MARCH 2020 GasTESS visit

1414 GasTESS visit 4thMarch 2020

Hi all

This was my out take from the SA Water GasTess tour last Wed.

I originally wrote this out as a tool for myself but I’m happy to share if it helps others, feel free to ignore if you are up to speed with it all. Also feel free to add anything I may have missed. Any opinions expressed are my own. All phrasing of what was said is from my own recollection, my own interpretation and notes.

Without turning it into a formal presentation it starts off with my general observations, a brain dump if you like re. what was talked about and finishes with some question/answers at the end. Enjoy.

The GasTESS all started because SA water was spending $70-80mil p/a on energy costs – their objective is to get to a ‘zero energy cost’ and to achieve this they have been proactively looking at and/or trialing a few options such as floating solar (they ended up installing & trialing stationary solar) /flywheel (researched but not trialed) and the 1414 GasTESS.

It was SA Water who approached 1414 about the possibility of modifying the original electricity fed TESS design to using bio gas as the fuel source. It was recognized by ALL parties as an experiment for 1414 and as both parties were operating from this understanding work was done in a collaborative manner, especially as part of it was Govt funded. Now we’re further along the experiment timeline SA Water are conducting a ‘commercial process’ to evaluate the GasTESS against their existing turbine engines. These engines/turbines have been operational for some years and produce electricity to run the treatment plant using biogas as the fuel source. This biogas fuel runs through the mechanics of the turbines like diesel fuel runs through and engine. This is unlike the GasTESS which burns the gas as a flame via a number of stationary burners. So there is no fuel through any engine mechanisms/pistons etc which is important for a number of reasons as discussed below.

SA Waters existing turbine engines have proven to work but have many challenges:

1. They involve a lot of real time operator intervention to balance the gas produced with the turbines activity.
2. The turbine engines are tightly coupled with the biogas levels in the tanks. So they can only run the engines if there is gas and if there’s gas they HAVE to run the engines. Additionally, if there isn’t the electricity demand to meet the supply (which happens) the excess gas needs to be flared off ...understandably this is viewed by SAwater as huge waste.
3. A component of the biogas is Hydrogen Sulphide and it has an effect to degrade the turbines causing substantial & ongoing parts replacement and maintenance. It turns the engine oil to acid / It corrodes the copper intercoolers / It causes issues with the spark plugs etc. Essentially biogas is a challenging & dirty ‘direct fuel source’.

SA Waters objective is to reduce the high capital expense involved with machinery / optimize the biogas fuel source / reduce maintenance costs / decouple biogas & electricity generation. Additionally, the tanks need heat to ‘ferment’ the soup (around 38 degrees) the existing turbines also create this heat which gets fed back into the soup, so they must be running (I’m not sure where heat comes from if the turbines are not running). Of course with the GasTESS they can store heat and feed it back to the tanks when required.

As mentioned the GasTESS is an experiment for SA water. From my observation it is also a huge experiment for 1414 as the initial concept was based on using electricity. With this newly requested application there has been a lot of what I would call ‘creating on the fly’. Personally, I respect this as it involves clever minds coming together to use existing knowledge & skills to journey into the unknown to create something new and even better – yes there are always risks with the unknown but that’s also how great things are created.

It was mentioned that the testing stages have taken place as follows:

Phase_1 (Sept 2019): Performance testing (1414 verifying their unit/assessing optimal temps and comparing actuals to models)
Phase_2 (Nov 2019) : Integration/performance testing with SA water – how does the 1414 box integrate into SA Waters process and is used to set a bench mark of how the unit is working

Based on Phase 2 results, improvements are being added to the unit to further optimise it. Part of this is the addition of a co-firing burner (commissioned end of 2019 to be tested early 2020) – but as we know there were some issues with the heat exchanges which has been addressed and it sounded like it will be tested in roughly a week or so (from the date of the tour) Assuming all goes well this will be shortly followed by a full thermal payload test. I could be wrong but I believe this is the first full thermal payload test.

From what I heard my understanding is that the current SAwater/1414 agreement in place stipulates all testing & amending is to be completed by October 2020.

Some of the elements playing into timings are: the existing turbine engines are already over their operating life and will need to be replaced, at latest by end of next year (but ideally at the end of this year). These old engines were described as basic, solid workhorses, nothing fancy but not very efficient (akin to the old Land Rover). The new version of engines are more akin to a Ferrari – more efficient but very delicate. However, this also brings with it a big maintenance problems when the fuel source is a dirty biogas. The ‘Ferrari’ needs a higher/cleaner spec fuel. This would mean additional costs for SAwater in the form of gas scrubbing/gas cleaning. Though it doesn’t solve the other issues (gas/electricity coupling/operator balancing required etc).

So, it becomes clear why SA Water are so proactive in wanting to make an alternative work. From the discussions I had my impression was that from the engineering side of SA Water there was more interest in retaining the status quo as the turbines are a ‘known’ despite their issues. However, the powers that be higher up the SA Water command chain are the ones pushing for a new and better way. Being a government run utility I think they should be congratulated for this initiative. For me this is especially relevant based on what I have seen in another investment of mine involving utilities with strong bureaucracy’s (especially around the area of engineering) in place. Namely the uptake of fireproof power/utility poles hitting resistance because of the desire of many of the ‘old guard’ to not change was so strong (and powerful financial ‘lobbying’ from wood/steel pole manufacturing sectors is also strong) It’s taken an event like the recent fires to now force the uptake.

At the end of the day the GasTess represents being a time shifting heat exchanger vs the alternative they have which is just an engine/s. From what I could establish a key metric for SA Water is that ‘running costs per hour’ is less for the GasTESS than the turbine engines. Achieving this will add value to the biogas and it will result in a YES from SA water. In my opinion this will be followed by the success story being promoted and then the path for additional utilities has been somewhat de-risked so its onwards and upwards.

Initially, it felt clear to me from discussions on the day that the ultimate success for 1414 sees multiple GasTess’s onsite taking 100% of the biogas and there are no turbines at all required by SA Water. However, the reality is that even if GasTESS proves completely successful the SAwater engineers will always want a redundancy of sorts for some years yet. So a more likely successful outcome look’s like them acquiring a new turbine engine plus the 1414 machine especially because the GasTess can keep the hot water moving 24/7 as its decoupled from gas production. Additionally, SAwater have solar on site that apparently produces more power than is required during the day – so it sounded like that excess energy could be stored in the TESS and used at other times which the turbine engine can’t do. I also understand that to consume all the gas in the SAwater plant there would need to be 3 or 4 of the existing size GasTess on site. So there is currently more gas than 1414 can consume.

As mentioned, it’s a big co-funded experiment with very willing participants. The opportunity to do real life testing with the actual unit and having both parties appreciating & supporting that this really is new ground. Also because it’s expected by both parties there will be variants from what is hoped for is actually a gift in my opinion. The fact that all parties understand that these variants (learning’s) will be addressed and changes implemented in partnership to move into round 2 of the experiment is a great spot to be in. The obvious caveat being: as long as 1414 have the cash and minimal debt so bills and payroll can be made.

It was mentioned to me that all the learnings from this project (using BioGas as the fuel source/SAwaters time shift requirements and general operation) have been taken back to the lab to further optimize the containment when it comes to Gas. Allowing for the construction of an even more ‘gas and combustion proof silicon containment unit’. A Mark II if you like. A nice side effect of this is that it will be a containment that will have even better applications for 1414’s grid scale units and will be even more scalable in the upwards direction. Kevin did mention the new units in development will have a much higher energy density than the Mark1. He then went onto express clearly and without reservation that: the current unit is working…it is doing the job. In reference to a Mark II he then went on to express with words to the effect of: we’re just being very cautious when choosing the next upgrade steps. As an 1414 LT investor I’m personally happy about.

Kevin did in passing mention that the corona virus may have some timing impact on some of the supply chain for this to happen but was not sure to what extent as yet.

Some direct questions and answers with Kevin (taken from my notes and memory):

Qu. Are the metrics looking good for SA Water to buy the Gas Tess?
Answer (paraphrased): We think so but we don’t have their modeling. We provide our data and would expect they will share their modeling with us.

Qu. Does SAwater have a date where they will make a decision
Answer (paraphrased): Can’t answer that for NDA reasons but they are doing their best to accommodate us and have all along.

Qu. But they do want it to work don’t they?
Answer (paraphrased): Yes! Initially we were asked to put something together to demonstrate that we can burn biogas as fuel and then they turned around and said actually we quite like it and now suddenly we have built this unit but it is not as optimized as it could be but we can now give them the specs for an optimized one (this is the MarkII mentioned in the quarterly) The MarkII is the one we really would build now that we have learnt everything about this.

RE Aurora and funding – Kevin talked about:

• The Solar component of the project will be funded in it’s own right – the structure of which is a WIP.
• 1414 are currently lining up power and heat purchase agreements.
• 1414 does need to fund the storage component which will start small. The issue Solar Reserve had was that they had to build a $600+ million complex before it created one watt of electricity. It’s a huge investment. 1414 will start small and with in our means and build it up.
• The first phase of funding will come from equity offerings from shareholders, grants from parties like Arena, + the expected Federal Govt allocation of $110m
• This funding source was earmarked at very low interest rates (or even as a grant) for Solar Reserve to invest in the project. As 1414 now owns Solar Reserve, Kevin said, he still expects the funding applies – though he then did say that if we know any federal politicians we should remind them of this offer which told me it’s definitely not in the bag.
• Kevin/Jordan(COO) also discussed that adding value to the national grid that wasn’t designed for renewables is one of the key discussion points at the higher levels. This was a bit above my understanding but apparently the original Solar Reserve proposal was actually taking (ie. costing) value from the grid not adding to it. But a 1414 TESS turbine scenario time shifts and adds value to the grid.
• A question was asked regarding timing for Aurora but they were not prepared to discuss things that they are not ready to announce to market. What Kevin/Jordan did say was that (paraphrased): we are proceeding with a whole lot of planning for Aurora, it already had DA approval for an output of 70mw – that can be installed tomorrow and there are bigger plans in the works.

Some questions I had for Kevin:

Qu: Does the success of Aurora depend on the success of 1414TESS technology because the unique position Aurora has when its come to solar is the ability to cost efficiently store large amounts of energy for release at times of optimal pricing. With out an efficient TESS then this is not possible and we are stuck like all the other solar farms?
Answer (paraphrased): Aurora with or without TESS will produce and sell electricity because of demand upstream from some major mines who will buy the power from Aurora as it would be the most reliable source as its way up from the grid and beyond the major substation at Port Augusta.

Qu: But if the TESS didn’t work for whatever reason then the Aurora would just be a solar….
Answer (paraphrased): No … the TESS clearly works and there is no low cost alternative for large scale storage. As a result there are subsidies available and we will be getting more as we have spent more than we said we would. Government is throwing money at storage and we just need to build credibility, which the SAwater project is helping with, but we now need to demonstrate this at grid operational level. Batteries are not the solution, they are extremely expensive and they don’t do very much for most of the time. It was also mentioned the share price will be driven by insto’s and they need a certain level of certainty. Can 1414 sell the GasTESS will be a key point? But from what I have learnt the GasTESS wasn’t really built to directly sell. As Kevin said (paraphrased) It was built as an experiment to show that the tech could burn Biogas and as a result it has created a huge amount of interest.

From what I could ascertain from listening to Kevin & Jordan was that 1414 was not aware (way back when) just how much these utilities didn’t like biogas engines as it eats up their revenues. And reading between the lines I felt it evident that even if everything still works 1414 still may face road blocks in that a group of engineers might feel its all too risky. However, with the Govt funding half of the build, I got a sense from the discussions that SA Water will be inclined to follow through with it and prove the case. I sense this may also be the feeling in 1414. As mentioned 1414 are now designing a commercial model (a Mark II) with the learning’s from this GasTESS. It was described by Kevin as bigger, more efficient and where the burners are larger and there is less of them and all sorts of other ‘bells and whistles’ which will reduce operating costs. He also mentioned another aspect affecting share price will be when we gain power and heat offtakes that will amount to revenues.

Kevin went onto mention that Government and now investment banks he has been in discussions with, have realized that the expansion of renewables (solar/wind farms/ even resi rooftop solar) has gotten way beyond the capacity of grids and what the network can handle as there is no ‘real’ way to store the power. The bankers that 1414 has been speaking to have said they feel the time is yet to come for this technology but it’s maturing fast.

My General observations:

I had met Kevin during the IPO process and closely watched all media interviews etc. I have always liked and admired him though I still strongly stand by my HC post from 03/08/2019 post 36895793 ‘Open letter To Kevin’ re company communications and how it could be optimized. In my opinion Kevin was & is the man with the ‘big ideas’. It was a crucial role as without him none of this would be happening. And I appreciate him fully for that huge achievement. But in this period of critical commercialisation for 1414 where convincing instos/other investors PLUS where new sales leads matter there should be a sharper communicatortaking the communications lead (to be clear this does not mean I think Kevin should withdraw from his key leadership role in the company) And I am not saying I could do a better job, I lean more to the ideas side of life myself. My true belief is we need a different character than Kevin for the brute force to market execution stage we are at the start of. 1414 needs someone to stand center stage and sell with optimal ‘clarity’, ‘professionalism’ & ‘sharpness’. After 20+ years of me being at the cutting edge of advertising and communications (working on brand and positioning for Tourism Australia/ Most of the State Tourism boards/Most of the banks/Kellogg’s et al knowing what’s good for a brand (at all levels) is my expertise…I read people fast and understand how others read them…. It’s why I like to meet the management of my investments and it’s what I can say I actually do know something about! At the tour I had the opportunity to meet Dr Jordan Parham, 1414’s COO. In my opinion and based on this brief meeting he would be perfect for the Comms to market job. He is very sharp, to the point, knows his stuff and feels reassuring. He reminds me of Greg English, Executive Chairman of Archer Materials (AXE) which is one of my favorite and most exciting holdings. Like 1414 they hold some great yet edgy opportunities and are led by the clear & steady hand of Greg across all areas (yes it helps that the CEO, Dr Mohammad Choucair is also an effective, sharp & dynamic communicator). Also, as a company, they are big on keeping investors well informed. But I digress.

I also met Nick 1414’s SA Water onsite engineer. He has been there 3 years and is exactly the type of character you want doing this role – he truly knows his stuff, the GasTess is his baby. He is also sharp and dedicated in a great ‘no frills’ way – for him it’s all about business and accuracy. Sha (from marketing/communications) was also there and again she is everything you want in a person to fulfill that role. From the small amount of team members I have met Kevin has clearly welcomed in a fantastic group of dedicated and knowledgeable people which is reassuring to an investor like me. It is also reassuring that Kevin’s remains as 1414’s largest shareholder. Also, while I’m talking about company people, I have been intently interested in Matthew Johnson’s movements who was 1414’s CTO until last year. For those who don’t know he was instrumental in the development of the 1414 TESS units especially the GasTESS and has a wealth of knowledge, so when it looked like he left I felt a little concerned – was it a loss of faith in 1414’s TESS? However, I have noted his stock holdings remain stable since he ‘left’ and Ammjohn remains the 4thlargest shareholder. After speaking to Jordan about this, he advises me that Matt was only ever a consultant and of late has many other obligations (Ammjohn et al) so it was a matter of his time/availability. Reassuringly, apparently, Matthew is still consulting with 1414 even as recent as the last couple of weeks.

Something interesting that Jordan & Kevin mentioned was that California recently asked for submissions for energy storage schemes and battery’s were not invited, thermal energy storage was. One reason for which was the degradation characteristic of Lit ion batteries. I would like to-do more research on this but how great if 1414 had something ready to offer in that market especially with our locked in IP and low AUD.

Other questions:

Qu. how fast can the unit respond to demand
Answer: did not ask question

Qu. When do they believe they will be able to sell power into the NEM? This is the area that they hoped to have last year to assist with cash flow.
Answer (Kevin paraphrased). He mentioned that we would have operating units now in the packaging factory if the LGC’s were at $80-90, its now down to $6. New vulnerabilities have opened up with wind/solar farms that can’t connect. 1414 did a deal with Nectar Farms for a power solution but for now they have gone with a grid solution because the wind farm they were going to set up next to it which was going to power the TESS is in limbo because they have been told they can’t export to the grid. Consequently they have only installed a third of capacity.

Qu (me). What Political party is best suited to a 1414 success plan.
Answer (Kevin paraphrased): He said they all are. They are looking for anything that will help out. The pollies don’t control the grid, its been sold off, but they get blamed for it. And Lit ion big batteries are not the solution (as demonstrated by what’s happening in California)

Qu. Does management know how the company looks when they avoid releasing real results.
Answer (Kevin paraphrased): He outlines as they are in an NDA situation with a government utility they can’t simply talk about what they want todo. It could destroy a relationship.

Additionally, my personal observation based on discussions from the tour is that hard numbers are not where 1414 are at just yetas the unit is so cutting edge and new. There are no bench marks. In fact they are at the stage where they are testing and pushing to see what the benchmarks are, so they are actually creating the benchmarks! And there are rounds of this testing, using the results and retesting. Around Oct 2020 a decision will be made based on a few metrics one of which is: ‘running costs per hour’. Is there an economic case based metric that says the GasTess wins over the turbines – they are in the process of testing (ie. running all the options) to see what combination gives the optimum running cost. And this is just one of the metrics SAwater will use. From my discussions it seems the powers that be in SA Water actually really want it to work and right now there is no reason it wont work.

Qu. what efficiency have they achieved with the GAS TESS system so far and if they have achieved complete phase change of the storage material for genuine PCM heat storage and recovery/utilisation without storage or insulation degradation.
Answer: I didn’t have an opportunity to ask this directly but hopefully the above gives you some insight about why its not a simple question to answer.

Qu. What are the total run hours of the unit, as well as how many hours it has run at 100% nameplate capacity..full throttle, all systems to their maximum?
Answer: I didn’t have an opportunity to ask this directly but from what I can work out the total run time isn’t a relevant metric (yet) as it appears it hasn’t been run at ‘full throttle’ or full load at full temp. So far it’s been run on and off during various testing stages at partial load capacity. This is how the issue with the heat exchanger not working to spec was established as potentially it was ramped up to hard and too fast – this is all part of the learning’s gained in this testing phase. Working with the heat exchanger supplier there’s now a fix being tested (as I believe was also reported by 1414 some weeks ago)

I found the visit, face to face time with key people and writing it all out as a helpful process to feeling into my 1414 investment and how I approach it from here onwards. Much of the above info that was discussed on the day has already been noted in releases in one form or another – but it helps me to put it all in one spot for context. On sitting with and digesting everything I find myself feeling very optimistic about 1414. Actually my only real concern is Kevin leading the communications front (only), though hopefully I have made my opinions respectfully clear re what could be done on this front to launch 1414 into the stratosphere. I hope my musings help punters with more of an insight into their own feelings about the company. Of course, as already stated - it’s all in my own opinion, there is no advice given and if there are any errors then it’s because I can’t remember everything, though I feel I’ve done a pretty good job, and there was no shortage of huge noisy machinery making things challenging to hear at times.

All the best and lets all remember, in these interesting times, that most famous Buffett quote, you guys know the one!