Fuel cells have decided advantages including compatibility with renewable fuels such as hydrogen, methanol and methane. It is often claimed that they have greater potential for efficient operation than heat engines because they are not restricted by the Carnot limitation. However, in this paper a generalized (exergy analysis) approach is utilized to clarify the comparison of the theoretical performance potential of heat engines and fuel cells, in particular, to show that fuel cell conversion is restricted by the second law of thermodynamics in the same way as heat engines. The Carnot efficiency is simply a manifestation of the second law for the heat engine excluding the combustion process. It is shown that the maximum work obtainable from the conversion device is related to the change in flow exergy between reactants and products, that is in general, not equivalent to the change in Gibbs free energy. For equivalent reactant and product temperatures, the difference between the change in Gibbs free energy and the change in flow exergy is equal to the exergy flux of heat transfer that must be rejected by the device due to absorption of entropy from the reactant-product flow. The importance of exergetic (second-law) efficiencies for evaluating performance is demonstrated. Also, exergy analysis is utilized to resolve a number of efficiency related issues for endothermic reactions. (C) 2003 Elsevier Ltd. All rights reserved.