Hi Fellow Hotcopperites,
First some background: in post 19810139 on 12 October I passed on to you all some answers from Mr Tim Horgan at Kalina Power Ltd. This information defused my then concerns about any potential commercial threat to Kalina Power Ltd from (for want of a better name) second-generation Kalina cycle technology.
On 29 October I sent some further questions to Tim on Kalina-related matters, with supplementary questions on 5 November. Tim soon drafted answers and circulated them for comment within Kalina Power Ltd. However, given that Tim and the Kalina Power staff generally are increasingly busy (perhaps an understatement) in gearing up the company, the answers did not reach me until yesterday. Meanwhile, Tim responded promptly to my follow-up emails, keeping me informed and reassuring me that I hadn’t been forgotten.
The following are my questions and Kalina Power Ltd’s answers.
1. Is Kalina-based power economically viable of itself? For example, how long does a typical Kalina installation take to pay for itself with and without “clean energy” regulatory supports?
One of the particular strengths of the Kalina Cycle® is that it provides very attractive returns without the need for government subsidies, generating returns on a typical 4MWe plant for any feed in price above 7.9c. This is particularly appealing to end users aware that government support can change and provides a significant comparative advantage over other forms of renewable energy can become uneconomical in the event that government support or subsidy is withdrawn.
Typical returns vary significantly depending on the size of plant and price paid (or obtained) by end users for their electricity. The likely IRR’s based on a fully burdened 5MWe Kalina Cycle plant obtaining 10c per KWe is over 14% and rises to 27% at 15c per Kwe price. This comfortably meets the required investment criterial for most large industrial groups.
2. Has Kalina Power compared all-up costs per output megawatt for say a 5mW Kalina-based power station based on various base-case waste/natural fluids compared to costs for say a 500mW conventional coal-fired steam power plant?
We have not. We do not see ourselves as competing with 500 MWe conventional coal.
3. How mass-produced, factory-produced and scalable can Kalina power plants be? For example, if each installation has bespoke requirements as to output power needs and siting, as well as input fluid types, flow rates and temperatures, etc., does this imply that turbines, boilers, condensers etc. require alteration for each project? Could site works ever approach casting concrete slabs and bolting factory-built units onto them?
It is possible to seek to modularise the Kalina Cycle® however doing so may lead to considerable loss of efficiency in the generation of electricity from an applicable heat source. In order to achieve the best efficiencies it is appropriate to take a bespoke approach to each heat source. This is an important source of revenue in our business model as we charge for the specialist engineering work involved. This work along with the turnkey fee we charge to oversee EPC work on a project adds less than 1c to the 7.9c cost per KWe on a fully burdened 5MWe plant whilst giving considerable efficiency returns. However, by partnering with key equipment vendors, such as Cryostar for the turbine, we will be able to bring down the lead times and costs associated with the key items and therefore achieve some cost gain similar to modularisation without the loss of efficiency.
4. Given the various risks of doing business in China, could Kalina Power refocus without going under if the Sinopec venture fails to bear fruit?
Absolutely. We have adopted an investment model that requires minimal investment into China. In order to complete the Hainan Sinopec Plant Sinopec monies shall be used and it is anticipated this will cover our costs as well. Any additional capital required for future plants in China will be raised in China and we have held discussions with many local investors in this regard. Our model anticipated no retained earnings being distributed from our China subsidiaries, rather we obtain revenues through charging engineering fees and technology license fees payable direct to our non-Chinese parent companies.
The Kalina Cycle is well regarded in China and has clear government support. We plan to expand our business development activities beyond Sinopec and are confident of success in the country. That said, the team of recent hires including the ex-Pristine Power team have considerable experience and success outside of China. We plan to rapidly develop the business outside of China leveraging partnerships with large EPC groups and preferred suppliers and the considerable experience and contacts of this team.
5. Is Kalina Power’s revenue model and/or reputation dependent on adequate maintenance and operational efficiency in completed power plants and, if so, how does Kalina Power plan to ensure that this is done?
To a degree yes. Not all previous plants were successful and those that had operational difficulties were contributed to by a licensing model that did not require strict quality compliance with Kalina standards in the Engineering Procurement and Construction of the plants. Kalina shall continue to support these plants as necessary with ongoing support.
The plants that worked and continue to work well were all built with good EPC partners under the supervision of Kalina’s specialist engineers. These plants require little ongoing support from Kalina.
Moving forward we will ensure the operational efficiency of plants through the turnkey model that requires use of our preferred EPC partners and suppliers as well as oversight by our specialist Engineers.
05 November Questions:
1. I seem to recall that in a recent Kalina Power document, the estimated mechanical completion date of the Hainan plant was given as December this year, whereas on page 11 of yesterday's presentation it's timelined for an unspecified date in 2017.
Why has this slippage developed?
A mixture of the required negotiation time on the agreements for the plant and recognition that the December timelines proposed by Sinopec may be optimistic, particularly with regard to the timing of some other third party suppliers that are required to attend the site. We anticipate providing an update to the market shortly with additional detail.
2. When is the revised estimated completion date?
Q1 2017. A wide date range is preferred to give a likelihood of coming in ahead of schedule.
3. I'd have thought that profitability would require at least an order of magnitude decrease in construction time per powerplant. If so, what changes will provide this?
Our model provides very attractive return based on 15 - 18 month construction times with payment milestones throughout construction. That said the longest lead items such as turbines we do hope to reduce wait time for by developing preferred vendor relationships (such as with Cryostar).
As for your other comments regarding the challenges to the system, there are many indeed. We take confidence from the fact this is a mature market with the market leader Ormat a massive company using a technology that is inferior in many respects to our own. The team we are assembling has considerable success in the sector and has developed a business plan that draws on this considerable experience in the sector to both minimise the downside risks and maximise the potential upside.
Thanks for the enquiries and feel free to contact me with any other questions.
Regards,
Tim.
(20min delay)