Ceramic Fuel Cells is hopeful that the increased tariffs in Germany and the UK, and some regulatory changes, may set the scene for its technology to finally gain the traction is has been seeking.
CEO Brendan Dow told RenewEconomy in an interview after the company’ interim results this week that the economic case for the technology, despite its high up front costs, is improving. “We are not going to be feted like solar and wind, we are going to have to stand on our own two feet fairly quickly,” he said. “The next three years is the game changer for the whole market in Germany.”
Indeed, as in wind and solar PV, Germany is emerging as an epicentre for fuel cell technologies. That is where Ceramic Fuel Cells has its manufacturing facility and its best prospects. As for Australia, Dow says the company will continue to be based here, at least in the short term, because that is where the engineers and scientists are. And Australia still does good R&D. As for incentives to actually deploy the technology, “don’t get me started,” Dow says.
Here is an edited transcript of the interview, in which he also discusses the IRR for buyers of fuel cells, and its competition with solar PV for household budgets.
It’s been a relatively good year for you, there’s been progress in Europe on tariffs.
The market settings in Europe, in particular in Germany and the UK have become very favourable for us. In Germany the federal government is proposing an increase on CHP (combined heat and power) bonus – which is additional to the feed in tariff. The FiT in Germany is relatively modest, but you get 5c CHP bonus on top of that, and they are talking about increasing it to 7c, or to 9c if you have got high electrical efficiency. And there is only one device that can do that and that is ours. The result of our lobbying has been very positive.
The other really, really important thing is that there are 3 state governments that have announced market introduction programs for the technology as well. The biggest one is the local North Rhine Westphalia – they will announce the detailed information in May. It starts on June 1, it will be worth around 250 million euro out to 2015. Our unit will get the homeowner a check for about 4,500 euro. That will give them a kick along.
How much do you sell them for?
We sell them for €22,000 at the moment. What it will do is give the retail punter a pretty decent return. It gives us the chance to drive costs down. Without the subsidies we are not going to be feted like solar and wind, we are going to have to stand on our two feet fairly quickly. The next three years is the game changer for the whole market in Germany.
And in the UK?
In the UK, the FiT has been upped to 12.5p from 10.5p, so that’s another big increase for us. The average UK punter will get a couple of thousand pounds return a year on BlueGen, so that is getting pretty interesting.
Is that really something a household is going to invest in?
Think about it the same way you purchase any capital good like a car, most people go and get a lease arrangement. People are being offered either a finance package, where you pay for the capital cost out of the electricity savings, and most people will take that. It’s not an out-of-pocket expense up front.
What are the returns?
The returns for a German household are about 8-9 per cent IRR post tax. So they are getting their money back in year 10 or 11.
Is that sufficiently attractive?
That is without additional incentives. If we throw in increases in feed-in tariffs, the market introduction program – you get back your investment in year six, that is pretty tasty.
You have got a forward order book of around 600 units, how much revenue is that?
It’s about $12 million in sales. Around 100 of those units will be delivered in the second half of this calendar year. If we can deliver and install 300-400 systems for year, we ae on the way. We will get to closer to 800 and 1,000 by the end of the year. We will be in good position.
You are on the way to what? What do you need to make this business thrive?
On an annualised basis, we’d need to sell somewhere close to 2,500 units a year to make the business profitable. As we sit here today, we are a decent chance for that to happen in the second half of next year. If it doesn’t, we’ll be bloody close. The order book is growing, we are not under a huge amount of price pressure at the moment, though I’m sure that will come. Just got to make sure we manage cash between now and then to get there under our own steam.
And what about Australia? That must be the weakest of your main markets.
Don’t get me started. There is no feed in tariff. The Victorian government announced a review by Victorian Competition and Efficiency Commission. They are reviewing feed in tariffs in general, for all technologies. My expectation is that this will set some guidelines and some precedent for other states to follow.
These are state-based tariffs?
My guess is that when government gets the nod for feed in tariff, other states will follow suit.
Feed in tariffs are not really popular here.
At the end of the day, whether it’s a FiT for solar or any other technology, it needs to be sustainable. Previous levels have been very volatile. They are trying to figure out what is a fair and reasonable tariff going forward is for all these technologies. Should we all get the same, or different rates because we deliver different outcomes.
Are you hopeful of getting some sort of incentive?
I’m hopeful, but not naively optimistic.
You are like many technology developers in Australia. It seems the best opportunities are always overseas.
It’s been frustrating for Australian technology developers. We have got the factories up and running in Germany, we’ve got 40 employees in Germany, got a Dutch sales office with half a dozen people and another handful in the UK. Those 40 manufacturing people could have been here, but they are not.
Are you going to move home base?
I think Australia is still a decent place to do R&D, but for the commercial people it is challenging. In the absence of being part of a bigger corporate, we will stay here, there are a lot of scientists and engineers here important to company. Me personally, I am now doing business development in the US, so I’m not sure where I should put myself to be honest. I’m on the plane most of the time.
What about competition?
I think the last time we spoke, we were talking about Bloom Energy. They’ve raised a big amount of money in last 12 months. I think they got pre-IPO money of $2.7 billion. They seem to have a decent order pipeline, they got 80 or 90 systems in the field. They are going OK but they are not a competitive threat to us, because they don’t do CHP. They are 100kW modules, ours are 1-2kW. So it’s a different game, we are in homes and buildings, they are in large central plants for industrial purposes. Cerus P, the UK company, have announced a long delay, in Germany we have two old rivals, but their electrical efficiency is low, so we not competing in the same market.
The boiler manufacturers threatening to do stuff., but the last time they exhibited in Hannover it was an empty box. My expectation is that they will exhibit again with an empty box, but it will be a funky looking empty box. Clear Edge Power in the US have announced a large framework order in Austria potentially worth €500 million. Fuel Cell Energy said they are moving into the German market, Panasonic moved their fuel cell R&D into Germany, so Germany is becoming an epicenter for these products. I reckon we’re in really strong position; we are strongly differentiated, we’ve got our manufacturing there, utilities are promoting and selling our product directly to their customers. I think we’re going pretty well, we’re finally getting some traction after 20 years of research.
A lot has happened in those 20 years, other technologies are emerging, are you battling solar, for instance, for headroom in this market?
I think there is room for both. In a number of installations we are connected up to solar PV. In Germany solar PV is starting to die off quite quickly at residential scale, the incentives are being reduced dramatically, primarily because costs have come down. Do we compete against them. Not really. We are a similar decision, we are still a discretionary purchase but our value proposition looks different. The heating part of it makes us look different, the fact that we produce a lot more power. In Germany, the punters get €2,500 from a BlueGen, for solar PV it is about a quarter of that. It’s a different game. The sales patter is very different. In the US, solar PV is more about selling a finance package than about renewable energy technology, because they are putting in some nasty gear.
You mentioned that you are a discretionary item. Don’t you need to get to the stage where it is a compelling proposition?
The reason I differentiate, most people think about our technology as a heater market, people think of it as the replacement boiler market. Actually it not about that at all, our market is wherever there is a gas connection with connection to grid, that’s a potential customer for us.
What is the driver for Australian purchases?
Ultimately it will be energy costs. You can still produce power in Australia for 8c-9ckWh using BlueGen. The river is reduced energy bills, particularly if you sign up for time of use metering. We can make power for 9c, you offsetting power that you are paying 23c. If you get a feed in tariff, maybe 17c-18c net, that will be a compelling return for people. Obviously we will need to reduce our price, but that will happen with volumes, and people will be getting sub-10 year paybacks and they’ll do it, without feeling like they need to get a ridiculous government subsidy.
What sort of price are you thinking of?
If we can install these things for sub $20,000, it will start to give people attractive commercial returns. It sounds expensive but if you look at unsubsidized solar PV, it’s still in vicinity of $20,000. Because we make so much power, around 17,000kWh, then with a little FiT, you get a better return. But it is a different game to solar PV.
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