Roughly half of the U.S. population lives in areas where air pollution poses a risk to public health and the environment, according to the U.S. Department of Energy (DOE). Much of this pollution comes from gasoline and diesel vehicles emitting nitrogen oxides and hydrocarbons. One solution is to replace these cars with electric vehicles that run on hydrogen-powered fuel cells, which only emit water (H2O) and warm air.
While EVs are making inroads in the overall market, there needs to be a more private investment in hydrogen fuel-cell technology to reach a wide scale. As the DOE notes, the cost of fuel cells will have to “decrease substantially without compromising performance” to be competitive in the marketplace.
But there has been some good news on that front. Thanks to improving economics involving sustainable technologies, a growing number of venture capital and private equity firms are investing in hydrogen fuel cells, as are huge automakers like Toyota. And one company – Silicon Valley startup Zero Emission Industries (ZEI) – has gained notice by recently launching the first commercial water vessel powered entirely by hydrogen fuel cells.
The boat, the Sea Change ferry, was launched into waters outside the California Bay Area in early February. Its hydrogen fuel cell system was built by ZEI, a four-person tech company founded in 2018 by Joe Pratt, who now serves as CEO. The launch of the Sea Change could represent a sea change of its own in terms of future funding for ZEI and companies like it.
ZEI’s funding during its first four years came from two government grants and less than $1 million in convertible notes from angel investors. There wasn’t a lot of interest from the private investment community. But lately, interest has picked up considerably. On September 8, ZEI announced the first close of its Series A fundraise, led by Chevron New Energies and with participation from Crowley, the logistics and shipping conglomerate.
Much of the recent interest is built around the commercial prospects of hydrogen fuel cell technologies. As Pratt said in an interview, the market is seeing “drastic decreases” in the cost of hydrogen amid a broader drop in the costs of renewable electricity.
“Making green hydrogen from electrolysis with solar or wind power, in my view, will be cheaper than fossil fuels very quickly,” Pratt said. “So if you factor that into the life of a 20- or 30-year-old vessel, you pretty quickly get to a lower total cost of ownership with hydrogen fuel cells than diesel engines.”
That’s a huge development, given the fact that high costs have long been a huge barrier to greater market adoption of hydrogen fuel cells. What’s more, hydrogen fuel cells are not weighted down by increasingly stringent air pollution regulations like diesel engines.
This combination of decreasing costs for hydrogen fuel cells and escalating costs for diesel engines has brought more VC firms into the mix for companies like ZEI.
“There are now hydrogen-specific VCs with hydrogen theses and hydrogen desks at major banks,” John Motlow, executive vice president at ZEI, told Fortune. “I think there’s still quite a bit of education that needs to be done. But Joe and the guys who came before him have been working on this technology for decades. It’s really well understood. There’s a lot of those key lessons and familiarity that still needs to get disseminated across institutional investors and the general public.”
ZEI’s focus on water vessels is partly rooted in the environmental impact of sea vessels. Pratt said that the international shipping industry currently contributes around 3% of the world’s global greenhouse gas emissions and has traditionally been one of the highest emitters of sulfur oxides, nitrogen oxides, and other pollutants.
“And those air pollution emissions are usually centered around poor areas, which is commonly where the disadvantaged communities are located,” he added. “So there’s a disproportionate impact to those folks. Cleaning up maritime is a pretty important part of the whole solution for air pollution and greenhouse gas emissions.”
