Elon Musk hates hydrogen, but automakers are still investing in it — and for good reason

David Paul Morris | Bloomberg | Getty Images. Bernstein reiterates its market-perform rating for Tesla shares, telling investors to avoid buying it due to Model 3 production risk.·CNBC

Elon Musk is no fan of hydrogen fuel cell technology, but some of the world's major automakers still think it is a bet worth making.

The Tesla (NASDAQ: TSLA) CEO has called fuel cells "mind-bogglingly stupid," "incredibly dumb" and "fool cells."

Musk's complaint is that using hydrogen as a mechanism for storing energy would be less efficient (i.e., result in more electricity lost) than simply using electricity to charge batteries. Other critics have variously cited such things as costs, safety and the lack of supporting infrastructure, among other things.

But other automakers are saying fuel cells are a better bet than critics claim. Some of the world's largest automakers are leasing fuel cell cars to customers, committing to improve fueling infrastructure and showing off new models at the world's premier auto shows, even as they explore other alternatives to the gasoline engine.

Fuel cells have their own limitations, but they may be here to stay. And they may end up maintaining certain advantages over battery electrics, even as technology improves for both powertrains.

Toyota (Tokyo Stock Exchange: 7203.T-JP) unveiled the fuel cell powered Mirai in Japan in 2014. Honda (Tokyo Stock Exchange: 7267.T-JP) released the Clarity fuel cell car last year, based on an earlier concept vehicle. Hyundai's (Korea Stock Exchange: 538-KR) luxury Genesis brand unveiled a hydrogen fuel cell SUV at the New York Auto Show earlier this year. Meanwhile, Hyundai already offers a fuel cell version of its Tucson, and Mercedes (XETRA: DAI-DE) is launching a car this year that combines fuel cells with plug-in electric technology. Others are expected in the years to come.

In the short term, pure battery electrics are expected to outpace fuel cells, among non-gasoline engine cars. Battery electrics are forecast to be 4 percent of the total car market by 2025, from about 1 percent today, while fuel cells will only be 0.5 percent of the total market, according to IHS Automotive.

"Realistically, the electrification of vehicles is almost entirely built around lithium-ion electric in the next five to seven years," said Brett Smith of the Center for Automotive Research.

He added that the improvements in battery technology over the last several years has been impressive, exceeding many expectations. And Tesla in particular has shown what can be accomplished with a vision.

But he added: "I think the internal combustion engine is still a tough target." He said he is among those still skeptical that pure electrics will be able to displace it without a "revolution" in battery technology.

The central issue is that battery electrics can still only go so far before the batteries need to be recharged, and that can be time consuming . Tesla's Superchargers, which may be the fastest chargers around, can recharge a battery to roughly 80 percent of its capacity in about 30 minutes. But that is still a lot longer than it takes to refill a gas tank.

"Charging is really the Achilles' heel of the battery electric," said Devin Lindsay, principal analyst at IHS Automotive. "We have places to charge, but the length of time it takes to charge is still an issue."

It would be especially difficult for drivers on tight schedules, and for people who do not have access to a charger — such as people who live in apartment buildings or who park on the street.

Fuel cell cars, on the other hand, can be refilled about as quickly as gas tanks, offer longer ranges on a single fill, and may be preferable for larger vehicles, especially heavy duty trucks or industrial equipment. So they do not require consumers to change their behavior when switching from gasoline engines, said Craig Scott, director of the Advanced Technology Group for Toyota Motor Sales U.S.A.

"Living with an EV requires you to modify your behavior," Scott said. "You have to think about where you are going to charge, and you have to think about how far you can go on that charge. And that is why, today, most people who buy [battery] EVs report that it is their second or third vehicle. Today, 94 percent of the people who buy the Mirai are reporting that they are replacing their primary vehicle. That is a very, very clear indication of people's mindsets. One they view as a replacement to their current vehicle, another they view as a supplement."

Irresistibility of convenience

Companies betting on fuel cells are, in part, betting on the irresistibility of convenience.

Of course, Tesla's top-shelf cars can travel more than 335 miles on a single charge. For a battery-only electric, that is a remarkable achievement. Tellingly, though, Musk acknowledged how difficult it was to squeeze that extra 10 kilowatt hours into a battery that size, and said the company will not put a battery larger than 100 kWh in the Model S, X, or 3, meaning the company will have to find another way to push range higher.

Meanwhile, the Honda Clarity fuel cell electric gets 366 miles on a single fill, according to Honda.

Fuel cells may be especially useful in certain applications. Any vehicle on a tightly managed circuit, such as a delivery truck, city bus, or other similar vehicle , would work quite well with hydrogen.

"Where hydrogen would make sense is where high-capacity electric cars are already making the most sense, which is in super-controlled, standardized environments," said Karl Brauer, executive publisher for Autotrader and Kelley Blue Book.

There are already 14,000 hydrogen fuel cell forklifts operating across the United States, for example, said Keith Malone, a spokesman for the California Fuel Cell Partnership, a public-private partnership between the auto industry and the state of California to promote fuel cell transportation.

Tellingly, Amazon (NASDAQ: AMZN) recently bought a stake in Plug Power (NASDAQ: PLUG), which makes fuel cells. Amazon aims to use it to power forklifts in its warehouses. Other companies have also begun to invest in fuel cell tractor trailer trucks.

"Hydrogen may never make sense for consumer vehicles," as we conceive of them now, Brauer said. "But it does make sense for B2B and B2C vehicles that do community standardized shuttling and personal transportation services. And don't forget that a lot of people are saying that is where we are heading anyway. A lot of people are saying hydrogen fuel cells sync well with something else coming up fast: self-driving cars."

In particular, hydrogen cars could work just fine in fleets of shared, autonomous vehicles, which some have suggested could be a big part of the future of everyday transportation.

Just like their battery electric counterparts, hydrogen cars could be stored in facilities near fuel sources and then summoned when needed, reducing the need for a vast infrastructure of filling stations catering to individual owners. The quick refilling time would mean cars could be redeployed more quickly, keeping fleets smaller.

The technology has its flaws. Critics and skeptics say fuel cell cars require a lot of energy to harvest the hydrogen needed for the tanks. Right now, a fair amount of this hydrogen is a byproduct of natural gas extraction or similar processes that are far from carbon neutral.

To be fair, solar and wind energy could be used to extract hydrogen, said Malone. California already requires that 33 percent of the hydrogen used in the state must be harvested using renewable energy.

Hydrogen fuel cell cars are also complicated, and they take more time and money to build than an internal combustion engine. For example, the Financial Times reported it takes 72 minutes to build a Toyota Mirai, compared with just 60 seconds for a regular internal combustion engine car.

If Tesla's aggressive push into improving manufacturing efficiency bears fruit, the company has promised it could provide a blueprint for electric vehicle that could be tough for complicated alternatives to catch up with.

Then there is the matter of infrastructure. Building hydrogen fueling stations cost about five times what it takes to build a conventional gas station. Fuel cell cars need a refueling infrastructure, mechanics and a supply chain for parts.

Finally, fuel cell cars are still expensive, due in part to their complexity and the materials used. The Honda Clarity may offer more range than a $69,000-plus Tesla Model S for less money, but both the Clarity and Toyota's Mirai start at just below $60,000 without incentives.

But these kinds of challenges are hardly unique to fuel cells, said IHS' Lindsay. And companies have made some improvements, such as by reducing the size of certain components, as Toyota has done with its Mirai.

As with many clean energy technologies, California has taken the lead among U.S. states in developing a program to support hydrogen fuel cell cars. There are currently 27 refueling stations throughout the state, and there are plans to get to 100 by 2020.

From there, the state aims to multiply that by a factor of five or 10, Malone said.

For now, manufacturers can also earn more zero-emission vehicle credits in California for hydrogen cars, than they can with battery electrics, Lindsay said. "Right now, even in limited volume, they can earn a decent number of credits" by selling far fewer hydrogen cars than battery electrics, he said.

International is a different story

Outside of California, there is almost no hydrogen fuel cell infrastructure in the U.S. auto sector, though Toyota partnered with a company called Air Liquide (: ) to build a network of hydrogen fuel stations throughout the Northeastern U.S.

But internationally, the story is different.

Japan has been especially supportive of the technology, and this cannot be overlooked when considering the moves by Honda and Toyota.

Government officials in Tokyo are investing $350 million in improving hydrogen refueling infrastructure. It is part of a larger plan to create a "hydrogen society" by the time Japan hosts the summer Olympics in 2020. There are plans for fuel cell-powered buses, about 100 of which are expected to be on the streets by the time the Games begin.

Critics have regarded Japan's bet on hydrogen as something of a gamble, perhaps even a losing one.

But other countries in Europe and Asia are considering the technology and making investments.

"I remind people we are filling up [hydrogen tanks] in kilograms," Malone said. "This is a global launch. This is also about Japan, Germany, South Korea, and increasingly the U.K. and the Nordic countries. I sometimes joke that I spend about 50 percent of my time bringing people to the realization this is happening."



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