brendon dow comments on business plan

from a uk forum. interesting read.


Brendan Repy
Firstly thank you for your interest in CFCL. It’s great to have such passionate investors who make the effort to really understand our business and engage with our company.



You've raised some good questions so I wanted to address them in some detail. I’ll try to deal with each of your questions as you raised them.



Payback



The payback of 7 years that you refer to is specific to a typical installation into an Australian household. In Australia we have lots of (dirty) coal and natural gas which means that the energy costs here are very different (lower) to those that a typical household in Europe might experience, but in any case there is still a very strong case for the technology in either market. (It also means that Australia's per capita carbon emissions are the highest in the OECD....and per capita emissions from electricity generation are 8 times the world average....)



You are technically correct that BlueGEN’s maximum efficiency of a little over 60% is achieved at 1.5 kW, however even at 2 kW BlueGEN has an efficiency of close to 60%. In fact we have achieved 60% efficiency at 2kW and even when we modulate to 50% output (ie. 1KW) BlueGEN still has an electrical efficiency of around 55%.



You also mentioned that energy companies are not interested in the energy exported to the grid by a Solar PV system. Here are a few reasons why we think that’s the case:

Solar PV is typically not able to be modulated. This means it is normally unable to respond to pricing or demand signals from the grid. As you can imagine, peak electricity is far more valuable to a Utility than off-peak.
On a winters morning or evening in the UK during peak demand time for electricity, Solar PV is clearly unable to make a meaningful contribution to the grid
A 2 kW Solar PV system will produce on average of 7 kWh per day (this is typical for Melbourne, so I am sure its less for UK), which equates to about 2,500 kWh per year. If the average (large) household in the UK uses 6,000 kWh as you say, then it’s almost never exporting anything useful to the grid. Even an average size UK home using closer to 4,000 kWh per year will rarely become an exporter
The typical entry level size of Solar PV is 1.2 kW, so even less power is produced than in our 2 kW example
Utilities cannot control the output of a Solar PV. The power output is variable and not very predictable. Yet Utilities are required to provide their product (power) to everyone, constantly, with severe penalties if they fail. (I'm sure the UK public and politicians beat up on utilities whenever the power fails, just as we do here in Australia.) So it's not too surprising to us that Utilities are reluctant to embrace an uncontrollable, variable, unpredictable source of supply.


Electricity from BlueGEN can be used as base load (where it contributes to the “de-carbonisation” of the grid as most base load still comes from coal) or importantly it can be used to contribute to peak load where Utilities all over the world are spending huge amounts of capital to upgrade their networks to cope with short periods of peak demand. (With your heatwave at the moment, just wait for air-conditioning sales to skyrocket, which drives huge spikes in peak demand, which requires billions in network upgrades. We have seen this here in Australia. Underlying energy demand is growing at 1.5% per year, but the peak demand is growing at >6% per year - and the networks must cope with the peaks. Get prepared for serious stress on the UK network from air-conditioners! In short, BlueGEN responds to demand and pricing signals from the grid. When integrated through smart metering, this provides an attractive solution for households who are often subject to “time of use” pricing.



But to answer your question more directly, let’s take a typical example for the UK (I have sourced my pricing from www.simplyswitch.com):



I’ll assume as in your example that a “large UK house” uses 6,000 kWh of electricity and say 15,000 kWh of heat (converted from btu so we have equivalent units)
Using a BlueGEN cost of say £4,500 (including VAT at 5% for a CHP system in UK)
and a retail price of 14.28p/kWh for Electricity and 4.0p/kWh for gas
your current electricity bill will be £856 and your gas bill £600
Let’s assume a wholesale delivered price of 9p/kWh (this is what you would get paid as a minimum by your Utility as a buy-back price)
Assume for simplicity sake that BlueGEN runs all the time at 60% electrical efficiency so cost of generating electricity for you (homeowner) is 7.0p/kWh
Taking the benefit of firstly avoiding import ((14.28p – 7p) x 6,000kWh) plus exported power ((9p – 7p) x (17,520kWh – 6,000kWh)) total electricity benefit is £667.20
Add the benefit of heat from the BlueGEN (800 watts for 24hours/day for 365 days per year) is 7,000 kWh of heat or about half of your heating load (in this simple case) so a saving of a further £300
Total benefit is £967.20
Maintenance cost needs to be deducted from this benefit (let’s say £300/year which includes a stack replacement in years 5 and 10 with end of life at 15 years)
Simple payback is 6.7 years


Now there are lots of assumptions here and I have only accounted for this very basically, but in really simple terms a gross benefit of almost £1,000 per year is pretty good.



Importantly if you look at it from a Utility ownership point of view, the benefits become incredibly compelling. Consider that a Utility:

Can purchase gas much cheaper than householders
Doesn’t pay VAT
Can modulate BlueGEN and trade the electricity actively and respond to market and demand signals
Can monetise carbon and network benefits
Has tax strategies (eg. Depreciation, repairs and maintenance) to offset costs
Is likely to purchase at lower costs than a single household


The key point to make here is that all markets are different. They all have features which make them more or less attractive depending upon the nature of the technology and the market dynamics that drive them.



In any case, I hope you can see that BlueGEN makes economic sense even without large in-feed tariffs and other subsidies. The real key here is that high electrical efficiency results in lower cost and cleaner electricity regardless of who owns BlueGEN.



The UK Domestic Market



The largest market for Boilers in the UK is certainly for those that are wall mounted. It’s not the case in most markets outside of the UK where boilers can be found in basements, utility rooms, lofts, ceiling spaces and even outdoors like here in Australia. This is a common question for the UK market, so its important to understand how our technology will be integrated into a house in the UK.



The key principle for any mCHP technology is its total efficiency. That means the combined efficiency of both Power and Heat. Whilst CFCL’s Fuel Cells produce electricity at 60% efficiency, its also important to capture as much of the waste heat as we possibly can. By law, mCHP’s are not allowed to “dump” unusable heat. For this reason you will find that most, if not all alternative mCHP technologies are forced to shut down when there is no heat demand. We call this “heat led” demand, and a typical heat led mCHP would run for only 2,000 – 3,000 hours per year, and typically during summer it has to be turned off. It’s difficult to create value for anyone when the unit is turned off!!



It’s important to know that the economic value of electricity from natural gas is 4 to 5 times that of heat produced from the same quantity of natural gas. CFCL’s technology can operate 24/7 365 days per year because the amount of heat produced as a by-product of our electricity is relatively small, but significant enough to contribute to domestic hot water demand. Our simple logic for creating value (and I mean real pounds and pence) is to maximise run time because we are making valuable electricity at twice the efficiency of the current grid in the UK (and 3 times the efficiency of our grid here in Melbourne). So in order to make sure that happens, we prefer our Fuel Cell Stack to be located as closely as possible to a Hot Water Tank (or thermal storage device). That means that where there is already space for a hot water tank, we would co-locate the Fuel Cell there (say in an airing cupboard or roof space) or in the event that wall hung is the preferred option, the primary system could be on the wall, but the trade off would be that thermal efficiency wouldn’t be ideal. It’s also important to remember that our technology can be sized and configured for various demand and market profiles.



In contrast to an mCHP system for UK homes, we consider BlueGEN to be more of an “add-on” or “modular” product. When you purchase an mCHP, you are buying a complete system that heats and powers your home. BlueGEN is a neat option for homes in Europe where households may have recently purchased a new heating system but also want to be part of the Energy Revolution……why wait till you need a new boiler when you can add on a BlueGEN!!



In Australia, BlueGEN sits ideally into the domestic hot water market. Sophisticated hydronic heating systems are very uncommon here. A BlueGEN coupled with a hot water tank, sitting on the outside of a house is a typical solution for Power and domestic hot water down-under. We are excited about BlueGEN because of its incredible potential in markets with warm climates, not just those in northern Europe.



On your last point, we agree that small commercial buildings and businesses are ideal for BlueGEN. Convenience stores (operating lighting and refrigeration 24/7), Office Buildings, Pubs, Health Clubs, Schools are all great opportunities for our products.



Once again, thank you for taking the time to write to me. We are working hard to make your company successful and profitable as quickly as possible.



Sincerely,



Brendan



Brendan Dow
Managing Director
CERAMIC FUEL CELLS LIMITED