollution from the combustion of gasoline and diesel in transport and the related health impacts from particles, carbon monoxide (CO), nitrogen oxides (NOx) and sulphur dioxide (SO2) are of particular concern for many cities in developing countries where the levels of NOx, CO, hydrocarbons and particulates exceed World Health Organization guidelines by significant margins. CO, emitted when fuels containing carbon are burned incompletely, poses serious health threats, particularly to foetuses and people with heart diseases, by hindering oxygen transport from the blood to body tissue. Nitrogen dioxide (NO2) has been linked with increased susceptibility to respiratory infection, increased airway resistance in asthmatics and decreased pulmonary function.1 Particulate matter (PM), discrete liquid or solid particles of different sizes, can be directly emitted from fossil-fuel combustion or result from transformations of gaseous emissions like NOx and SO2. Particulates aggravate respira­tory and cardiovascular disease. NOx and SO2 are also key agents of acid deposition (acid rain). Gaseous air toxins, like benzene, are considered human carcinogens, and lead impacts on the intellectual development of children.

Generally, conventional air pollutants in the absence of advanced pollution controls and standards rise in direct proportion to increased energy use. Motorization in transport is a major contributor to increased emissions of these pollutants. In recent years rapidly motorizing Asian cities have experienced particularly sharp rises in air pollution from transport.2

Conventional air pollutants have been significantly reduced in many industrialized countries over the last few decades with improved fuels, engine technology, engine efficiency and engine after-treatment technology. Many developing countries are following a similar path by introducing higher standards (such as EURO standards) for new vehicles and improving gasoline and diesel quality. Leaded gasoline, for example, is being phased out in most of the developing world. Many developing countries are now looking at reducing sulphur in gasoline and diesel in order to reduce local emissions and enable the use of engine after-treatment technologies (such as advanced catalysts and particulate filters) that would be inoperable with high-sulphur fuels. However, financial challenges, low vehicle turnover rates, the practice of importing older vehicles from the North3 and weaker enforcement institutions in developing countries may delay the control of conventional pollutants in the South. Many analysts agree that cleaner fuels (including alternative fuels) and vehicles need to be taken up, along with inspection and maintenance regimes and integrated transport planning, in order to deal with urban air pollution comprehensively.

Greenhouse gas emissions

Climate change4 is emerging as a major, long-term global threat that is projected to have negative impacts for developing countries, including impacts on agriculture and food production. Climate change results from emissions of greenhouse gases – mainly CO2 released in the combustion of fossil fuels. CO2 emissions are distinct from conventional pollutants in both the scope and the nature of the impact on human health and environment. Conventional pollutant impacts are more immediate and localized (respiratory health/acid rain), whereas greenhouse gas (GHG) emission impacts are more delayed and global (global climate and ecosystem instability/sea-level rise/food production). While higher efficiency standards and other measures can be taken to reduce CO2 emissions from in-use vehicles, "tailpipe" technologies like catalytic converters or other

devices that are used to reduce or nearly eliminate conventional emissions are not yet available for CO2.

As of 2000 emissions from transport-related activities accounted for around 20 per cent of GHG emissions5 worldwide. According to the International Energy Agency (2004a), developing countries are expected to contribute more than two-thirds of the increase in global CO2 emissions over the next three decades and to surpass the OECD as the leading contributor in the early 2020s. An increasing share of these emissions will come from transport. The World Energy Outlook (ibid.) projects CO2 emissions from transport will grow by approximately 170 per cent from 2002 to 2030 in developing countries, compared to 43 per cent in OECD countries over the same time period (table 5.1).

Although improvements in efficiency are expected to reduce CO2 emissions per kilometre travelled (especially in industrialized countries where more efficient technologies may first be deployed), these improvements will probably be offset by both increased utilization and increased numbers of vehicles. According to the World Business Council for Sustainable Development (2004), total annual passenger-kilometres are expected to grow over the next 30 years on average by 3 per cent per year in China, 2.8 per cent in Latin America and 1.6 per cent in Africa. Vehicle ownership rates in China and Latin America are projected to rise to current OECD levels (approximately 500 vehicles per 1,000 people) by 2050, which would result in approximately 5 billion vehicles worldwide compared to the current 1 billion.

Analysts and policymakers have promoted a range of solutions to address GHG emissions from transport. Solutions include transport planning measures like linking urban development and land use with transport to improve access to goods and services while reducing the need to travel, improving options for non-motorized transport and public transportation, and promoting modal shifts to rail for freight transport, as well as more technological solutions related to improved fuel efficiency, fuel and vehicle quality, inspection and maintenance and the use of bio-fuels and other alternatives, including hydrogen (ADB, 2006).

Oil dependency and energy imports

Oil dependence and expensive oil imports are a major concern for developing countries and a key driver of energy policy, particularly since so few countries possess oil reserves and the price of oil has increased dramatically in recent years. In 2030 the transport sector will account for 54 per cent of global oil consumption, compared to 47 per cent now and 33 per cent in 1971, and the bulk of the growth is projected take place in developing countries (International Energy Agency, 2004a). South and East Asia's share of world energy demand in transport is projected to grow from 11 per cent in 2000 to almost 30 per cent in 2030, and China is expected to account for 12 per cent of total transport energy demand by 2050. At the same time, the Asian region's oil import dependence is expected to double from 43 per cent to 78 per cent in 2030, marking significant increases in oil imports in coming years for Asia's developing countries (table 5.2). And by 2020 India's oil imports are expected to rise from 70 per cent to 85 per cent of consumption, also indicating increased energy dependence.

In addition, high oil prices have significant impacts on the fiscal positions of many developing countries that rely heavily on oil imports or subsidize domestic fuel consumption and/or regularly intervene to shelter their economies from price shocks. Indonesia, for example, which has long subsidized domestic fuel consumption, has faced increasing subsidy costs with rising world oil prices. In 2004 the Indonesian government originally planned to spend 14 trillion rupiah ($1.5 billion) on fuel subsidies. As the oil price rose, the bill more than quadrupled, to 63 trillion rupiah (The Economist, 2004). Indonesia, Nigeria and Iran (also

oil-producing countries with traditionally low fuel prices but limited domestic refining capacity) face significant costs related to importing higher-priced fuels bought on the world market and maintaining low domestic prices.6

The production and use of alternative fuels have become a key solution to reduce oil imports and save foreign exchange reserves. In the case of the Brazilian ethanol programme, which was originally prompted by high oil prices in the 1970s, it has been estimated that the use of ethanol in transport led to foreign exchange savings of $18 billion (in 1990 US$) from 1978 to 1990 (La Rovere, 2005). The high price of oil in the 1970s and the balance-of-payments crisis in the country were probably the primary drivers of the Brazilian programme.

Industrial development and employment

The industrial development and employment opportunities in the development of the alternative fuels industry are also important, especially when considered in conjunction with the costs of foreign oil dependency. In a number of developing countries with oil resources, a primary step towards further innovation is developing refining capacity to provide automotive fuels domestically rather than relying on imports. Oil-producing countries that rely on refined-product imports include Indonesia, Viet Nam, Nigeria and Iran.

Many developing countries have invested in CNG and a growing number are interested in biofuels. The often-cited success story of the Brazilian ethanol industry demonstrates the potential gains in industrial development, exports and employment in the alternative fuels sector. The Brazilian ethanol programme (Proálcool) is the largest commercial application of biomass for energy production in the world, accounting for 70 per cent of the world total biofuel transport market. The programme has led to the creation of 720,000 direct jobs and more than 200,000 indirect jobs in rural areas – a significant outcome in Brazil, although there has been criticism of the social conditions of workers. Industries involved in the programme have also seen large productivity gains over its course.

Similarly, the natural gas vehicle industry has had important benefits for Argentina and other countries with natural gas programmes. The programme in Egypt is credited with the creation of 2,500 new jobs. Biofuels also represent an important potential industrial opportunity for developing countries, which often possess the best climatic conditions for biofuel crops. In addition, biofuel production can be adapted from existing agricultural industries and capacities in many developing countries.

Alternative fuels and their status in developing countries

There are a number of different fuels and fuel-propulsion-system combinations (table 5.3). Here the chapter considers alternative fuels to gasoline and diesel that have seen some commercial market penetration: natural gas, liquefied petroleum gas, electricity and biofuels.

Natural gas

Natural gas is comprised primarily of methane, which has a higher hydrogen-to-carbon ratio than gasoline or diesel and a higher octane number, permitting engines that operate at high compression ratios. Natural gas offers significant reductions in local air pollutants, especially particulate matter, compared to conventional diesel vehicles. World supplies of natural gas exceed proven oil reserves by 22 per cent, and natural gas requires very little processing for automotive use. Countries that already have natural gas distribution infrastructure can introduce gas as a vehicle fuel relatively easily by installing refuelling appliances in grids. Without grids, road tankers must be used in large numbers.

Gasoline and diesel vehicles need to be retrofitted for natural gas unless new vehicles are used. Natural gas vehicles can be bi-fuel vehicles (which can run on either gasoline or natural gas); dual-fuel vehicles (which run on a mixture of diesel and natural gas); and dedicated vehicles (which run entirely on natural gas). Natural gas vehicles are typically more expensive and have shorter driving ranges than conventional

vehicles. As of 2003 there were more than 3.3 million natural gas vehicles and almost 7,000 refuelling stations worldwide (table 5.4). Italy, Argentina, New Zealand, the Russian Federation and the United States have significant natural gas vehicle fleets, as do Brazil, Pakistan, Egypt, India and China in selected cities.

Liquefied petroleum gas

Liquefied petroleum gas (LPG) is a mixture of light hydrocarbons, mainly propane/propenes and butanes/butenes. Sixty per cent of LPG in the world today is produced through extraction from natural gas or from crude oil streams coming from underground reservoirs, and 40 per cent is extracted in the refining of crude oil. LPG generally has lower conventional emissions but similar NOx emissions to gasoline vehicles; it has a high octane number (especially propane), permitting higher compression ratios than gasoline engines. Most LPG vehicles replace gasoline vehicles. The main potential problems in introducing LPG to the transport sector have to do with stability of supply and the distribution system. Special refuelling equipment is needed to transfer the pressurized liquid from storage tanks to the vehicle and ensure that no LPG escapes during refuelling: such facilities are already in use on a large scale in the Netherlands and Italy. LPG is also used in significant amounts in Japan, North

America, Mexico, Turkey, Hong Kong, China, Iran and Thailand (table 5.5).

Biofuels

The two most commonly used biofuels in vehicles are ethanol and biodiesel. Ethanol-blended gasoline or "gasohol" at 5–10 per cent ethanol-blended gasoline is a common concentration. Pure ethanol is used only in the Brazilian Proálcool programme, which uses specialized engines.7 Ethanol has high octane and relatively clean combustion characteristics. The presence of oxygen in ethanol facilitates combustion, reducing CO and hydrocarbon (HC) emissions; however, the emissions of aldehydes, which are toxins, are higher from ethanol than from conventional fuels. CO2 emissions vary, and depend on life-cycle emissions.8

Ethanol can be produced from many biological feedstocks, including sugarbeet, sugarcane, corn and other cereals, as well as potentially cellulose materials: grasses, wood and various waste products are common examples. Alcohol can be used in gasoline vehicles at blends of up to 20 per cent, provided rubber parts are replaced in older vehicles. Distribution is similar to gasoline, but requires installation of alcohol-resistant materials along the fuel chain.

Biodiesel is produced by reacting vegetable or animal fats with alcohol to produce a fuel similar to diesel; it comes mainly from rapeseed, soyabean, sunflower and palm. Engines running on low-level blends of biodiesel tend to have lower CO emissions but higher NOx. CO2 emissions vary depending on production. Biodiesel may have negative side-effects on engine and refuelling components unless precautions are taken, but biodiesel and diesel have no major differences in infrastructure requirements. A significant barrier to biofuels is the land area required for feedstock.

Global biofuel consumption in transport was 8 Mtoe in 2002, representing 0.4 per cent of total transport fuel consumption worldwide.

Seventy per cent of the world total consumption takes place in Brazil, where ethanol has been produced from sugarcane since the 1970s and where the fuel accounts for 30 per cent of local gasoline demand (table 5.6).

The second-largest producer of ethanol is the United States, with around 23 per cent of the global share. Biodiesel production is highest in Europe, where more biodiesel is produced than ethanol, but total production of both fuels is fairly small compared to production of ethanol in Brazil and the United States. The main biodiesel-producing countries are France, Germany and Italy, where the fuel is used as a diesel blend (5 per cent or 20 per cent). In Germany biodiesel is commonly sold "neat" (100 per cent).

China and India are beginning to produce significant amounts of ethanol for fuel blending. The Philippines is investing in coconut biodiesel, equivalent to about 1 per cent of diesel fuel use in the country. Malaysia is gearing up for greater production of palm-oil biodiesel production. A number of African countries have begun to experiment with the production of biodiesel from physic nuts (jatropha). In Colombia the government approved a law requiring cities with populations exceeding 500,000 to add 10 per cent ethanol to gasoline beginning in 2006. India and Thailand have incentive programmes.

Direct electric propulsion

In electric propulsion, a vehicle uses batteries to power an electric motor. Electric vehicles produce no emissions during operation. For public transport vehicles, use of external current is well established, while for private automobiles battery electric vehicles have encountered problems with slow recharging, cost and driving range, and have received less attention than hybrid gasoline-engine/electric vehicles in recent years. Battery-driven three-wheeled vehicles occupy small segments of urban transportation systems in India and Nepal. Lead-acid batteries are currently used as a low-cost option; nickel-metal hydride and nickel-cadium have greater driving range, but are more expensive. The economics of electric vehicles also depends on the local cost of electricity. Electric batteries must be recharged by plugging the vehicle into a power source and may take between two and eight hours to replenish, depending on the power of the charging system. Some vehicles have on-board chargers, while others plug into a charger located outside the vehicle, but both must use electricity that comes from the power grid to replenish the battery. Electric batteries have a limited number of charging cycles – and typically need to be replaced every three to six years.

Factors influencing market deployment

Despite their benefits, alternative fuels and vehicles are typically more expensive than conventional fuels and vehicles. They face significant barriers, like new and different fuelling infrastructure, insufficient codes and standards, increased maintenance costs and technical support requirements, underdeveloped financing mechanisms, unestablished consumer support and so forth. As such, there are some important lessons to be drawn from the developing country experience to date with alternative fuels in trying to understand how new and existing alternative fuels, including hydrogen, are likely to enter the market.

Alternative fuel markets tend to develop as niche markets in the context of gasoline and diesel markets and tend to be supported by conditions that are unique to each country case. The factors that are particularly catalytic in the deployment of alternative fuel programmes in developing countries to date are categorized as local energy resources, supportive pricing policy and political commitment, history of related innovation and supportive social attitudes and perceptions.

Local energy resources

The local endowment of energy resources is clearly an important factor determining the market development of alternative fuels. Countries with alternative fuel programmes typically possess domestic alternative fuel resources and lack conventional oil reserves. Countries that have natural gas vehicle programmes typically possess significant gas reserves, like Pakistan, Argentina, Egypt and Iran, or significant production capacity, like India. Brazil has abundant sugarcane to support ethanol production, and Nepal has significant hydroelectric resources to fuel its battery-operated three-wheeled vehicles. Emerging biofuel production programmes in developing countries are also based on local agricultural resources. Examples include ethanol from corn in China and sugar and tapioca in Thailand, and biodiesel from palm oil in Malaysia, coconut oil in the Philippines and jatropha in Mali and Ghana.

Possessing alternative fuel resources and lacking oil reserves, however, are only part of the picture. The economic advantage of local sources is expressed most accurately in the price competitiveness of alternative fuels relative to conventional gasoline and diesel. Prices may depend on local innovations and conditions that are not always readily apparent or transferable. The use of relatively inexpensive hydroelectricity during non-peak hours to power three-wheeled vehicles in Nepal, for example, has enhanced the cost-effectiveness of that programme, as have the particularly productive soils and climatic conditions for efficient sugarcane and ethanol production in Brazil. Also, even if a country possesses oil reserves, a lack of refining capacity may make alternatives more economically attractive than oil. While Iran, for example, has significant crude oil reserves, it lacks refining capacity, making its natural gas more competitive with imported gasoline.

The price advantage of alternative fuels may fluctuate over time depending on world prices for oil and the alternative fuel in question. Fluctuations in world sugar and oil prices, for example have largely determined the path of the Brazilian ethanol programme, which since 1975 has experienced a series of peaks and valleys that mirror international oil prices. Prompted originally by high oil prices and low sugar prices, the Proálcool programme was successful in adding high-ethanol blends in the early 1970s and then hydrated/"neat" ethanol (typically 96 per cent ethanol and 4 per cent water) vehicles after the second oil crisis. By 1984 the number of cars running on pure hydrated alcohol reached 17 per cent of the country's fleet, and by the late 1980s neat ethanol was used in over a quarter of the vehicle fleet: 3–4 million vehicles consuming nearly 10 billion litres per year. With the drop in world oil prices in the late 1980s, however, ethanol prices and related subsidies quickly lost their advantage and the programme eventually collapsed, only to be revived again with the higher oil prices at the end of the 1990s. Recent revival of the market has been accompanied by the introduction of flex-fuel vehicles in Brazil that can run on any mixed proportion of gasoline or ethanol.

Supportive pricing policy and political commitment

Policy support is another factor determining the market development of alternative fuels in transport. Policy support and public leadership involve research and development support, pricing support and regulations, overall coordination, codes and standards development, raising public awareness and political and symbolic leadership for the market. In some cases governments have played more interventionist roles in promoting alternative fuels than in others. Delhi's introduction of natural gas vehicles was prompted, for example, by a mandate from the Supreme Court of India in 1998 to replace the city's bus fleet, three-wheelers and taxis with gas and outfit the city with refilling stations. CNG sales subsequently increased dramatically from 0.99 lakh kg per day in March 2001 to 6.5 lakh kg per day in January 2003, and Delhi now has one of the largest CNG bus fleets in the world with 7,400 buses, 4,000 minibuses and 45,000 three-wheelers. Similarly, the Ministry of Petroleum in Egypt approved a set of companies which were given specific mandates and targets for vehicle conversion centres and filling stations.

All programmes have supportive fuel pricing, through either liberated pricing policies, tax exemptions or controlled prices that benefit alternative fuels, as well as incentives or tax breaks for new vehicles, vehicle conversions, refuelling infrastructure or production facilities. Table 5.7 shows the relative price advantage of natural gas in selected countries in 1998.

History of related innovation

Alternative transport fuel markets are typically built on the legacy of existing industries and other fuel applications. LPG and natural gas are typically used as domestic or industrial power sources, for example, before they are used in transport. Pakistan, one of the world's most gas-dependent economies, started to use natural gas as early as the 1950s and now has a well-developed and integrated infrastructure (approximately 50,000 km of distribution and service lines). While possessing one of the world's largest natural gas vehicle programmes, Pakistan consumes only a small portion of its gas in transport. In 2003 45 per cent of natural gas consumption went to power, 18 per cent to fertilizer, 18 per cent to general industry and 2 per cent to transport (HDIP, 2004). Similarly, Mexico's use of LPG has followed the refining sector's development in that country, and the recent surge of natural gas vehicles in Chinese cities has followed the construction of the west-east gas pipeline network, constructed to bring natural gas from western China and Mongolia to the industrial centres on the east coast.

Ethanol and biofuel transport programmes typically redirect existing industrial production to the transport sector. The development of the Brazilian ethanol programme was built on the infrastructure and knowledge base that had been developed since the country's inception. In recent years sugar distilleries in the country have become highly productive ethanol producers. Table 5.8 shows the productivity gains in different

manufacturing capacities of Brazil's leading ethanol-distillery-equipment manufacturer (commanding approximately 80 per cent of market share) from 1975.

South Africa, which is starting to supply the transport sector with ethanol as a lead replacement for gasoline, is sourcing ethanol from existing production, which is mainly for industrial and pharmaceutical use. Similarly India, also a large producer of ethanol for non-fuel sectors (industrial, beverage and pharmaceutical), has begun to market ethanol-blended gasoline.

Supportive social attitudes and perceptions

Alternative fuels are also typically viewed as key solutions to pressing social problems that are frequently related to one or more of the "drivers" mentioned above. Urban air pollution is often a key driver of alternative fuels in developing countries due to its magnitude and visibility and the degree of public exposure to the problem. The introduction of electric three-wheelers in Nepal was accomplished during a period of intense objection to visible air pollution from three-wheeled diesel vehicles, for example. The anti-diesel three-wheeler movement among NGOs, the tourism sector and others in Kathmandu peaked in early 1999 and the vehicles were banned, making way for the alternative technology. Urban air pollution was also the driver of the gas conversions in Delhi as well as LPG taxi conversions in Bangkok and other Asian cities. Pressure to improve air quality in Beijing and Shanghai in time for the upcoming world exposition and Olympics has driven natural gas vehicle programmes in those cities. Energy security and balance-of payment concerns were the chief drivers in Brazil's ethanol programme, although climate change and the market mechanisms of the Kyoto Protocol have more recently drawn attention there, and industrial development and exports are key drivers behind emergent biofuel production in Ghana, Peru, Costa Rica, India and China. Industrial leadership and export potential are major drivers in Argentina.

Conclusions

It is important to put alternative fuels and hydrogen into context in policymaking. The policies that drive hydrogen fall under goals relating to air pollution, climate change, oil dependency, industrial development and transportation. These goals, on their own, can be approached with a range of solutions, some of which are directly related to vehicle and fuel technology – the introduction of alternative fuels, for example – and some of which are not, such as better urban transport planning. Some of these changes, moreover, respond to immediate and pressing manifestations of these goals, such as the need for domestic refining capacity for oil exporters, while others address longer-term implications, for example the need to develop a substitute for oil.

In terms of alternative transport fuels, developing countries have some of the largest and most successful alternative fuel programmes in the world. At present natural gas is used in a number of developing countries, as noted above. Brazil dominates global biofuel production, but other developing countries are investing in biofuels in the face of higher oil prices. There are also smaller pockets of LPG and electricity use in developing countries.

Experience shows that alternative fuels tend to be taken up in a manner that depends on a range of local conditions related to energy resources, policy leadership, social concerns and industrial experience. There is no reason to believe that the uptake of hydrogen will be much different, particularly since hydrogen is likely to be produced in a decentralized fashion, through different techniques and from various feedstocks available from country to country – an approach that is markedly different from today's more centralized and uniform gasoline and diesel production processes.

Based on these lessons, those countries, including developing countries, that are not at the forefront of hydrogen research and experimentation should monitor the latest developments closely and plan engagement in the hydrogen economy on the basis of a clear assessment of policy priorities relating to transport and energy and a solid understanding of local energy, technological and social characteristics that are likely to shape the development of alternatives to oil in a given setting.

Notes

1. Major sources of nitrogen dioxide (NO2) are high-temperature combustion processes, such as those occurring in automobiles and power plant. Nitrogen oxides generally (NOx) also react with volatile organic compounds in the presence of heat and sunlight to create ground-level ozone (the main ingredient in smog), which can cause harmful respiratory effects including aggravating asthma and decreased lung function.

2. See chapter 12 for a discussion of the situation in Malaysia.

3. See chapter 16 for the Nigerian case.

4. There is now extensive evidence, accepted by the international scientific community, that the world is getting warmer, with an increase in global average surface temperature of about 0.6°C over the twentieth century. The atmospheric concentration of carbon dioxide has increased by 31 per cent since 1750 to levels that have not been exceeded during at least the past 420,000 years.

5. Greenhouse gas emissions include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), halocarbon gases and some other synthetic compounds (e.g. perfluorocarbons).

6. In 2005 many Asian countries began reducing subsidies and letting consumer prices rise in the face of increasing world oil prices. Malaysia, Thailand and Indonesia, for example, have recently let prices rise, with near-100 per cent increases in Indonesia.

7. For a discussion of the Brazilian flex-fuel engines see chapter 6.

8. Energy-intensive bio-ethanol production from corn in the United States, for example, results in almost no CO2 reductions, while some of the pilot plants in Europe using cellulostic feedstocks see up to 100 per cent improvement over gasoline (International Energy Agency, 2004b).

REFERENCES

ADB (2006) "Energy Efficiency and Climate Change Considerations for On-Road Transport in Asia", Working Paper, Asian Development Bank, Manila.

Frost and Sullivan (2004) "Fuels for Road Transport: Final Report, Prepared for Workstream 3 of the SMP, December 2002", in World Business Council for Sustainable Development Mobility 2030: Meeting the Challenges to Sustainability, available at www.wbcsd.org/templates/TemplateWBCSD5/layout.asp?type=p&MenuId=ODE&doOpen=1&ClickMenu=LeftMenu.

GAIN (2002) "Statistics", available at www.worldlpgas.com/gain/mainpages/infoportal/statistics.php#chart2.

HDIP (2004) "Inter-fuel Substitution", available at www.hdip.com.pk.

IANGV (2005) "Natural Gas Vehicle Statistics", available at www.iangv.org/default.php?PageID=130.

International Energy Agency (2004a) World Energy Outlook 2004, Paris: IEA/OECD.

——— (2004b) Biofuels for Transport: An International Perspective, Paris: IEA/OECD.

La Rovere, E. (2005) Personal correspondence.

The Economist (2004) "Pump Priming", The Economist, 30 September, available at www.economist.com/world/asia/displaystory.cfm?story_id=E1_PNQSDJG.

World Business Council for Sustainable Development (2004) Mobility 2030: Meeting the Challenges to Sustainability, available at www.wbcsd.org/templates/TemplateWBCSD5/layout.asp?type=p&MenuId=ODE&doOpen=1&ClickMenu=LeftMenu.

6
The ethanol and biodiesel programmes in Brazil

Paulo Teixeira de Sousa Jr, Evandro L. Dall'Oglio, Michèle Sato, José M. Marta, Rodrigo Aleixo Brito de Azevedo and Célio Spindola

Introduction

Since the beginning of civilization, human ingenuity has been used to increase the efficiency of work and reduce physical human effort. Applications in energy technology have enabled achievements that otherwise would have been impossible. Societies that have had access to energy resources and the knowledge to exploit them have tended to enjoy significant benefits and improved standards of living.

Society's demand for energy, however, is constantly growing as a consequence of technological development and the improvement of living conditions. The average energy consumption of human beings has grown enormously, from the initial value of 2,000 kcal/day that characterized primitive man 1 million years ago to a modern average of 250,000 kcal/day per capita (the United States in 1970) (fig. 6.1). It is important to stress, however, that there is an enormous difference in the energy consumption when industrialized countries (25 per cent of the world population) are compared with the rest of the world. The United States, with just 6 per cent of the population, accounts for 35 per cent of the energy consumed in the world. This difference is reflected in the average per capita world energy consumption, reaching in 1998 the value of 18,000 kcal, or 1.79 TEP (tonne equivalent of petroleum) (Goldemberg and Villanueva, 2003). Modern society, however, relies heavily on an adequate supply of energy: at the end of the nineteenth century human effort

Figure 6.1 Per capita energy consumption over time
Source: Goldemberg and Villanueva (2003).

constituted 94 per cent of all industrial work in the United States; today it represents only 8 per cent (Lomborg, 2002).

A steady growth in world population has taken place in tandem with ever-increasing per capita energy consumption. Population, moreover, has grown geometrically in the last 1,000 years, placing additional pressure on energy resources. To satisfy the ever-increasing demand, humanity has made use of different energy sources, and the relative importance of these resources has differed between industrialized and developing countries. In 1988, for example, 37 per cent of the energy consumed in industrialized countries came from petroleum, 25 per cent from gas, 19 per cent from coal, 9 per cent from nuclear energy and only 10 per cent from renewable energies such as hydro and biomass. In contrast, although petroleum accounted for 33 per cent of energy resources in the developing countries, renewables such as biomass (22 per cent) and hydropower (7 per cent) provided 29 per cent of their energy sources (Goldemberg and Villanueva, 2003).

The great increase in fossil-fuel energy consumption observed mainly over the last century, along with increasing petroleum prices, has forced several countries to seek alternative energy sources in the last 30 years, as well as to improve their efficiency in energy consumption.

OECD countries account for 80 per cent of the world's economic activity, with annual energy consumption above 300 exajoules (EJ). Such countries are highly dependent on petroleum imports, and are responsible for 63 per cent of total primary energy consumption. It has been estimated that in 2100 this consumption will range from 500 to 2,700 EJ/year. Renewable sources such as solar and biomass will likely play a central role in meeting future demand, with a lesser role for other renewables such as hydro, tidal and geothermal energy. The current use of renewable energy in the world amounts to an estimated value of 56 EJ/year (including 38 EJ/year coming from traditional biomass, like firewood). This is equivalent to 14 per cent of the world's consumption of primary energy.

Between 1970 and 1990 about 800 million people benefited from rural electrification programmes, mostly in China. In spite of this monumental effort, the number of people without electricity access remains the same in absolute terms today – around 2 billion (Goldemberg, 2002). The development and improvement of modern biomass technologies for electrification, as well as for cleaner energy supply in all sectors, including transportation, are of fundamental importance for improving the standard of living for excluded populations. Modern biomass also enables the substitution of the traditional use of biomass (firewood for cooking and performing other rural tasks) by more efficient forms of biomass conversion.

By 2004 renewable energies had come to constitute 43 per cent of total primary energy consumption in Brazil. Unlike other developing countries, where the burning of firewood is intensively used as an energy source, Brazil relies on a huge agro-industrial park for ethanol production from sugarcane. The country is the world leader in the production and consumption of renewable energy from biomass, and often serves as an example for other countries in using local biomass resources to achieve the Millennium Development Goals and help mitigate greenhouse gas (GHG) emissions and the impact of climate change.

Therefore, although hydrogen seems to be the most promising energy source in the long term for the transport industry, for developing countries biofuels present a more feasible alternative in the short term, as the Brazilian experience demonstrates. This chapter intends to show, in light of this experience, how developing countries can develop alternative sources of energy and take advantage of these to improve their living conditions.

The Brazilian alcohol programme (Proálcool)

The 1970s were a time of military dictatorship in Brazil. The government was closely associated with multinational capital as well as with large Brazilian agrarian and industrial capital. The decade saw several international economic crises. Financial deficits grew sharply as a function of rising imported petroleum prices, and an appreciable rise in external debt occurred as a consequence of increasing international interest rates.

Another component of the deficit was the historically low exporting capacity of the country, in association with the accelerated expansion in capital goods and intermediate imports needed to achieve the II National Development Plan of the Geisel government (1974–1978). By that time the close relationship of the government to international financial capital had enabled the country to secure the financing of international private banks in order to pay for the copious state enterprise investments demanded by the development plan. Rising interest rates, and the subsequent financial burden on the country, would be one of the central components of the deep crises Brazil confronted from 1981 to 1984.

The petroleum crises, furthermore, had a sizeable impact on the country's financial health. Although the state petroleum company (Petrobrás) had initiated its activities in 1954 and there was considerable investment in oil exploration and refining, more than 80 per cent of the petroleum used at that time was imported (fig. 6.2). Regarding electricity generation, it was as it is today: predominantly hydroelectric. Again, many of the hydroelectric plants (including the world's largest, Itaipú) were built in the 1970s. The nuclear agreement with Germany, which led to the construction of several nuclear electricity plants, also dates back to this period. By the middle of the 1970s overall Brazilian dependence on external energy sources was around 45 per cent, as shown in figure 6.2.

The search for alternative fuels in Brazil can be dated back to the 1920s, when the Instituto Nacional de Tecnologia (INT) carried out experiments using biofuels in internal-combustion engines. It was not until the 1970s, however, that the implementation of alternative fuels was

Figure 6.2 Brazilian external energy dependence to the year 2004 (%)
Source: Ministry of Mining and Energy (2005).

seriously considered, primarily as a means of alleviating the country's energy dependence. This motivation, along with the low price of sugar in the international market and the strong pressure and political power of the sugarcane producers, enabled the elaboration and implementation of the Brazilian alcohol programme (Proálcool1).

Proálcool also benefited from a previous rural and industrial productive infrastructure, sustained by extensive rural property and industrial plants in the north-east and south-east regions of the country. This industrial oligarchy had been very influential since colonial times. The Brazilian alcohol programme was therefore initially dominated by sugarcane monoculture and concentrated in two regions of the country (north-east and south-east). Only recently has it been expanded to the centre-west region.

The technologies to produce sugar and alcohol were developed in colonial times, combining large land properties and slave-based production, as well as mills for sugar manufacturing and sugar exportation from the north-east. After the 1930s the old sugar mills were transformed into modern industrial plants. In the south-east and centre-west modern production methods and technologies were used but old practices were preserved, namely the concentration of land and the use of cheap labour to remain competitive in the internal and external markets.

The USA-Cuban crises (1961) gave new vitality to the production and export of sugar from Brazil. With the petroleum crises and the decrease in sugar prices in the international market, the implementation of Proál-cool promoted the technological diversification of the sugar-alcohol production chain in each of its components and in its organizational infrastructure. During the 1990s some large agricultural enterprises intensified innovation in land treatment, planting, handling and harvesting, but low-wage labour remained a key component in the sugar industry. Since colonial times people employed in the sugarcane plantations, the "cane-cutters", have been subjected to precarious labour conditions. From the 1990s cane-cutters were subcontracted by means of so-called "cooperative-cats",2 maintaining, if not worsening, the precarious conditions. The technological improvements, the subcontracting of the cane-cutters and the concentration of capital in four big sugarcane agro-industrial enterprises, which accounted for more than 90 per cent of the sugarcane purchase in São Paulo state or 60 per cent of national production, caused the unemployment of thousands of workers (Silva, 2004). In São Paulo state there are approximately 40,000 cane-cutters. The increasing area planted to sugarcane forces them to improve their productivity constantly, deteriorating their working conditions even more (Toledo, 2005). Other authors, however, paint a more positive picture (Nastari, Macedo and Szwarc, 2005). Figure 6.3 shows the ratio of jobs per generated energy and the investment per steady job from the sugarcane/

Figure 6.3 Employment per generated energy and investment per steady job in sugarcane and alcohol (Proálcool, 1980–1984) and other economic activities
Source: Goldemberg (2002).

alcohol sector and other economic activities. Sugarcane plantations are spread across more than 5.6 million ha, employing 5 million people overall. Direct jobs account for 1.2 million: 511,000 people employed in sugarcane production, where manual harvesting accounts for 80 per cent of the total production of sugarcane, and the remainder are involved in sugar and ethanol production. This represents about 6 per cent of Brazilian jobs in agro-business (Viana Filha, 2005).

It is important to emphasize, therefore, that Proálcool was born within the context of technological and productive arrangements that were already available for sugar and alcohol production and were associated with an organized and strong political lobby. This powerful combination of factors made it possible to overcome the opposition of the petroleum companies as well as the gasoline-car-manufacturing industries during the first phase of Proálcool.

The economic, financial and political conditions in Brazil in the early years of the twenty-first century differed notably from those of the 1970s. Once again there is a significant increase in petroleum prices, but this time with much more political tension arising from anti-Americanism and terrorism in the oil-producing regions. The Brazilian trade balance shows rising surpluses, but the services balance (especially the financial one) is in large deficit and the state financial deficit is even greater, as a consequence of the large public debt and high interest rates (around 19.5 per cent in October 2005). Brazil's investment capacity is highly reduced, limiting the reach of any policy for infrastructure or social improvement, severely obstructing economic growth and leading to unemployment, violence and serious socio-economic problems. Added to this, the state has been largely adopting neo-liberal planning and investment policies imposed by the IMF and World Bank and carried out in association with internal Brazilian oligarchies.

From the point of view of the energy balance, the Brazilian situation is much better now, as seen in figure 6.2, considering that the country has achieved self-sufficiency in oil production/consumption. A new source of fuel and energy is now available in natural gas imported from Bolivia. Political uncertainties, however, put in doubt the reliability of these imports. A huge reserve of gas has been found in Brazil, in the Santos Basin, and should be available for consumption in a few years.

The sugarcane sector in Brazil is in a period of great buoyancy. The steady increase in the international price of oil, the Kyoto Protocol, the EU targets to reduce greenhouse gases and the global mass production of flex-fuel vehicles are powerful incentives for this industry. Furthermore, there has been considerable technological advance over the past 30 years, which has reduced the cost of ethanol production by two-thirds – as illustrated in figure 6.4 showing the ethanol learning curve.

Currently, more than 350 million tonnes of sugarcane are produced and processed annually by the sugarcane sector in Brazil. More than 50 per cent of this amount is used in ethanol production. Six thousand litres of ethanol are produced per hectare per year on average. There are more than 500 varieties of sugarcane available, although only 20 of these account for 80 per cent of the market (Hassuani, Leal and Macedo, 2005;

Figure 6.4 Ethanol learning curve
Source: Nastari, Macedo and Szwarc (2005).

Leite, 2005b). Of the overall amount of ethanol produced from the 2003–2004 sugarcane harvest in Brazil, 12.5 billion litres were consumed by the internal market and 0.7 billion litres were exported. Although the amount destined for the external market is still modest, it grew from 0.4 per cent of the 2002–2003 harvest to 2.6 per cent in 2003–2004. In 2004 a total area of 5.34 million ha was designated for sugarcane plantations associated with sugar and alcohol production in Brazil. This represented less than 10 per cent of the total crop area (60.4 million ha) and a small fraction of the estimated 300–320 million ha of arable land in the country (Nastari, Macedo and Szwarc, 2005).

The low efficiency of photosynthesis, however, is a great obstacle to the widespread use of biofuels worldwide (Lomborg, 2002). If all the petroleum consumed in the world were to be substituted by biomass, a planted area equivalent to the entire Brazilian territory would be necessary. However, according to Leite (2005a), Brazil can increase its production of ethanol 10-fold utilizing only 30 per cent of the 90 million ha of arable land that can be used with low environmental impact. It must also be pointed out that the energy output from ethanol produced through fermentation of sugarcane juice is 700 per cent; in contrast, ethanol production from corn yields only 20 per cent more energy than is used to produce the alcohol. The US alcohol programme can thus be maintained only if government subsidies are allowed. Ethanol from sugarcane, on the other hand, can be competitive with gasoline without subsidies (Leite, 2005a, 2005b).

The sugarcane sector accounts for approximately 9 per cent of the overall Brazilian energy matrix. Hydroelectricity contributes 65 GW of the total 82 GW of electricity produced in Brazil on an annual basis. Co-generation of electricity from sugarcane bagasse had made steady progress in recent years, with new technologies for energy production from bagasse burning, waste gasification and gas turbines powered by bagasse gasification. Bagasse gas-turbine technologies have the potential to produce power six times more efficiently than traditional vapour systems (the use of modern gas-turbine technologies in all plants could contribute 30 per cent of the overall electricity generated nowadays in Brazil). This might help Brazil's effort to avoid energy shortages – assuming a modest 3 per cent annual growth in GDP takes place, by 2009 Brazil could face serious supply problems (Hassuani, Leal and Macedo, 2005). Sugarcane bagasse can also be used to produce ethanol and methanol. It is claimed that four times more methanol can be produced from sugarcane bagasse compaed to ethanol produced from fermentation of sugarcane juice (Audi, 2005; Viana Filha, 2005).

The use of sugarcane waste and bagasse to generate energy could contribute to a 44 per cent reduction in GHGs originating from fossil fuels in Brazil. If 50 per cent of the oil-based power capacity is substituted, an amount of US$110 million/year in carbon credits could be generated (Hassuani, Leal and Macedo, 2005). The use of wastes, however, requires further technology improvements before it can be employed on a commercial scale.

Ethanol fuel use has resulted in a 50 per cent reduction of the gasoline that would have been consumed in Brazil since the end of the 1970s, representing an estimated 10 per cent reduction in GHG emissions by the country's automobile fleet. The foreign exchange savings are estimated as US$50 billion (Goldemberg, 2002).

The use of ethanol fuel is environmentally advantageous as compared to gasoline, for a number of reasons.

• It produces low emissions, giving a drastic reduction in atmospheric CO2. Life-cycle assessments showed that a fivefold reduction in CO 2 could be achieved when ethanol is used in place of fossil fuels (IPCC, 2001).

• It presents lower toxicity and is biodegradable.

• It contains oxygen and therefore burns more efficiently, resulting in "lean" combustion and less exhaust emissions, mainly CO.

• It does not emit sulphur oxides (SOx).

• It reduces emissions of "photochemical smog" precursors due to its lower photochemical reactivity.

• It does not emit particulates.

• It is less volatile than gasoline, causing less evaporative emissions during storage, transportation and handling.

Ethanol also has a higher octane number than gasoline – in fact it has been successfully used as an effective "octane enhancer" in place of other expensive octane additives such as MTBE and the highly toxic TEL.

Ethanol cars produce more aldehydes than gasoline cars. However, it must be realized that the aldehydes produced by ethanol are the typically much less toxic acetaldehyde, compared to the very toxic and carcinogenic formaldehyde associated with methanol. Regarding NOx emissions, there is little difference between ethanol and gasoline cars. On the other hand, gasohol (gasoline plus ethanol) cars tend to produce higher NOx emissions – although some authors claim that if careful engine calibration is performed, the NOx emissions of ethanol, gasoline and gasohol cars do not differ appreciably. It has been also claimed that the amount of NOx emissions depends on the proportion of ethanol blended in gasoline, the characteristics of the base gasoline, the response of the vehicle to the fuel and the traffic conditions (Nastari, Macedo and Szwarc, 2005; CETESB, 2003).

In 2004 there were 1.35 million flex-fuel vehicles running in Brazil, out of a total of 22 million light vehicles (ANFAVEA, 2004). According to the CETESB (Coelho, 2005), vehicle emissions from flex-fuel automobiles show similar figures when compared to hydrated ethanol3 or gasohol cars.

Regarding emissions in sugarcane production, the burning of sugarcane straw is a common practice in manual harvesting. The ongoing automation of harvest processes in some mills may reduce these emissions (mainly NOx and methane); however, this may cause the loss of many jobs. Nonetheless, São Paulo's state environmental legislation bans straw burning from 2020.

There is conflicting information about the use of stillage for fertirrigation4 in sugarcane plantations. Some authors claim this co-adjuvant has many beneficial effects, including an increase in soil potassium concentration, and also saves on fertilizer usage and therefore on fossil energy used by fertilizer industries (Nastari, Macedo and Szwarc, 2005). Others, however, claim that stillage application in sugarcane plantations causes soil erosion (Couto, 2000).

The Brazilian biodiesel programme

Although the development of alternative fuels in Brazil started early in the last century, support for biodiesel5 research only began in the 1960s. The initial motivation for this support was related to the strategic and national security considerations of the military government, concerned with isolated communities, mainly in frontiers regions, where the supply of diesel fuel was difficult for logistical reasons. It was thus of interest to produce the fuel locally. From the 1970s there was also a need to find alternatives to expensive petroleum.

Thus, a few years after the start of Proálcool, the government developed another ambitious programme, the so-called Prodiesel, which aimed to set up the agro-industrial infrastructure to produce what is known today as biodiesel.6 Prodiesel was in principle easier to implement than Proálcool, since use of biodiesel did not require engine modification, as is the case with alcohol. Much research was carried out during this period, resulting in the first international biodiesel patent by Brazilian scientists (Parente, 1980), among other publications. Many tests were carried out employing pure biodiesel or biodiesel-diesel mixtures; biodiesel was even tested in airplane turbines at that time. However, it could not compete with cheaper diesel oil and the Prodiesel programme did not proceed further.

This situation remained unchanged up to the 1990s, when European countries, followed by many others and motivated mainly by concern over environmental impacts and the supply uncertainty of petroleum, began introducing biodiesel. In 2002 the Brazilian Ministry of Science and Technology set up a network of institutions to study the production and use of biodiesel made from the transesterification reaction of soyabean oil with ethanol. In 2003 an interministerial committee for biodiesel was established under the new government which took office that January. This committee was charged with analysing the possibility of the production and use of biodiesel in Brazil, and it undertook a series of public hearings across the country with public and private institutions related to the biodiesel production chain (research, performance tests, industrial production, agriculture and so on), as well as federal and state parliaments. The main conclusions of the hearings were as follows (Rodrigues, 2005).

• Biodiesel can contribute favourably to many fundamental problems in Brazil by generating jobs and income (social inclusion); reducing environmental pollutants, resulting in reduced costs for the public health system; mitigating regional inequalities; and reducing petroleum imports.

• Biodiesel is already available in many industrialized countries. The common motivation for its use in those countries relates to environmental pollution and the reduction of "petrodependence".

• Brazil has made advances in biodiesel technology since the 1970s. However, those advances were discrete and not harmonized. Brazil can produce biodiesel through many technological routes and raw materials, which can be adjusted to the regional diversity in the country so that all regions can be involved in biodiesel production. This approach could reduce regional inequities.

Based on these conclusions, the committee elaborated the following recommendations.

• Immediate inclusion of biodiesel in the official agenda of the government to send a positive signal to the biodiesel industry.

• Social inclusion and reduction of regional inequalities should be the orienting principle of the National Programme for the Production and Use of Biodiesel.

• To grant official authorization for use of biodiesel in Brazil. The committee considered this an important step to make the country a possible beneficiary of the carbon credit market (as in the clean development mechanism of the Kyoto Protocol).

• To carry out recognized and certified tests (in vehicular and stationary applications) and R&D activities in partnership with the automobile industry, the Brazilian states and other countries.

• To perform technical studies with economically viable raw material and agricultural production at the national level.

• To formulate norms, regulations and quality standards for biodiesel according to its different uses.

• To implement public policies (for financing, technical assistance, rural extension and research grants) aimed at increasing efficiency in biodiesel production.

• To avoid subsidies for biodiesel and its productive chain, in order to circumvent distortions over time, and instead to allow fiscal incentives to achieve economic, social and environmental sustainability for the biodiesel production chain.

In the overall implementation of these recommendations, an inter-ministerial executive commission directly subordinate to the presidency was created. A managing group subordinate to the Ministry of Mining and Energy was also established. In 2004 the group presented and obtained approval for a working plan to implement biodiesel in Brazil. Since then, many laws and regulations have been adopted to put this plan in practice.

There are some aspects of the Brazilian biodiesel legislation that should be highlighted in order to show how this programme differs from those in other countries and from the earlier Proálcool programme. Law 11116 (of May 2005) and Decree 52977 (6 December 2004) exempt biodiesel producers from paying the IPI tax and regulate reductions for them in the PIS/PASEP and COFINS taxes.8 However, after providing an across-the-board 0.6763 aliquot reduction in PIS/PASEP and COFINS taxes, this legislation goes further, to allow an incremental reduction if the raw materials are purchased from family agriculture9 and offering differential incentives depending upon the type of raw material input used and the region in which it is grown. The greatest incentives accrue to biodiesel made from palm or castor oil produced in the north, north-east or semi-arid regions of the country and bought from family agriculture. Under such conditions there is no need to pay PIS/PASEP or COFINS – an incentive equivalent to approximately US$90.0/m3 (R$218.00/m3) of biofuel.

Agrarian Development Ministry Normative Instruction No. 2 (30 September 2005) specifies the norms for biodiesel production project financing, with special financing conditions for projects that promote social inclusion of family farmers as raw material suppliers. Producers can be awarded the so-called "social fuel stamp"; to be eligible for this, the biodiesel producer must meet certain conditions.

• A minimum quantity of the total annual amount of raw material to produce biodiesel must be bought from family farmers: at least 50 per cent in the north-east region of the country; 30 per cent in the south and south-east regions; and 10 per cent in the north and centre-west regions.

• Technical assistance must be provided to family farmers.

From 13 January 2005, Law 11097 introduced biodiesel in the energy matrix of Brazil, fixing a mandatory percentage of 5 per cent biodiesel in diesel oil (B5) from 2013 and a 2 per cent mixture (B2) from 2008. Finally, Resolution No. 3 (23 September 2005) of the National Council for Energy Policy obliges oil producers and importers as of 1 January 2006 to purchase first all the biodiesel that is available from companies or associations awarded with the social fuel stamp, and only then to purchase biodiesel from other producers. This biodiesel will be sold through public auctions held by the National Agency for Petrol and Biofuels (ANP). It would appear that with this biodiesel programme the government intends to avoid the mistakes observed in Proálcool, notably the concentration of production in just a few hands and in only in some regions.

Table 6.1 shows the regions of Brazil, the main oil plants they produce, the industry installed oil extraction capacity and the demand for biodiesel production if a B5 mixture of biodiesel and diesel oil is required. Very few countries have the same diversity of biodiesel sources available to Brazil. Currently, the country produces four times more vegetable oil than the amount necessary for the implementation of a B5 mixture in the national fleet. Much of this is based on edible soyabean oil. However, it is important to note that Brazil uses a relatively small amount of its land for agriculture and much land is available without the need for deforestation. New technologies for cattle raising and mixed farming/husbandry, for example, may allow for a 40 per cent reduction in required pasture land. There are also degraded lands that can be recovered for agriculture. Brazil uses 7 per cent of its land for agriculture and 35 per cent for pasture; forest occupies 55 per cent of the territory. According to EMBRAPA (the leading Brazilian agricultural research company), there are 90 million hectares of land available for agriculture

in Brazil that could be used with negligible environmental impact (Nastari, Macedo and Szwarc, 2005).

Table 6.2 shows the oil productivity per hectare of some of the main oil plants available in Brazil. The palm tree is by far the most productive. Although it takes four to five years to start production, it has the advantage of being a permanent culture that lasts for about 100 years. Palm, babassu and piqui (Caryocar brasiliense Camb) are all very productive permanent cultures; however, only palm was given fiscal incentives for biodiesel production under the legislation. It is important to mention that the palm tree is very common in the Amazon. In this remote region one could consume four litres of diesel oil for every one litre of this oil delivered to isolated communities. According to specialists, biodiesel from castor oil generates 400 per cent more energy than is used to produce it; and in the case of palm oil the ratio is even higher, amounting to 500 per cent (Canzian, 2005).

Concerning temporary cultures, peanut is the most productive in terms of the ratio of the extracted oil per planted area, followed closely by the castor-oil plant. Castor oil is among those crops granted fiscal incentives for biodiesel production in Brazil, as mentioned above. This temporary culture is important because it does not require expensive tools or sophisticated technological assistance, and is therefore appropriate for small family agriculture businesses. However, some specialists criticize as excessive the government's focus on biodiesel from castor oil, claiming that it is more expensive to produce because of its longer reaction time, has a high viscosity, lower calorific power and a lower cetane number, and consequently has lower potency as compared, for example, with other vegetable or animal oils.

The use of soyabean and cotton oils to produce biodiesel, although not favoured when one considers the low oil yield per hectare, is important to consider because of the large volume, organized productive chain and technological capacity the country has for these crops. Brazil is a world leader in productivity in these crops. In the case of cotton, it is worth mentioning that oil from cottonseed is produced as a by-product in textile manufacturing. Many farmers from the centre-west region of Brazil are interested in producing biodiesel from cottonseed oil, since they have large quantities of cottonseed and cannot get good prices for it in the region. Soya accounts for 98 per cent of grain production in Brazil.

Furthermore, Brazil is the world's largest beef-cattle and chicken producer and is a significant producer of pork meat. Mato Grosso state alone produces 22 million cattle (10 per cent of the national production), illustrating the large potential of biodiesel derived from animal fats. Producing biodiesel from animal fat could also be important from the environmental point of view by eliminating the dumping of these fats, which are generally considered a waste in the meat production process. The environmental service provided by finding a noble use for these wastes, in addition to the savings in butcher plants that this can provide, is worthy of notice. Unfortunately, Brazilian legislation does not provide incentives for biodiesel produced by this way.

Allowing the production of biodiesel from different raw materials, however, introduces a new complexity in production not seen anywhere else in the world. The different vegetable oils and animal fats yield biodiesel with diverse physicochemical characteristics, necessitating the development and adoption of a sophisticated quality control system. The ANP is responsible for monitoring the quality of biodiesel in Brazil, as well as aspects related to its production and distribution.10 There are standard quality control methods for several types of biodiesel, but castor-oil biodiesel still requires an official method (the ANP adopted, provisionally, a method developed by Petrobrás).

Biodiesel can be produced by many different technological processes; the simplest and most widespread one makes use of vegetable oils and methanol in the presence of potassium or sodium hydroxide, in a chemical process called transesterification reaction. This process produces biodiesel in high yields with glycerine as a co-product, and offers advantages in terms of simplicity of production. Biodiesel from methanol is produced by using a toxic compound (methanol) originated mainly from non-renewable sources (petroleum); however, new technologies for methanol production from renewable sources are foreseeable in the near future.

As may be expected, biodiesel will be produced in Brazil mainly through the use of ethanol as the transesterification agent, building on the country's experience and market development with ethanol. Ethanol, moreover, is a non-toxic biodegradable agent, as compared to methanol. But the transesterification reaction with ethanol presents some technical difficulties not encountered when methanol is employed. The reaction with ethanol requires high temperatures and produces an emulsion that causes problems during the purification process. Another problem is the lack of solubility of sodium hydroxide in ethanol. Although relatively satisfactory technological solutions have been found to overcome these difficulties, it is true that the conventional methanol-base-catalysed method is still simpler, cheaper and produces biodiesel generally in higher yields.

The use of a base to catalyse the reaction presents restrictions, regardless of the transesterification agent employed (methanol or ethanol). The vegetable oil or animal fat to be transesterified through these base-catalysed processes must be neutral. If there is any acidity in the oil, processing will form soaps, producing emulsions and making it difficult to purify the products. In addition, if the alcohol is not anhydrous the water present will prevent the reaction from proceeding smoothly, reducing the yield drastically.

To overcome these problems, researchers from the Pantanal Regional Environmental Programme, a joint initiative from the Federal University of Mato Grosso and the United Nations University (UFMT/UNU-PREP), have patented a new and very efficient solution (Dall'Oglio, Sousa and Garofalo, 2005). The transesterification reaction is carried out in the presence of microwave radiation instead of conventional heating processes. This allows the reaction to take place in the presence of an acid catalyst, overcoming the problems associated with the base-catalysed processes mentioned above. The reaction also proceeds smoothly when ethanol is used, and the presence of water is tolerated regardless of the transesterification agent employed.11 This technology is being scaled up at the moment in order to establish the optimal conditions for the reaction to proceed in industrial plants.

In 2000 the use of fossil fuels accounted for about 9 gigatonnes of carbon dioxide emissions worldwide. It has been estimated that by 2030 CO 2 emissions from oil use will increase by 60 per cent, amounting to 15 gigatonnes (Haug, 2004).

The use of biodiesel,12 as with ethanol, presents many environmental advantages. As a renewable biofuel, it contributes to the international effort to reduce GHGs. Compared to diesel oil, biodiesel produces 78 per cent fewer emissions of carbon dioxide (Holanda, 2004). It is virtually free from sulphur and therefore produces no sulphur dioxide emissions. Biodiesel is a very good lubricant, and can be used as an additive in diesel oil to replace sulphur, which in the past was used as lubricant in diesel despite its negative environmental impact. Currently, there is a great effort to produce diesel oil with low sulphur content, requiring lubricant additives in order to avoid engine damage. As an oxygenated fuel, biodiesel burns more readily than diesel oil and thus reduces drastically the emissions of toxic carbon monoxide. The nitrogen oxide emissions of biodiesel, however, are slightly higher than diesel oil (Clery, 2001). Biodiesel engines show overall superior combustibility when compared to their diesel counterparts. This can be explained by the better cetane index (and therefore better combustibility) of the former.

According to the Swedish Environmental Protection Agency in a study considering new petrol and diesel-driven cars, there is an environmental cost equivalent to US$0.10 per litre of petrol and US$0.20 per litre of diesel arising from the vehicular use of fossil fuels. An annual saving of US$100 million would be feasible for 1 million cars running with renewable fuel (e.g. ethanol, biodiesel) if a 25 per cent reduction of environmental hazards is assumed as a consequence of cleaner exhausts (Goldemberg, 2002).

Brazil's diesel consumption amounted to 35 million m3/year in 2004, with 5 million m3 of imports. The use of a B2 blend, mandatory from 2008, will require the production of 800,000 m3/year (and a B5 blend will require 2 million m3/year). Although the country possesses advanced agricultural technology and extensive experience in the production and use of biofuels (e.g. ethanol), one cannot take for granted that this high quantity of biodiesel will be easily produced in the short term.13

Unlike Proálcool, the biodiesel programme was not preceded by earlier technological developments, except for the technology available for some crop production (e.g. soyabean and sugarcane), and a modern edible oil and ethanol industry. This lack of infrastructure could be considered the main bottle neck in the Brazilian biodiesel programme. There are also only a small number of reliable entrepreneurs dealing with equipment for the biodiesel industry. Some of these companies are the same as those producing equipment for the ethanol industry, and their competence in the biodiesel business is not yet proven.

Industry has tended to complain about the lack of financing despite government promises. In 2005 the Programme for Biodiesel Financial Support from the National Bank for Social and Economic Development (BNDES) was considering an amount of R$450 million (US$200 million) in loans. The bank claims that the reason for the delay in making loans is the tedious procedures required for environmental licences. The Bank of Brazil (BB) also has special facilities for the biodiesel business; in this case, the bank is interested in financing the whole production chain as a way to minimize risks. Another recurrent complaint concerns insufficient tributary incentives and the limitation of these incentives for palm and castor oil produced in the north and north-east regions of the country. It should also be noted that government incentives for palm- and castor-oil production can lead to the undesirable predominance of monocultures in these regions. The deleterious effects of monocultures, namely the negative environmental impacts and the economic risks associated with dependence on a single product market, are well known and were experienced in Brazil when the country chose only sugarcane for the alcohol programme.

According to data provided by the Brazilian Association for Biodiesel (Abiodiesel), as of May 2005 there were eight biodiesel projects going on in Brazil with an overall production capacity of 444 million litres/year (this would account for half of the 800 million litres/year necessary to achieve the B2 blend).14 Still, according to Abiodiesel, biodiesel production in Brazil using soyabean (as under government support provisions) will be profitable only if it is exported. Castor and palm oils, on the other hand, tend to have more attractive prices in the international market.

Proálcool, although a larger undertaking than the biodiesel programme, was implemented at a time when the investment capacity of the state was higher. Nowadays there is relatively little money for productive investment in infrastructure, although much more money is being spent in the development of new technologies for alcohol and biodiesel production. Most of Brazil's finances are driven by external and internal debt. During the 1970s economic news in Brazil was dominated by headlines related to production records in many industrial sectors and heavy government investment in infrastructure. In contrast, nowadays the stock market, dollar and euro exchange rates, the so-called "Brazil risk" and ever-increasing profits for the financial sector are the main topics.

The neo-liberal faith in market solutions is, unfortunately, dominating the political scenario in Brazil. This is clearly reflected in the formulation of the biodiesel programme, which is characterized by the absence of regulatory power – the key to the success of the alcohol programme. The authors strongly believe that a long-term strategy is the basic premise for the long-term success of a national renewable energy programme. This strategy should take into account all the programme parameters, e.g. the technological structure, the financing availability and the market and management strategies and policies. The lack of a long-term strategy has weakened the efficacy of incentives for developing industrial technologies, created uncertainty over the capacity of national industry to supply necessary capital investments and led to difficulties in defining a minimum price for biodiesel; all of which stand to undermine the programme seriously. Although it is likely that biodiesel will see international demand growth over the next 30–50 years, and despite the Brazilian legislation developed to provide a framework for biodiesel business in the country, the success of the biodiesel programme cannot be taken for granted.

The lack of previous biodiesel production experience in the country and of methodologies for research on revenues and costs, as well as other issues, makes it difficult to estimate initial biodiesel prices in the Brazilian market. According to some specialists, the initial price could vary from two to three times the price of conventional diesel (it must be noted, however, that these estimates were made before the price of oil reached US$70/barrel). Biodiesel produced from palm or castor oil and biodiesel certified with the social fuel stamp should be cheaper, according to current legislation.15 Moreover, the market imposed by the legislation (B2 immediately and B5 from 2013) will create the conditions for economies of scale and lower prices in the future. Co-product sales (bran and glycerine) can also contribute to mitigate the price of biodiesel, increasing its competitiveness. Certainly, increasing petroleum prices favour the biodiesel programme goals in Brazil.

Conclusion

Biofuels can make an important contribution to the achievement of the Millennium Development Goals as well as to the mitigation of climate change impacts by reducing greenhouse gas emissions. Improved air quality due to lower conventional emissions from biofuels can reduce public health expenses in many countries, especially developing countries, allowing this money to be applied in social programmes. Biofuel production can also lead to poverty reduction, generating new jobs and income in developing countries. Although the authors do not agree with the argument that there is a shortage of food in the world (hunger is caused by poor distribution of food and social inequities, and is not due to shortages in food production), it must be said that the use of land to produce biofuels must not compete with the use of land for food production. In this sense, Brazil occupies a very privileged position: it is the fifth-largest country in the world by territory size (850 million ha) and still has great availability of croplands. Sugarcane occupies 0.6 per cent of the territory, and it is estimated that the area eligible to support this kind of crop amounts to at least 12 per cent (Nastari, Macedo and Szwarc, 2005). Brazil also has the advantage of being the world's leading country in the production and use of biofuels: it was the first country to use ethanol in its vehicular fleet, and has more than 30 years of experience in the production and use of the ethanol biofuel.

In September 2005 the Rio de Janeiro stock market inaugurated the Clean Development Mechanism Project Stock. Seventy-four projects, with the potential to avoid annual emissions of 130 million tonnes of CO2, have been initially identified. This should place the country in a world-leading position in the CDM market (Oliveira, 2005).

The protocol on European targets for biofuels signed by EC countries for GHG emissions reduction and also the efforts to use sulphur-free diesel (biodiesel would be an excellent additive in this case, as noted above) present a great export opportunity for Brazil. However, it is too early to assume that the country can take full advantage of this situation. The biodiesel programme, although less challenging than its predecessor Proálcool, is only in its infancy and its success is yet to be seen. Nevertheless, this and other export possibilities are certainly a positive sign to other developing countries intending to implement biofuels in their energy matrix. The globalization of the biofuel market is in the interest of Brazil, since it will provide stability and reliability for this market. Furthermore, Brazil can take advantage of its leadership in biofuel production and become a technology provider for other countries, instead of being only a biofuel exporter.

According to IEA projections (Haug, 2004), consumption of fossil fuels will increase to 5.8 million tonnes by 2030 – 60 per cent more than consumption in 2000. The transport sector will represent more than two-thirds of this increase, and developing countries will be responsible for 71 per cent of the growth. The development of biofuel initiatives in developing countries will thus be important to reduce the "petrodependence" of most of these countries.

The world economic, political and environmental situation appears very promising for biofuel producers. In the case of Brazil, the ethanol industry is booming and there seems to be no doubt about its bright future. However, the same cannot yet be said about the biodiesel industry. A national strategic energy programme, like the biodiesel programme, can only be structured and developed with a long-term perspective. It should not be dependent on short-term fluctuations in the market. Beyond basic supply-and-demand issues, destabilizing fluctuations can also arise from short-term capital movements. Therefore a socially based energy programme regulated and financed by the state should be implemented and carried out until it can survive without government intervention. This was the basis for the long-term success of Proálcool, leading to the current situation where government subsidies and intervention are no longer necessary. Unfortunately, the Brazilian government appears reluctant to regulate biodiesel adequately and seems to be subscribing to the neo-liberal faith in markets.

Still, in the authors' opinion the promises outweigh the threats. The enormous potential of the Brazilian agro-industry, the creativity of Brazilian entrepreneurs, who have survived in a high interest rate environment for many years, and the previous experience with Proálcool lead one to believe that the biodiesel programme will be successful as well.

Acknowledgements

The authors are grateful to ELETRONORTE for supporting Projeto Biodiesel-Guariba, and to Grant Boyle for patient English review and valuable criticism.

Notes

1. The term Proálcool will be used in this text, although the programme does not exist any more. The production and trade of ethanol are fully liberalized in Brazil.

2. Labour cooperatives of workers, dominated by the truck drivers responsible for workers' transportation between their towns and the cane farms.

3. Hydrated ethanol is used to power ethanol cars. Anhydrous ethanol, or simply ethanol, is used for mixing with gasoline to power gasohol cars, since hydrated ethanol, although cheaper to produce, is not mixable with gasoline.

4. Stillage is a by-product of the sugarcane fermentation process; fertirrigation is fertilization plus irrigation.

5. According to Brazilian legislation (Law 9478 of 6 August 1997), biodiesel is defined as "biofuel derived from renewable biomass, for use in internal combustion motors with ignition by compression or, according to regulation, for the generation of other kinds of energy, that can replace totally or partially the fuels from fossil origin".

6. The use of vegetable oils to replace diesel oil was also considered initially. This option, however, was soon abandoned after some disappointing experimental results.

7. Modified later by Decree 5457, from 6 June 2005.

8. These are acronyms for various Brazilian taxes: PIS = Programa de Integração Social (Social Integration Programme); PASEP = Programa de FormaçãodePatrimônio do Servidor (Programme for Employee Patrimony Formation); COFINS = Contribuição para o Financiamento da Seguridade Social (Contribution for Social Security Financing).

9. Family agriculture is an internationally recognized expression; but there is no common definition for it. In Brazil, farm size, number of employees and, of course, the fact that overall the main workforce on the farm are family members are taken into account. Again, even within Brazil, the numbers vary from region to region. What is considered family agriculture in the state of Mato Grosso, for example, may not be considered the same in Rio Grande do Sul.

10. The technical specifications of biodiesel in Brazil are defined according to an ANP resolution, "ResoluçãoANP No 42, de 24/11/2004".

11. There are limits, however, to the presence of water. Although the process does not require anhydrous alcohol, if the concentration of water is at high levels it will act as a competing nucleophile, and the hydrolysis reaction, producing the fatty acids, will compete with the transesterification reaction and thus compromise the yield of biodiesel.

12. Although biodiesel is used here in the singular, it must be remembered that there are many "biodiesels", depending upon the raw materials and manufacturing processes used.

13. This chapter was written in October 2005 and revised in September 2006. By the time of the revision, more than 800 million litres of biodiesel had been sold in ANP auctions in the country, demonstrating that there was no reason for the concerns expressed earlier. However, most of this fuel had not yet been delivered, so one cannot be sure about its quality. Most if not all of the biodiesel sold at the moment is made from methanol, showing that the ethanol process is not competitive yet.

14. According to the Secretary of Industry Commerce and Mining of Mato Grosso state (Alexandre Furlan – oral communication in August 2006), Mato Grosso alone will be able to respond by producing 830 million litres/year of biodiesel from 2007. Two of the plants being installed at the moment deserve comment: one, to be installed in Rondonópolis, will be the world's biggest biodiesel plant, and the other, which has just been inaugurated in Barra do Bugres, will be the first biodiesel plant coupled to an ethanol distillery.

15. There were four biodiesel auctions promoted by ANP as of September 2006. The average prices were around US$0.83/litre. Only biodiesel producers awarded with the social fuel stamp were allowed to participate in the auctions.

REFERENCES

ANFAVEA (2004) "Anuário Estatístico", available at www.anfavea.com.br.

Audi, R. (2005) "Tecnologia Raudi", paper presented at Alternativas Energéticas a Partir da Cana-de-Açúcar seminar, CTC, Piracicaba, 31 August–1 September.

Canzian, F. (2005) "Biodiesel Obrigatório Começa Neste Ano", Folha de São Paulo, 21 August.

CETESB (2003) Relatório de Qualidade do Ar no Estado de São Paulo, São Paulo-SP: CETESB.

Clery, P. (2001) "Green Fuels Challenge: Submission for Biodiesel and Bioethanol", British Association for Biofuels and Oils (BABFO), available at www.biodiesel.co.uk.

Coelho, S. T. (2005) "Biofuels – Advantages and Trade Barriers", paper presented at UNCTAD Expert Meeting on Developing Countries' Participation in New Dynamic Sectors of World Trade, Geneva, 7–9 February.

Couto, E.G. (2000) Personal communication.

Dall'Oglio, E. L., P. T. Sousa Jr and M. N. Garofalo (2005) Brazilian Patent Office PI 0403530-5.

Goldemberg, J. (2002) "The Brazilian Energy Initiative", report presented to World Summit on Sustainable Development, Johannesburg, 26 August–4 September.

Goldemberg, J. and L. D. Villanueva (2003) Energia, Meio Ambiente e Desenvolvimento, São Paulo: Editora Universidade de São Paulo.

Haug, M. (2004) "Fossil Fuels: Technical, Economical and Political Issues on the Horizon 2030–2050", paper presented at Panorama 2004 Annual International Colloquium, Paris, 27 January, available at www.iea.org/textbase/speech/2004/haug/MH-IFP.pdf.

Hassuani, S. J., M. R. L. V. Leal and I. C. Macedo, eds (2005) Biomass Power Generation: Sugar Cane Bagasse and Trash, Série Caminhos para a Sustentabilidade 01, Piracicaba: PNUD/Centro de Tecnologia Canaveira.

Holanda, A. (2004) "Biodiesel e Inclusão Social", report, Brasília: Câmara dos Deputados.

IPCC (2001) Third Assessment Report, available at www.ipcc.ch/pub/un/syreng/spm.pdf.

Jesus, W. M. (2005) "Projeto Biodiesel Guariba", paper presented at Biodiesel BR 2005 seminar, Cuiabá, 23–25 May.

Leite, R. C. (2005a) "Biomassa, a Esperança Verde para Poucos", JC e-mail 2714, 25 February.

——— (2005b) "O Fim da Maldição da Maldição do Petróleo", Folha de São Paulo, 21 August.

Lomborg, B. (2002) O Ambientalista Cético: Medindo o Verdadeiro Estado do Mundo, Rio de Janeiro: Campus.

Ministry of Mining and Energy (2005) "Balanço Energético Nacional" ("National Energy Balance"), available at www.mme.gov.br/site/menu/s_elect_main_menu_item.do?chennelled=1432&pageld=4060.

Nastari, M. N., I. C. Macedo and A. Szwarc (2005) "Observations on the Draft Document Entitled Potential for Biofuels for Transport in Developing Countries, World Bank Air Quality Thematic Group", report, Brasília: Ministério da Agricultura e do Abastecimento – Câmara Técnica do Açúcar e do Álcool.

Oliveira, N. (2005) "Brasil tem Posição de Liderança no Mercado de Crédito de Carbono", available at www.radiobras.gov.br.

Parente, E. (1980) Brazilian Patent Office PI – 8070957.

Rodrigues, R. (2005) "Biocombustíveis no Brasil: Passado, Presente e Futuro", paper presented at Biodiesel BR 2005 seminar, Cuiabá, 23–25 May, available at www.ufmt.br/biodiesel.

Silva, M. A. M. (2004) "Se Eu Pudesse Eu Quebaria Todas as Máquinas", in R.S. Antunes and M. A. M. Silva (Orgs) O Avesso do Trabalho, São Paulo: Ed. Expressão Popular, pp. 29–78.

Toledo, M. (2005) "Tecnologia Faz Bóia Fria Trabalhar Mais", Folha de São Paulo, 18 September.

Viana Filha, A. R. (2005) "Identificação e aproveitamento dos resíduos da Agroindústria sucroalcooleira", monograph presented to agro-industry specialization course, FAECC, Cuiabá-MT.

7
Diversifying the energy portfolio: Competencies and investment opportunities in Nigeria

R. S. O. Samuel

Introduction

The steadily increasing price of crude oil and the problems associated with greenhouse gas effects have created an urgent need to develop alternative sources of energy. The possible use of hydrogen as fuel has in recent years been strongly considered as an elixir to cure the world's energy supply problems.

Hydrogen, a non-metallic, monovalent and light element of simple molecular structure, is the most abundant element on earth. Its energy releases do not contribute carbon dioxide (CO2) to the atmosphere. It is also known to have about three times the energy content of gasoline on a weight-for-weight basis (Hock, 2006). Unlike fossil fuels, whose combustion produces toxic by-products and greenhouse gases, the by-product of hydrogen combustion is pure and clean water safe for human consumption.1 Successful development of hydrogen fuel technology will thus greatly revolutionize the world energy sector by cutting both pollution problems and world dependence on oil.

Nigeria is a country with abundant oil and gas reserves. Its large population offers enormous potential for domestic gas usage, though currently much of the natural gas, derived during crude oil production, is simply flared. Recently the country launched a number of domestic and export-driven gas projects with very strong growth prospects. Estimated national gas reserves are currently about 168 trillion cubic feet (TCF), and 10 per cent of this has been committed to the Bonny liquefied natural gas (LNG) project, which is expanding rapidly. With 3 per cent reserved for the upcoming Brass and Olokola LNG projects and 12 per cent earmarked for various new and proposed independent power generation projects, about 127 TCF (76 per cent) of the national reserve remains undeveloped. This offers an enormous investment opportunity.

One possibility is to produce hydrogen through steam reforming of natural gas. Another is to exploit Nigeria's cellulose materials, agricultural products and bio-based wastes to produce biofuels such as ethanol and/or to transform these into hydrogen. This chapter discusses Nigeria's potential for entering the hydrogen economy and the steps that the Nigeria National Petroleum Corporation is taking in this direction.

Scepticism about the hydrogen economy

Hydrogen does not occur naturally in its pure state, but must be obtained by extraction from its compounds. It is, however, a choice fuel in fuel cells (US Department of Energy, 2006a). Fuel cells are electrochemical devices used to convert the chemical energy of fuel oxidation directly into electricity without having to apply combustion technology (Fuel Cell Works, 2006).

The development and application of hydrogen fuel have, however, encountered a number of challenges with respect to safety, storage, time and cost that have led to scepticism about the feasibility and viability of the technology as an alternative energy carrier (Harvey, 2005). Although hydrogen is available in almost all organic and inorganic substances, it bonds strongly to other elements in the compounds in which it occurs. To produce pure hydrogen requires considerable energy to free it from its bonds and purify it. Storing and transporting hydrogen in the quantities needed to guarantee a sustainable energy supply have thus far required that it be liquefied at temperatures below its boiling point of –253°C (–423°F). This involves putting hydrogen gas under very high pressure, in the region of 10,000 psi. Handling liquid hydrogen under these conditions could pose severe safety problems, apart from the increase in cost. The safety challenges result from the fact that hydrogen is odourless and burns with a colourless flame that is intensely hot locally. It ignites easily, and any leak may not be readily detectable. With its low density at atmospheric conditions it can diffuse rapidly – a property that could make it attractive to terrorists.

In spite of the scepticism surrounding the use of hydrogen, there is considerable enthusiasm and optimism within the industry (Hock, 2005; Broehl, 2006). This can be seen in the amount of resources committed to the development of hydrogen technology. Of great importance is the extensive collaboration of the US Department of Energy with various organizations in research efforts designed to develop cost-effective production, storage and transportation methods for hydrogen fuel (US Department of Energy, 2005a).

The issue of safety has also been raised (Fuel Cell Store, 2006b: 1015). Hydrogen is believed to be safer than hydrocarbon fuels if properly used (Vincent, 2004). Although its use requires lots of safety precautions, its inherent characteristics2 means it produces no pollution and thus has little impact on the environment. Because it is currently being produced and/or used in refineries and petrochemical and food-processing plants all over the world, safety issues surrounding its storage and transportation have been well resolved. For the emerging hydrogen economy, the US Department of Energy (2005a) has articulated safety guidelines for proposed projects.

With the amount being spent on research and the investment efforts in the industry, there is no doubt that hydrogen will be the future energy carrier for both commercial and domestic applications. Some fully developed areas of the technology are already being commercialized (Fuel Cell Store, 2006a).

Generation of hydrogen

The most common ways of producing pure hydrogen gas can be broadly classified into fossil-fuel and water-based methods (Fuel Cell Store, 2006b: 1013; US Department of Energy, 2006b). However, other methods, such as biomass gasification and pyrolysis, are fast developing.

Natural gas reforming

Hydrogen can be produced from coal, gasoline, methanol, natural gas and other fossil fuels. The amount of hydrogen obtained by this method will largely depend on the hydrogen-to-carbon ratio of the hydrocarbon used. Natural gas and methane are known to have the best hydrogen-to-carbon ratio. Production of hydrogen from natural gas is generally achieved by steam reforming. The process, which occurs in two steps, yields mainly hydrogen and carbon dioxide. A relatively efficient (70–90 per cent) method is the source of most hydrogen used in the chemical and petroleum industries. The carbon dioxide produced is generally sequestered and stored in tanks, and can be useful in the manufacture of fire extinguishers. The cost of hydrogen produced by steam reforming is greatly affected by fluctuations in the price of natural gas.

Electrolysis and photolysis

Water-based methods of hydrogen generation are centred on electrolysis and photolysis. While electrolysis uses electricity to split water into its constituent elements, hydrogen and oxygen, photolysis uses sunlight in the presence of photovoltaic semiconductors and electrolysers or algae and bacteria to produce hydrogen.

The water electrolysis process requires electricity to implement. Thus, relative to steam reforming of natural gas, electrolysis is very expensive: the electrical inputs in the process account for about 80 per cent of the total cost. This cost is reduced when the process is coupled to renewable energy sources like solar, wind or hydroelectric. Photolytic processes, although promising, are still in the research and development stages.

Biomass gasification

Hydrogen can also be produced from the hydrogen-rich biomass of cellulose materials and agricultural or biological wastes. The process involves converting the biomass into hydrogen-rich vapour which is condensed into pyrolysis oil and then steam reformed to generate pure hydrogen. This process could yield 12–17 per cent of hydrogen by weight. With the increasing price of crude oil and natural gas, and the high electricity demand for water electrolysis, biomass gasification will probably be the most economically viable method for future hydrogen generation.

The Nigeria National Petroleum Corporation

The main platform for Nigeria's participation in the global oil industry is vested in the Nigeria National Petroleum Corporation (NNPC). The mandate of the corporation includes:

• by 2010 build up the national crude oil reserves to 40 billion barrels from the present 33 billion, and increase production levels to 4.5 million barrels per stream day (mbpd) from 2.7 mbpd

• commercialize the vast natural gas resources

• facilitate local participation in the industry by fast-tracking technology transfers and harnessing collaborations within the economy

• maintain domestic self-sufficient supply and distribution of petroleum products and derivatives via a market-oriented downstream sector

• transform the national economy from oil-dependent monoculture to an industrial polyculture using the petroleum sector as a springboard.

The NNPC is actively involved in exploration, refining, petrochemicals and transportation, as well as marketing activities. These operations are driven by the group managing director's office via four directorates: exploration and production, refining and petrochemicals, finance and accounts, and corporate services. These activities are implemented through a number of strategic business units, two of which are partly owned and several others are associated companies.

Exploration and production activities are implemented by several wholly owned companies.

• Integrated Data Service – involved in seismic data acquisitions, interpretations and oil-block mappings.

• Nigerian Petroleum Development Company – oil-block acquisition, development and management of production facilities to achieve production quota.

• Nigerian Gas Company (NGC) – natural gas gathering, processing and distribution; management of national fuel gas supply network.

• National Petroleum Investment and Management Services – supervises Nigerian government investments in production-sharing and service contract agreements with joint-venture partners like Shell, Chevron, Mobil, Agip and others.

• National Engineering and Technical Company – provides engineering services within the oil and gas industry; involved in feasibility studies, conceptual design, basic and detailed engineering design, procurement, construction supervision and project management.

• Duke Oil – a partly owned company involved in drilling and production activities.

The NNPC refining and petrochemicals activities are implemented via the Port Harcourt Refining Company (PHRC), Warri Refining and Petrochemicals Company, Kaduna Refining and Petrochemicals Company (KRPC) and Eleme Petrochemicals Company (EPCL). The Nigerian government is currently involved in a process of disinvesting 51 per cent of its holdings in both the PHRC and KRPC. Seventy-five per cent of the shares in EPCL have already been sold to the Indorama Group of Indonesia.

The marketing activity of the NNPC is implemented through the Pipelines and Product Marketing Company (PPMC), Hydrocarbon Services of Nigeria (HYSON) and the partly owned Calson. The PPMC is responsible for domestic distribution of all petroleum products; it also manages the vast product depots and associated pipeline networks. HYSON is responsible for offshore bulk procurement of petroleum products to offset any shortfall in domestic supplies, and also exports any excess capacity if necessary. Calson, partly owned by the NNPC, is an offshore company that oversees NNPC interests in oil and gas businesses outside Nigeria.

Hydrogen is produced at EPCL. Conceived as a complex and designed for development in three stages, it is presently in its first stage:

this consists of a 997 KT/Y Kellogg Brown & Root licensed Olefins cracker designed to produce 300 KT/Y polymer-grade ethylene for use by 270 KT/Y Nova Chemicals of Canada licensed solution-phase polyethylene and 22 KT/Y IFP of France Alphabutol Butene-1 manufacturing processes. The Olefins cracker is also designed to produce 126 KT/Y polymer-grade propylene used by an 80 KT/Y Basell of US licensed polypropylene manufacturing process. Also generated in the cracker operation is about 1,800 MT/Y of pure hydrogen gas, some of which is used for hydrogenation processes within the cracker operation and the balance delivered to the polymer plants for use as a chain terminator in the polymerization processes for polyethylene and polypropylene.

For the cracker to produce more hydrogen, expansion of the plant capacity far beyond its present size will be needed. However, the cracker also produces 33.1 KT/Y of methane-rich steam (98.36 per cent methane and 1.64 per cent hydrogen by weight), which is directed to the complex fuel-gas system. This stream can be developed into a feedstock for a steam-reforming process for generating hydrogen. The available hydrogen generation capacity within the NNPC is indicated in table 7.1.

The NNPC's move into natural gas and biofuels

The current democratic government in Nigeria has initiated a far-reaching reform agenda in all sectors of the national economy. Its purpose is to install the catalysts needed to build a robust economy that will attract a continuous flow of investment and thus increase income-generating capacity while diversifying the economy itself. The government plans to support its reform agenda with generous investor incentives.

As part of the government's reform agenda, the NNPC, a major element in the Nigerian economy, is undergoing a transformation process aimed at repositioning the corporation to realize fully its vision of becoming a world-class oil and gas company. This transformation programme is implemented via a project labelled PACE, aimed at positioning (P) and aligning (A) the corporation for higher performance by creating (C) appropriate processes and systems for global competitiveness and enabling (E) and empowering the human capital that drives the processes to achieve organizational goals. A deliberate policy is to open NNPC operations to private sector participation, in line with global trends in modern business practice and government deregulation, liberalization and privatization policies.

With its large oil reserves (30–40 billion barrels), vast gas reserves (168 TCF) and massive amounts of fertile land with coal and other solid minerals like bitumen, Nigeria offers abundant investment opportunities. In order to boost investment in the economy, the Nigerian government planned to spend US$30 billion in the petroleum sector by 2008: this governmental effort is aimed at creating about 10,000 new jobs in this sector alone.

Natural gas

One of the main objectives of the investment in gas development will be the commercialization of compressed natural gas (CNG) for automotive applications. This technology is presently being harnessed by the Nigerian Gas Company, a subsidiary of the NNPC. The project, which is progressing rapidly, has pilot plants for automotive CNG refilling in the NGC's Warri and Egbin stations. Presently the NGC is shopping for technology to adapt fuel-injection vehicles for CNG use. To accomplish this goal, a team of NGC engineers have been sent to Argentina to understudy and adapt its technology for application in Nigeria, starting with the NNPC mega-stations. For this purpose, the company spent about $500,000 in 2006. The CNG automotive application project offers investment opportunities in CNG filling stations, conversion or adaptation workshops and conversion kits in the country.

Apart from the CNG automotive application project, the NGC is involved in distribution of CNG for both domestic and industrial uses and is also engaged in the West African Gas Pipeline project. However, Nigeria is already an exporter of LNG: the first cargo was shipped from the Nigerian Liquefied Natural Gas Company in Bonny in November 1999; as a result of this, further investment in CNG export terminals is very unlikely.

Biomass

The Nigerian energy sector is regulated by the Nigerian Energy Commission. The commission has developed a comprehensive energy policy for the country, which was approved in April 2003 (Government of Nigeria, 2003). The policy acknowledges the significant biomass energy resources in Nigeria which can be harnessed for power generation. The by-products can be used as fertilizers, thus reducing dependence on chemical fertilizers.

The policy seeks to integrate biomass energy resources with other energy resources through the adoption of an efficient conversion technology, and thus develop a biomass technology for the country and maximize the use of agricultural residues, animal and human wastes for energy generation. It is envisaged that this will help reduce health problems associated with biomass incineration at open waste-dumping sites scattered across the country. The strategies to be adopted to accomplish this, as spelt out in the policy, include development of extension programmes, promotion of R&D efforts, establishment of pilot plants, creation of an enabling environment for local and foreign investors and development of the requisite manpower requirements.

The recent policy decisions and government investment efforts have generated NNPC interest in alternative energy technologies. This resulted in the creation of the Renewable Energy Division (RED) within the corporation in July 2005. The division's activities have commenced with an automotive biomass ethanol programme which involves securing alternative fuel through the use of biomass technology to produce ethanol from sugarcane and fresh cassava. RED, an NNPC greenfield business initiative, will be responsible for the development of the biofuels industry in Nigeria as a means to reduce carbon dioxide releases, improve air quality and thus contribute to a reduction in global warming as required by the Kyoto Protocol, to which Nigeria is a signatory. The programme will help to integrate the agricultural sector with the petroleum industry, thus creating jobs, boosting research activities and opening new investment opportunities.

As part of the Nigerian government's programme aimed at stimulating the transition to sustainable energy by developing an indigenous biomass technology using cassava and sugarcane, the NNPC's RED is collaborating with several universities and research institutes in Nigeria. Those involved in cassava research include the University of Agriculture in Abeokuta, the University of Markurdi, the International Institute for Tropical Agriculture in Ibadan and the National Root Crop Research Institute in Umudike. For now, the only collaborator involved in sugarcane research is the National Cereal Research Institute in Pategi.

Collaborative research efforts are presently aimed at realizing the government's automotive biomass ethanol programme. When the biogas technology is fully developed and deployed, it is envisaged that another unit will be needed within the NNPC RED for the production and distribution of hydrogen. This initiative, when adopted, will create further extensive investment opportunities, as partners will be required in the areas of production, storage and distribution infrastructures for hydrogen fuel.

Conclusion

Nigeria is a country with abundant hydrocarbon resources. Until recently this has been a major impediment to thinking about the development of alternative, non-polluting energy resources. However, under the present democratic government a far-reaching reform agenda has been launched. It includes a major effort at developing local research into energy-related technologies and a considerable increase in investment in this sector.

As part of this process, in April 2003 the Nigerian Energy Commission approved a comprehensive energy policy for the country. The policy takes account of the country's huge landmass coupled with its favourable climatic conditions for agriculture, both of which enhance its potential for biomass technology. This potential is presently being tapped in the new government alternative energy initiative to produce ethanol fuel for the automotive sector. The NNPC's RED is part of the Nigerian government's programme to stimulate a transition to sustainable energy by collaborating with universities and research institutes in the development of an indigenous biomass technology using cassava and sugarcane.

The national policy also recognizes hydrogen as an environmentally friendly combustible fuel that generates energy with an excellent safety record, and it acknowledges the potential for hydrogen to replace fossil fuels in energy generation in the transport sector and for hydrogen fuel cells to play a role in electricity generation. The policy seeks to integrate hydrogen as an energy source into the country's energy mix, so as to develop local production capacity and eventually ensure the use of hydrogen as a preferred energy source.

Despite its considerable activities in crude oil drilling and production in the Niger delta region, most of the natural gas derived during crude oil production has been flared. Since 1999 a small percentage of Nigeria's natural gas resources has been exported as LNG; more recently, a project to develop CNG for commercialization in the domestic market has been initiated. However, the country also offers potential for investment in steam reformation projects for hydrogen production. Currently there is no research effort in steam reforming of either biogas or natural gas to produce hydrogen for the automobile sector to match the biogas initiative already under way.

Notes

1. This process has already been adopted in the space-shuttle operations.

2. When ignited, hydrogen produces no residual soot and very little radiant energy.

REFERENCES

Broehl, Jesse (2006) "Despite Hype, Hydrogen Moves Ahead", available at www.renewableenergyaccess.com/rea/news/story?id=44355.

Fuel Cell Store (2006a) "Hydrogen Equipment", available at www.fuelcellstore.com/cgi-bin/fuelweb/.

——— (2006b) "Hydrogen Generation", available at www.fuelcellstore.com/cgi-bin/fuelweb/view=navpage/cat=1013.

Fuel Cell Works (2006) "Types of Fuel Cells", available at www.fuelcellsworks.com/typeoffuelcells.html.

Harvey, Desmond (2005) "Hydrogen: Trouble in Paradise", Chemical Engineer 773 (November): 26–27.

Hock, Susan (2005) "Hydrogen: Realising the Benefits", Chemical Engineer 773 (November): 28–29.

——— (2006) "Hydrogen Safety", Fuel Cell Store 1015: 28–29, available at www.fuelcellstore.com/cgi-bin/fuelweb/view=navpage/cat=1015.

Government of Nigeria (2003) National Energy Policy, Energy Commission of Nigeria, pp. 1–63.

US Department of Energy (2005a) "Guidance for Safety Aspects of Proposed Hydrogen Projects", available at www.eere.energy.gov/hydrogenandfuelcells/pdfs/safety_guidance.html.

——— (2005b) "Hydrogen Production and Delivery: Summary of Annual Programme Reviews", available at www.eere.energy.gov/hydrogenandfuelcells/future/economy.html.

——— (2006a) "Future of Hydrogen Economy", available at www.eere.energy.gov/hydrogenandfuelcells/future/economy.html.

——— (2006b) "Hydrogen Production", available at www.eere.energy.gov/hydrogenandfuelcells/production/current_tecnology.html.

Vincent, Bill (2004) "Hydrogen and the Law: Safety and Liability", available at www.fuelcells.org/info/hydrogenandthelaw.pdf.

8
Egypt's policies and measures for sustainable transport

Ibrahim Abdel Gelil

Introduction

Egypt is the largest Arab country, with more than 75 million inhabitants, and is the second most populous country in Africa. The population is growing by some 1–1.5 million per year, and is expected to reach 80 million by 2015. Almost 50 per cent of the population live in urban areas, and the rest in compact rural settlements surrounded by intensively cultivated irrigated land along the River Nile. Together with the growing economy, this is inevitably putting more pressure on the country's natural resources, environmental quality and infrastructure, including the transport system.

The transport sector is a major consumer of fossil fuels and therefore contributes a significant share of the country's emissions of greenhouse gases (GHGs). In 2003–2004 the transport sector was responsible for 29.16 per cent of overall energy consumption and about 31.6 million tonnes of CO2, representing nearly 26 per cent of the energy-related CO2 emissions (OEP, 2004).

To mitigate the environmental and health impacts of the transport sector, the government has implemented a number of policies and measures, including the commercialization of alternative fuels such as compressed natural gas (CNG), and the demonstration of other technologies such as electric vehicles and fuel-cell buses (FCBs).

This chapter outlines the interlinkages between transport, energy and environmental quality in Egypt, and reviews the air quality management programmes that are being implemented or planned. Further, it discusses different policy options available to Egypt in the long term to foster a sustainable transport system. These include the electrification of the rail-road system, building an underground metro for the Greater Cairo area, phasing out leaded gasoline and demonstration projects for electric and hybrid buses. Initially the option to create a fuel-cell bus demonstration project was also considered. The reasons for its postponement in the first few years of Egypt's planned sustainable transport programme are discussed in the concluding section.

Energy situation in Egypt

The energy sector plays a substantial role in the economic development of Egypt and fulfils domestic energy demands for petroleum products, natural gas, and electricity. It contributes to macroeconomic variables such as gross domestic product (GDP) (9.9 per cent in 2003–2004) and investments (20.6 per cent of total investments in 2003–2004) (OEP, 2004).

Egypt is an oil producer and an emerging natural gas exporter. Though net exports of crude oil and petroleum products have declined in recent years, higher prices on world markets and new gas discoveries have pushed Egypt's oil revenues upward. Oil exports were equivalent to 37.6 per cent of total commodity exports in 2003–2004. The country also began exports of liquefied natural gas (LNG) from its first terminal in January 2005, adding another hard-currency revenue stream; this was expanded in late 2005 with the completion of the second LNG export terminal (Energy Information Administration, 2005).

Egypt's main energy resources are oil, natural gas, coal and hydro-power, in addition to good potential in renewable energy resources. Oil reserves are estimated at approximately 3.6 billion barrels, most of which are located in the Gulf of Suez. Oil production accounted for about 34 million tonnes (Mt) at the end of 2004, of which nearly 95 per cent was consumed domestically. Natural gas reserves equal nearly 67 trillion cubic feet (TCF). Natural gas is mainly used as feedstock into the Egyptian petrochemical industry. At the current annual production level of about 941 billion cubic feet (BCF), however, it is expected that natural gas will play a crucial role in the country's future fuel mix and commodity exports.

Hydropower is the third major energy resource in Egypt. Most of the Nile's hydropower potential has already been exploited to generate about 13 TWh of electricity per annum. As shown in figure 8.1, oil and gas accounts for about 95 per cent of total commercial energy produc-

Figure 8.1 Commercial energy production in Egypt (2001–2002)

tion, while hydropower represents the remaining 5 per cent (Abdel Gelil, 2005). Egypt also has limited coal reserves estimated at about 27 Mt.

In addition to its commercial energy resources, Egypt has good potential in renewable energy resources. These include solar, wind and bio-mass such as fuelwood, agriculture wastes and dried animal dung, which are used in some rural areas to meet part of the energy demand. It is estimated that about 3.6 Mt of oil equivalent of biomass energy is consumed annually. Due to its geographic location, Egypt enjoys sunshine all year round with a direct daily solar intensity range of 1,970–3,200 kWh/m2. Wind-speed assessments have shown that there are locations in Egypt where average annual wind speed is about 30 km/hr, making these suitable for producing power from commercial wind turbines (Abdel Gelil, 2005). Thus far, the contribution of solar and wind in the country's energy production is underexploited. The Egyptian renewable energy strategy sets a target to provide 20 per cent of Egypt's electricity demand by renewable energy resources, mainly solar, wind and biomass applications, by the year 2020. Currently there is 140 MW of grid-connected wind capacity located by the Red Sea coast. The target is to increase that capacity to reach 850 MW by the year 2010 (New and Renewable Energy Authority, 2006).

The Egyptian transport sector

The demand for energy in the transport sector has been growing in tandem with the population, economic growth and the increasing pace of urbanization. The Transport Sector Development Plan, which covers the years to 2017, includes measures to promote public passenger transport and encourage a modal shift of cargo transport from road to railways and inland waterways; it envisages government investments of hundreds of millions of dollars. In addition, the government has for many years pursued a policy of gradual liberalization and privatization of the transport sector (EEC, 2005).

Road is the dominant mode of internal transport in both passenger and freight operations. In 2003–2004 the volume of people transported by road had reached nearly 115.6 billion passenger/km, while freight transport amounted to nearly 43.1 billion tonnes/km (State Information Service, 2006).

For railways, the policy goal is a revitalization of the sector and the development of better service quality by Egyptian National Railways (ENR), which is state-owned and highly subsidized. While rail has a relatively high share of the domestic passenger market, its share of the freight market is very low (only 8 per cent of the total tonnes/km capacity). The rail system delivered 76.1 billion passenger/km in 2003–2004; while freight was only 4.7 billion tonnes/km. ENR is presently undertaking significant investment in order to modernize and upgrade the railways and extend its network (table 8.1).

Egypt's inland waterways, the River Nile and canals, are severely underutilized for transport. Primarily designed as an irrigation system, in 1995 the inland waterways carried approximately 3.6 million tonnes of freight, which represented only 3.3 per cent of the total tonnes/km transported (EEC, 2005).

The energy consumption of freight transportation is another area with rapid growth. What characterizes Egypt's freight system is that it is domi-

nated by road transport, with a 90 per cent share of all freight, while the opportunities for more energy-efficient rail and inland waterway transport are clearly underutilized; the transport demand is concentrated on a few transport corridors starting from or ending in Cairo; and the transport patterns are influenced by the imbalance between exports and imports (the value of imports being about twice the value of exports in 2002).1

Urban transport

Currently mobile emissions are one of the major sources of air pollution in the country, producing about 25 per cent of Egypt's energy-related CO2 emissions. This is particularly acute in Cairo, a megacity of 17 million people and the country's major urban, industrial and financial agglomeration. Demand for mobility in Cairo has greatly outpaced the capacity of the public transportation system. The gap has been primarily filled with privately owned and operated shared taxis (so-called informal transport) and the use of private cars. As the Cairo Regional Area Transportation Study (UNDP, 2005) pointed out, congestion has become a major problem and the air quality has deteriorated to an alarming level.

The number of vehicles registered in Egypt increased from nearly 3.6 million in 1992 to almost 6.6 million in 2005 (Egypt Information Portal, 2007). About 50 per cent of the total vehicles were registered in the Cairo metropolitan area. Significant features of the Cairo vehicle fleet include:

• the average vehicle age is relatively old

• passenger cars are expected to constitute the fastest-growing category over the next few years due to economic growth, gradual decreases of tariff duties on imported cars and increased numbers of locally assembled ones

• almost all trucks and buses use diesel fuel and have old-generation diesel engines

• there are essentially no diesel-powered passenger cars because these have been prohibited by law.

The number of public buses has not been expanding at a significant rate due to capital constraints and the growth of the underground metro system. Public transport in Cairo consists of two generic groupings: formal and informal services. Formal urban public transport services are provided by the state-owned Cairo Transient Authority (CTA), the Greater Cairo Bus Company (GCBC) and the Cairo Metro Organization, which runs the urban heavy-rail service. The informal sector consists predominately of route-specific shared taxis, operated by the private sector using microbuses with typical capacities of 11–14 seats.

In 2001 public transport services carried a total of 12.44 million trips every weekday, or 68 per cent of the total (public and private) motorized trips generated within the metropolitan region. Shared taxis (microbuses) carried some 6.5 million daily passengers, or roughly half of daily motorized public transport trips. CTA buses accounted for a further 3.5 million daily trips, and the metro for slightly more than 2 million trips per day – most of these riders had previously travelled by bus, microbus and taxi. Other modes of transport contribute about 0.4 million trips per day. Formal bus services are constrained by government control on the route structures they offer and the fares they may charge. Concurrently, the ageing fleet (the average bus age is now in excess of 12 years) must serve ever-expanding urban centres. As a result, service frequencies are declining throughout the system. Although the network has increased from 6,100 to 10,100 kilometres over the past decade, fleet size has only increased from 3,700 to 4,400 buses (some three-quarters of which are considered operational). Thus, crowding on buses sometimes reaches intolerable levels (Thompson and Nagayama, 2005).

Air quality in Cairo has been partially monitored since the early 1970s. In 2004 the measurements revealed that the average annual concentration of SO2 exceeded the limits set by Egyptian air quality standards and the average annual concentration of NO2 exceeded the WHO limits in the most congested areas of the city. Due to traffic congestion, Cairo city centre had the nation's highest concentrations of CO2 (6.8 mg/m3) (Egyptian Environmental Affairs Agency, 2004).

Policies to improve air quality

Egypt's contribution to the global emission of greenhouse gases is relatively minimal, yet given its growing population, its limited fertile land and the concentration of major economic activities in the coastal zones, the potential social and economic impacts of climate change could be devastating for the country's future development.

The first national communication to the UN Framework Convention on Climate Change (UNFCCC) outlined the overall national policy to address the challenge of climate change. The climate change action plan not only considers adaptation measures but also mitigation actions aimed at the reduction of carbon dioxide and methane. Supported by bilateral and multilateral development agencies, a number of mitigation options were assessed, of which some are being implemented. Mitigation actions to reduce CO2 deal with energy, industrial processing and transport sectors, while those for CH4 mainly cover the agriculture/livestock and waste sectors (Egyptian Environmental Affairs Agency, 1997).

Mitigation options for the transport sector outlined in the first national communication included the following.

• Energy efficiency through improvement of vehicle maintenance and tuning-up of vehicle engines.

• A programme to use compressed natural gas as a vehicle fuel.

• Reintroduction of electrified railways in intercity and intra-city transport.

• Intensifying the use of environmentally sound river transport systems.

• Extending metro lines to newly developed cities.

• Encouraging private sector participation in financing and managing the new metro lines.

Thus addressing the problem of air quality has been the focus of environmental policy in Egypt for many years. The national air quality management programme includes a broad array of policies and measures to curb emissions of pollutants from both stationary and mobile sources. A brief outline of those policies and measures relevant to the transport sector follows.

Vehicle emissions testing and tuning programme

Inspections of 13,000 vehicles operating in Cairo in 1999 showed that hydrocarbon and CO emissions generally exceeded the Egyptian vehicle emission standards by 12 per cent and 17 per cent, respectively. A total of 66 per cent of the vehicles inspected were found to comply with national standards, while 34 per cent failed to pass. Based on this pilot experiment, a vehicle emissions testing, engine-tuning and certification programme was established in Cairo in order to improve fuel efficiency and air quality. The programme has subsequently been progressively introduced to other cities in Egypt, and vehicle emission testing and certification have become mandatory for vehicle licensing.

CNG as a transport fuel

As part of the national policy to switch from oil to natural gas in all consuming sectors, the use of natural gas as a transportation fuel was endorsed as a means to improve air quality and public health. In the early 1990s the government recognized that utilizing Egypt's abundant natural gas as a transportation fuel could, in addition to developing a new market for natural gas, make a significant contribution towards improving air quality and protecting public health.

As Egypt has enjoyed remarkable success in the exploration and production of natural gas, supported by the success of pilot projects, the Egyptian government encouraged the private sector to begin commercializing natural gas vehicles (NGVs). In December 1994 the first company to convert gasoline vehicles to natural gas was formed.2 This programme proved to be successful. By the end of 2005 there were six operating CNG companies,3 93 CNG fuelling stations and about 63,000 CNG vehicles in use, 75 per cent of which were taxis, mainly in Cairo. This represents about 3 per cent of the world's CNG vehicles. A primary key to the NGV industry's success in Egypt is a package of incentives offered by the government, including five-year tax holidays for CNG companies, low-cost conversion charges for car owners and the attractive price differential between CNG and gasoline. At 45 piastres per cubic metre (equivalent in energy content to a litre of gasoline), CNG is less than half the gasoline price of 1.00 LE (Egyptian pound) per litre. In addition, a typical vehicle conversion kit, which is currently imported, costs the customer 5,000 LE (about US$870). Owners of high-fuel-use vehicles, such as taxis, can recover the cost of conversion in as little as six months from fuel savings alone. This clearly explains why taxis have been the most converted fleet.

Another exciting development for Egypt's CNG growth was the EEAA/USAID-sponsored $63 million Cairo Air Improvement Program (CAIP). This initiative focused on improving Cairo's air quality through reducing harmful emissions from lead smelters and vehicle exhausts. Part of the programme included providing 50 dedicated CNG public-transit buses to the CTA and GCBC. The bus bodies are locally manufactured, but the CNG engines are manufactured by Cummens in the United States and the rolling chassis were supplied by a US manufacturer. Key challenges for the government have been to fund the conversion of the some 3,500 public buses operating in Cairo and change the price differential between CNG and diesel, which is heavily subsidized.

With this ongoing encouragement from the Egyptian government and the oil industry, the CNG commercialization initiative in Egypt will continue to provide a successful model for other countries to emulate. In addition, as the natural gas supply network expands into new areas, vehicular natural gas will also become possible for these regions. Egypt is now recognized as having one of the top 10 most successful CNG commercialization programmes worldwide (Chapel, 2002).

Electrification of railways

Historically, Egypt was second to the United Kingdom in introducing railways in the 1880s. Rail plays a vital role in passenger transport in Egypt, with a total share in 2003–2004 of about 39 per cent. Most of the rail system operates on gas oil (diesel). A preliminary study on the feasibility of railway electrification was carried out in 1999, using the Cairo–Alexandria line as a test case. As Egypt is a net importer of gas oil, which is subsidized by the government for domestic use, and as part of the government's "switching to gas" policy, the anticipated environmental and economic benefits of rail electrification would include fuel savings (nearly 15 per cent of the electricity is produced from hydropower and the remaining 85 per cent from oil and gas), lower operation and maintenance costs and improved economic efficiency.

Cairo underground metro

A major step to upgrade Cairo's transport system has been the construction of an underground metro, the first of its kind in Africa and the Middle East. The 63 km underground network links the three governorates comprising Cairo metropolitan region: Cairo, Giza and Qalyoubia. The network comprises two lines: line 1, Helwan–El-Marg, and line 2, Shubra–El-Kheima–Mouneeb. Line 1, which was completed in 2000, is 44 km long and currently carries 1.5 million passengers per day. Line 2, 19 km long, was completed in 2005 and is now used by 1.2 million passengers per day.

Future plans include building a third line from Cairo International Airport, east of Cairo, to Imbaba in the west. The new line, about 33 km in length, will have a design capacity of 2.1 million passengers per day. It is expected to take 13 years to complete. Three additional lines are also envisioned for the year 2022 (Egyptian Tunneling Society, 2004).

Phase-out of leaded gasoline

A major objective of air quality initiatives in Egypt has been to reduce the ambient lead concentration to below the WHO level of 0.5 mg/m3. Lead emission sources are mainly lead smelters and leaded gasoline. The 1999–2000 inventories of stationary lead emission sources in the Cairo metropolitan area clearly showed that secondary lead smelters are the most significant sources of lead emissions in the city (Egyptian Environmental Affairs Agency, 2001). Of the total emissions in 2000, 79 per cent came from lead-smelting activities, compared to 82 per cent in 1999, and 20 per cent resulted from the combustion of heavy fuel oil, compared to 18 per cent in 1999. According to the study, lead emissions decreased about 30 per cent in 2000 compared to 1999. The reduction in the total emissions is primarily due to a production decrease in the lead-smelting industry in Greater Cairo as well as switching to natural gas instead of oil in the industrial and power generation sectors. Lead-free gasoline has been introduced in the Cairo metropolitan area and has been gradually introduced to the rest of the country (ibid.). In Cairo 100 per cent of gasoline is now lead-free; in rural areas this falls to about 80 per cent. In addition, attempts are being made to relocate lead smelters to more remote areas and, as explained earlier, promote further expansion in use of CNG in transport.

Demonstration of electric buses

The Global Environment Facility (GEF) is sponsoring a project to demonstrate electric and hybrid buses in Egypt. Initially these were intended to be used as shuttles around the historic site of the Pyramids outside Cairo. The buses, procured under a GEF-sponsored project entitled "Introduction of Viable Electric and Hybrid Electric Bus Technology in Egypt", were expected to begin operation in early 2001. In the proposal this was conceptualized as part of a longer-term transition to clean technologies that included electric and hybrid-electric as well as hydrogen fuel-cell buses, since all three are based on the same propulsion technology – electric motors with power electronics. The difference lies in the energy conversion or storage device. Issues such as drive-train maintenance, operator training and technology training of engineers are common to all three platforms. At present only two electric buses are operating, both at the Temple of Luxor, one of the world's historic heritage sites, instead of the planned plateau of the Pyramids. Each bus is generating a daily income of around US$1,200. The demonstration, during which these buses were operating for two years, has now come to an end, and the UNDP is preparing a final project evaluation with the hope that the Egyptian government will replicate the same experience in other similar sites.

The fuel-cell bus demonstration project

Under Egypt's climate change action plan, the Egyptian Environmental Affairs Agency submitted a concept paper to the GEF in 1998 requesting support for a fuel-cell bus demonstration project in Cairo. As part of the GEF strategy to develop FCBs for the developing world, and consistent with the objectives of GEF Operational Program OP-11, Sustainable Transport, the GEF council decided at its meeting in November 2000 to develop the five FCB projects then in its pipeline – in Egypt, India, China, Mexico and Brazil. The development objective was to reduce long-term GHG emissions from the transport sector in the GEF programme countries (Global Environment Facility, 2004).

According to Egypt's GEF project brief, the FCB demonstration project, though it was to be located in Cairo, would deal with the wider Mid­dle Eastern and African bus market. Further, it was recognized that conditions in Egypt would allow the opportunity for performance testing of fuel cells and thus provide valuable information for similar climatic/geographic regions in the world. The proposed demonstration project had eight specific objectives (Global Environment Facility, 2000).

• Verify the efficiency, operability, reliability and maintenance requirements of FCBs.

• Build up local experience and capability in both personnel and parts' supply for operating and maintaining FCBs and hydrogen facilities.

• Demonstrate to the public, and gain their acceptance of, the operability, safety, high performance and low emissions of FCBs and hydrogen production and fuelling facilities.

• Provide opportunities for local bus manufacturers to integrate and assemble FCBs with imported engines and chassis.

• Induce universities and research institutes in Egypt to get more involved in fuel-cell technology.

• Establish policy changes and codes/standards to promote the use of fuel-cell technology.

• Increase the volume demand for FCBs, jointly with other GEF FCB demonstration projects, to accelerate commercialization.

• Accumulate experience as input to FCB developers to improve their products further and accelerate commercialization.

The learning inherent in these objectives would also enable Egypt to become a regional or worldwide FCB supplier. This would be accomplished by building upon the manufacturing expertise gained during the demonstration project and the low labour cost in Egypt. The new business created might thus have contributed significantly to the nation's economy.

The project was designed to build and operate eight FCBs over a period of five years. These buses would be put into regular revenue service to gain real-time test data and experience. Over the test period this bus fleet was expected to accumulate a total of about 1.6 million km.

The systems optimization study

As part of the proposed project, a systems optimization (feasibility) study was undertaken by Bechtel (2000). The study covered both the production and the distribution of hydrogen. It showed that the best system to supply hydrogen for full-scale commercial deployment of FCBs in Cairo was a centralized natural gas reforming plant with the hydrogen delivered to the bus garages by a gas pipeline and the CO2 recovered and sequestered in a spent gas well. This system was selected from among eight alternatives based on the supply of energy and other local conditions in Egypt, as well as selection criteria such as the cost of CO2 reduction, amount of CO2 reduced, cost of bus driving, capital required and ability to undertake investment.

For the demonstration project, the study noted that a packaged electrolyser unit, including high-pressure hydrogen gas storage cylinders, hydrogen compressors and dispensers, would have to be purchased and installed at the host garage to meet the hydrogen requirement. The centralized reforming plant, hydrogen pipeline and CO2 sequestration facility (pipeline and injection pumps) are all proven technologies and thus it was not regarded as essential to demonstrate them in this project.

In its economic analysis the study found that FCBs could be more economical than diesel buses even with the additional costs of hydrogen production, transport, storage, compression and dispensing. One of the main reasons is that public buses in Cairo run very long hours every day, and maintenance is the single largest cost item of bus operation. Bechtel (ibid.) argued that the savings on maintenance costs that would result from the purchase of new buses and the higher reliability of FCBs because of fewer moving parts when compared to a conventional internal-combustion engine would be more than enough to compensate for the hydrogen cost.

A baseline study drawing upon data for eight diesel buses operating for 1.59 million km showed that these vehicles could be expected to emit approximately 3,312 tonnes of CO2. The FCBs would emit only water vapour, but the production of the electricity needed to produce hydrogen via electrolysis would result in the emission of 3,127 tonnes of CO2. The net CO2 benefit from this project would therefore be 185 tonnes. Additional expected emission reductions resulting from the implementation of the demonstration project are illustrated in table 8.2.

Local capabilities to support fuel-cell technologies

As part of the GEF project cycle, a "project development facility" was undertaken to justify the GEF funding. This involved an assessment of Egypt's capabilities to support the fuel-cell technology. As mentioned earlier, Egypt has a large potential for wind power, huge solar resources and an abundance of natural gas that could easily be used to produce hydrogen. In addition, Egypt has extensive experience in operating refineries, petrochemical complexes and fertilizer and chemical plants that currently produce large quantities of hydrogen for their own consumption. The KIMA plant in Aswan, for example, uses hydropower to produce H2 by electrolysis. Three fertilizer plants and eight major oil refineries in Alexandria, Talkha and Suez are producing H2 by natural gas reforming. Thus producing hydrogen on a large scale is not new to

Egypt, which already has skilled local operating and maintenance capabilities for its existing hydrogen production facilities.

The bus manufacturing/assembly industry was established more than 40 years ago. There are four major bus manufacturers producing more than 4,000 buses annually. With the exception of NASCO, which is state-owned, the other three are privately owned either through joint ventures with local firms or under direct licence from three global truck and bus manufacturers, Mercedes-Benz, MAN and Scania. These privately owned companies are all equipped with state-of-the-art bus manufacturing and assembly facilities. Thus the build-up of local capability to manufacture and supply FCBs in Egypt is expected to have a high probability of success. The current price of a full-size diesel bus manufactured in Egypt is about US$120,000, while it is US$235,000 in the United States and Canada. This large price differential is due to the low labour cost in Egypt and the higher US/Canadian bus standards. Not all the bus manufacturers in Egypt are simply assemblers. Some have their own bus body designs built on imported chassis. So Egypt's local bus manufacturing capacity can contribute to a long-term strategy of producing FCBs.

Another supporting capacity for developing FCB technology is the fact that Egypt has a well-developed CNG industry. The Cairo Transient Authority (CTA) is currently introducing CNG buses through a demonstration project under the EEAA/USAID-funded Cairo Air Improvement Program (CAIP). CNG engines are commercial technology and are an immediate solution to the pollution problem in Cairo. As the hydrogen refuelling of FCBs uses essentially the same technology as CNG refuelling and the hydrogen production in Egypt will be most likely based on natural gas, the build-up of infrastructure for natural gas distribution and CNG fuelling in the current pursuit of CNG buses will provide a good base for future switching to FCBs.

Barriers to the commercialization of fuel-cell buses

Although the feasibility study showed that Egypt has the potential to develop FCBs, it also identified a number of barriers to the commercialization of FCBs in Egypt at that time (Bechtel, 2000).

• Costs. The initial cost of the GEF demonstration project, estimated at around US$23.5 million, was extremely high. Given that only eight buses were planned, the average cost per FCB would be very high compared to the baseline diesel buses option.

• Technology uncertainties. A key issue in the GEF project brief was that this is a new technology. The FCB thus had to compete in terms of efficiency, reliability and cost with the newly introduced CNG buses in Egypt. Reducing the cost of the fuel-cell technology has been always a key concern. However, recent developments have signalled the potential in the long term to overcome these barriers.

• Safety issues and public acceptance. Safety concerns would be an issue due to the introduction of FCBs into the public transport system and the exposure of hydrogen use to the general public. In the absence of safety codes and standards, commercialization of this technology would be associated with health and environmental risks. In addition, lack of information and low levels of awareness about hydrogen as a fuel would decelerate commercialization of such technology.

• Shortage of qualified human resources. Even though Egypt has an extensive education and research system to produce professionals and skilled labour to serve the FCB industry, there are currently no sufficient knowledge base, research and/or education programmes for hydrogen technologies.

• Lack of proper regulatory framework. As the FCB is a new technology, the proper regulatory framework is not yet in place worldwide. International and industry experiences in the short to longer terms would facilitate the development of those regulations, especially in developing countries.

• Lack of proper infrastructure. Building hydrogen infrastructure has been one of the major barriers to commercialization of fuel-cell technology worldwide. For nearly two decades Egypt has been building its natural gas infrastructure, including a national gas grid which recently reached a capacity of 130 million m3/day (Soliman, 2005). Given the expected relatively low demand for hydrogen in the transport sector, it would be hard to justify, even in the long term, building a new hydrogen infrastructure in the current Egyptian context.

To overcome these barriers, a package of policy interventions was recommended in the feasibility study (Bechtel, 2000). These included direct financial subsidies, soft loans or tax credits for the FCB technology and privatization of the two public transport companies to improve their operational and economic efficiencies. Other recommendations were:

• reform of the energy pricing scheme to remove current distortions

• imposition of more stringent vehicle emissions standards to promote cleaner fuel-cell technology

• consideration of a carbon tax to promote zero-emission FCBs

• reduction or elimination of import duties on fuel-cell-related components

• government support for R&D on H2 technology

• establishment of codes and standards for safe hydrogen operations.

Making choices about hydrogen: Why Egypt declined to participate in the GEF FCB demonstration project

Recently the government of Egypt decided to withdraw from the GEF FCB programme. Three main reasons lay behind that decision.

First was the recommendation from the GEF to wait. One of the main implementation strategies of the GEF's FCB programme is project phasing for structured learning, where FCB projects under way provide lessons learned to those beginning implementation at a later time. A key lesson learned concerns the procurement of FCBs, and specifically the validation of the FCB programme's strategic assumption that FCBs can be procured competetively. To this end, the Egypt and India FCB projects were advised by the UNDP, with the guidance of the GEF secretariat and the support of the GEF council, to wait for the Brazil, China and Mexico FCB projects to advance sufficiently such that the procurement-related assumption could be validated (Global Environment Facility, 2004).

Second was the recognition that the project was focused on a single-technology-driven approach without an integrated strategy. The GEF's FCB project involved the demonstration of a single technology that was in the early stages of maturity. Focusing on a single technology would not address the many problems of the transport sector in Egypt, outlined earlier. There has been growing recognition of the need for a more holistic approach to secure a sustainable path for Egypt's transport sector.

Third was the need to allow more time for the commercialization of CNG. While the FCB project was being developed, government support led to the successful commercialization of CNG technology (as mentioned above). Today Egypt ranks eighth worldwide in the use of CNG as a transport fuel. The risks associated with the new FCB technology, the high capital costs needed and the lack of infrastructure, together with the other barriers identified above, made it difficult for the government of Egypt to proceed with the GEF project. For a developing country like Egypt it appeared to be too early and too costly to start a demonstration of FCB technology. It might be more rational to allow more time for the successful CNG technology to penetrate further in the transport sector in Egypt, while developing a more integrated strategy to achieve a sustainable transport system.

Rethinking sustainable transport

While several studies have been conducted and sound strategies and plans have been developed to address the challenges faced by the Egyptian transport sector, the implementation of these plans has suffered from different barriers.

• Lack of intersectoral coordination (harmonization of policies, institutional cooperation) and limited institutional capacity to adopt, implement and further develop the programmes effectively.

• Focus on single infrastructure investments or technology-driven approaches without an integrated view of broader requirements for successful intervention.

• Pressing needs to find solutions to pending day-to-day problems at the cost of adequately addressing the long-term sustainable development needs of the transport sector.

• Possible public perception, social and cultural barriers and occasionally conflicting interest between the different key stakeholders.

• Limited access to suitable financing mechanisms to meet the required investments needs.

• Inadequate emphasis on integrating sustainable transport planning with urban planning of new cities, and on promotion of non-motorized transport in middle-size provincial cities.

To address these challenges, a recent initiative also supported by the GEF is being developed to realize a long-term sustainable transport sector in Egypt. The objective of the new initiative is to reduce the growth of energy consumption and the related GHG emissions of the transport sector, while simultaneously mitigating the local environmental and other problems of increasing traffic, such as deteriorated urban air quality and congestion (UNDP, 2005).

This project takes a broader perspective on ways to reduce the growth rate of energy consumption in the transport sector and facilitate market development towards "sustainable mobility". It does so by supporting the key stakeholders in Egypt to:

• reduce the growth of overall transport demand by improved land use and other urban planning measures, especially in new urban areas currently under development

• maintain or increase the modal share of sustainable public transport and reduce the use of private cars and other low-capacity motorized transport for regular daily commuting

• maintain or increase the modal share of non-motorized transport, with a focus on provincial medium-sized cities

• improve the energy efficiency and logistics of freight transportation by promoting a modal shift from road to rail and inland waterways and promoting measures towards optimizing the cargo transport system and vehicles used for that purpose in general.

The past experiences from other countries suggest that in order to deal effectively with the transport sector problems, there is a need for a holistic approach combining a package of different measures at different levels, rather than trying to address the challenges faced with any single-technology or non-technology-driven intervention. As of today, this project is still in its early stages of development.

Conclusions

Road is the dominant mode of transport in Egypt, in both passenger and freight operations. Thus the transport sector is a major consumer of fossil fuels and therefore contributes a significant share of the country's emissions of air pollutants and GHGs.

Transport problems are particularly acute in the Cairo metropolitan area, one of the world's megacities with a population of more than 17 million. Air quality measurements in Cairo reveal high levels of pollutants that exceed both national and WHO standards. GHG mitigation options for the transport sector outlined in Egypt's first national communication to the UNFCCC included a number of policies and measures, some of which have been highly successful – such as improved energy efficiency through vehicle maintenance and tuning-up of vehicle engines, phasing out of leaded gasoline and a programme to encourage the use of CNG as a vehicle fuel. Others, such as the reintroduction of electrified railways in intercity and intra-city transport, intensifying the use of environmentally sound river transport systems, extending underground metro lines to newly developed cities and testing electric and hybrid buses, are in need of further development.

Although in some areas, such as the production of H2 and the manufacture of buses, Egypt has strong capabilities to support the implementation of a fuel-cell bus demonstration project in Cairo, a feasibility study identified a number of barriers that could hinder the commercialization of FCB technology. These barriers included extremely high capital investment, technology uncertainties, shortages of qualified human resources, safety issues, public acceptance of H2 as a fuel and a lack of a proper regulatory framework and infrastructure.

In 2003 the Egyptian government decided to withdraw from the GEF-sponsored fuel-cell programme. Many reasons lay behind that decision, but among the most important were a recommendation from the UNDP-GEF to wait until similar projects in China and Brazil had gained some experience, the absence of a holistic approach going beyond the focus on a single technology that is in its early stages of development and the need to give time for the successful CNG commercialization programme that is under way.

It was thus viewed as too early and too costly for a developing country like Egypt to start a demonstration of the FCB technology at this stage. Instead, a new initiative has just started to develop an integrated plan to realize a long-term sustainable transport sector in Egypt. The objective of the new initiative is to reduce the growth of energy consumption and the related greenhouse gas emissions of the transport sector, while simultaneously mitigating the local environmental and other problems of increasing traffic, such as deteriorated urban air quality and congestion.

Notes

1. The main categories of goods transported in Egypt are petroleum products; food and agricultural products; construction materials; and manufactured goods (including wood and metal products). The transport of imports and exports via Egyptian ports, the transport of agricultural products and the transport of cement from factories to ports for export and to local consumers present the main transport markets.

2. Although the conversion kits are now imported, there are plans to manufacture them locally. The CNG is produced locally by many companies.

3. Not all of these are totally state-owned; some are owned by multinational oil companies such as BP and Shell.

REFERENCES

Abdel Gelil, I. (2005) "Climate-friendly Energy Policies for Egypt's Sustainable Development", in Pak Sum Low, ed., Climate Change in Africa, Cambridge: Cambridge University Press, pp. 182–187.

Bechtel (2000) "UNDP Integrated System for Zero or Near Zero Emission Fuel Cell Bus Operation in Cairo, Final Summary Report", Bechtel Corporation, unpublished.

Chapel, F. (2002) "Egypt's Clean Fuels Initiative", paper presented at World NGV Conference, Washington, DC, 8–10 October, unpublished.

EEC (2005) "European Neighbourhood Policy", Country Report, Egypt, Brussels: Commission of the European Communities.

Egyptian Environmental Affairs Agency (1997) "First National Communication to the UN Framework Convention on Climate Change", available at http://unfccc.int/2860.php.

——— (2001) Annual Report, available at www.eeaa.gov.eg/.

——— (2004) Air Quality in Egypt, available at www.eip.gov.eg/index.asp.

Egypt Information Portal (2007) "Vehicles in Egypt: Facts and Figures, 2007", available at www.eip.gov.eg/index.asp.

Egyptian Tunneling Society (2004) "Member Nation Activity Report", International Tunneling Association, available at www.ita-aites.org/cms/200.html.

Energy Information Administration (2005) "Egypt Country Analysis Brief", available at www.eia.doe.gov/emeu/cabs/egypt.htm.

Global Environment Facility (2000) "Egypt: Fuel Cell Bus Demonstration Project in Cairo, Phase I", project brief, available at www.gefweb.org/.

——— (2004) "GEF/UNDP Fuel-Cell Bus Programme: Update", GEF/C.23/Inf.17, available at www.gefweb.org/.

New and Renewable Energy Authority (2006) "Large-scale Grid-connected Wind Farms on Suez Gulf", available at www.nrea.gov.eg/english/page101e.html.

OEP (2004) "Energy in Egypt", Cairo: Organization of Energy Planning.

Soliman, H. (2005) "Egyptian Natural Gas Industry Development", paper presented at Seminar on Reform of the Legal and Institutional Energy Sector Framework, EUMEDA programme, Salzburg, 16 February, unpublished.

State Information Service (2006) "Transport and Communications", available at www.sis.gov.eg/En/Economy/Sectors/trans&communi/050304000000000001.htm.

Thompson, John E. and K. Nagayama (2005) "Controlled Public Transport Fares in the Developing World: Help or Hindrance to the Urban Poor", available at www.findarticles.com/p/articles/mi_qa3734/is_200506/ai_n13644216.

UNDP (2005) "PDF B Project, Government of Egypt, Sustainable Transport", available at http://gefonline.org/projectDetails.cfm?projID=2776.

9
Practical pathways towards a "hydrogen economy": A view from Iceland

Ágúst Valfells

Introduction

In recent years Iceland has been mentioned as a possible candidate to implement a "hydrogen economy" based on renewable energy. Quite a bit of attention has been given to Icelandic efforts in this area, and some media reports have been very effusive about the prospects for hydrogen as the final piece in the puzzle to implement a completely sustainable energy sector.

According to Ragnarsson and Helgason (2003), over 70 per cent of all primary energy used in Iceland comes from sustainable energy sources. Nearly all energy for stationary use is provided by either geothermal or hydropower sources. The nearly 30 per cent of primary energy that is not from renewable sources comes almost entirely from oil and gasoline. The use of coal and gas as energy sources is negligible.

Annual oil use is currently around 850,000 tonnes and is, roughly speaking, distributed equally between air transport, fishing operations and other mobile surface use (freight, transport and heavy machinery).

Annual greenhouse gas emissions that are counted towards the Kyoto "quota" are somewhat greater than 3 million tonnes of CO2 equivalent. Over 50 per cent of these emissions stem from oil use. The target for annual emissions in the period 2008–2012 is that they should not exceed 3.6 million tonnes of CO2 equivalent. It is estimated that Iceland will readily meet this target due to the 10 per cent increase in GHG emissions from 1990 levels allowed because of the country's early and large-scale adoption of low-emission renewable energy sources, and due to Decision 14/CP.7 of the Kyoto Protocol that exempts process-based CO2 emissions from aluminium smelters from being counted towards total emissions under certain extenuating circumstances. Nonetheless, the government aims to take a proactive stance to reduce GHG emissions further, primarily through consultation with the aluminium industry to ensure minimal PFC emissions from smelters, changes in tariffs and incentives to promote use of more fuel-efficient vehicles, reduction of organic waste disposal, collection of landfill gas for energy recovery and encouraging the fishing industry to increase efficiency.

It has been estimated, using current economic, environmental and technical criteria, that Iceland has the potential for generating 50 TWh/annum of electricity from hydropower and geothermal sources. The potential of hydropower is assumed to be 26 TWh/a, while that of geothermal energy is assumed to be 23 TWh/a. Currently about 8.5 TWh/a of electricity is being generated, so there is plenty of room for growth. Also it is quite possible that the potential for electrical generation via geothermal energy is much greater, due to the fact that the estimate for geothermal power was fairly cautious and, perhaps more importantly, due to technological advancements that might open possibilities for harnessing a considerably greater portion of geothermal energy for electrical generation (by an order of magnitude, according to the most optimistic accounts, e.g. FriDleifsson and Elders, 2005).

Iceland thus has ready access to substantial amounts of reasonably priced renewable energy. The problem is that the country is far removed from major markets, and utilizing this energy has not always been straightforward.

Currently about two-thirds of the electricity generated in Iceland is used by heavy industry. Aluminium production constitutes by far the greatest part of this use, and is growing rapidly. There is, however, an interest in diversifying the large-scale uses of electricity.

A possibility for addressing the problems of fuel supply, greenhouse gas emissions and diversification of the demand side of the energy sector would be large-scale production of alternative fuels for mobile use. There are two main possibilities here, electricity and hydrogen (Óskarsdóttir et al., 2005).

This chapter will focus on hydrogen in the Icelandic energy sector, and try to relate developments and needs in Iceland to those in a wider world.

Possible roles for hydrogen in Iceland

Hydrogen is an energy carrier, like electricity, and generally not an energy source, in the sense that there are hardly any "hydrogen wells" to be found (there are some examples of natural hydrogen sources such as geothermal vents, but they are minor). In this respect hydrogen differs sharply from oil and natural gas.

Hydrogen is most commonly produced by reacting steam with natural gas. This has generally been the least expensive method, but a lot of carbon dioxide is produced as a by-product, as well as some carbon monoxide. Electrolysis is another traditional method of making hydrogen. Electrolysis produces very pure hydrogen and, depending on the energy source for the electricity, can involve minimal greenhouse gas emissions.

Hydrogen has been produced via electrolysis in Iceland since 1952, when domestic production of synthetic fertilizer began. Fertilizer production in Iceland has recently been discontinued, but there is currently some hydrogen production for vehicular use.

Currently, plans for hydrogen production are mostly oriented towards direct use of hydrogen as an energy carrier to replace gasoline and diesel oil in surface transport. Automobile applications for hydrogen have been in the forefront, but marine applications are also of great interest due to the importance of the fishing industry in Iceland. Storage of hydrogen poses a particularly daunting challenge in this regard as large fishing vessels are very energy-intensive and must be able to stay at sea for long periods of time, refuelling infrequently.

Storage of hydrogen has been a major obstacle when it comes to mobile, energy-intensive applications. Due to its low energy per volume, hydrogen is not as convenient to use as oil or gasoline. Several means of improving the energy density have been investigated. Improvements in material technology have made high-pressure storage more attractive as an intermediate technology (though considerable energy is expended compressing the hydrogen), while liquefaction does not seem to be a feasible avenue due to energy losses and problems with prolonged storage. Solid-state storage of hydrogen has been investigated intensely and is promising, despite problems of price and kinetics.

The heavy seas of the North Atlantic put great demands upon the reliability of a ship's power plant. It is thus likely that any use of hydrogen for large-scale marine applications would either be indirect, with hydrogen as an ingredient in a synthetic fuel used by the ship, or would involve solid-state storage of hydrogen. It should also be noted that the large diesel engines in ships used in Iceland are much more efficient than the combustion engines in passenger vehicles, so the advantage in fuel efficiency gained by switching from a gasoline engine to a hydrogen fuel cell in a car will not be nearly as significant aboard ship. Thus the increased costs of using hydrogen are not offset by increased efficiency in the same manner as in cars, and the economics of converting to hydrogen are less attractive.

A popular idea is to use hydrogen as an energy storage medium for intermittent renewable energy sources such as wind or solar power. The idea is to use electrical power generated in excess of that supplied to the grid at any given moment to produce hydrogen via electrolysis, and then produce electricity from the hydrogen, using either fuel cells or combustion-based generators, when there is a need for more electricity at a later time. In this case, hydrogen storage would not pose a problem since space is usually not as restrictive in stationary applications. This scenario for energy storage is mostly confined to areas that are not connected to a large electrical grid and could absorb excess electricity from intermittent sources. Since reservoir-based hydropower plays such a large role in generating electricity in Iceland, it is easier to accommodate other fluctuating sources of electrical energy than if other baseline power sources were predominant. It should also be noted that the energy efficiency of the conversion electricity-hydrogen-electricity is not particularly attractive.

So far this chapter has mostly been looking at pure hydrogen as an energy carrier, but there are other indirect means for using hydrogen as well. Although synthetic fuels, such as Fischer-Tropsch diesel and methanol, are generally produced from coal and natural gas, there is an alternative approach that has been considered in Iceland: using the emissions from aluminium smelters and other heavy industry as a relatively concentrated source of CO2 and CO that could then be reacted with hydrogen to produce synthetic hydrocarbon fuels (Arnason and Sigfusson, 1999). The value of this approach is that synthetic fuels produced in this fashion would be carbon-neutral in emissions. Also, such fuels are more easily handled than pure hydrogen, so it might be possible to sidestep some of the technical issues that make the use of hydrogen for mobile applications tricky. Here, as in the other options, price is an issue.

Many experts are of the opinion that the first widespread use of hydrogen as an energy carrier will be for consumer electronics. Cellphones, laptop computers and music players use comparatively little energy, but consumers are willing to pay a premium for them to have extended periods between recharging (e.g. a laptop should be able to run continuously during a long airplane flight). It is quite reasonable to expect that there would be some domestic production of hydrogen for recharging these devices, but this would not call for any substantial increase in energy production as the amount of energy used is small compared to that needed for transport, and also since hydrogen would be replacing rechargeable batteries that are already getting energy from the grid.

In some ways Iceland's energy resources may be considered to be "stranded", in the sense that there is no electrical connection to a major market. However, energy is exported indirectly in the form of aluminium and other products of energy-intensive industry. Some preliminary studies have been carried out on the possibility of exporting energy in the form of hydrogen, by either ship or underwater pipeline. First indications are that it would be much more suitable either to export energy in the form of a product (i.e. aluminium or via greenhouse farming) or as electricity via a submarine cable rather than exporting hydrogen. One should also keep in mind that Icelandic energy sources, though large in per capita terms, are not very large in absolute terms (50 TWh of electricity is only enough to meet the needs of roughly 6 million average OECD citizens).

Creating an environment for change

In 1997 Iceland's Ministry of Energy appointed a committee to look into opportunities for domestic fuel production. In its report, the committee recommended that efforts be directed towards hydrogen and related fuels as one means to reduce consumption of imported oil. Two years later a corporation, Icelandic New Energy (INE), was formed. Fifty-one per cent of the shares in INE are held by a holding company whose shareholders are a consortium of Icelandic business firms, research and education institutes and the Iceland government. Forty-nine per cent of the shares are held by DaimlerChrysler, Norsk Hydro and Shell Hydro (Skulason and Bjarnason, 2003).

The key project undertaken by INE is a fuel-cell bus and refuelling station demonstration project, the Ecological City Transport System (ECTOS), financed by the European Union under its Fifth Framework Programme. The ECTOS project (2001–2005) provided an example of a working, commercial refuelling station located in an urban area, the capital city of Reykjavik, and a demonstration of three fuel-cell buses. It opened in April 2003 and is operated by INE in collaboration with Shell Iceland. The station, equipped with a Norsk Hydro alkaline electrolyser, produces hydrogen on site using renewable electricity provided by the municipal power grid to split water into hydrogen and oxygen. The station is equipped with a compressor unit that delivers gaseous hydrogen at 440 bars to storage bottles (Skulason and Bjarnason, 2003) and "a dispenser capable of delivering about 30 kg of Hydrogen in less than 7 minutes (a benchmark for bus-refuelling)" (Sigfusson, 2005). In its initial stage the station could provide about 120 kg of hydrogen a day.

The ECTOS project is now completed and the station is still open. Initial results show that public acceptance of hydrogen buses was high and the general experience of both drivers and passengers was positive. However, maintenance costs were higher and fuel efficiency lower than had been anticipated. The buses proved to be safe and were operated without major incident. But the results for public acceptance are somewhat questionable, in this author's opinion, since the public were not made aware of the realistic energy efficiency of the hydrogen buses and issues of price. Customer satisfaction is not an indicator of economic sense, especially when the customers are not paying the full price for the service. However, studies of public acceptance with regards to safety concerns, bus performance, etc. are quite valid. The results of the ECTOS project have been used for infrastructure studies as well as by makers of equipment, e.g. Norsk Hydro and Daimler (Skulason, 2006).

There are also some smaller-scale projects concerning H2 use aboard ships, infrastructure studies and hydrogen storage. According to a report by the Icelandic Ministry of Industry and Commerce in July 2006, the Icelandic government intends to support hydrogen research further and partake in international cooperation towards a "hydrogen society". It is assumed that this will mainly be done via further demonstration projects geared towards cars and marine applications of hydrogen. The impetus for this is to ensure that the nascent hydrogen research community in Iceland maintains momentum.

Attention now turns towards how to go about advancing the use of hydrogen as an energy carrier in a country such as Iceland. Most importantly, one must bear in mind that hydrogen is a means towards an end, not an end in itself. This is a distinction that it is vital to make, especially on the government level, and is especially true for smaller countries with limited resources which might be tempted to place undue emphasis on a single area. A private concern involved in hydrogen technology might be inclined to advance the use of hydrogen for its own sake, but that would probably not be conducive to long-term business success. In this respect, it is important to define specific objectives (i.e. reduced greenhouse gas emissions, security of fuel supply or new forms of energy storage) so that the capacity of hydrogen for reaching those goals can be assessed and effective action can be undertaken.

There is often a tendency for governments to write legislation in a fashion that assumes a given state of technology, thus prescribing rules and regulations dealing with a certain technical approach rather than a more results-oriented approach. An example of this is Icelandic tariff regulations regarding the import of vehicles (2005). These regulations state that when importing a vehicle with an engine size less than or equal to two litres the tariff is 30 per cent, whereas it is 45 per cent if the engine size is greater than two litres. There are plentiful examples of either diesel or hybrid vehicles with engine sizes greater than two litres that have lower fuel consumption than vehicles, comparable in size and performance, with engines smaller than two litres. Thus there is an incentive for consumers to buy the less efficient vehicle – in contrast to the aim of the law. A much more direct (results-oriented) approach would be to scale the tariff to the nominal fuel efficiency of the vehicles, which is measured in a standard fashion for all newer cars. This tendency towards means-oriented legislation is understandable in many ways; for instance when safety standards are introduced there is a desire to ensure a uniformity of approach to the rules. However, such laws often have the detrimental effect of discouraging new technological solutions because the new technology had not been anticipated when the rules were written. Often the legal hurdles are too many and too great for the new technology to gain market entry. This applies not only to safety issues, but to a host of other aspects as well. Although Iceland is used as an example, this is hardly a uniquely Icelandic problem.

This brings us to the first prescription for introducing a new technology such as hydrogen for widespread energy use: carefully crafted laws and a reasonably responsive bureaucracy. This is probably one of the more difficult conditions to insist upon, but is an extremely important one. One factor in the rapid construction of the hydrogen filling station in Reykjavík was the willingness of local safety authorities to consider this unfamiliar technology in a quick manner, which can be contrasted with a more plodding official response in larger societies.

The next issue is that of research and development. Depending on what role hydrogen is to play in the energy sector, there is the matter of which technology is readily accessible and what countries lacking a large industrial or research capacity can do to improve their condition. For instance, Icelandic interest is mainly in the use of domestically produced hydrogen as an energy carrier for automobiles. However, the automobile industry is based on mass manufacturing. Icelandic consumers have no influence on this industry, and it is quite unlikely that Icelandic research will have any direct influence in this area. Thus one cannot anticipate that Iceland will have any direct effect upon the emergence of hydrogen vehicles for the consumer market.

However, this does not mean that a small society such as Iceland should not invest in research and development in the area of hydrogen. Rather, the hydrogen effort should be included in a more broad-ranging effort to reach the goals that hydrogen technology is meant to strive for. For instance, it is necessary to conduct research on infrastructure improvements, hydrogen production possibilities and some basic hydrogen-related research to train engineers and scientists and improve their competence. In short, the practical research effort in smaller countries must be oriented towards niche competencies and local expertise, and address questions that will not be answered by foreign parties.

The success of a new technology hinges upon public acceptance. This can be on two scales. First of all users must find the new technology easy to use, fairly priced and convenient. On another scale the public as a whole must feel confident in the new technology, particularly concern­ing safety and effects on the environment. Therefore it is necessary to educate the public in a clear and concise manner, stating both the pros and the cons. For hydrogen, a commonly cited public concern is safety. Images of the Hindenburg accident tend to occupy people's minds, and some are confused as to whether there is any relation to hydrogen bombs. Demonstration projects and an emphasis on the positive aspects of hydrogen in Iceland seem to have alleviated fears the public might have had, and there is a fairly favourable view of hydrogen as an energy carrier. It is important that the possibilities of hydrogen should not be overstated, and that the public should not be led to believe that a hydrogen economy is "just around the corner". This could have adverse long-term effects on the credibility of hydrogen researchers and possibly lead to waning interest in hydrogen as an energy carrier.

Converting to a full-fledged "hydrogen economy" calls for a substantial change in infrastructure, and this can lead to a "chicken-and-egg" problem for the market. For instance, it would be difficult for automobile sellers to introduce hydrogen vehicles if there is no pre-existing system of filling stations to refuel them. Similarly, it is not appealing to energy vendors to build hydrogen filling stations if there are no customers. To solve this dilemma there are a few approaches, two of which will be mentioned here. One idea is that the government builds a number of filling stations, thereby guaranteeing that automobile owners have ready access to fuel in most areas. Another idea is that the government pledges to buy and operate a significant number of vehicles, thus creating a customer base for energy vendors, which would then build up an infrastructure. One might also envision some mix of these two strategies.

It should be stressed once more that conversion to a "hydrogen economy" is not an end in itself, but a possible means towards an end – and that endpoint will vary from region to region. There will also be competing technologies aimed at reaching many of the same goals as hydrogen. For instance, in Iceland the use of hydrogen as a means of storing energy from intermittent sources will probably not be expedient. This is due to the large amount of unutilized, steady and renewable energy sources that are cheaper to use than the intermittent ones, and the fact that it will probably be less costly and more efficient to use wind energy to pump water into existing reservoirs, rather than using it to produce hydrogen for energy storage. Similarly hybrid electric automobiles, with the ability to be recharged from an outlet overnight, may prove to be successful, competing with pure fuel-cell cars. This technology is receiving increased attention due to the much higher efficiency of the pathway from primary power to battery to motive power compared to the hydrogen route. It is especially important for nations with limited resources, which are intimately tied to technological development elsewhere, not to commit to a single approach to solving their energy or environmental problems, but rather to adopt a policy of informed anticipation based on knowledge of several viable proposed solutions. Also, it should be stressed that there are usually a number of straightforward practical solutions that will help alleviate most of the energy and environmental issues that hydrogen technology promises to address. These existing opportunities for improvement should be carried out immediately, rather than neglected in the hope that a future cure-all will present itself.

Conclusion

Hydrogen offers the tantalizing possibility of a clean energy carrier produced by a much broader range of suppliers than oil today. This promise of a clean and secure source of "fuel" has in recent years received increasing attention, and a great deal of research and development has been carried out to advance the cause.

This has been particularly notable where hydrogen has received a lot of political support, and there is long-standing interest in using Iceland's plentiful renewable energy resources to produce an alternative energy carrier to replace oil. This builds on Iceland's previous success in replacing fossil fuels for stationary applications such as generating heat and electricity. Although Iceland cannot launch a "hydrogen economy" on its own, it could become one of the earliest adopters of such an economy when the technology becomes available. Many of the issues addressed by Icelanders in their quest to reduce oil dependence and greenhouse gas emissions may be useful to other nations as well, particularly to smaller countries or those with limited industrial resources.

Hydrogen must be considered in a framework with other possible solutions to the energy and environmental issues that hydrogen is meant to address. Clear goals should be defined with regard to these issues.

Legal obstacles, such as prohibitive safety codes towards the adoption of new technologies, should be reduced. Laws and regulations should concern results rather then methods, and the civil service should try to deal rapidly and responsibly with new, unfamiliar technology such as hydrogen technology.

Research should be weighted towards niche areas or areas where local expertise is most likely to make a significant contribution. Low-cost basic research should be encouraged to train students and professionals to become familiar with hydrogen and hydrogen systems. Here, flexibility is also important.

The public should be informed in an unbiased manner about the pros and cons of hydrogen technology (and competing technologies), safety is­sues, likely cost and availability. If technological development can make the relevant hydrogen technology available at a competitive price (or is anticipated to do so in the near future), governments will most likely have to step in to solve the "chicken-and-egg" problem of introducing demand for and supply of hydrogen simultaneously.

Authorities should not take a narrow view of hydrogen, but consider competing technologies as well, aiming to facilitate the adoption of the best available technology progressively.

REFERENCES

Arnason, B. and Th. I. Sigfusson (1999) "Converting CO2 Emissions and Hydrogen into Methanol Vehicle Fuel", Journal of Materials, Minerals and Metals Society 51(5): 46–47.

Friðleifsson, G. O. and W. A. Elders (2005) "The Iceland Deep Drilling Project: A Search for Deep Unconventional Geothermal Resources", Geothermics 34(3): 269–285.

Icelandic Ministry of Industry and Commerce (2006) "Frekari þátttaka Íslands í aljþóðlegum vetnisverkefnum [Further Icelandic Participation in International Hydrogen Research Projects]", Reykjavík: MIC.

Óskarsdóttir, G. H., Á. Valfells, B. Jónasson, B. Pétursson, B. Bjarnason, B. M. Júlíusson, G. M. Kristmundsson, G. Gunnarsson, H. Halldorsson, I. Thorb-jórnsson, J. B. Skúlason, M. Gudmundsdóttir, M. Maack, R. Baldursson, S. Ólafsson, Th. Finnsson and Th. I. Sigfusson (2005) "The Icelandic Hydrogen Energy Roadmap", Working Paper, Ministry of Industry and Commerce, Reykjavík.

Ragnarsson, A. and Th. Helgason (2003) Energy in Iceland, Reykjavík: Orkustofnun.

Sigfusson, Th. I. (2005) "The Hydrogen Projects in Iceland and Possible Lessons Learned", unpublished manuscript.

Skúlason, J. B. (2006) "ECTOS, Ecological City Transport System: Final Public Report", Reykjavík: Icelandic New Energy.

Skúlason, J. B. and H. Bjarnason (2003) "Hydrogen Developments: Case of Iceland", paper presented at IEA/OECD Towards Hydrogen Conference, Paris, March, unpublished.

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Part III
Hydrogen fuel cells and the global automobile industry

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Introduction

For many decades the automobile sector was regarded as a mature industry within which technological changes were incremental and competitive practices were long established. Among the first challenges to these traditional habits and practices was the introduction of small cars by emerging Japanese automobile exporters. A second came from the growing awareness that motor vehicles were an important contributor to rising levels of urban pollution. The third was the oil shock of 1973, which briefly drew attention to the issues of energy security and fuel efficiency.

But none of these challenges significantly or durably changed competitive practices among the vertically integrated motor vehicle companies that dominated the industry. More powerful cars, SUVs1 for example, recaptured the focus of attention and the catalytic converter, an end-of-pipe approach rather than a more substantive innovation, became the solution of choice for the automobile emissions problem.

These consumption models and this technological approach diffused to developing countries as private automobile ownership spread and market opening processes created new opportunities for globalized production. Foreign direct investment and joint ventures with local firms established motor vehicle assembly and production in many developing countries. Mergers and acquisitions led to increased concentration in the auto industry globally and enabled automobile manufacturers to position themselves across a wide spectrum of end markets, from luxury to compact vehicles. Partnerships with preferred "first-tier" suppliers were formed for the purpose of sharing the risks and costs of designing principal components and subsystems. By reducing the number of suppliers, distinct components and parts, these partnerships have accelerated the pace at which new products are designed. Shared platforms, modularized production, long-term contracts with a global scope and the accommodation of first-tier suppliers within the assembler's own factory or near to it have reduced the costs and uncertainties associated with a process of continuous change in the motor vehicle industry.

Towards the end of the millennium, rising fuel prices and pollution levels drew attention to the need for more innovative solutions to the problems of energy security, fuel efficiency and high levels of greenhouse gases, but policy support for a concerted move towards clean fuels and alternatives to the internal-combustion engine (ICE) was neither strong nor sustained, as changes in the 1990 California Air Resources Board zero-emission-vehicle targets illustrated (Yarime, Shiroyama and Kuroki). This added to the difficulties that General Motors encountered in commercializing an electric vehicle, although only a few years later Toyota would successfully introduce the first hybrid car, the Prius, into the American market. Two factors were particularly important in explaining the speed of its adoption: it catered to traditional tastes for power and range by keeping the ICE at the core; and it enhanced fuel efficiency through the introduction of an electric battery that could take over for stop-and-start urban driving. The battery, moreover, was recharged through regenerative braking.

But these technological innovations alone would not have generated the strong commercial response that followed; governments in a number of large-market countries provided demand-side incentives by subsidizing the difference in price between the more expensive hybrid and a similar ICE vehicle. The Toyota Prius now has many imitators, and even models such as "gas-guzzling" SUVs and large luxury cars are being produced in hybrid versions, thus contributing to the maintenance of traditional consumption patterns.

The wide array of technological choices is raising new issues for developing countries in their role as both importers and producers of automobiles and auto parts. Growing numbers of used-car imports, for example, present a major problem for technological catch-up in developing countries. They prolong the life of older, less energy-efficient technology and slow down the need for local micro and small enterprises, engaged in auto repair, to upgrade their skills. Skill upgrading is needed to service the electric-based systems of contemporary hybrid vehicles – which are similar to those that will be used in wholly electric and fuel-cell vehicles of the future. Skill upgrading is also needed to deal with the growing importance of numeracy associated with electronic controls, especially those used in the fuel-injection systems that are critical components in flex-fuel engines and enable drivers to switch easily between 100 per cent ethanol, 100 per cent gasoline or any blend of the two. Flex-fuel engines that will make it possible to switch between compressed natural gas (CNG), gasoline and ethanol, and others that will enable the use of a wide variety of inputs for biodiesel, are now under development. In the short and medium term, making and maintaining such engines will be important elements in a strategy to reduce energy costs and pollution levels in the megacities that have emerged in the developing world. Imports of used cars, however, create a disincentive to invest in such capacity building.

In addition to their role as growing consumers of imported motor vehicles, many developing countries are also active players in both the manufacture and the export of motor vehicles and auto parts. More than two dozen developing countries currently make and export automobiles, buses and/or parts and components.2 The importance of the motor vehicle industry in stimulating demand for inputs from a wide range of upstream industries, including steel, plastics, new materials, glass and electronic and electrical industries, has made the automobile sector one of the driving forces in industrial employment and growth in all the principal global players today. Governments in many developing countries have thus promoted the automotive industry in their overall development strategies.

Most of the subsidiaries and joint-venture companies of multinational corporations, whether located in Canada (Molot) or in developing countries, simply reproduce models and production processes developed in their parent firms. Even wholly owned national firms have largely pursued an imitative strategy that has yet to respond to the emergence of new technologies by building capacity in flex-fuel engines or electric vehicles, as the case of Malaysia illustrates (Kari and Rasiah).

There is some evidence, however, that three of the developing world's largest countries have begun to explore a variety of innovative alternatives to the issues of energy security, fuel efficiency and urban pollution. Brazil (Part II) has worked upstream to develop biofuels and produce flex-fuel engines. India (Part II) has converted buses in its capital city to CNG, and its largest automotive company, Tata Motors, has launched a new, small, cheap and more energy-efficient family car, the Nano. In China (Part IV) local automobile companies and joint-venture firms are building electric and hydrogen fuel-cell vehicle prototypes. Learning more about these experiences can help in choosing among pathways that better position developing countries for the technological changes ahead.

Notes

1. Sport utility vehicles.

2. This includes the well-known large-market participants in this global industry, China, Mexico and Brazil, as well as a number of lesser-known producers and in some cases exporters of automobiles, trucks, auto parts and components, such as Argentina, India, Indonesia, Malaysia, Nigeria, Thailand and South Africa.

10
The strategies of the Japanese auto industry in developing hybrid and fuel-cell vehicles

Masaru Yarime, Hideaki Shiroyama and Yusuke Kuroki

Introduction

Currently it is an urgent issue at the global level to reduce the amount of pollutants in the atmosphere. In areas where the atmospheric concentrations of nitrogen oxides (NOx) and suspended particulate materials are high, automobiles are regarded as the main source of these substances in many cases. Therefore, environmental regulations have been imposed on exhaust gases of automobiles in the past in many parts of the world, with the aim of encouraging innovation in the auto industry.

At the beginning of the 1970s the most stringent regulation in the world, the so-called Muskie Act, was enacted in the United States. Under this Act, the auto industry was required to reduce the amount of emissions of carbon monoxide (CO), hydrocarbons (HCs) and NOx to one-tenth. As this target was considered by the auto industry to be unrealistically stringent without any sound technical basis, the Muskie Act was opposed by the US auto industry so fiercely that the Environmental Protection Agency (EPA) decided in 1973 to delay its implementation (Mizutani, 1990, 1991a, 1991b).

A year earlier the Environmental Agency in Japan had publicly announced that legislation similar to the Muskie Act would be introduced soon in the country. Japanese auto makers, having less influence on environmental policymaking than their counterparts in the United States, were thus obliged to concentrate on complying with the coming regulations through technological innovation (Wallace, 1995; Zhu and Otahara, 2004). Specialized in the production of motorcycles and relatively small-sized automobiles, Honda focused on utilizing its expertise in engines for technological development and became the first auto producer to succeed in complying with the stringent target of emissions reduction by developing a new type of engine, namely the CVCC. In contrast, larger companies such as Toyota and Nissan, which produced a full range of automobiles, sought to achieve the target by creating a new type of catalyst, the three-way catalyst, rather than changing the structure of engines. What is interesting to note is that although the CVCC engine was able to achieve the target for emission reduction from the beginning, Honda subsequently abandoned its production, whereas the three-way catalyst has improved significantly over time in reducing emissions and came to be adopted widely throughout the world. In effect, the CVCC engine turned out to be a transient technology.

Uncertainty and diversity are inherent in the process of technological change (Rosenberg, 1982, 1994). There are multiple options for clean vehicle technologies, including electric, hybrid and fuel-cell vehicles, with their long-term cost and performance very difficult to predict in advance. Furthermore, the strategies of companies are formed not just in terms of their market and competitive positioning, but also with reference to their histories and institutional environments (Levy, 2005). Among the most important institutional conditions influencing technological change in industry is environmental regulation (Yarime, 2007). Under the circumstances, a certain degree of heterogeneity can be observed with regard to corporate strategies on the development of alternative clean vehicles. The environmental regulations that were introduced in the United States in the 1990s had particularly significant impacts on the direction and speed of technological development at Japanese automotive producers, which relied heavily on the large US market for their exports.

This chapter examines how environmental regulations have influenced the strategies of the Japanese auto industry in developing alternative clean automobiles, with a particular focus on hybrid and fuel-cell vehicles. The extent to which Japan's leading auto producers are moving towards commercializing clean vehicles is having a worldwide impact on the automobile industry, shifting the technological trajectory on clean vehicles and transforming the industrial structure through inter-firm alliances. In particular, hybrid vehicles are quite distinct from conventional gasoline vehicles, in that their technology critically depends on the performance of batteries, motors, inverters and control systems, which are also crucial components of fuel-cell vehicles. Therefore, it is becoming increasing critical to establish close relationships between car manufacturers and component producers for successful development and commercialization of alternative clean vehicles. This will have significant implications for corporate strategies and policymaking in developing countries which intend to promote the growth of this industry.

Regulation for emission control in the auto industry in the 1990s

In the United States the California Air Resources Board (CARB) enacted a low-emission vehicle (LEV) regulation in 1990. The LEV regulation required that seven large automobile producers, namely the Big Three (General Motors, Ford and Chrysler), plus Toyota, Nissan, Honda and Mazda, include zero-emission vehicles (ZEVs – vehicles that do not emit any pollutants) as a small percentage of their total sales. The initial targets for the introduction of ZEVs were set at 2 per cent after 1998, 5 per cent after 2001 and 10 per cent after 2003. This invited fierce opposition from the auto industry, which argued that discussions with regard to the introduction of the regulation did not reflect their understanding at the time that alternatives to the conventional gasoline engine vehicle still presented many difficulties in technology and infrastructure. Despite that strong resistance, the ZEV regulation was enacted in the end. The necessity to comply with the regulation greatly prompted the auto makers to develop ZEVs.

Since at that time no feasible options were considered to be available for ZEVs other than electric vehicles, automobile manufacturers focused their efforts on developing this technology. It became increasingly clear, however, that there were serious difficulties with electric vehicles, notably the poor performance of the battery and a short cruising range (Sato, 1999). As it was expected to take much more time than planned for these vehicles to replace conventional gasoline vehicles, a consensus soon formed in the industry that it would be impossible for sales of ZEVs to reach 2 per cent of total vehicle sales by 1998. Auto makers thus strongly argued to CARB that a full-scale introduction of electric vehicles would face serious difficulties from a technical perspective. Furthermore, the US auto industry, which had traditionally derived most of its profits from larger vehicles, light trucks and more recently sport utility vehicles, was particularly concerned about low expectations of market viability for LEVs (Levy and Rothenberg, 2002).

The auto industry's aggressive lobbying worked well, and consequently CARB decided in 1996 to revise the ZEV regulation. The implementation of the ZEV mandate was delayed for five years; that is, the targets for 1998 and 2001 were cancelled, but the mandate that ZEVs constitute 10 per cent of total sales in 2003 was kept unchanged. And the big seven companies were also required to carry out fleet demonstration projects of ZEVs from 1998 to 2000 through a memorandum of agreement with CARB. As the industry continued to lobby further, CARB subsequently came to recognize other vehicles whose burden on the environment is very small, but not nil like ZEVs. When the regulatory framework was revised in 1999, the category of partially zero-emission vehicles (PZEVs) and a multi-credit system were introduced, while the mandatory introduction of ZEVs by 2003 was maintained. In the new system a PZEV was regarded as equivalent to 0.2 ZEV, and it became possible to achieve the ZEV target by introducing ZEVs for 4 per cent and PZEVs for 6 per cent of the total sales.

In 2001 the regulation was amended again, and the category of advanced-technology PZEVs (AT-PZEVs) was newly established, to be equivalent to 0.4 ZEVs. ZEVs now corresponded to electric vehicles and hydrogen fuel-cell vehicles, AT-PZEVS to hybrid vehicles and fuel-cell vehicles with fuel reforming and PZEVs to gasoline vehicles which could comply with the super-ultra-low-emission vehicle (SULEV) level that had been created in 1998 through the tightening of the LEV regulatory framework (Takagi, 2003). The modified regulatory standard made it possible to achieve the 10 per cent target by introducing ZEVs for 2 per cent, AT-PZEVs for 2 per cent and PZEVs for 6 per cent of the total sales.

Once again, auto makers argued that they had considerable difficulties in realizing the 2 per cent target for ZEVs. Consequently, the procedure for calculating the credits for ZEVs, AT-PZEVs and PZEVs was changed in 2003 so that the credits for vehicles such as hybrids were increased. What is of particular importance is that it became possible to substitute AT-PZEVs for ZEVs, on the condition that a minimum of 250 ZEVs per year would be produced by the auto makers as a whole.

In the meantime, fuel-cell technologies had progressed significantly. The possibility of commercializing fuel-cell vehicles began to be discussed seriously, which subsequently led to the creation of a new public-private collaborative venture, the California Fuel Cell Partnership (CFCP), in January 1999. The goals set by the CFCP were to demonstrate fuel-cell technology by operating and testing vehicles, to demonstrate alternative fuel infrastructure technology, to explore the path to commercialization and to increase public awareness (California Fuel Cell Partnership, 2004). The original eight members included a fuel-cell manufacturer (Ballard), automotive manufacturers (DaimlerChrysler and Ford), energy providers (BP, Shell Hydrogen and ChevronTexaco) and government agencies (CARB and the California Energy Commission). Honda, together with Volkswagen, joined the CFCP in October 1999, Nissan in March 2000, Hyundai and International Fuel Cells (now UTC Fuel Cells) in June 2000 and GM and Toyota in October 2000.

The CFCP sprang from the ZEV regulation initially, and was thus regarded as a driving experiment at the state level. As the technologies of fuel-cell vehicles improved substantially, however, the programme strengthened its nature as a national project, with subsequent participation by the Department of Energy and the Environmental Protection Agency. Since the world's major auto makers have joined, the CFCP has provided an arena in which each company could test new fuel-cell vehicles, and the driving standards of the programme function as milestones in the process of developing fuel-cell vehicles.

What one sees in California was basically the gradual regress of efforts to regulate pollution in the face of technological difficulties and the pressure of heavy lobbying, coupled with a sharp turn towards conservatism in the state. The stringent regulation requiring the production of ZEVs initially pushed the auto makers to conduct R&D on clean vehicles, particularly electric vehicles. As auto makers encountered technical difficulties, however, the regulation underwent a process of revisions which influenced the heterogeneous strategies the Japanese auto makers took in developing hybrid and fuel-cell vehicle technologies.

The strategies of the Japanese auto industry

The strategies of Japanese auto companies in coping with environmental regulations are examined by using the Japanese patent data on clean vehicle technologies (Kuroki, 2004). The patent applicants considered in this study are six large Japanese auto makers: Toyota, Nissan, Honda, Mazda, Mitsubishi and Fuji Heavy Industries (Subaru). Patents are searched for technologies specifically related to electric vehicles, hybrid vehicles (series, parallel and series/parallel hybrid vehicles1) and fuel-cell vehicles, respectively, including components and control techniques. Patent data were obtained from the database maintained by the Japanese Patent Office.2 Figure 10.1 gives the trends in patent applications made by the six Japanese auto producers for clean vehicles. Note that since the figure indicates the year in which each patent was published, its application was made 18 months earlier.

Applications for patents on electric vehicles appeared as early as the mid-1970s, when many auto makers in Japan were engaged in R&D. Throughout the 1980s, however, the number of patent applications for electric vehicles remained at a low level, as R&D on this technology was basically aborted at most of the auto makers, except the small firms of Suzuki and Daihatsu (Environmental Restoration and Conservation Agency of Japan, 2002). Following the introduction of the ZEV regulation in California in 1990, electric vehicles were again regarded as the

Figure 10.1 Patent applications by major Japanese auto makers on clean vehicles

main target for development, and the number of patent applications on electric vehicles began to rise sharply in the early 1990s. Applications stabilized at a level of a little more than 100 per year in the mid-1990s, after which they declined rather rapidly in the early 2000s.

This is considered to reflect the slow progress in the technologies related to electric vehicles. In particular, the performance of batteries is one of the most critical elements of electric vehicle technology, and there remained serious obstacles in improving it (Sato, 1999). At the beginning of the 1990s, electric vehicles with lead batteries were mainly developed, with many technical difficulties limiting the battery lifetime and the cruising range of vehicles. Consequently, the focus of R&D was shifted to nickel metal hydrate batteries and lithium ion batteries. Figure 10.2 shows the chronological development and commercialization of electric vehicles by the major auto companies, indicating that commercial production almost stopped in the early 2000s. Recently, however, major auto makers have announced that they plan to develop and commercialize plug-in electric vehicles, including those of the hybrid type which can utilize electricity stored at home (The Economist, 2006; Yamane, 2007). That could pave the way for a resurgence of electric vehicles in the future.

Figure 10.2 Development and commercialization of electric vehicles by major Japanese auto makers
Source: Center for Electric Vehicles (2006b), modified by the authors.

While the auto industry as a whole continued to lobby intensively against environmental regulations in the 1990s, the figures on patent applications suggest that several companies initiated technological development of hybrid vehicles. In particular, series hybrid vehicles, whose structure is very close to that of electric vehicles, were chosen initially to meet the development target. While patent applications on electric vehicles stagnated, those on series hybrid vehicles rose in the early 1990s. They began a gradual decline in the late 1990s, however, mainly due to a serious problem directly related to the structure of series hybrid vehicles. The efficiency of series hybrid vehicles was low, because the kinetic energy generated by the combustion engine is transformed into electric energy that is transformed once again into kinetic energy by the motor (Horie, 1999).

As the number of patent applications on series hybrid vehicles declined, applications on parallel hybrid vehicles, including series/parallel hybrid vehicles, began to increase in the late 1990s. Since the category of PZEV was created in the regulatory framework in 1999, it became

possible for auto makers to receive credits for ZEVs without actually producing pure ZEVs. That encouraged the auto manufacturers to shift their target of technological development to parallel hybrid vehicles, which were considered to be more feasible than other alternative technologies. The development and commercialization of hybrid vehicles by the major auto companies are given chronologically in table 10.1. Currently, most commercialized models of hybrid vehicles are of the parallel type.

With regard to fuel-cell vehicles, the auto makers basically started to apply for patents in the mid-1990s, and the number of applications increased sharply in the 2000s. That could also be considered to reflect the changes in regulations influencing the research focus in the auto industry. After the revisions of the ZEV regulation in 2001 and 2003, more ZEV credits were given to fuel-cell vehicles than to electric vehicles, and subsequently research activities started to be conducted intensively by major auto makers on fuel-cell vehicles. Initially these vehicles were mostly based on the reformation of methanol, because high-pressure hydrogen tanks were not yet well developed and it was considered that hydrogen-based fuel-cell vehicles could not have a sufficient cruising range (Nishimura, 2007). Since the early 2000s, however, the mainstream of R&D has shifted to the hydrogen type of vehicles, as it became clear that the reformation type of fuel cell takes a longer time to start up and has lower energy efficiency than the hydrogen type. Table 10.2 shows the chronological development of fuel-cell vehicles by Japanese auto makers. Most types of vehicles developed so far are based on the fuel-cell/battery hybrid system, which suggests that the knowledge and experience accumulated through working on hybrid vehicles would be very important in developing fuel-cell vehicles.

This chapter has discussed the overall trends in patent applications for clean vehicles in the Japanese auto industry. As the chronological development and commercialization of electric, hybrid and fuel-cell vehicles suggest, however, there have been large differences in the R&D strategies among the major car makers in Japan, reflecting their own strengths and weaknesses as well as the environment surrounding them. Thus the chapter now examines the corporate strategies on R&D and inter-firm relationships in detail, using data on patent applications.

Toyota: Proactive approach with technological diversification

The trends in Toyota's patent applications for clean vehicles are shown in figure 10.3. The arrows indicate when revisions and modifications were made to the ZEV regulation. The figure suggests that Toyota applied for patents on electric vehicles in the mid-1970s, after which it made very few patent applications from the late 1970s to the mid-1980s. The company started applying for patents on electric vehicles again in the late 1980s, when the ZEV regulation was discussed in California. Following the regulatory imposition, Toyota's patent applications jumped in the mid-1990s. The company released the first electric vehicle with nickel metal hydrate batteries, the RAV4L-EV, into the Japanese market in 1996. Figure 10.3 also indicates that Toyota began to apply for patents on series hybrid vehicles in the early 1990s, prior to the 1996 CARB decision to delay the implementation of the ZEV regulation. Patent applications for technologies related to parallel hybrid vehicles and series/parallel hybrid vehicles followed subsequently in the mid-1990s. Development of fuel-cell vehicles started in the same period, as the company's patent applications suggest.

In the 1970s the company had suffered badly from a negative image of being reluctant to act on environmental protection compared to Honda and Mazda, which were considered to be the leaders in developing technologies to reduce auto pollution. That experience became one of the major factors which later prompted the company to move actively into developing and commercializing clean vehicle technologies (Sasanouchi, 2000). As the ZEV regulation was imposed on the auto industry in the early 1990s, Toyota took various initiatives concerning environmental protection. In 1992 it set up an environmental committee chaired by the

Figure 10.3 Patent applications by Toyota on clean vehicles

president, which was of decisive importance as an institutional framework in its strong leadership concerning environmental matters (ibid.). To support the activities of the committee, the Environment Affairs Division, comprising 50 staff members positioned just under the president, was created in 1998. The company's first Global Environmental Charter was released in 1992,3 followed by an environmental implementation plan in 1993.

In September 1993 Toyota initiated a project, Global 21st Century (G21), to develop new automobile technologies for the next century. The original idea of the technical staff involved in the project was to pick up gasoline direct-injection technology, which would make it possible to improve fuel efficiency by 50 per cent. But the vice president in charge of the project at that time insisted on raising the target to a 100 per cent improvement in fuel efficiency. It quickly became clear that improving existing technologies would not be sufficient to achieve the target. This led to the rediscovery of the hybrid technology from among the technological options on which work had been undertaken earlier at the company's research centre. Originally, hybrid technology was developed in 1977 for a sports vehicle, the Toyota Sports 800 HV (Sasanouchi, 2003). Since then, research on hybrid technology had been conducted for 15 years at the research centre without receiving any particular attention regarding its commercial applications.

Then suddenly the development of hybrid vehicles was given top priority in Toyota's corporate strategy. The original target date for the commercialization of hybrid vehicles was set for December 1998. But the president pushed hard to put the new hybrid on the market at the time when the Third Conference of Parties to the UN Framework Convention on Climate Change (COP3 UNFCCC) would be held in Kyoto, Japan. This strong leadership contributed critically to introducing Toyota's first mass-produced hybrid vehicle, the Prius, to the Japanese market in December 1997, just after COP3 UNFCCC (Sasanouchi, 2000). The Prius was subsequently released in the US and European markets in 2000. Other hybrid vehicles, including the Estima and Crown hybrids, were commercialized in 2001. The trend in the annual sales of hybrid vehicles produced by Toyota is shown in figure 10.4. Recently the overseas sales of Toyota's hybrid vehicles, mainly in the United States, have surpassed those in the domestic market.

One of the crucial factors in Toyota's successful development of hybrid vehicles was the R&D strategy under which a diversified technological portfolio was maintained. Although the research on hybrid vehicles did

Figure 10.4 Annual sales of Toyota's hybrid vehicles
Source: Tanokura and Karishu, 2006.

not produce commercially significant results for a long time, the company did not abandon this technological option entirely. Because of this diversification of R&D, when the hybrid technology was later picked up for Toyota's G21 project, the company could quickly engage in developing hybrid vehicles. A closer examination of Toyota's patent applications on hybrid technologies reveals that its R&D preceded that of its rivals, Nissan and Honda, in almost all of the components and control techniques relevant to hybrid vehicles.

Hybrid vehicles are different from conventional gasoline vehicles in that the performance of the former relies crucially on batteries, motors and inverters, which are not contained in the latter (The Economist, 2004; Tachimoto, Hayashi and Kawabata, 2005). Thus it is of critical importance to have knowledge and experience of these new types of technologies in producing hybrid vehicles. And since fine-tuning between the engine and the motor is very important for increasing the fuel efficiency of hybrid cars, the development of electronic control systems was also essential.

Batteries, motors, inverters and control systems are indispensable components for electric vehicles in a broad sense, including fuel-cell vehicles as well as hybrids. In particular, battery technologies are the key to improving the performance of alternative clean vehicles. As Figure 10.5 shows, in the relationships that major auto makers have established with battery producers, close collaboration is vital to car makers in the development of electric vehicles in this broad sense.

In 1996 Toyota and Matsushita Battery Industry created a joint venture, Panasonic EV Energy, to provide nickel metal hydrate batteries for use in electric vehicles (Panasonic EV Energy, 2006). Their collaboration continued to develop nickel metal hydrate batteries, and later lithium ion batteries, for hybrid vehicles. Matsushita Battery Industry is, along with Sanyo Electric, one of the major battery producers in the world (Takeshita, 1999). Through its sustained experience of collaboration with Matsushita on electric and hybrid vehicles, Toyota obtained the necessary knowledge and expertise of these technologies and related problems and could later apply them in the development of fuel-cell vehicles.

Toyota's comprehensive development of fuel-cell vehicles, from materials, components and systems to control and production technologies, started in 1992 (Toyota Motor Corporation, 2004). In October 1996 the company demonstrated its in-house-developed fuel-cell vehicle, equipped with an original fuel-cell tank utilizing hydrogen-absorbing metal alloys. This vehicle was developed by modifying the electric vehicle Toyota had developed during almost the same period, the RAV4L-EV. In September 1997 the company unveiled the world's first fuel-cell vehicle with an

Figure 10.5 Relationships between auto makers and battery producers
Source: Center for Electric Vehicles (2006b), modified by the authors.

onboard methane reformer. In rivalry with the alliance between Daimler-Chrysler, Ballard and Ford with regard to the development of fuel-cell vehicles, Toyota started joint efforts with GM in 1999. In March 2001 Toyota announced the development of the FCHV-3, equipped with a fuel-cell stack featuring improved power output and a hydrogen-absorbing alloy tank, and in June 2001 the FCHV-4, equipped with high-pressure hydrogen tanks and the company's original fuel-cell stack. As the chronological development of fuel-cell vehicles by Toyota shows (table 10.2), from the beginning Toyota developed fuel-cell stacks in-house, rather than introducing technologies from outside companies, notably Ballard.

Testing of fuel-cell vehicles started on public roads in Japan and the United States. After Toyota's fuel-cell vehicles were certified by Japan's Ministry of Land, Infrastructure and Transport for the first time, the company began limited marketing with the delivery of two vehicles in the United States and four in Japan in December 2002. Recently, Toyota also announced that it would start road testing of plug-in hybrid vehicles in autumn 2007 (Takada, 2007). This strategic decision suggests that the company now takes plug-in hybrid electric vehicles seriously as a promising option for alternative clean vehicles.

Nissan and Honda: Reactive approach with technological selection and concentration

The trends in patent applications by Nissan and Honda related to clean vehicles are given in figures 10.6 and 10.7, respectively. Technological development at Nissan and Honda progressed in accordance with the general trends in the Japanese auto industry, with a particular focus on their own fields of strength. A closer examination of patent applications shows that there are specific areas in which Nissan and Honda have developed technologies comparable to those of Toyota: Nissan has strength in the field of lithium ion batteries, and Honda in ultra capacitors. The trend in patent applications suggests, however, that the two companies conducted little R&D on series hybrid vehicles. Full-scale development of hybrid vehicles at these two companies was not conducted until the ZEV regulation was amended in 1996.

Figure 10.6 suggests that Nissan conducted R&D on electric vehicles at a level comparable to that of Toyota. Nissan's patent applications on electric vehicles were seen in the mid-1970s and continued during the 1980s. In the 1990s numbers increased sharply, and remained as many as 50 per year in the middle of the decade, followed by a rapid decline in the early 2000s. While Toyota initially worked on nickel metal hydrate batteries for use in electric vehicles, Nissan from the beginning focused

Figure 10.6 Patent applications by Nissan on clean vehicles

on lithium ion batteries, which were considered to be a more advanced technology. The company developed lithium ion batteries through collaboration with Sony, and released Tino hybrid vehicles in 2000. There remained many difficulties in the lithium ion battery system, however, which resulted in only limited development of Nissan's electric vehicles by the end of the 1990s compared with those of Toyota or Honda (Sato, 1999). In terms of vehicle sales, while Toyota developed 10 different types of hybrid vehicles and had sold about 235,000 hybrids by 2005, and Honda approximately 48,000 hybrids by the same year, Nissan sold only 100 Tino hybrid vehicles based on the lithium ion battery system.

This initial experience of the development of lithium ion batteries might have discouraged Nissan's subsequent R&D on hybrid vehicles. After its alliance with Renault in March 1999, the company virtually stopped the development of hybrid vehicles, giving priority to cost-cutting efforts (Asahi Shimbun, 2006). Instead, Nissan emphasized the importance of introducing ultra-low-emission vehicles based on internal-combustion engines, rather than hybrid vehicles, for improving air quality (Wada, 2003). Consequently, Nissan's technological development lagged considerably behind that of Toyota in most of the technical fields related to hybrid vehicles. With the remarkable success of hybrids in the market,

Figure 10.7 Patent applications by Honda on clean vehicles

however, Nissan announced in 2002 that it would make an alliance with Toyota to introduce hybrid technologies from its rival. Based on the supplied hybrid system, the Altima Hybrid was released in the North American market in February 2007. In its mid-term environmental action plan released recently, Nissan Green Program 2010 (NGP 2010), the company plans to develop hybrid vehicles with its original system to be launched in Japan and the United States, with a target of 2010 (Nissan Motor, 2006). Recently, Nissan established a joint venture with NEC and NEC Tokin for producing lithium ion batteries, Automotive Energy Supply (Karishu, 2007b). As lithium ion batteries are expected to be widely adopted in hybrid vehicles in the future, the company plans to sell its batteries to other auto manufacturers and primary suppliers.

Figure 10.7 suggests that Honda was not engaged in conducting R&D significantly until the late 1980s. In the early 1990s it started to develop nickel metal hydrate batteries jointly with Matsushita Battery Industry (Sato, 1999). Based on their successful development, Honda could introduce its first electric vehicle, the EV Plus, to market in California in 1997. Although figure 10.7 indicates that Honda did little R&D on hybrid vehicles until the mid-1990s, the previous experience of working on nickel metal hydrate batteries through collaboration with a leading battery producer could be considered to have helped the company develop hybrids later. Honda succeeded in developing its own hybrid vehicles and began to sell the Insight in 1999. Its Civic hybrids were commercialized in 2001 and its Accord hybrids in 2004 in the North American market.

With regard to fuel-cell vehicles, figure 10.6 suggests that Nissan did a certain amount of R&D in the 1980s, but after that little was conducted until the mid-1990s. Nissan's patent applications on fuel-cell vehicles suddenly started to increase in the late 1990s, following Toyota's development of its first fuel-cell vehicle. In May 1999 Nissan announced that it had developed its first fuel-cell vehicle, the R'nessa, and started road trials (Homma, 1999). The vehicle was based on a methanol steam reformer developed jointly with the chemical engineering company Mitsubishi Kakoki Kaisha, the Ballard polymer-electrolyte fuel cell and a lithium ion battery. After concluding an alliance with Renault, Nissan decided in 2000 to invest ¥85 billion over five years for R&D on fuel-cell vehicles. In NGP 2010 the company plans to introduce next-generation fuel-cell vehicles into the United States and Japan in the early part of the next decade, with a key technology focusing on advanced fuel-stack systems.

In September 1999 Honda produced its first fuel-cell vehicle with a metal hydride battery, the FCX-V1, relying on the fuel-cell stack developed by Ballard (Moriya, 2003). One month later, at a motor show, the company exhibited its second fuel-cell vehicle, the FCX-V2, based on a methanol reformer and a fuel-cell stack developed in-house. In 2000 Honda announced the development of its third fuel-cell vehicle, the FCX-V3, equipped with a high-pressure hydrogen tank and Ballard's fuel-cell stack. Another version of the FCX-V3 was developed in 2001, with a fuel-cell stack developed by Honda this time. The company's fourth fuel-cell vehicle, the FCX-V4, was developed in the same year, equipped with a higher-pressure hydrogen tank and Ballard's fuel-cell stack. Subsequently, the company produced several types of fuel-cell vehicles with stacks developed in-house. In this way Honda adopted the fuel-cell stacks developed by Ballard at early stages and then gradually shifted to internal development.

Fuji Heavy Industries, Mazda and Mitsubishi Motors: Alliance and collaboration with foreign auto makers

The clean-vehicle-related patent applications of Fuji Heavy Industries, Mazda and Mitsubishi Motors are shown in figures 10.8–10.10. Compared with their larger Japanese competitors, Toyota, Nissan and Honda, these three companies are relatively small, as indicated by the absolute amount of patent applications made for clean vehicles. It was hence difficult for them to devote a large amount of financial resources to research

Figure 10.8 Patent applications by Fuji Heavy Industries on clean vehicles

Figure 10.9 Patent applications by Mazda on clean vehicles

Figure 10.10 Patent applications by Mitsubishi Motors on clean vehicles

and development in new, advanced fields such as hybrid and fuel-cell vehicles.

From the mid-1990s to 2000 these companies formed or strengthened alliances with foreign companies. Fuji Heavy Industries started a capital and business tie-up with GM in 1999; Ford increased its holdings of Mazda shares significantly in 1996; and Mitsubishi Motors formed a capital and business alliance with DaimlerChrysler in 2000. Coupled with the revision of the ZEV regulation in 1999, these capital and technical alliances had a significant effect in encouraging these companies to conduct R&D on clean vehicles. The focus of patenting activity, however, was slightly different across the three companies. Fuji Heavy Industries patented mainly in series/parallel hybrid vehicles, Mazda in both parallel and series/parallel hybrid vehicles but with an emphasis on the latter, and Mitsubishi Motors in series hybrid vehicles initially and parallel hybrid vehicles later. Although Mitsubishi was able to develop its own technologies for hybrid vehicles relatively early, these were mainly for series hybrids and the company could not shift its R&D focus to parallel hybrids quickly. Fuji Heavy Industries established a joint venture with the major electric and electronic manufacturer NEC, NEC Lamilion Energy, for developing lithium ion batteries in 2002, and planned to develop hybrid vehicles with GM using the batteries (Karishu, 2007b). After Fuji dissolved its capital relationship with GM in December 2005, however, the company withdrew from the joint venture in March 2006 and has started to develop hybrid vehicles through collaboration with Toyota. Mazda's hybrid vehicle, the Tribute Hybrid, and Ford's Escape Hybrid and Mercury Mariner Hybrid are based on the hybrid system developed by Aisin AW, a major component company which belongs to the Toyota group (Karishu and Tanokura, 2007).

On fuel-cell vehicles, Mazda actually revealed a trial model as early as in 1992, with a high-pressure hydrogen tank (Center for Electric Vehicles, 2006b). Following that, as figure 10.9 indicates, Mazda's applications for patents on fuel-cell technology increased, and in 1997 it developed its first fuel-cell vehicle, the Demio, with hydrogen-absorbing metal alloys. After Mazda made its alliance with Ford, the company joined the DaimlerChrysler-Ford project on fuel-cell development. Mitsubishi Motors gave up developing fuel-cell vehicles in 2006 and shifted its R&D to focus on electric vehicles (Nishimura, 2007). Recently the company developed its iMiEV electric vehicle for joint research with electric power companies, including Tokyo Electric Power Company, and aims at commercializing it in 2010 (Tomioka, 2006).

Concluding remarks

This study argues that regulations combined with the particular strengths and weaknesses of individual companies have shaped the choice of technological direction and probably its speed, as reflected in R&D expenditures. The initial CARB regulations exercised a powerful influence on Toyota's R&D, since California was a key market for the company. Once the company had begun investing in electric and hybrid vehicle technologies, it chose to continue rather than abandon this pathway even though the regulations themselves were significantly weakened. Having worked on electric vehicles and nickel metal hydrate battery technologies, Toyota could accumulate experience and utilize it in revitalizing the development of hybrid vehicles maintained within the company. In this respect, by focusing on the advanced lithium ion battery too early, Nissan was not as successful in developing electric vehicles, which induced the company to abandon this technological option prematurely, including related hybrid vehicles. This suggests that there was a combination of vested interests, path dependence and regulatory impact affecting the principal market of sale at work here.

Somewhere along the line, however, Toyota also recognized that Daimler-Benz, later DaimlerChrysler, was a potentially huge threat, given its rapid move along the learning curve in developing hybrid fuel-cell vehicles (HFCVs), as discussed by Ishitani and Baba in this volume. This probably stimulated the sharp upturn in research on HFCV technologies, which led to patent applications in the late 1990s in fuel-cell vehicle technologies. At the same time, as Mytelka argues in the introductory chapter of this book, once Toyota's hybrids began to take off thanks to US government subsidies to reduce the gap between the price of hybrids and internal-combustion engines, the rules of the game changed for every player, and all major car makers – such as Honda and Ford – had to produce hybrid vehicles, especially hybrid sport utility vehicles (SUVs). This buys time to develop further the technologies for HFCVs for the auto producers. It still remains to be seen when fuel-cell vehicles will actually be commercialized for the mass market.

In relation to developing countries, it should be emphasized that components, particularly batteries, will be crucial in developing electric vehicles in general, including hybrids as well as fuel-cell vehicles, and accordingly the relationship with suppliers will become much more important than in producing conventional gasoline vehicles. Distinct from conventional vehicles, hybrids depend on batteries, motors, inverters and control systems, and thus new types of knowledge on electric and electronic technologies are required in producing hybrid vehicles. While the proportion of electronic components in a vehicle is now approximately 20–30 per cent on a monetary basis, it is expected to increase to 50–60 per cent as electronic technologies are increasingly used for power-trains in hybrid vehicles (Okubo, 2006). Auto makers are now trying to develop "drive-by-wire" technologies, in which the mechanics of automobiles are entirely controlled electronically. Along with that, embedded software will become much more complicated in control systems, and this also requires close coordination with outside suppliers (Yarime and Baba, 2005). Under these circumstances, major auto makers in Japan and other countries have established close collaborations with leading battery makers and have accumulated experience of working on battery technologies. This is of considerable importance for the development of fuel-cell vehicles in the future. Therefore, the authors argue that it is desirable for developing countries to get into the production of hybrids as learning opportunities, although they might face more difficulties in entering this sector than in the case of producing conventional gasoline vehicles, as the level of required knowledge is higher and its scope more extensive. What is critically important is to find good suppliers of components and to establish a close collaboration with them for learning and accumulating knowledge on new sets of expertise. Rich experience of working on hybrid vehicles will also be valuable in producing plug-in hybrids, which could prevail in the near future as they do not require the costly infrastructure of hydrogen, even if fuel-cell vehicles turn out to be the ultimate clean vehicles in the long run.

Notes

1. In a series hybrid system, the engine runs a generator which can either charge the batteries or power an electric motor that drives the transmission. The engine never powers the vehicle directly. In a parallel hybrid system, the battery and engine are both connected to the transmission, and as a result either the battery via the electric motor or the engine directly to the transmission or a combination of both can provide propulsion power. The series/parallel system, combining both the series and the parallel systems, has a power diverter which can direct the energy from the engine to the wheels or to the generator. This means that, depending on the situation, the engine can provide propulsion to the wheels or energy to the battery (Rogoza Consulting Group, 2006).

2. See www.jpo.go.jp/.

3. The Global Environmental Charter was revised in 2000.

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Karishu, Hiroshi and Yasuo Tanokura (2007) "U.S. Auto Makers Fighting Back with Plug-in Hybrid", Nikkei Electronics, 29 January, pp. 65–72.

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11
The race to develop fuel cells: Possible lessons of the Canadian experience for developing countries

Maureen Appel Molot

Introduction

The auto industry, comprising vehicle assembly and parts production, is Canada's most significant manufacturing industry. In 2005 it accounted for 13 per cent of Canada's manufacturing gross domestic product, 20 per cent of its exports and approximately 20 per cent of new manufacturing capital expenditures, and it powers the economy of Ontario, Canada's largest province (Industry Canada, 2005). The industry is vibrant, with new investment in assembly and parts. The assembly sector is wholly foreign owned, which means that decisions on production – platforms and vehicles allocated to plants, production runs and plant closures – and on research and development (R&D) are made elsewhere (in the United States, Japan and Germany). Some auto industry R&D is done in Canada, but thus far not in leading-edge areas. In this regard, the Canadian auto industry resembles the industry in developing countries like Brazil, Mexico, South Africa, India and, to a lesser degree, China. With the exception of Mexico, these countries have all embarked on significant fuel-cell (FC) R&D programmes.

Canada is also host to a front-running fuel-cell sector in which firms like Ballard Power and Hydrogenics have been, and continue to be, key players. This chapter examines both sectors, and the extent of linkages between them. It begins with an analysis of the Canadian assembly and parts sectors and their place in an integrated North American auto industry. It then surveys auto industry R&D on new propulsion technologies. The third section briefly describes the Canadian fuel-cell sector, and the fourth the extent of Canadian participation in the assembly and testing of alternative-propulsion vehicles. The chapter concludes with a discussion of the character of connections between the auto and fuel-cell sectors and lessons of the Canadian case for developing countries.

The Canadian auto industry

Vehicle assembly

Vehicle assembly in Canada is fully integrated with that in the United States and Mexico as the result of three agreements, two bilateral and one trilateral.1 Ford, DaimlerChrysler (DCX),2 General Motors (GM), Honda, Toyota and CAMI (a GM-Suzuki joint venture) all assemble vehicles in Canada. The first three original equipment manufacturers (OEMs) have a long history in Canada, while Honda, Toyota and CAMI opened assembly facilities in Canada in the mid- to late 1980s. All Canadian vehicle assembly takes place in Ontario, which overtook Michigan in 2004 as the largest vehicle-producing jurisdiction in North America.3

As mentioned above, the auto industry is Canada's largest and most important manufacturing industry. Approximately 85 per cent of assembled vehicles are exported (almost solely to the United States), as are two-thirds of Canadian-made parts.4 Canada produces about 16.5 per cent of all vehicles assembled in North America, approximately twice the number bought by Canadians (DesRosiers, 2005a: 2). The industry accounts for 9 per cent of total manufacturing employment in Canada; one in six jobs in Ontario is linked to the industry.

Over the last decade the Canadian assembly sector has received between 18 and 20 per cent of annual Canada-US new capital expenditures in the sector; in 2003 Canada received 25.2 per cent of new assembly-sector dollars (DesRosiers, 2005b). In 2004–2005 Ford, GM, DCX and Toyota announced major investments in assembly capacity, either to upgrade existing facilities or to build a new assembly plant (Toyota).

With the integration of the Canadian and US assembly sectors following the Auto Pact, R&D and engineering expertise were centralized in the United States (Fitzgibbon et al., 2004: 21). The industry in Canada has traditionally focused on vehicle assembly and the maintenance of jobs that assembly generates directly and indirectly. R&D was not a priority.

In recent years the three traditional North American assemblers have begun to invest in R&D in Canada. GM made the most significant com­mitment, investing in R&D and vehicle engineering activities at its Oshawa facility. Ford and Chrysler are also doing some R&D at their Canadian operations. But serious R&D capacity takes a long time to develop, so for the short and medium terms at least Canada remains on the R&D periphery. Canadian R&D tends to be an offshoot of that done at corporate headquarters. Although the governments of Canada and the province of British Columbia (BC) are supporting tests of Ford's hydrogen fuel-cell vehicles (HFCVs) in BC, Ford of Canada is not participating.5

The Canadian vehicle assembly sector is strong and is likely to remain so, despite the challenges currently being faced by the traditional Big Three OEMs. An important reason for this is the output by Honda, Toyota and CAMI, which in 2006 produced more than 900,000 vehicles (Roy and Kimanyi, 2007). Since the Canadian auto industry is integrated with that in the United States, a brief look at the overall North American market is an essential part of this analysis.

North America remains the world's largest vehicle market, but its auto industry, once dominated by the Big Three, is now facing aggressive competition from the "new North American assemblers" (NNAA), the Asian and European transplants. This competition is of three kinds: sales, profitability and R&D.

Ford, GM and DCX's market share for passenger cars has fallen steadily over the last decade, and their dominance of the light-truck market is also under attack as the NNAA increase truck production. Ford, DCX and GM had 73 per cent of market share in 1995 (DesRosiers, 2007b: 2); by June 2007 it was 50 per cent and by August it hovered at 48–49 per cent (Keenan, 2007a: B1). In 1990 the traditional Big Three OEMs produced 81.7 per cent of light vehicles assembled in North America; by 2006 this had fallen to 61 per cent (DesRosiers, 2007b: 2). All of the new vehicle assembly plants in the United States and Canada since 1990 have been built by the NNAA, with financial incentives offered by job-hungry US states (Molot, 2005) and since 2004 by the Canadian and Ontario governments. Toyota replaced GM as the largest seller of vehicles worldwide in the first quarter of 2007 (Maynard, 2007).6

There is considerable excess assembly capacity in North America. Assembly plants can produce 25 million vehicles annually, yet sales across the three countries are closer to 20 million (DesRosiers, 2007b: 1). The traditional Big Three have closed a number of assembly plants and will close more. Ford, GM and DCX are also struggling with serious financial situations. Stock values are uncertain and corporate bonds of GM and Ford now have "junk" status. All three, in contract negotiations with the United Autoworkers in late summer 2007, were trying to reduce their wage costs as well as their legacy obligations – the pension and healthcare benefits of retired workers.

Canadian parts sector

The parts sector is an essential segment of the Canadian auto industry and, like assembly, is integrated into the North American vehicle production system. Two-thirds of vehicle components made in Canada are exported directly (almost solely to the United States) and many others are exported indirectly, in finished vehicles. Over the last decade capital expenditures in the parts sector have ranged between 7 and 12 per cent of North American investment in parts capacity; in 2005 preliminary estimates put the figure at 10.7 per cent (DesRosiers, 2005b). In May 2006 Honda announced the construction of a new engine plant in Ontario. Employment in the Canadian parts sector increased by about 40,000 jobs between 1992 and 2003, but by the end of 2006 had declined by 10,000 (DesRosiers, 2007c) to just over 92,000.

The Canadian parts sector depends heavily on sales to the traditional Big Three. Close to 85 per cent of components are sold to these OEMs. Some Canadian-owned parts firms sell to Toyota and Honda, but relatively few have cracked this market given the length of time these two OEMs have been in Canada and the number of vehicles they assemble.7 Instead, a significant number of Japanese parts firms have followed their historic OEM customers to Canada.

The Canadian parts sector can be divided into three segments. The first (tier 1) is a group of globally competitive companies – Magna is now the second-largest parts producer globally – which account for about one-third of sector employment and output. The second and largest segment (tier 2) comprises subsidiaries of US parts firms, a small but growing number of subsidiaries of Japanese companies and a still smaller number owned by European parts firms; collectively this second group produces about half the sector's output and employs half its workers. The third group (tier 3), perhaps half of all parts firms, is made up of small Canadian companies that produce about 20 per cent of output and employ the same percentage of workers (Pilorusso, 2002).

There are a few other tier 1 companies in Canada besides Magna, but not many. The most important parts "sub-industries" in Canada are metal stamping, engines and parts (this segment is in flux with the impending closure of engine plants owned by the traditional OEMs and the opening of a new Honda facility) and plastic parts (Fitzgibbon et al., 2004: 17). There are a number of important parts categories in which Canada has little capability – electronics, drive-trains and steering suspension (DesRosiers, 2002: 4), batteries and regenerative braking (the latter two are important in hybrid vehicles).

Parts producers in the United States and Canada face continuing demands from the OEMs. Assemblers see cost reductions from parts sup­pliers as one way to reduce vehicle costs. Assemblers want to limit the number of suppliers with whom they work and are encouraging (if not demanding) tier 1 firms to become system integrators (assembling components into vehicle segments). As a result the number of tier 1 suppliers has declined and a number of major suppliers that had previously shipped directly to the assemblers have become second-tier firms or left the industry (Fitzgibbon et al., 2004: 20).

Canadian parts producers are also facing competition from Asian and some Mexican suppliers. To meet the competition from Asia for lower-cost parts, as well as to supply the OEMs located in Asia, Magna has invested heavily in that region;8 other Canadian firms are considering Asian investments, though the small size of many Canadian parts producers makes this difficult (Beauchesne, 2006).

Because of their dependence on the traditional Big Three and the continuing demands for price reductions, most Canadian parts firms have tight profit margins and short time horizons. Their ability to remain solvent depends on fulfilling current sourcing agreements, anticipating the next opportunity to bid and hoping they can meet the competition. The declining market share of the traditional Big Three and the rise in value of the Canadian dollar since 2003 are adding to the challenges facing Canadian parts firms.

Canadian parts producers do some R&D, but it tends to be focused on activities with an immediate pay-off. Most R&D is on process technologies that will help meet assembler demands on price, delivery times or engineering and design. Since many of the larger firms in the sector are subsidiaries of MNEs, much of their R&D, and any that is leading edge, is done elsewhere (Fitzgibbon et al., 2004: 22). The major exception to the relatively short-term focus of parts-firm R&D is Magna, which because of its size and diversity of activities can afford to invest in R&D with a longer-term pay-off.9 And Dana Corporation's Canadian subsidiary is doing some work on heat-exchanger products and hydrogen fuel-processing systems for its parent, which has contracts with GM, for example to produce components for hybrid vehicles. But overall, with a few exceptions, Canadian parts suppliers are not involved in R&D around alternative fuels.

Auto industry R&D on alternative fuels

Fuel-cell vehicles

Inter-firm R&D competition is intense. The major competition is over fuel-cell technology and, increasingly, around hybrids and electric vehicles. The assembler that is the first to produce a reliable and reasonably priced FC vehicle will enjoy a significant first-mover advantage. Most OEM leading-edge research is done in-house or close to head offices, though some are now conducting research at their foreign locations.10 DCX's fuel-cell R&D is based in Germany, that of Ford and GM in the United States and Toyota, Honda and Nissan in Japan. The same is true for research on hybrid and electric cars.

Rising energy costs, fears about security of supply and concerns about global warming and the environment are all pushing the OEMs to expend large sums on work on alternative-propulsion vehicles. In the two-year interval between the conference that generated the chapters for this book and authors' revisions, the R&D effort has intensified as OEMs compete with each other on environmentally friendly vehicles. At the 2007 Detroit, Los Angeles and Frankfurt auto shows, all high-profile opportunities for OEMs to demonstrate their latest technologies, most assemblers devoted considerable attention to new-generation vehicles, including FCVs, hydrogen-fuelled internal-combustion engines (ICEs) and electric- and diesel-powered products (DesRosiers, 2007a; Crawley, 2007: 2). At the April 2007 Shanghai Motor Show two of China's biggest OEMs showed experimental FC vehicles (Fuel Cell Today, 2007a). A 2007 Fuel Cell Today report on HFCVs stated that "many of the key automotive manufacturing companies have announced plans for fuel cell concept vehicles and some have even gone as far as proposing dates for commercialization much earlier than had been previously anticipated" (Crawley, 2007: 1). To cite but a few examples, Honda expects to launch FC vehicles on the global market by the end of the current decade, GM anticipates production of its FC-powered Chevrolet Sequel by 2010, BMW expects to roll out a hydrogen-fuelled ICE by 2008, Ford is working on its HySeries Drive vehicles and Toyota continues work on its FC cars, noting that it has reduced the time required for sub-zero start-up for such cars. Crawley (ibid.: 4–5) also notes that in 2006 North America was the dominant region in which FC vehicles were being developed, in contrast to 2005 when development was spread fairly evenly across Asia (excluding Japan), Japan, Europe and North America.

The range of HFCVs being built is increasing, as is the number of vehicle tests.11 DCX is testing five HFC cars at Los Angeles airport and has three test vehicles with a California power company (ibid.: 14); it has also been testing 100 HFCVs in various locations (Globe and Mail, 2005). Moreover, the company has been a major producer of fuel-cell buses, which have been on trial in a number of major European cities. With its own resources as well as support from the US Department of Energy, GM is deploying FC demonstration vehicles in Washington, New York, California and Michigan. Shell Hydrogen is supporting GM by setting up five hydrogen refuelling stations in Washington and New York, between these two cities and in California (National Post, 2005). GM also demonstrated one of its FC vehicles at the 2007 FC Expo in Japan (Crawley, 2007: 9). Ford's distribution of HFCVs for trials in US and Canadian cities is evidence of that firm's FC R&D. In May 2007 Ford initiated a trial of eight hydrogen-fuelled buses in Orlando, Florida (Fuel Cell Today, 2007b). Japan has a demonstration programme with 60 vehicles and 10 refuelling stations, and has plans to commercialize 5 million fuel-cell vehicles by 2020. In sum, most of the OEMs are involved in some R&D on, and testing of, FC vehicles in their home economies and sometimes in other locations.

A critical issue in this R&D, with implications for the Canadian auto industry, is the identity of the FC stack suppliers with which the assemblers are working. Ballard Power Systems of Vancouver, the unquestioned leader with respect to proton-exchange-membrane (PEM) fuel cells (the technology in widest use – Crawley, 2007: 3), supplies the technology to six of the assemblers. It is providing more than half the FCs used in the tests of HFCVs in different locations in the United States and Canada (Globe and Mail, 2005). In addition to Ford and DCX, Ballard has supplied fuel cells to GM, Honda and Nissan (Bourgeois and Mima, 2003: 91). Hydrogenics of Toronto has an alliance with GM to assist in the production of its in-house FC system (Avadikyan and Larrue, 2003: 134). Beyond Ballard and Hydrogenics, few Canadian firms fall into the most-trusted-supplier category – those firms with which the traditional Big Three are engaged in the critical R&D around HFCVs (ibid.: 146–149). The connection between Canadian firms active in the fuel-cell sector, whether the FCs themselves or the hydrogen infrastructure, and the vehicle assemblers is generally mediated through OEM head offices.12

Hybrid vehicles

The pressures underlying the race to develop FC vehicles are also pushing the auto industry to focus on short- and medium-term innovations. The intermediate technology, which most assemblers are now developing to diffuse across existing models, is the hybrid, a car that uses both an ICE and a battery for propulsion. From a vehicle that aroused mild interest when it was first demonstrated some years ago and which was not seen as a significant innovation, hybrids are now the subject of intense competition among assemblers. Toyota, which sold its first hybrid vehicle in 1997, is now producing a third-generation Prius and anticipates that all its vehicles will have a hybrid model in the relatively near future. By 2010 Toyota anticipates selling 1 million hybrid vehicles annually (Katz and Inoue, 2005), including 600,000 in the United States (Brooke, 2005). At the end of May 2007 Toyota announced that it had sold more than 1 million hybrid vehicles worldwide (National Post, 2007). Ford, which currently makes its Escape SUV as a hybrid, wants to position itself as a major player in the hybrid vehicle market (Ottawa Citizen, 2005).13 In September 2007 Chrysler announced the creation of a new unit to "jump-start" its development of hybrid and electric vehicles, both market segments in which the company now lags (Krolicki, 2007).

In the competition around hybrid vehicles, Toyota is the leader and aims to make its technology the industry standard (Rechtin, 2005). Toyota holds far more hybrid patents than its competitors. In fact, some of the other OEMs producing hybrids – Ford and Honda – have been licensing Toyota technology in addition to working to develop their own. The number of Toyota patents on hybrids has generated what one senior auto parts executive termed a "patent minefield", expensive to review and move beyond.

Toyota's success with hybrid technology has thus had an impact on the R&D priorities of its competitors.14 And at this juncture in the global auto industry, Toyota has far deeper pockets than other OEMs. It will be some years before Ford makes a profit on its hybrid Escape and, with the exception of Honda, the other assemblers are playing catch-up. Anticipating its first hybrids in late 2007, GM would appear to have misjudged the trajectory of new automotive technologies. The company, which at one point derided hybrids, recognized in 2005 that it had no option but to develop them. A BMW executive explained his company's decision to participate in the development of hybrids in language that captures the challenges all assemblers face as a result of the first-mover advantage Toyota, and to a lesser degree Honda, has in hybrids: "The creation of a shared technology platform for hybrid drives will allow us to more quickly integrate the best technologies on the market and will therefore exploit and strengthen the innovative potential of all participating companies" (Shields, 2005). In other words, assemblers and their suppliers are not going to move from ICEs to HFCVs in one step. Interim steps are required, of which the hybrid is a significant one, largely for the learning involved.

Most of the critical parts for hybrid vehicles are sourced in Japan. Although Toyota imports some, if not most, of the significant hybrid components – the battery, electronics and power-train – for the hybrids it assembles in North America, it will have to develop North American supply capacity. This is one of the reasons why the Asian OEMs are now investing heavily in R&D centres in the United States. Although R&D on power-trains, electronics and vehicle architecture is, and will likely continue to be, done in Japan, the North American centres will be responsible for sourcing parts from North American suppliers and working with these suppliers to create components and adapt technology developed abroad for vehicles assembled and sold in North America (Truett, 2005: 1, 49).

Canada's fuel-cell sector

Canadian companies were early movers in research on, and commercialization of, capacity in fuel cells and related technologies. Ballard Power Systems is a world leader in PEM fuel cells and has strategic alliances around the world, including as noted above with many of the OEMs. Although Canada ranks fifth in the number of fuel-cell patents by country (Liston-Heyes and Pilkington, 2004), the Canadian fuel-cell industry ranks highly when measured in terms of the number of firms in the sector and the range of technologies covered. There are two major fuel-cell clusters in Canada, the larger one in the Vancouver, BC, area around Ballard Power Systems, and the second in the Toronto area around Hydrogen Village.15 There are also firms producing inputs for the hydrogen economy or doing fuel-cell R&D in Alberta and Quebec.

Canadian companies are working in a number of areas relevant to the hydrogen economy: infrastructure, including H2 production, delivery and storage; mobile applications, such as buses, cars and industrial vehicles; stationary applications, including back-up power and residential heating; and portable power (Government of Canada, 2005: 4). Beyond Ballard and Hydrogenics, other Canadian FC firms have connections with the assemblers – Dynetek Industries with Ford, DCX and Nissan, and Praxair with Mercedes. In addition to the longstanding Ford and DCX investment in Ballard Power Systems, other OEMs have provided Canadian FC firms with capital. Many Canadian FC companies have international connections. Firms in this sector have research, marketing, demonstration and financial relationships with companies in the United States, Europe and Asia. For example, as a result of its acquisition of Stuart Energy, Hydrogenics has ties in Europe and Asia. It has a subsidiary in Europe that produces hydrogen using electrolysis; it also works with companies in Europe and elsewhere on issues related to the generation and storage of H2.

Alliances and partnerships are important for the Canadian FC sector. Their number increased from 135 in 2002 to 256 in 2003: the largest number of alliances were with vehicle assemblers (33 per cent); those with other hydrogen and FC developers and public-private partnerships ranked second (at 20 per cent each) (Government of Canada, Fuel Cells Canada and PriceWaterhouseCoopers, 2004: 7). Figure 14.3 in Fitzgibbons's chapter in this volume illustrates the regions in which Canadian FC firms are involved in demonstration projects.

Although the Canadian FC sector is active in R&D, firms in the sector are financially precarious. Many are small, dependent on government support and have difficulty raising the venture capital required for R&D and commercialization. Chapter 14 in this book identifies a range of financial issues facing the sector.

Fitzgibbons's chapter also details the breadth of federal Canadian government support for fuel-cell R&D and commercialization. This support involves several government departments and the National Research Council (the government's primary institution for R&D in the fields of science and engineering), as well as some important funding programmes which provide support for high-risk, pre-commercialization research. Although the Canadian government has been a proponent of FC technology and has created programmes to underwrite some R&D costs, it does not appear to appreciate, or be able to provide, the level of resources required to sustain a serious Canadian presence in the costly and competitive race to develop and commercialize alternative fuels. As Fitzgibbons notes in his conclusion, the government's 2005 discussion paper on a national hydrogen and FC strategy (Government of Canada, 2005) has not moved forward. Nor is the government promoting linkages between the FC and automotive sectors, although through the Canada EcoTrust for Clean Air and Climate Change the federal government is contributing to British Columbia Transit's purchase of 20 fuel-cell buses and the province's development of fuelling stations, which will constitute the centrepiece of BC's Hydrogen Highway project (Crawley, 2007: 11).

As Fitzgibbons outlines in chapter 14, Canadian provincial governments also have programmes to promote H2 technologies, but neither of the two provinces with the major FC clusters is investing heavily in the technology. BC's goal is to have the world's leading hydrogen economy by 2020: its H2 strategy is shaped by the presence of Canada's largest fuel-cell cluster, the Hydrogen Highway, which is a large-scale demonstration project for HFCVs, refuelling stations and stationary power systems to be developed for the 2010 Winter Olympic and Paralympic Games, and the revitalization of the province's resource heartlands to supply the fuel and know-how for hydrogen-based communities and industries (Premier's Technology Council, 2004: ii). But although BC has provided C$33 million in funding to the FC sector over the years, the province's fiscal constraints impose limits on capacity to underwrite its hydrogen strategy statement.

The Ontario government announced its Fuel Cell Innovation programme in January 2005. The programme provides C$3 million in annual funding over three years, with a focus on product commercialization. The funds are designed to nurture the development of small and mediumsized Ontario companies working on FC technology development and FC-compatible strategies (www.fuelcells.2ontario.com). Given the cost of FC R&D and the range of challenges to commercialization, this government support is small and suggests that FCs and the hydrogen economy are not a priority. Moreover, despite the importance of the auto industry to the Ontario economy and the provincial Liberal government's introduction of a programme to attract OEM investment in new and upgraded plants, the government has not promoted or facilitated connections between the auto and fuel-cell sectors. The Ontario H2 programme focuses more on stationary and portable power applications of fuel cells than on mobile uses. In June 2007 the Ontario government announced a C$650 million fund aimed at stimulating the development of green technologies, including in the auto industry. It is too early to identify any real impact of this new fund, although one executive of a Canadian OEM subsidiary commented that the availability of these resources "will make it easier to make a business case for green-technology investments in Ontario" (Lindgren, 2007).

Linkages between the Canadian auto and FC sectors

The connections between the auto and FC sectors fall into two categories: manufacturing, and testing and demonstration projects. While the following discussion demonstrates that there are a number of initiatives in Canada that are important in terms of learning for the future (beyond vehicle assembly), as noted above decisions with respect to manufacturing are made outside Canada. Just as critical, the linkages between the FC firms and vehicle and forklift assemblers largely go through firm headquarters, again outside Canada. The exception is the FC bus project in Vancouver; New Flyer, the Winnipeg-based company that will produce the vehicles, has contracted with Ballard to supply the fuel-cell modules for these buses (Ballard Power Systems, 2007).

Beyond the FC bus assembly, there is one FC vehicle assembly project in Canada: in September 2006 GM announced that it would build 100 HFC Equinox SUVs in Canada. Production of this vehicle will be done in two stages at two different plants. The basic assembly of the Equinox, the first and thus far only FC vehicle engineered and manufactured in Canada, will be done at CAMI (the GM-Suzuki joint venture in Ingersoll, Ontario); final assembly, including the engines and FC stacks, will be done at GM's regional engineering centre in Oshawa (Malloy, 2006). In addition, there have been two commitments to build hybrid vehicles in Canada. In early 2006 Ford announced that it would produce hybrid versions of two of its vehicles at its Canadian assembly plant by 2010 (Keenan, 2006). In February 2007 GM indicated that it would build hybrid variants of two of its pick-up trucks for sale in 2008 (Van Praet, 2007a). As noted above, parts producers in Canada are doing little R&D related to alternative technologies and firms in Canada are not directly supplying any of the components needed to transform internal-combustion engine vehicles into FC or hybrid ones.

There is considerably more activity in Canada with respect to demonstration projects and testing of FC and hybrid vehicles. The first FC bus demonstration, using a Ballard FC stack, took place in Vancouver in 1993. Since 2005 six hybrid buses have been part of the fleet of a midsize BC city.16 The most significant bus demonstration project will be the 20 FC buses that will ply BC's Hydrogen Highway for the 2010 Winter Olympics. BC has also been the site for a major test by Ford of its five Focus FC cars, which are powered by Ballard FC stacks.17 Three mostly made-in-Canada Ford hydrogen fuel-cell shuttle buses started a test run on Parliament Hill in Ottawa at the end of 2006. Hydrogenics has supplied the FCs to Purolator for that firm's hydrogen fuel-cell hybrid electric vehicle (PriceWaterhouseCoopers, 2006: 7). Finally, Powertech Labs (PTL), a subsidiary of BC Hydro, is testing vehicles for a number of OEMs, including Toyota, Ford, DCX, GM Hyundai and Nissan (the latter two of which do not assemble vehicles in Canada). PTL has developed a worldwide reputation for its expertise, and most of its business comes from outside Canada.18

Conclusion

This chapter analyses the characteristics of the Canadian auto and fuel-cell sectors to derive lessons from the Canadian experience for developing countries. Without question the Canadian auto industry is robust, with new investments in assembly and parts and strong employment figures despite some plant closures. But neither segment of the industry is actively participating in the race to develop and commercialize FC and hybrid vehicles. OEMs hold leading-edge research close, and very little critical research is done at subsidiaries. OEM decisions have meant that their Canadian plants emphasize vehicle production and conduct only narrowly focused R&D. The exception is GM, which has just designed its first vehicle in Canada. Canadian parts firms of necessity have short time horizons and, to the extent that they undertake R&D, do it on process rather than leading-edge technologies. There is some testing being undertaken in Canada, with the potential for more. The situation of the Canadian auto industry is not unusual for a small, open economy in which critical decisions on vehicle assembly as well as R&D are made outside the country.

Domestic linkages are developing between the auto and fuel-cell sectors, but these are largely mediated through OEM head offices. There seems to be little governmental attention to this situation and its consequences. Canadian governments at both levels are supporting FC R&D, although whether they are doing so sufficiently relative to the costs of R&D, timeframes to commercialization and funding levels in other countries is another matter. The new Ontario green technology fund may spark some R&D, but it is too early to be able to indicate anything other than the presence of this initiative.

Lessons can be drawn from the Canadian experience for developing countries engaging in R&D in the fuel-cell sector. Perhaps the most fundamental is the importance of building a strong domestic knowledge base in both auto and FC sectors. R&D capacity in assembly and parts, including attention to leading-edge technologies, is essential to participating in the development of the new vehicle-propulsion systems. As the Canadian case shows, despite its attractiveness as a site for vehicle production, the essentially assembly character of the Canadian auto industry raises doubt about its ability to play a significant role in the R&D around, and commercialization of, HFCVs. In part this is because deep corporate and government pockets and commitment are necessary as a result of the cost of leading-edge research and the challenges of its commercialization. But it is also a result of the absence of an indigenous auto industry and the limited ability of Canada's parts firms, thus far, to become first-tier preferred partners of the OEMs in the development of parts at the core of the new propulsion technology. Whether this is possible at all, and through what means, remains to be seen.

With the exception of China, developing countries with automobile assembly industries are not likely to become major players in the development and application of H2 technology in the near future. However, learning and capacity building in their parts sectors could take place through licences to produce relevant parts should global OEMs decide to build hybrids or HFCVs in countries like Malaysia, India, Brazil or South Africa. Attention will need to be paid to building alliances with these firms to encourage such activities. Policies will need to be put in place not only to strengthen domestic research capacity but also to open opportunities for linkages to users. Governments should pay particular attention to orienting R&D and demonstration projects to meet local needs – such as in stationary power and niche markets in the transport sector, including two- and three-wheeler vehicles and fleets like hybrid taxis, where local firms might emerge as assemblers, component manufacturers and systems integrators. In some cases, such as India and Malaysia, the development of hydrogen FC two- and three-wheel vehicles is already under way and should be further developed and diffused. In countries with sufficient land and technological capabilities the development of new fuels such as ethanol, biodiesel and hydrogen would provide yet another entry point for participation in the emerging hydrogen economy.

Acknowledgements

Research for this chapter was supported by AUTO21, a Canadian National Centres of Excellence initiative. I acknowledge, with thanks, the research assistance of Ilka Guttler and Darek Dziewanski. Comments from Lynn Mytelka were helpful in revising the chapter. My understanding of the subject matter has been enhanced by interviews with stakeholders in the auto and fuel-cell sectors.

Notes

1. The first was the Canada-US Auto Pact signed in late 1964, which promoted rationalization of vehicle assembly between Canada and the United States. It was followed by the Canada-US Free Trade Agreement, implemented on 1 January 1989, and the North American Free Trade Agreement, which took effect on 1 January 1994. Vehicles and parts move tariff-free across borders as long as content requirements (62.5 per cent under NAFTA) are met. Each NAFTA member retains its own tariffs on vehicles and parts imported from non-NAFTA members.

2. In the spring of 2007 Cerebus Capital Management bought 80 per cent of Chrysler from Daimler-Benz, thus ending the nine-year merger between the German and US vehicle assemblers. Since the break-up of DCX occurred after the timeline covered by this analysis, the company will be referred to as DCX, with the exception of a reference in the section on hybrid vehicles.

3. In 2004 assembly in Ontario surpassed that of Michigan by about 100,000 vehicles. By 2008 the difference is projected to be more than 500,000 (Durbin, 2005a). Ontario will suffer less than Michigan from the decline in traditional Big Three assembly because of the assembly capacity of Honda and Toyota in Ontario. In contrast, none of the new US assembly capacity built by the new North American assemblers is in Michigan.

4. Ninety per cent of the vehicles purchased in Canada are imported, 65–70 per cent from the United States, the remainder from offshore. Seventy to 75 per cent of parts used in vehicle assembly in Canada are imported.

5. The data on vehicle operations are sent directly to Ford's research division in Michigan (interview with official from Hydrogen and Fuel Cells Canada).

6. In mid-2007 vehicle sales in the United States were declining as a result of falling consumer confidence in light of the weakness in the US housing market and the credit crunch, but sales in Canada remained strong (Van Praet, 2007b). Because so much of Canadian vehicle output is exported, declining US sales have a direct impact on Canada. In late August 2007 GM announced it would cut 1,200 jobs (one shift) at its pickup truck plant in Oshawa, Ontario.

7. A survey of North American parts suppliers suggests declining confidence in the traditional OEMs and a preference for working with the Japanese assemblers. Parts makers indicated their intention to raise R&D budgets and capital expenditures for Toyota, Honda and Nissan while reducing them for the Big Three (Durbin, 2005b). These reports do not indicate whether Canadian parts producers were included in the survey. However, the survey results fit with interview comments about the difficult relationships between Canadian suppliers and the traditional North American OEMs.

8. In September 2007 Magna had 25 plants in Asia, and it expects the number to increase to 30 in the next couple of years. In addition to manufacturing plants, Magna has engineering and product development facilities in China (four of them), Japan and South Korea (Keenan, 2007c).

9. An August 2007 article reporting on Magna's very profitable second quarter of 2007 suggested that, recognizing OEM interest in hybrids, the company "is considering a major new strategic initiative that will involve developing components for hybrid engines" (Keenan, 2007b).

10. Fuel Cell Today (Crawley, 2007: 16) reports that GM has announced plans to open an R&D office in Moscow which will focus on hydrogen and fuel cells, among other projects.

11. Fuel Cell Today forecast that by the end of 2007 there would be over 250 new HFCVs built, for a total of close to 900. The total number of HFCVs in 2005 was about 300 (Crawley, 2007: 2).

12. Though not in the automotive sector, Canadian or Canadian-based FC firms have also been producing FCs for forklift vehicles and participating in tests of these vehicles. In June 2007 Hydrogenics released the latest generation of its HyPX Power Packs after successful tests in 2005 of its previous Power Packs in two forklift trucks at GM's Oshawa plant and the FedEx facility at Toronto airport (Fuel Cell Today, 2007c). Cellex and General Hydrogen, both located in the Vancouver area and both purchased in 2007 by Plug Power, are involved with a number of US retailers in tests of pallet trucks. Both companies use Ballard FC stacks (Adamson, 2007).

13. Ford has plans to assemble hybrid versions of the new Ford Edge and Lincoln MKS cross-over utility vehicles at its upgraded Oakville, Ontario plant, though no production date has been announced. Ford expects to sell 250,000 hybrids annually by 2010 (Keenan, 2006).

14. The competition among OEMs around hybrid technology extends to China. GM and Shanghai Automotive Industry Corporation have agreed to explore ways to expand a hybrid bus development programme. GM and SAIC will also work on hybrid cars as well as HFCVs (Webb, 2005). Toyota now produces its Prius in China.

15. Hydrogen Village works with companies in southern Ontario to promote R&D and demonstration projects to develop and promote the hydrogen economy.

16. The buses are made by New Flyer; GM supplied the hybrid system.

17. The programme runs for five years and is supported by the governments of Canada and British Columbia, Hydrogen and Fuel Cells Canada and Ford.

18. PTL has more US corporate clients than from any other country. Japanese companies rank second, those from Germany third and those from Canada fourth.

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Bourgeois, Bernard and Silvana Mima (2003) "Rationales for Co-operation between Firms and States within an Emerging Radical Innovation", in Patrick Cohendet, Arman Avadikyan and Jean-Alain Heraud, eds, The Economic Dynamics of Fuel Cell Technologies, Heidelberg: Springer-Verlag, pp. 79–113.

Brooke, James (2005) "Toyota Hopes to Push Its Hybrids Beyond the Niche", New York Times, 7 September, available at www.nytimes.com/2005/09/07/business/worldbusiness/07hybrid.html.

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——— (2007c) "Assembly Employment in Autos Remains Strong", electronic communication, 15 February, available at www.desrosiers.ca/.

Durbin, Dee-Ann (2005a) "Big Three, CAW Launch Contract Talks", Globe and Mail, 18 July, p. B4.

——— (2005b) "Parts Firms' Trust in Big Three Drops", Globe and Mail, 31 May, p. B12.

Fitzgibbon, Susan, John Holmes, Tod Rutherford and Pradeep Kumar (2004) "Shifting Gears: Restructuring and Innovation in the Ontario Automotive Parts Industry", in David A. Wolfe and Matthew Lucas, eds, Clusters in a Cold Climate: Innovation Dynamics in a Diverse Economy, Montreal and Kingston: McGill Queens University Press, pp. 11–41.

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Keenan, Greg (2006) "Ford First to Build Hybrids in Canada", Globe and Mail, 15 February, pp. B1, B7.

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12
Automobile emissions and the environment: The Malaysian experience

Fatimah Kari and Rajah Rasiah

Introduction

Since the turn of the new millennium, the automobile industry has been in the grips of three major changes: increased liberalization that has seriously reduced the opportunity for further latecomer national car development policies; rationalization that has reduced production platforms to specialized locations; and the proliferation of environment-friendly technologies in the industry. With the exception of developing economies with huge domestic populations, such as China and India, national automobile assembly has either declined in importance or the shakeout from competition has reduced the manufacture of components to a few locations (e.g. Brazil, South Africa and Taiwan) that offer cutting-edge technologies and the agility to respond quickly to changes in demand on a global scale. The rising demand for cleaner technology, especially in the major markets of Europe and the United States, has moreover attracted increasing investment in environment-friendly vehicles and fuels. In addition to outright bans, legislation in Europe and the United States has stimulated the demand side for environment-friendly products through taxation on the use of polluting and non-renewable resources.

This chapter explores the consequences of these developments for automobile development and related environment and energy policies in Malaysia. Given the focus on institutions and systemic influences, the dynamic way with which these institutions interact and the degree of connectivity and interdependence (both structural and complementarities) between economic agents, the chapter deliberately uses the systems-of-innovation approach to examine the critical drivers of automobile and emissions policies in Malaysia.

The chapter presents an analytic framework, followed by an overview of Malaysia's automotive industry since its inception in the early 1980s. It then evaluates the consequences of the growing production and use of automobiles in Malaysia for the country's environment and energy policies, and reports on Malaysia's energy roadmap in hydrogen and fuel cells. It concludes with a number of policy considerations for the future.

Framework of analysis

This chapter draws upon the systems-of-innovation literature to examine the promotion of automobile assembly and the state of environmental governance relating to the automobile industry in Malaysia (Mytelka, 2000). It looks at automobile policies alongside efforts to regulate emissions – both in the manufacturing of vehicles (e.g. catalytic converters and the development of hydrogen fuel-cell-powered engines) and in the use of vehicles after their sale.

Automobile assembly in Malaysia was initiated by Volvo in 1967, but domestic manufacturing took on a serious dimension following government efforts since 1985 to widen and deepen value added in the industry through the development of national companies. Despite the developing economy status of the country and the general lack of attention given to the environment, environmental issues have become increasingly important since the late 1990s. Although much of this can be argued to have arisen from international market pressures involving exports to developed markets, rapid expansion in domestic vehicle ownership is already dragging the country into a potentially dangerous environmental situation.

Within various agencies of government, discussions have thus begun on a number of different options to deal with these emerging problems. These include the incorporation of environment-friendly instruments in car manufacture, efforts to reduce personal vehicle use through the expansion of public transport and the development of environment-friendly fuels such as hydrogen. This chapter uses the systems-of-innovation framework to examine these developments and identify points in the system where injections of dynamism are needed to stimulate the absorption of best practices. Figure 12.1 provides a schematic representation of an innovation system. Because of gaps in Malaysia's policy framework, however, not all of the critical components noted in this figure are discussed in this chapter.

Figure 12.1 Innovation systems
Source: Mytelka (2000: 17).

Given the limited ability of civil society to translate its utility considerations into a sufficiently potent force for policy influence, more attention will be paid in this chapter to the role of government in promoting the development of the automobile industry in Malaysia. Nevertheless, owing to increased integration into the World Trade Organization (WTO) and the recognition that sustainable exports require adjustments to the manufacturing of local cars to meet, inter alia, environmental standards, the chapter does examine the drivers of environment-friendly instruments, albeit these instruments are largely still unlinked to car manufacturing. Also examined is the extent to which supplier networks, R&D institutions and their interface with clients and access to financial institutions have developed. In establishing the critical catalysts, the chapter evaluates the drivers of the automobile chain, including the sources of technical change. It addresses the market and the nature of learning specificity unique to such a scale-based heavy industry that has undergone substantial rationalization and global restructuring over the years. The chapter also traces policy influences from the impact of related international agreements, such as the WTO Trade Related Investment Measures (TRIMS) agreement, the ASEAN Industrial Cooperation Scheme (AICO), the ASEAN Free Trade Area (AFTA) process and the WTO TRIPS agreement, on learning, innovation and competitiveness in the automobile industry.

The authoritarian nature of policymaking in Malaysia – especially from 1981 to 2003 – meant that the domestic constituency was not significantly consulted before a national car policy was formulated. Indeed, the government decided in 1981 to launch the Look East policy, which inter alia emphasized the development of heavy industries. International agreements in the early 1980s did not prohibit the use of local-content policy or differential treatment on the basis of ownership. Although such opportunities were closed to WTO members with a per capita annual income exceeding US$1,000 which signed the TRIMs agreement in 2000, Malaysia managed to maintain its local-content policies by not signing the agreement.

Although no formal legal jurisdiction currently exists in the WTO on the legislation of environmental standards, many initiatives in this direction have already taken effect. In addition, national policies requiring more stringent controls on pollution have already required car manufacturers to reduce noise, carbon dioxide and particulate levels. Cars not meeting these standards have been banned from imports, notably into developed economy markets.

Building a national automobile industry

The automotive industry in developing countries typically began with the assembly of completely knocked-down (CKD) parts into completely built-up (CBU) units. Manufacture of components and their subsequent assembly into CKDs came afterwards. To meet minimum scale-efficiency levels, latecomer economies promoting car assemblies – both national and foreign – started by raising tariffs on imports for domestic assemblers. In Brazil, Mexico, the Philippines, Thailand and South Africa the focus was or has been on promoting assemblies domestically without any limits imposed on ownership (Rasiah, 2003; Quadros, 2003; Ofreneo, 2003; Wood, 2003; Lara, 2002). In contrast, Malaysia, India, Indonesia and Korea have from time to time provided special support to national assemblers (Amsden, 1989; Prasada, 2003; Rasiah, 2001, 2005). Explicit promotion of national assemblers using the "carrot-and-stick" approach successfully contributed to the creation of internationally competitive assemblers in Korea (Amsden, 1989). While in many of these economies the manufacture of auto components has risen to complement assembly activities, Taiwan has defied the old logic of assembly-led creation of backward linkages by becoming a major platform for the manufacture and export of auto components without significant assemblies within the island. In fact, Taiwanese manufacturers were the fourth-largest patent filer in auto parts in 2003 after the United States.

Like other latecomers, Malaysia was an importer of CBUs until import-substitution industrialization policies stimulated the start of assembly work by Volvo in 1967. It was not until 1981, when the Heavy Industries Corporation of Malaysia (HICOM) was formed, that government efforts to build national cars emerged. However, the first cars under the national umbrella only rolled out in 1985, and the initial cars were foreign made. Backward and forward linkages in the industry were expected to be created through a policy of technology agreements with foreign firms, localization and subsequently the acquisition of foreign automobile firms such as Lotus (UK).

Typically, automotive manufacturing in latecomer economies can be divided into four stages (Torri, 1991):

• import and sale of CBU automobiles

• assembly of imported CKD parts and localization of parts, which can be subdivided into three stages defined by technical level and market size for parts: local production of replacement parts or components; local production of original equipment manufacturer (OEM) parts for automotive assembly; and local production of major and functional parts (OEM), such as engine and transmission components

• local production of materials for cars and components

• local design of automotive bodies and other components.

Of significance in Malaysia was government investment in the first national automotive company, Proton. The company, launched among a series of heavy industry firms in 1981, was 70 per cent owned by the government-backed HICOM, while the remaining shares were taken up by two Japanese subsidiaries, Mitsubishi Corporation (MC) and Mitsubishi Motor Corporation (MMC), with 15 per cent equity each. In 1992 the company was listed on the Kuala Lumpur Stock Exchange (KLSE) and restructured as Perusahaan Otomobil Nasional Berhad (still using the same name, Proton). In December 1996 its shareholders were HICOM Holdings Berhad (with 26.0 per cent shareholding), Khazanah Nasional Berhad (16.50 per cent), MC (8.06 per cent), MMC (8.06 per cent) and other local and foreign investors with 41.38 per cent shareholding (Malaysia, 1998). The first two companies are owned and controlled by the government. Currently the largest shareholders in Proton are still government-controlled agencies, i.e. Khazanah Nasional Berhad (42.7 per cent), Employees Provident Fund (12.6 per cent) and Petronas (9.8 per cent). More recently Temasek Holdings, Singapore's investment arm, bought a 5 per cent share in Proton (Malaysia Business, 2005).

While the national industry enjoyed considerable government-backed insulation from competition, including from the WTO TRIMs agreement, the government had to accept deregulation initiatives under the AFTA agreement. Hence, the lowering of tariffs and the integration of assembly policies to be consistent with CBU and CKD conditions began in 2005 and are expected to be completed by 2008, by which time tariffs on car imports are expected to fall to 5 per cent. These initiatives have already reduced Proton's market share, though Perodua (an automotive company with two wholly owned subsidiaries set up to handle manufacturing and distribution activities) has retained its position in the domestic market (Mohamed and Kari, 2008). Whatever the future of national cars, figures for the period 1985–2003 show a continuous rise in sales in the country (see figs 12.2–12.4).

Whether national car policies continue or not, the liberalization of the industry has thus increased automobile sales in Malaysia – with foreign brands expected to rise in demand, especially after 2008. This rise will inevitably increase the pressure on the environment. The next section examines government emphasis on the environment and the policy instruments that address these points.

Figure 12.2 Car sales in the domestic market, Malaysia, 1985–2003

Figure 12.3 Car ownership per 1,000 population, selected economies, 2003

Figure 12.4 Cars and motorcycles registered, Malaysia, 1983–2003

Environmental and energy governance

Environmental regulation in Malaysia can be traced back to British colonialism. The colonial government introduced environmental standards to ensure the orderly provision of mineral and agricultural resources to Europe. Environmental issues gained official importance in the Malaysian government following the promulgation of the Environment Quality Act (EQA) in 1974 (Rasiah, Sazali and Abas, 2002). However, it was only in the second half of the 1980s that serious efforts were taken by the government to improve environmental standards in the country. In 1989 the government introduced financial incentives to encourage the use and treatment of environment-friendly technologies (Malaysia, 1995). Incentives to encourage the utilization of safe technologies to store toxic waste and other hazardous materials include "pioneer status" giving tax reductions over five years.1 The proliferation of environment-friendly technologies was particularly important in the rubber and palm-oil industries, and fees paid for licensing dropped from 88 per cent to 44 per cent over the period 1977–1989 (Mohd Sham, 1992: 13, 15). The impact of this in the palm-oil industry is documented by Vincent and Rozali (1997). The government introduced preventive measures when it gazetted mandatory environmental impact assessment (EIA) studies to assist better environmental standards ex ante activity. Environmental audit procedures have also been adopted by a number of government bodies since the early 1990s (Gurmit, Soo and Chandran, 1993). The 1990s also saw the implementation of the ISO14000 series in the environmental arena and the adoption of more stringent controls by the Standards and Industrial Research Institute of Malaysia (SIRIM) on production and product technologies.

This section examines emission trends of selected pollutants against the background of environmental governance in Malaysia. The fundamental question posed is whether increased environmental legislation lowered emission levels. The effects of automobile manufacturing and vehicle use on environmental pollution will be examined after a discussion of the overall environmental emissions trend in Malaysia.

Trends in environmental quality

Despite legislation and other policy interventions, emission levels rose for some air pollutants while falling for others. Emissions of most pollutants from industrial processes rose with rising industrialization from the mid-1980s. Carbon dioxide emissions rose at an annual average rate of 7.5 per cent in 1960–1997, the rise being highest in 1988–1997 (8.6 per cent). The emissions of particulates, nitrogen dioxide and carbon monox-

ide rose from 10,400, 25,900 and 4,700 tonnes respectively in 1987 to 25,200, 27,200 and 7,700 tonnes in 1990 (table 12.1). Emissions of sulphur dioxide and hydrocarbons fell from 54,100 and 3,000 tonnes in 1987 to 39,300 and 1,800 tonnes in 1990. There was an exceptional increase in particulates, sulphur dioxide and nitrogen dioxide recorded in 1988.

From table 12.1 it can be seen that air pollution levels increased considerably in the 1990s. Haze from fires and forest clearing caused serious eye problems and irritations in 1991–1994 and 1997. Emissions from industrial processes of particulates, sulphur dioxide, nitrogen dioxide, carbon monoxide and hydrocarbons rose to 104,100, 117,000, 44,500, 7,300 and 4,100 tonnes in 1996. While emissions of particulates fell sharply and hydrocarbons slightly in 1997, the rest have continued to rise.2

Against the background of these pollution trends, the rapid rise in vehicle sales in the country – the largest passenger-car market share in Southeast Asia – clearly highlights the potential for damage to be inflicted on the country (see fig. 12.4).

Regulating the transportation sector

As in other developing countries, Malaysia has witnessed an explosive rise in the demand for transport vehicles in recent decades in conjunction with its rapid economic growth. The highest growth of urbanization and motorization was recorded in Kuala Lumpur and the Klang Valley: the rates of increase in car ownership are the highest in Kuala Lumpur compared to any other part of the country (Abd Rahman, 1997). Car ownership in the Klang Valley increased from 247 vehicles per 1,000 persons in 1990 to 546 and 994 vehicles per 1,000 persons in 1996 and 2002 respectively, far beyond the national level per 1,000 population of 91 vehicles in 1990, 133 in 1996 and 210 vehicles in 2002 (Malaysia, 2004). A total of 8.5 million registered vehicles in 1997 accounted for emissions of 1.9 million tonnes of carbon monoxide (CO), 224,000 tonnes of nitrogen oxide (NO), 101,000 tonnes of hydrocarbons (HC), 36,000 tonnes of sulphur dioxide and 16,000 tonnes of particulate matter (PM) into the atmosphere.3

In 1993 a study on air quality management in the Klang Valley conducted by the Department of Environment (DOE) with the help of the Japanese International Cooperation Agency (JICA) warned that air pollution in urban areas would reach a critical stage by the year 2005 if steps were not taken to address it (JICA, 1993). The study highlighted that if Malaysia continues to ignore environmental emissions the pollution load will be heavier, and thereby more difficult and costly to manage. The report also noted that the emission of sulphur oxide from vehicles, factories and power plants would surge from 35,655 tonnes in 1992 to 51,999 tonnes by 2005. Assuming that 3.5 tonnes of pollutants are equivalent to a lorryload, the amount of sulphur oxide in the atmosphere by the year 2005 would reach 742 lorryloads. For other pollutants, if there was inaction then within 10 years nitrogen oxide emitted mainly by motor vehicles would swell from 54,472 to 115,308 tonnes, suspended particulate matter (fine dust) from 12,623 to 18,513, carbon monoxide from 290,407 to 659,223 and hydrocarbons from 73,455 to 166,720 tonnes.

The poor status of public transport has driven the demand for private transport. This can be observed by the increase in the percentage of trips using private vehicles, which rose significantly from 47 per cent in 1985 to 71 per cent in 2005, while the share of public transport dropped from 35 per cent to 16 per cent in the same period. The rising substitution of public transport with private transport is likely only to worsen the environment. There is growing concern about noise and atmospheric pollution, traffic congestion, accidents, energy use and conservation, and general environmental decay as a result of the excessive use of motor vehicles: their ubiquity has become a formidable threat to the natural environment and the quality of social and economic life. There is therefore an urgent need to slow down the growth in private transport. The concept of sustainable development as applied to the area of human mobility and transportation can only materialize when motorized transport is limited to serving the essential needs of society (Abd Rahman, 1997).

With the increase in car ownership, it was estimated that the demand for travel to central city areas would grow far beyond the capacity of the road network. The strong fleet growth as compared to low road network growth has resulted in rising vehicle-density ratios in Malaysia. The ratio reached 71 vehicles per road kilometre in 1999 as compared to only 46 vehicles in 1994, further intensifying traffic congestion. The difficulty of constructing new roads and widening existing ones, especially in Kuala Lumpur, is already well known (Morikawa, Yamamoto and Dissanayake, 2003).

Apart from the transportation studies undertaken to manage the demand for travel in Kuala Lumpur, a structure plan has also been developed. The basic framework of a master plan study is the interaction between land use and transport. In 1982 the Federal Territory (Planning) Act was adopted, in which Kuala Lumpur City Hall was obliged to prepare structure and local plans for Kuala Lumpur. The structure plan established a broad policy framework for the planning of the federal territory over a 20-year period (Jamilah, 1992). This strategy called for the balanced development of Kuala Lumpur through moderate development within the city centre and much faster development in the outlying areas. The overall transport objective identified in the structure plan was to effect a 40–60 per cent shift from private to public transport, and the policy formulated in the plan is that a bus plus light-rail transit (LRT) network be adopted as the major public transport system to handle future traffic demands in Kuala Lumpur and its conurbation.4 Construction of the LRT system was approved by the government in 1984.

In order to assist the master plan unit in formulating a set of transport programmes and policies that would complement the overall structure plan strategy for the development of Kuala Lumpur, the Kuala Lumpur Master Plan Transportation Study was conducted in 1981. According to Jamilah (ibid.), the study reiterated the need to restrain future traffic growth in the central core of the city, improve public transport services and provide priority movement of high-occupancy vehicles; it also recommended additional forms of mass transit. New roads and road improvement were recommended to provide accessibility to new growth centres (fig. 12.5).

Considerable effort went into these studies and their recommendations, and some of the proposals were implemented. The constraints, however, took many forms, including political, financial and operational (ibid.). One important caveat was the choice of measure to be implemented. Road building and improvement, for example, eases traffic in the short run, but generates new traffic in the longer term. The introduction of the rail-based public transport system in the 1980s failed to reduce the proliferation of private vehicle use. This might be due to a lack of integration at the system level between and within the various modes. Infrastructure projects such as the LRT and monorail are built without serious consideration of their role in the larger system. The multi-bus companies do not have efficient feeder services to the LRT system, although one of the LRT operators provided feeder bus services within a three-kilometre radius of its stations.

Figure 12.5 Road mileage (paved and unpaved), Malaysia, 1980–2003

There has recently been rising support for reconstructing the mass transport system in the Klang Valley to provide a comprehensive and efficient network. Public transport in the region will be regulated by the proposed Klang Valley Urban Transport Authority. The establishment of the proposed regulatory authority will be initiated by the steering committee of the Public Transport System in Klang Valley (INSPAK). The committee will undertake measures to increase the quality of the LRT and existing bus services. Physical integration will be implemented to improve connectivity in public transport terminals, as well as the use of the integrated ticketing and fare systems which the government believes will encourage the greater use of public transportation, thereby reducing traffic congestion (New Straits Times, 2004).

The question of how this will affect the transport behaviour of private vehicle users remains a pertinent issue. Will the countermeasure taken by the government to promote public transport be effective? Three important factors need to be addressed in answering this question. First is the extent to which predictions of demand are reliable. Second is the level of public acceptance. This requires careful estimation of the users' response to changes in prices and the characteristics of the services to be provided in terms of price and service elasticity. Lastly, the cheap fuel policy has a reverse impact on sustainability of future resources and shapes the parameters within which decisions about using public transportation are made. Estimating these three conditions is crucially important as a guide for policymakers in choosing among alternatives.

Vehicle emissions plan

Exacerbated by limited enforcement and the rapid urbanization rate in Malaysia, loopholes in addressing the air quality problem are related to the inadequacy of the present law to control vehicle emissions. The present regulation is confined to diesel-vehicle users, and car assemblers can get away with substandard engines. The Road Transport Department (RTD) is powerless to nab drivers of petrol-powered vehicles. The Motor Vehicles (Control of Smoke and Gas Emission) Rules 1977, which are enforced jointly by the RTD and the Department of Environment (DOE), are confined to diesel vehicles. This is a major setback considering there are 6.56 million petrol-driven vehicles on the road as against 626,622 diesel-powered vehicles.

The Ministry of Science, Technology and Environment (MOSTE) conceded in 1997 in a press statement by a senior official that it had been more than three years since the DOE proposed new regulations to curb excessive smoke emitted from diesel and petrol motor vehicles as well as motorcycles. With the exception of proposed control of emissions from diesel engines, which had been approved by the Attorney General's chambers, other proposed regulations to control emissions from petrol vehicles and motorcycles are still pending. What is urgently needed is a ruling and legislation to regulate vehicle assemblers to meet DOE emission standards before cars are allowed to be sold to consumers. Catalytic converters must be mandatory for all new cars. At present all cars locally assembled, including those made by Proton, Perodua, Toyota and Mercedes-Benz, are free from scrutiny. In the early 1990s the government proposed mandatory installation of catalytic converters to be fitted to the exhaust system of cars, which must be used with unleaded petrol under the Clean Air Action Plan. This proposal was initially scheduled for 1994 but was deferred when the car assemblers protested, citing high cost as the reason. Ultimately, such a failure is just a case of a lack of political will and scant public participation in the related political processes.

In light of the intricate and complex relationship between environmental degradation and the automotive sector, any effort to formulate an environmental action plan in Malaysia must include:

• emissions control whereby motorcycles with two-stroke engines are replaced with four-stroke ones for more efficient fuel combustion, and expediting changes in engine types to meet new emissions standards

• fuel control to increase the use of unleaded petrol and decrease the sulphur content in diesel

• traffic volume control by keeping tabs on the registration of new diesel vehicles and conducting periodic investigations on traffic volumes and patterns to determine the volume of pollutants generated by vehicles

• inspection and maintenance systems in which all vehicles are inspected biennially by the authorities to ensure fuel combustion is below the emission standard

• public education

• improvement in public transportation by introducing LRT and enhancing road networks to reduce traffic volume and lessen concentration of motor vehicles

• replacement of old, overused vehicles with new ones equipped with advanced combustion systems, and banning vehicles which fail to meet new emission standards

• promotion of the use of natural gas for power plants and vehicles.

Fuel diversification and the transport sector

In light of the mounting problems arising from increasing pollution levels, the government adopted the Four Fuel Diversification Strategy in 1980 with a view to diversifying fuel use, notably towards the use of natural gas and renewable oils (e.g. biodiesel). In addition it directed research towards, and created a timeline for, the introduction of environment-friendly fuels – e.g. hydrogen and fuel cells. As a result of pressure from both users and vehicle makers, these policies have lacked follow-through despite the emergence of an action plan to drive the changes.

Crude oil and petroleum products, which comprised 87.9 per cent (2,374.4 pj) of final energy consumed in 1980, fell to 50.8 per cent by 2005 (see table 12.2). The supply of natural gas was increased from 7.5 per cent in 1980 to 39.9 per cent in 2005. Other energy sources such as hydroelectricity recorded a slight decline in share, from 4.1 per cent in 1980 to 3.4 per cent in 2005. Coal and coke, most of which was imported, recorded a significant increase from 0.8 per cent to 5.9 per cent in 2005. Energy supply saw an almost fivefold increase over the last 25 years (table 12.2).

Table 12.3, which looks at the fuel mix of commercial energy supply in Malaysia over the period 1990–2005, shows that the industrial and transport sectors dominate. The country's transport sector, moreover, has been and continues to be the least diversified in terms of fuel use: it remains highly dependent on petroleum and oil as the major energy source (table 12.4). More than 35 per cent of the country's oil use in 2005 went

to transportation, dominated by road travel. In the last four decades Malaysia's cheap gas policy has bred bad habits among motorists. The government introduced the "Go Gas" initiative in 1983, but achieved little success despite strong sales incentives.

While evolutionary economists allow the use of protection and subsidies to spawn technological capabilities among "infants" and provide equitable distribution, price distortions on fuel consumption have adversely affected the development of less-polluting fuels. Government failure has severely undermined energy policy in Malaysia. The government paid energy subsidies equivalent to around RM0.9 billion in the first six months of 2004 (The Edge Daily, 2005), and this rose to RM6 billion in the financial year 2006–2007 (New Straits Times, 2007).

Energy roadmap: Hydrogen and fuel cells

Knowledge-intensive, new-wave technologies are driving a revolutionary change in the automobile industry (Mytelka, 2004). In response to these changes, under the Seventh Malaysia Plan (1996–2000) the Ministry of Science, Technology and Environment through the intensive research priority area (IRPA) mechanism financed the first Malaysian fuel-cell project. The research programme is jointly run by two public universities, the National University of Malaysia (UKM) and the University of Technology of Malaysia (UTM), each of which has been assigned primary research tasks related to the development of components of hydrogen fuel cells as part of a future roadmap for the development, testing and application of hydrogen and fuel cells in the Malaysian transport and energy sectors.

UKM was given the task to develop:

• fabrication of membrane electrolyte assembly and bipolar plates

• hydrogen production from methanol

• hydrogen production from solar energy

• design and fabrication of fuel-cell stacks.

UTM researchers were asked to focus on:

• fabrication of new polymer electrolyte membranes

• hydrogen storage on metal hydrides

• control system and power conditioner.

Under the Eighth Malaysia Plan (2002–2007), both institutions were awarded a RM30 million grant from the Ministry of Science, Technology and Innovation (MOSTI) through the IRPA mechanism to move from components to the development of fuel-cell technologies. Their research has already produced some early results.

A tricycle prototype powered by a 300 W proton-exchange-membrane fuel cell (PEMFC) using hydrogen, for example, was developed and rigorously tested under different road conditions. The actual performance followed closely the design performance. Maximum speed is 40 km/hr, fuel consumption is greater than 800 km/gallon of gasoline equivalent and fuel capacity is 900 km. The tricycle is used to calibrate a new fuel-cell engine simulator developed by the UTM fuel-cell research group. The simulator was used by UTM in the design of the H2Motive, a fuel-cell-powered scooter developed as a means to demonstrate the technical and economic viability of a 7 kW fuel-cell engine powered by hydrogen. Its power-train consists of PEMFC stacks and a traction battery. The direct-drive train uses a permanent magnet motor with regenerative braking capability. The scooter was ready for road testing in 2005.

In addition to the development of fuel-cell vehicles, work is under way on a variety of means to generate hydrogen, and demonstration projects to enhance public awareness are also being carried out. The solar-hydrogen eco-house is one example. Solar energy is used by a PV panel to generate 5 kW electricity for lighting and an electrolysis process using a PEMFC to generate 0.54 m3/hr hydrogen as clean fuel for cooking and hot-water uses. Stored hydrogen is also used by the PEMFC at night for electricity generation. Excess electricity is connected to the grid.

These projects find their successors in the content and recommendations of Malaysia's interim framework document on hydrogen fuel-cell (HFC) technologies produced by the Malaysian Energy Centre (MEC), the Economic Planning Unit (EPU) and the Ministry of Science, Technology and Innovation. The contents of this framework cover several broad policy areas (table 12.5):

• financial and funding

• capacity building and awareness

• standards and policy development

• technology development, R&D, cost competitiveness and market enhancement.

Within this framework, a work programme for research, development and demonstration over the period 2005–2014 was drawn up and some elements of the programme have been initiated (table 12.6).

Malaysia is also an active partner in the Asia Pacific Economic Cooperation (APEC) Energy Working Group (EWG). Within its work programme, the EWG is identifying opportunities for hydrogen and fuel-cell development in the region as well as sharing information and experiences emerging from the range of hydrogen policies and programmes already in place in member economies. It is also exploring avenues for cooperation with the International Energy Agency (IEA) and the International Partnership for the Hydrogen Economy (IPHE), and developing a programme for capacity-building assistance on policy and regulatory issues. Over the longer term the EWG is working towards harmonized codes, standards and regulations.

The APEC EWG also developed an interim framework document, which was presented to APEC energy ministers at their meeting in Manila on 10 June 2004. The interim framework was developed as a means to obtain general agreement on the first steps APEC economies could take to support hydrogen and fuel-cell development, recommending a priority list of potential activities that would help create this foundation. It is also designed to identify competitive advantages for participating countries as both users and producers of hydrogen technologies. The

region has strong manufacturing capabilities and in particular has close links with the automobile sector, from which significant demand for fuel cells and other hydrogen technologies may originate. In addition, many of the APEC economies are already world leaders in hydrogen and fuel-cell technologies.

Three of the areas in Malaysia's HFC roadmap – education, outreach and information dissemination; safety, codes and standards; and capacity-building assistance – are being developed within the context of this regional cooperation framework. APEC forums on energy, for example, have actively discussed ideas to facilitate outreach to policymakers, industry and the general public about the life-cycle costs, benefits and safety considerations of the hydrogen economy, including web-based information tools, policy forums and training workshops. Recognizing that harmonization of codes, standards and regulations can help to reduce barriers to trade and the development of hydrogen technologies, APEC forums have continued to discuss the development of codes and standards and have held workshops to identify standards gaps. This work will build on a current APEC project to develop a codes and standards sourcebook, which will serve as the baseline for future discussions within APEC. In the area of capacity building, suggestions include information sharing with other international organizations, including the IPHE and the IEA, establishing APEC hydrogen test-beds and online sharing of information and expertise.

In response to the 2004 meeting, the government of Malaysia has initiated policies to begin diversifying energy resources. As part of this plan, Malaysia is now considering hydrogen as a potential future fuel and funding has been directed to related institutions for a hydrogen R&D programme. One of the initiatives that have resulted from this funding was the establishment of the National Institute of Fuel Cells in UKM. Research undertaken at this institution is conducted as UKM-UTM collaborative projects. Although Malaysia has yet to launch any hydrogen demonstration projects, there are currently a number of ongoing hydrogen R&D activities. Recently a workshop was convened to gather inputs from both government and private sector perspectives on the development of new energy sources, including hydrogen. This workshop was, in part, meant to serve as an opportunity to develop an overview of future hydrogen energy development activities within the country (see www.aseanenergy.org/pressea/news/n_malaysia/news_my_11.htm).

Conclusions

This chapter examines the development of environment-friendly automobile policies in Malaysia using the systems-of-innovation approach. Ma­laysia is a rare example of a latecomer that has retained its national car development policies, although liberalization initiatives are threatening a shakeout among the domestic participants. Malaysia's national car policy succeeded in producing Malaysian-designed cars, especially under Proton. Extensive focus on national car development without an equally proactive emphasis on technological capability building – including in environment-friendly technologies that are essential to supporting car sales in developed car markets – has meant that environmental policies in the country have not responded effectively to check pollution. Liberalization trends – especially following the inclusion of automobiles in the AFTA process since 2005 – have stimulated an increase rather than a drop in car demand. Rising car sales threaten to wreak further havoc on the country's environment.

The lack of integration between vehicle manufacturing and sales, transport policy and environmental policy raises serious problems for the process of development in the country. Despite the growth in LRT networks, public transport has done little to relieve vehicle-use pressures in the bigger cities in Malaysia. The government's lack of emphasis on vehicle emission levels, in not requiring the use of at least catalytic converters, has only aggravated air pollution further. Yet the manufacturers already have the capabilities to equip vehicles with catalytic converters, as seen from the sales in export markets.

There is thus growing public concern over noise and atmospheric pollution, traffic congestion, accidents, energy use and conservation and general environmental decay as a result of the excessive use of motor vehicles. In Kuala Lumpur alone, the number of vehicles increased 200 per cent over the period 1995–2005 while the city's road networks only expanded half as fast. Currently, more than 35 per cent of the country's oil use goes to the transportation sector, which is dominated by road travel. Heavy petroleum and gas subsidies have bred negative perceptions among motorists. With little effort made to raise awareness among the public about the dangers of emissions, efforts to reduce subsidies on energy sales since 2005 have brought ugly protests among consumers. Policies, strategies, legislation and enforcement are inadequate.

In short, it can be seen that a number of initiatives have been taken at the policy level to address environmental issues in Malaysia, including efforts to frame strategies to reduce vehicle emissions. However, these have encountered serious problems of enforcement. It is quite puzzling that manufacturers have lobbied to reduce the use of environment-friendly gadgets in cars sold in the country. The costs involved in installing environment-friendly devices, even if only end-of-pipe solutions such as catalytic converters, are marginal since the scale and volume necessary to appropriate the R&D costs have already been met following the mandatory use of these items in the developed economies. As a latecomer, Malaysia should learn from the existing examples at a faster rate and implement environment-friendly policies. Serious efforts should thus be made to implement the energy roadmap. Unless these initiatives are taken quickly the country is likely to be overtaken in the development ladder by economies currently lying below it.

The Malaysian government, moreover, must focus more concertedly on environmental management if it is to avert a potentially disastrous environmental calamity. In addition to enforcing existing environmental legislation in order to reduce environmental emissions, the HFC road-map must be regarded more seriously with a view to its rapid implementation. This will require not only sustained efforts to substitute existing technologies with cleaner ones, but also new initiatives designed to expand the use of public transport in the country.

Notes

1. Firms directly involved in storage, treatment and disposal of toxic and hazardous waste in an integrated manner can apply for "pioneer status". Companies generating waste can establish facilities to store, treat and dispose of it, either on site or off site, and are then eligible for a special allowance at an initial rate of 40 per cent for one year and an annual rate of 20 per cent of capital expenditure in the next four years (Malaysia, 1995). Firms can access duty drawbacks on machinery involved in storage, treatment and disposal activities. Foreign firms have the same rights and regulations on environmental standards as local firms.

2. In addition to rapid industrialization, it is possible that part of the rise in recorded air pollution levels could be due to improved measurement coverage and instruments used in the 1990s.

3. Emission of smoke and gaseous pollutants such as carbon monoxide, hydrocarbons, oxides of nitrogen and particulate matters emitted from motor vehicle exhausts are controlled under the Environmental Quality (Control of Emission from Diesel Engines) Regulations 1996 and the Environmental Quality (Control of Emission from Petrol Engines) Regulations 1996.

4. See chapter 8 in this volume for the corresponding efforts by Egypt to deal with pollution generated by road transportation in the Cairo area.

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Part IV
Strategies and roadmaps

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Introduction

A critical point of departure in thinking about hydrogen strategies and roadmaps is the uncertainty that continues to surround the notion of an emerging hydrogen economy. Government strategies and funding policies with regard to the development of clean hydrogen, hydrogen fuel cells and alternative fuels have been in flux over the past 10 years, and frequently move in opposite directions. A recent example of this is the US Department of Energy's proposed 2009 budget request for its Office of Energy Efficiency and Renewable Energy. This proposal eliminates funding for renewable hydrogen production and for research and development leading to manufacturing. It also cuts in half the funding request for fuel-cell vehicle validation. In contrast, the European Union's new Strategic Energy Technology Plan (SET-Plan) contains proposals for joint technology initiatives that would focus precisely on the development phase of new technologies with a view to their commercialization. One of these deals with fuel cells and hydrogen.

Adding to the uncertainties resulting from policy changes is the high cost of hydrogen and fuel cells relative to alternatives. Although there is general agreement that costs are coming down, no dominant design has yet emerged for hydrogen fuel-cell vehicles and there remains a lack of consensus on when commercialization might take place.

Faced with rising CO2 emissions, a wide range of choices in alternative fuels and vehicles has emerged. This, too, creates difficulties in designing strategies and roadmaps for countries in the South that do not have the resources to move in multiple directions at once. They must make choices, and must do so under relatively high levels of uncertainty. Acknowledging these difficulties, however, does not mean that thinking about transitions to new technologies in the transport sector can simply be postponed.