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Can Iceland run on hydrogen? They called him "Professor Hydrogen" -- and it wasn't supposed to be a compliment. For two decades, Bragi Arnason, a University of Iceland chemistry professor, clung to a vision of his country's future that sounded like something out of an Isaac Asimov novel. He was convinced his tiny North Atlantic nation could become the world's first hydrogen-powered economy. Suddenly, his dream is becoming a reality and he's a national hero. And he's got the whole world watching. Mr. Arnason's plan to replace fossil fuels with hydrogen-powered fuel cells has received backing not only from the Icelandic government but from automotive and oil giants, including Shell and DaimlerChrysler (NYSE: DCX), who have ponied up millions to see if Professor Hydrogen just might be right. They want to use Iceland as a test bed for a new generation of cars and buses powered by hydrogen. If the project succeeds, what was once dismissed as a crazy fantasy may become the foundation for the world's transition from the dirty and inefficient process of burning fossil fuels, to the cleaner, more efficient power of hydrogen fuel cells. "We believe that we can eliminate most of our dependence on oil by 2030," says Hjalmar Arnason, chairman of the Icelandic government's committee for alternative fuel, and no relation to the professor.

The reason all eyes are now on Iceland is that a host of countries are looking to replace fossil fuels with hydrogen -- a quest motivated in equal measure by economic, political, and environmental concerns. Within the next 15 years, the demand for oil is projected to outstrip production, and the shortage will make gasoline prohibitively expensive. And there is the environmental factor. Burning fossil fuels causes pollution, and, as scientists are increasingly concerned, global warming. And if that isn't enough, more than two-thirds of the world's remaining oil reserves are in politically unstable regions, such as the Middle East.

"There is no doubt in our minds that hydrogen is the future," says Don Huberts, CEO of Shell Hydrogen. "The only real question is when." Hydrogen fuel cells are clean, emitting steam instead of exhaust fumes. They are more efficient, because they use a chemical reaction rather than squirting oil into a cylinder and setting it alight (see "Fuel Cells Explained"). And hydrogen is as plentiful as tap water. The eco-friendly William Clay Ford, chairman of Ford (NYSE: F), who drives an electric pickup truck to work, has predicted that hybrids -- cars fueled by both hydrogen and gasoline -- could account for 20 percent of all vehicle sales by 2010. Likewise, predictions for stationary applications are optimistic, topping 2.2 million kilowatts by 2010, according to the American Hydrogen Association, a trade association.

But the technology does have limitations. Hydrogen is usually found bound to other elements, such as oxygen and carbon, which means it must be extracted using electricity. And where does much of the world's electricity come from? You got it -- oil. If the predictions by automakers are correct, hydrogen-powered fuel-cell vehicles will begin to appear in delivery and public fleets in the next ten years. And it will probably take another 20 years before they become pervasive. But with gas prices rising to two dollars a gallon in the United States, the economics may change soon. While the gallon equivalent of hydrogen now costs $3 to produce, it is nearly twice as efficient as gasoline.

If hydrogen power is to become a practical alternative to oil in the long run, then it needs to be created using electricity from renewable sources such as hydroelectric, geothermal, and wind power. That's where Iceland comes in, with its abundant supply of low-cost geothermal and hydroelectric power. Exactly how much? That's the question Bragi Arnason set out to answer in his doctoral research in 1970.

"I discovered that we have enough geothermal energy to provide the equivalent of 100 nuclear power stations and enough hydroelectric power to provide the equivalent of 15 nuclear power stations," says the professor, who is now 65. "So I began to think about ways in which we could use the surplus."

THERMALS UNDERTHERE Beneath Iceland's capital, Reykjavmk (which means smoky bay), magma from volcanic activity far beneath the earth's surface heats fresh water to boiling point. The water turns to steam, which works its way to the earth's surface, collecting debris along the way, and billows out as black smoke. When the Vikings arrived in 800 A.D., they settled here because of the plentiful hot water. They used natural hot springs for bathing.

The only black smoke that can be seen in Reykjavmk today comes from the buses and cars that zip around the city. But just 20 miles away at the Sudurnes geothermal power plant, steel vents release the pressure built up under the earth's surface. The excess water, which contains sulfur and silica, is run off into a ravine. Like their Viking forebears, Icelanders today relish natural baths. Many come to bathe in the waste product of the power plant, where a resort called Blue Lagoon has sprung up. Across the lagoon, the plant uses the steam pressure from below the ground to drive steam turbines and generate electricity. That steam then heats fresh water that is piped back to Reykjavmk and used to heat the city.

In 1950, when the rest of the world thought that nuclear energy was the wave of the future, Iceland moved all of its heating and electricity production from oil- and coal-fired power plants to geothermal and hydroelectric power plants. This gave the nation of 280,000 inhabitants some of the lowest-cost electricity and heating in the world ($0.02 per kilowatt). Cheaper heating was no small matter given Iceland's frigid climate. Low-cost electricity was a boon to the fish-processing industry. Despite their remote location, local plants managed to compete successfully in the international market. The result of all these changes was striking. Before World War II, Iceland was considered a third world country. Today it is ranked seventh in quality of life by the Organization for Economic Cooperation and Development (OECD).

Two-thirds of Iceland's oil consumption goes to fishing and industry; the rest is used for ground transportation. Fishing accounts for 65 percent of Iceland's exports, so the nation relies on low oil prices to supply fish to the world market at a competitive price. The price of oil is therefore the single biggest factor to the success of Iceland. If oil prices go up, fish prices go up and exports drop.

But if Iceland can cut this fuel bill, it can lower import and export costs. This would assure even greater economic progress in the next 50 years than Iceland has achieved in the last 50. In many ways, Iceland has as much to gain from the implementation of a hydrogen economy as it did from the introduction of geothermal and hydroelectric power production. Of course, the same can be said for the rest of the world. Greater efficiencies in energy production make for greater economic progress.

Mr. Arnason was thinking along these lines when he began considering how Iceland might use its geothermal surplus to produce low-cost electricity, not only for fish-processing plants, but also to power the fishing fleet and local transportation. This would allow the nation to make another leap in prosperity.

But how? Standard battery technology was not powerful enough to propel cars or fishing vessels. So Mr. Arnason decided that hydrogen was the most workable solution because it could be produced by applying low-cost electricity to water. But low-cost fuel cells didn't exist. Without them, Mr. Arnason's idea was simple science fiction. "I had a problem," he says. "I knew that hydrogen was the solution but I also knew that people would think I was crazy."

Mr. Arnason sought advice from a mentor, University of Iceland physics professor Thorbjvrn Sigurgeirsson. "He told me that if I really believed that hydrogen was the solution then I should start talking about it immediately because any new technology takes about 30 years to mature." Thirty years later, DaimlerChrysler, Ford, Toyota (NYSE: TM), and Nissan Motor (Nasdaq: NSANY) are working on hydrogen-powered cars, which they plan to release in 2004.

If the hydrogen plan is carried out, Iceland could reduce its annual oil bill of $150 million to almost zero. This may be small by U.S. standards, but it would have a significant impact on the tiny Icelandic economy.

"Moving our economy from oil to hydrogen will enable us to reduce the trade deficit, which is important," says the Icelandic government's Hjalmar Arnason. "But much more important is that it will create a center for hydrogen expertise in Iceland."

As a small, advanced nation, Iceland would like to position itself as a testing ground for new technologies well beyond energy. The government is hoping that the hydrogen experiment will distinguish the country as an ideal, innovative lab. "It's best to introduce a new technology in a small society because if it goes wrong it's easier to fix," Hjalmar Arnason says. "Then you take the lessons you've learned in a small society and apply them to larger societies."

SHEIK UP Two other motives lie just beneath the surface. First, if hydrogen becomes the fuel of choice, then Iceland could produce it by the megaton and ship it to mainland Europe. This could transform the already wealthy Icelanders into hydrogen sheiks. Second, and far more urgent, is the need to reduce pollution. Despite Iceland's low consumption of fossil fuels, its carbon dioxide emissions are extremely high -- more than 2.6 million metric tons a year -- because of two large aluminum plants and one large ferrosilicon plant. "We already use renewable sources of power so how do we lower emissions?" Hjalmar Arnason asks. The only practical solution was to reduce oil consumption.

The nation's high level of pollution made Iceland unqualified to sign the Kyoto Accord of 1997, the international climate agreement that dictated emission levels for participant countries. It was this accord that sparked broad interest in Bragi Arnason's dormant hydrogen plan. The government commissioned a report from the University of Iceland. What may have seemed like a crazy idea in 1970 now seemed sound, and even economically practical, in the late '90s. Moreover, if the country could reduce transportation and fishing emissions, then it could build more aluminum and ferrosilicon plants.

When the Icelandic government publicly announced plans to move to a hydrogen economy, officials began receiving calls from around the world. Mr. Arnason's papers were getting the attention of energy and automotive companies. Shell and DaimlerChrysler were particularly intrigued, and agreed to back the project to use Iceland as a testing ground for hydrogen-based technology. And Mr. Arnason became a public figure.

FUEL FOSSILS What changed? Certainly, automobile and energy companies knew the economic, environmental, and political problems with oil better than anyone. Then in the '90s DaimlerChrysler and Ford put their money into developing alternatives, investing more than a billion dollars in one of the most promising fuel-cell companies, Canada's Ballard Power Systems (Nasdaq: BLDP). General Motors (NYSE: GM), Volkswagen (OTC: VLKAY), BMW (OTC: BAMXF), Honda (NYSE: HMC), Toyota, and Nissan all followed suit and began to develop fuel-cell vehicles. Most are due to hit car showrooms in the next three to five years. "Fuel cells will end the 100-year reign of the internal combustion engine," predicted Mr. Ford of Ford Motor at the Detroit Auto Show in January.

Wary of losing their grip on the energy supply market, the oil companies are also getting in on the hydrogen act. Two years ago, Shell Chairman Mark Moody-Stuart created Shell Hydrogen to explore how the company could use its more than 20,000 gas stations to supply a new generation of vehicles. Texaco (NYSE: TX) and BP Amoco (NYSE: BPA) have also set up hydrogen research projects.

The oil and energy companies have a lot at stake. First, it is projected that current oil reserves will begin to run low in the next 50 years. Long before that happens, the world will begin using oil faster than it can be extracted from the ground, according to the International Energy Agency, energy advisors to the OECD. Of course, there are other alternatives, such as natural gas and even the extraction of gasoline from coal. But fossil fuels will get increasingly expensive because it will require a change to the current delivery infrastructure.

Also, there's the discomfort of having so much oil produced in the politically unstable Middle East. And there's the environment: if global warming continues to be an important concern and the rate of climate change increases over the next several decades, the automotive and oil companies could someday find themselves vulnerable, like tobacco companies today.

According to a recent study by the Intergovernmental Panel on Climate Change, mean global surface temperature will increase by 1 to 3.5 degrees Celsius by 2100 -- a faster rate of warming than that seen in the past 10,000 years.

For these reasons, DaimlerChrysler started the ball rolling in the early '90s, when it commissioned a study to determine how much life was left in the internal combustion engine. "We realized that we would have to start looking for alternative fuel sources very quickly," says Wolfgang Scheunemann, DaimlerChrysler's manager for technology communications. "After some research we decided that hydrogen or a fuel from which we could extract hydrogen was the most viable alternative to oil."

It seems fitting that a descendant of Daimler-Benz, the company that first commercialized the internal combustion engine at the beginning of the 1900s, would also be the first automotive company to decide it was time to move on at the end of the century. In 1993, when the company said that it was going to have production-ready hydrogen-powered electric vehicles by 2004, the rest of the automobile industry scoffed. Such an idea seemed ridiculous because the technology was not commercially viable. Now, an automotive or energy company without a hydrogen strategy is like a retailer without an Internet strategy.

Last year, the Icelandic government signed its deal with Shell, DaimlerChrysler, and Norwegian hydrogen producer Norsk Hydro (NYSE: NHY) to test hydrogen fuel-cell buses and cars. Two months later, Toyota arrived on the island with a planeload of scientists. One official, who asked not to be identified, says Toyota tried to snag the project by offering to foot the full cost and supply as many engineers as were needed. Toyota officials refused to comment.

To implement the plan, the Icelandic government, Shell, and DaimlerChrysler created a consortium called Vistorka (meaning eco-energy), with $1 million in seed capital. The consortium has three objectives: replace Iceland's public buses with fuel-cell buses, persuade the population to buy fuel-cell cars, and develop fuel-cell technology to power fishing trawlers.

"Originally, we believed that phase two should be to import fuel-cell cars into Iceland," says Jon Bjorn Skulason, general manager of Vistorka. "This seems impractical so now we have decided to investigate converting our fishing fleet to hydrogen-powered vessels." Vistorka is about to begin the first phase of its ambitious plan -- a $50 million project to replace the Reykjavmk Municipal Bus Service's 100 buses with hydrogen fuel-cell buses. In May, it raised $3.5 million from the European Community for the project. Now, Vistorka is looking for partners to launch a startup to develop hydrogen fuel-cell fishing vessels.

ALTERNATIVE REALITIES Iceland is hardly the only place with hydrogen power on its mind. Chicago; Vancouver, British Columbia; Dusseldorf, Germany; and Sacramento, California all have hydrogen bus projects in the works. In October, a consortium called the California Fuel Cell Partnership will begin testing hydrogen fuel-cell cars in California, with the goal of exploring their commercial potential. "We will explore the fueling issues, road test the vehicles, and also gauge the public's reaction to hydrogen power," says Joe Irvin, spokesman for the partnership.

The partnership chose California for the trial because the state has mandated that by 2004, 10 percent of cars sold within its borders must be zero-emission vehicles, meaning they must not belch polluting fumes. That's not to say that we are all going to be humming around in hydrogen-powered vehicles anytime soon. Even the most enthusiastic fuel-cell proponents estimate that the transition will take from 20 to 40 years.

"My guess is that hydrogen will not reach the same level of acceptance in the transportation industry as oil until 2050," says Karl Jessen, director of energy and Internet strategies at the Yankee Group consulting firm. "Unless of course we have a major ecological or energy crisis in the next few years."

It's difficult to store hydrogen in small spaces and there is no infrastructure to deliver it to a mass market. This has compelled the automakers to look at alternative fuels from which they can extract hydrogen. The contenders are propane, methanol, and gasoline. These are stored in a vehicle in much the same way as gasoline and a specialized apparatus called a reformer is used to strip out the hydrogen. The drawback with propane is that while it would significantly reduce pollution it won't eliminate it completely. One carbon atom will have to be released to free every four hydrogen atoms. The same goes for methanol. And reforming hydrogen from gasoline does almost nothing to help the environment, as one carbon atom is released to produce every one and one-half hydrogen atoms. Furthermore, adding a reformer raises the cost and substantially increases the weight of the vehicle, which goes a long way to making fuel-cell cars less competitive than their gasoline counterparts.

"Unfortunately, we won't see pure hydrogen-based fuel-cell vehicles for some time," says Jason Mark, senior transportation analyst with the Union of Concerned Scientists. "The automakers will first introduce natural gas- and methanol-based vehicles. Gas stations are just not equipped to deliver hydrogen and we estimate that it will cost about $200 billion to upgrade them."

WARM FRONT Although moving to hydrogen will ease the energy supply problem, slowing down the effects of global warming may be more difficult. The catch-22 is that, environmentally speaking, the best way to obtain hydrogen is to extract it from water, and the electricity used to do so must come from somewhere.

While Reykjavmk is a rarity, with its access to massive amounts of low-cost, environmentally friendly power, the rest of the world relies on oil for a great deal of its electricity. If the process is to be completely pollution-free, then renewable sources such as hydroelectric, geothermal, or solar power must be used. "You have to measure the process from well to wheel," says Steven Taub, associate director of energy consultancy Cambridge Energy Research Associates. "It's no use saying that our cars are emission-free if oil is used to create the hydrogen."

But hydrogen seems to have enough greenbacks behind it. Although the auto industry is the most aggressive promoter of the technology, it is certainly not the only industry looking to harness fuel cells. The market for fuel-cell technology for stationary applications is perhaps more advanced. International Fuel Cells (formally ONSI and a subsidiary of United Technologies (NYSE: UTX)) has sold more than two hundred 200-kilowatt fuel cells for stationary applications. The company started out the technology for the National Aeronautics and Space Administration but now sells fuel cells for use as back-up power generators. Each cell costs about $800,000, runs on natural gas, and provides digitally perfect electricity. The customer list is impressive, and diverse: First National Bank of Omaha, Staten Island University Hospital, and 4 Times Square, the New York home of the Conde Nast publishing empire. "Fuel cells are more reliable than generators since there's no maintenance, no moving parts, no servicing needed," says Mike London, communications manager for International Fuel Cells. "Just natural gas in one end and pure, digitally perfect power out the other."

Meanwhile, companies from Ballard Power Systems to Motorola (NYSE: MOT) are working on fuel-cell technology for the electronics industry. The advantage is that users could instantly recharge their cell phone or laptop by adding a cartridge containing methanol (the hydrogen would be extracted from the methanol and used to power the fuel cell). And SRI International has been working on fuel-cell technology for the portable-devices market for the past decade, and this year expects to spin out a company called Polyfuel to produce fuel cells. "We have developed a portable-devices fuel cell that will give users five times the run time and the ability to instantly recharge their device," says Subhash Narang, SRI's director of product development. Mr. Narang believes that Polyfuel can have a product to market in the next three years.

By that time, Iceland's Professor Hydrogen may be traveling on Reykjavmk's hydrogen-fueled buses, watching his nation's hydrogen-fueled economy prosper, and enjoying the fact that it isn't all part of a sci-fi novel.

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-- K (, July 26, 2000

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