Ceres Power Holdings plc (CWR) Earnings Call Transcript & Summary

Hello, everyone, and welcome to our latest renewable energy and clean tech podcast. And today, we are delighted to have with us alongside Nick Walker, our Head of Renewable Energy Research, the CEO of Ceres Power, Phil Caldwell. Very good morning, Phil. How are you doing?

Very well. Thank you for having me.

Excellent. Good. Now you're very, very welcome. Now this is a highly topical podcast. I'm incredibly grateful to have your time here, and I think listeners have been eager to listen to you. Your plans going forward and a little bit about the company. But just to really set the scene, 2023 is going to be absolutely enormous. Obviously, 2022, we saw some huge numbers coming out in the global fight for decarbonization. And just to throw a few numbers out there. In the U.S., we've got $370 billion worth of funding for clean energy, of which $9 billion will be for regional hydrogen hubs. In the EU, we've got EUR 5.4 billion award program for hydrogen tech value chain. And obviously, over in China, Asia and Indonesia and other places, this continues to be a hot topic.

So Phil, all that given, perhaps could you just give us just a bit of an outline about how you see the renewable energy sector specifically on hydrogen? And maybe just give us a bit of a background on yourselves?

Yes, sure. So all those numbers, they can make your head spin. But -- and 2022 for many reasons was quite a difficult macroeconomic backdrop going on. However, the underlying drivers for hydrogen and fuel cells have just continued throughout. There's been various triggers. Obviously, war in Ukraine has put more and more pressure on conventional fuels. The U.S. come into the party with the IRA Bill has really, I think, taken people by surprise, and we had repowered in the EU, but now there's pressure on the EU to go faster. And as you rightly mentioned, there's other parts of the world that haven't yet announced what we expect to be similar IRA kind of policies. Japan is definitely warming up with one. We know of South Korea has always been in a leading position, and we've got partnerships there. India has got big ambitions to go from an importing fossil fuels to actually be in a net exporter of things like green steel, green ammonia. So we're seeing a big shift in the energy landscape. One of the things that sometimes I think is overlooked in the U.K. When we talk about hydrogen and fuel cells in the U.K., we look at it with a very U.K.-centric lens sometimes. And one of the things that I'm very keen to get across to people is, Ceres is a very proud U.K. company, but we're very, very global. And if you look at the partnerships we've got, we look at decarbonization as obviously a global endeavor that we have to act pace and at scale, and that can only be done through collaboration, and that's one of the key values that we have at Ceres.

Yes. And I think we'll go into a lot more detail about some of these collaborations that you've got. And to be honest, it's very good to see a British company, which is truly a global operation. Just moving it back because obviously, we started off with some huge headline numbers. And one of the questions we often get asked by investors is great. I see the amount of money that's going into the sector that's fantastic. But how much of that is really going to be applicable to, say, solid oxide fuel cells, which is obviously where you guys are operating. So can you sort of give us an idea about how you can really be part of that mix and that funding going forward?

Yes. So without getting too technical, sold oxide have some key attributes that are very relevant to decarbonization. And obviously, where hydrogen plays, we believe in Ceres in the heart to decarbonize areas of society. So that's things like industrial decarbonization, that's things like heavy transportation. That's things like distributed power. And really, some of these sectors don't have many other alternatives. I'll give you a good one, shipping. You might think of that as quite a niche sector, but it's actually huge in terms of the challenge. And how do you actually power ships, what kind of fuel are they going to go on in the future. That's an area where solid oxide is probably the only alternative because we're high efficiency and we're fuel flexible, so we're able to go on today's fuels like natural gas, but also on future fuels like methanol and we're doing work on things like ammonia as well. So that's a good example. The high efficiency of our technology also lends itself very well to low-cost green hydrogen, particularly for industrial decarbonization where we're able to capture waste heat and industry is something like 29% of carbon emissions globally. So again, a huge market. So when you start to look at markets and what -- how much of that is addressable by solid oxide, it depends on sector-by-sector. I think in green hydrogen, some forecasted they're saying about 20% could easily be solid oxide, particularly in things like industrial decarbonization. We expect to have very high market shares in things like shipping and heavy transportation. And then in distributed power, that's quite an interesting area because we need more and more distributed power as we get intermittency on power grids, et cetera, and as we start to see a shift in the energy landscape. So it's not one technology wins are, but solid oxide definitely has the sweet spot of fuel flexibility and high efficiency.

Phil, can I just pick up that point on electrical efficiency. When I'm asked by investors sometimes to try and describe Ceres Power in a nutshell, what's the key USP. The thing I'd like to talk about often is about electrical efficiency, you're 60% electrical efficiency at system level and how that compares with the efficiency of power coming out of the plug, okay? So you've got obviously thermal power stations, coal, gas, producing power, probably around 50%-ish grossly goes through the transmission and distribution network loses maybe 10%, 15%. And you're getting about 30%, 35% out of the plug with distributed power with Ceres Power systems, you're getting 60%. So that's actually 70% more power for the same fuel input cost, okay? Now in this era that we're in at the moment, based obviously Ukraine war, inflation with high energy prices, that's obviously very, very valuable, 70% more power, same fuel input cost. As you look at sort of across the ecosystem of your customers and some of those new customers you tantalizingly pointed to in your last trading update last week, how important is that to people? And on the distributed sort of baseload stationary power sector in particular, both -- are you seeing increasing traction both inside different types of buildings? And what about the potential diesel-generated replacement market, is that something that people are looking at as well.

I think that the big appeal, it depends on where you are in the world. So post Ukraine, everybody is looking at how do we reduce our dependencies on fossil fuels. So therefore, a better use of fossil fuel, a better use of nat gas or whatever it is, is obviously putting it through a fuel cell or putting it through a thermal plant or putting it through a diesel gen set of combustion engine type arrangement. But I think the other thing that's going on is there's a need for dispatchable power and reliable power. I'll give you an example. We looked recently at building a new technical center. One of the big problems in the U.K. is actually getting power to it, just on the power networks, et cetera. And we're seeing that in several different places. So there's a combination of what's a better use of fuel to generate power, but also what's a reliable source of power now changing -- replacing a diesel gen set, we see that as less of a market because if you got something like a fuel cell, which is so efficient, more efficient than the grid, you actually want to run it continuously to get the best use of that asset. But it does give you this independence that is going to be more and more important. And we've seen that -- if you look at what's happened in Europe in the last year or so, we've had French nuclear going down. We've had Germany reducing nuclear power plants. We've had hydro power levels coming down because of reduced snowfall and rainfall. All of those trends mean that there's more and more need for dispatchable power. And sometimes that's not very clean. And therefore, that's one of the areas that we do see that we feed into. And then when you go outside of Europe and you look at places like Asia, they're moving away from coal to cleaner fuels. And part of that energy transition will be potentially towards natural gas and then towards hydrogen. So again, it depends on the application and the end market, but the beauty of this technology is really that fuel flexibility.

Could I just ask just on that before we go specifically about your products? Because obviously, you're talking about the changing power landscape and it is absolutely right about the need for reliable power as well as cheap power. And obviously, one of the sort of collaborations or discussions you have ways with Shell and some of the other big global oil and gas majors. Could you just maybe comment just about the kind of work that they are doing, which would allow you guys to scale up and for this to be a much more -- a system that is much more readable and easily available for people, i.e., some of the questions we get is, when is the infrastructure going to be in place? What are the pipelines going to be there? Where is it going to be the transportation of this and the actual generation of these things. So maybe it would be quite useful just to give a sense on how much work is going behind the scenes, which maybe we don't see from some of the other super majors and things to get us to that point where it becomes much more of a normal conversation.

Yes. So I think the criticism that you can label it hydrogen fuel cells as it's been talked about for a long time, but we've never really scaled it. And our approach to that is different. We have such unique technology that we're able to license it. And therefore, we work with industrial giants like Bosch, like Doosan and like Shell. And in that value chain, people like Shell and oil majors, et cetera, are very important because they create the pull, the demand for this technology. But where I think a lot of pure-play companies have struggled is it can raise capital, but then you've got to industrialize and put down manufacturing. Now we are world-class at sellers in electrochemistry and particularly solid oxide. But in terms of industrialization, mass manufacture, our partnerships like Bosch and Doosan, that's what they do. So we want to get this technology to the scale of solar and lithium-ion and therefore, you've got to make it a standard and you've got to really grow it at scale and pace. And that requires the collaborations. So people like Shell, like Bosch, et cetera, they're really important in how do we actually get hydrogen fuel cells from being tomorrow's technology to actually something that's part of our infrastructure of society.

And importantly, you just mentioned that it's not up to you to then find the capital to them invest rapidly expand. You're actually relying on, as you said, the people who already are doing this mass expansion and they are manufacturing businesses ultimately.

Yes, that's correct. Because the more successful you become, the more capacity you're going to need and you really need that balance sheet strength to do that.

Let's talk about Bosch for a second because we know that they're building right now an initial 200 megawatts worth of capacity. They've got some great videos on their Bosch SOFC website and they interestingly talk about their building capacity there a number of different centers to supply themselves through the right sort of value chain of componentry to build the systems. And they've got 100 systems or so on trial. So what I'm interested in, first of all, this is going to be a sort of 2-part question. How is that building going in terms of the -- do you get down to go see there or some of your colleagues to go down and see how that's all going? And then strategically, clearly, Bosch are looking at stationary power as a big, big market. And they talked about being able to put their units and modularize them into larger and larger sort of power capability, baseload power, dispatchable power, as you talked about, potentially in apartment blocks, potentially in factories, potentially in shopping centers and other situations. 200 megawatts, obviously, is not very much in the scheme of things. How do you see once that's ready to get out their business plan sort of beginning to expand based sort of from an application standpoint, but also from a geographical one. They're a global company. I think I read they're in 100 countries, big in China, obviously, we'll talk about in a minute. But how do you see this efficiency capability, this dispatchable capability, this distributed capability overcoming intermittency as we get more wind on the system, more solar on the system, how do you see that panning out once the initial capabilities, the additional capacity comes online, I think it's 2024, is it?

Yes, that's right. So I mean, I think you just summarized all the applications that Bosch are looking at and trialing. And you can see from that, that creates the demand for the stationary power business. The way Bosch of tend to work is they have like a reference plant, which will be Bamberg in Germany, and I was there last week. And then from that, they then build other plants. So if you look at the lambda sensor business, which is the small oxygen sensors, which a bit like fuel cells, but currently are used in 40% of the world's diesel engines. They make that in Bamberg in Germany, in China and also in, I think, it's South Carolina in the U.S. So they industrialize from Germany and then they build global plants elsewhere. And we see -- I expect that would be the same kind of pattern. And if you look at the 3-way China joint venture that we've got underway at the moment in the negotiation stage, that would be a second Bosch facility. So it would probably follow a similar kind of pattern. And you mentioned, okay, 200 megawatts isn't much, but actually, that's the first building block. And I think from there, you would expect scale to much larger quantities. And if you look at the demand, we just talked about it at the beginning, you very quickly get into gigafactory kind of territory.

And you think that's -- absolutely their intention is sort of gigafactory capability in potentially, as you say Europe, in Asia, North America, that could be a build-out plan in due course.

I can't speak for Bosch. But look, if you look at the global market opportunity, and then you've also got other opportunities in the future, that would only be the beginning.