How residential fuel cells work

Fuel cells can operate in different ways, but in general, residential fuel cells combine oxygen with hydrogen extracted from natural gas or propane to produce electricity. The chemical process uses the fossil fuels cleaner and more efficiently than the combustion process that occurs in, say, a gas furnace. The primary byproducts of fuel cells are heat and water.

Residential fuel cells can be tied directly into a home’s electrical panel to supply electricity. Excess electricity can even be sold back to your local utility. More likely, fuel cells will meet a portion of a home’s power needs, with the rest drawn from the electric grid. As a bonus, fuel cells can continue to function during power outages.

The heat produced as a byproduct by fuel cells can be used to provide hot water and heat to your home. A fuel cell system, which has heat-exchanging technology built in, is tied to a boiler or water heater and works in tandem with those units. Access to a fossil-fuel source such as natural gas is required. A typical residential fuel cell system is about the size of a refrigerator.

Fuel cells come at a hefty cost

Residential fuel cells aren’t cheap. A system can cost $50,000, and that’s not counting installation. The federal tax credit can help defray some of the expense, as can energy savings once the system is up and running. Manufacturers estimate a system can lower utility bills by as much as 40% a year. That’s an annual savings of $880 for the average homeowner, making fuel cells best suited for regions with well-above-average energy costs.

Residential fuel cells can be integrated into just about any type of heating system: radiant heat, hot water baseboard, or forced air. Most homeowners will require a system with a capacity of 5 kilowatts or less. Fuel cells capable of generating 2 kW to 5 kW of electricity should work effectively in homes between 2,000 square feet and more than 4,000 square feet.

Natural gas is by far the most common fuel source for residential fuel cells. Budget for a hookup to your home, if you don’t already have one. The system can be sited inside with your other mechanicals, or in some cases outside.

Installation adds to the price

It’s cheaper to install residential fuel cells in a new construction. Expect to pay more to retrofit an existing home. The federal tax credit applies to both new and existing homes, as long as it’s your primary residence. While neither option is cheap, Bud DeFlaviis at the U.S. Fuel Cell Council says fuel cell prices are comparable to what you’d pay for solar panels.

Installation in a newly constructed home can run between $3,000 and $4,000, on top of the $50,000 for the system. In an existing home, installation can add $12,000 to $25,000 to the total bill. Costs escalate depending on how far the system is from your electrical panel and boiler, and how much wiring and plumbing is involved.

Some cities require permits to install residential fuel cells, so budget time for you or the installer to secure them. Most local governments won’t be accustomed to issuing them since so few systems are in use. According to Clear Edge Power, a maker of residential fuel cells, a system shouldn’t take more than three days to install once the paperwork is in order.

Tax credit has limits

The federal tax credit for residential fuel cells lets homeowners write off 30% of the cost, up to $500 per 0.5 kW. The system has to have a minimum 0.5 kW capacity and efficiency of more than 30%. Take the credit in the year the system is placed into service. Use IRS Form 5695. Save your receipts and manufacturer’s certification statements.

There are other restrictions. Calculating your precise tax credit depends on the total installed cost of the system. To determine the credit, the cost is multiplied by 0.3 (30%) and the kW output is multiplied by $1,000. The taxpayer is entitled to the smaller dollar amount.

For example, if a 5 kW system costs $60,000, 30% of the unit cost would be $18,000. However, you would only get a $2,500 tax credit because of the $500-per-0.5-kW cap. If a 5 kW system costs $15,000, you’d take a credit of $4,500 (30% of $15,000) rather than the full $2,500 ($500 per 0.5 kW), according to the U.S. Fuel Cell Council. The cap is higher for joint-occupancy homeowners.

(Technically, the tax credit also applies to microturbines, which through a combustion process use natural gas to produce power and heat. In general, however, microturbines aren’t yet practical for use in single-family homes.)

Convincing homeowners to pay upward of $75,000 for residential fuel cells will be a tough sell until upfront costs decline. The federal tax credit helps, as do the energy savings, but payback periods remain lengthy unless your electricity rates are two, three, or more times the national average. State incentives can reduce system costs further, though the current number of incentives aimed at systems sized for homeowners is limited. Check the Database of State Incentives for Renewables & Efficiency.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.