AFC Energy - is the tide turning towards the industrial adoption of fuel cell technologies?

Many fuel cell providers have been getting closer to commercialisation of their products and the recent hype over Silicon Valley’s Bloom Energy is a case in point. With Google, Fedex and Ebay amongst their trial customers, General Colin Powell sitting on the board and Arnold Schwarzenneger publicly praising the founder, it’s little wonder that CBS covered the Silicon Valley fuel cell maker in a 60 minutes special [ref] http://www.cbsnews.com/stories/2010/02/18/60minutes/main6221135.shtml [/ref] . But for all the press attention, the billions invested in fuel cell companies, and billions more that have disappeared from sector capitalisations through twin bear markets, there has been little return in the way of real world revenues.

Most fuel cell companies are targeting mass adoption in consumer markets - whether aiming to replace the internal combustion engine in vehicles or providing combined heat and power production in homes and offices - but there’s a UK listed company in Surrey that’s focused on reinventing the most neglected form of the technology as a low cost industrial option and in the process potentially carving out a niche in an area which seems to have little current competition. [ref] http://www.afcenergy.com/wp-content/uploads/CPI-Review-of-AFC-Technology-Development-Progress.pdf [/ref]

Dunsfold Park, Surrey
AFC Energy Plc (LON:AFC) is developing a modular alkaline fuel cell system for the industrial market. Originally formed when the founders bought the fuel cell assets from Eneco in January 2006, the company has put together a strong management team including Tim Yeo MP as chairman, Ian Balchin ex Stanelco as CEO, and Dr. Gene Lewis ex Ceres Power as Technical Director. The company was floated on the AIM Market (LON:AFC) in April 2007 with the goal of commercialising its fuel cell technologies for application primarily in the chlor-alkali industry.

Recently, the prospect of applying its fuel cells to the Underground Coal Gasification process is bringing the potential for a much larger market for their product. [ref] House Broker Allenby Capital http://www.allenbycapital.com/research/afcenergy180310.html [/ref] We recently visited with AFC Energy at their labs and offices in the industrial units surrounding the Dunsfold Park Aerodrome in Surrey, home of many a ‘Top Gear’ road test, after their recent investor and shareholder open day. We met with Howard White, one of the original founders and now consultant to the company and Dr. Gene Lewis the Technical Director who gave us a tour of the labs.

Alkaline Fuel Cells - history, pros and cons
The pioneering fuel cell developed in 1843 by Robert Grove [ref] http://en.wikipedia.org/wiki/William_Robert_Grove [/ref] was an alkaline fuel cell (AFC) and the technology was further developed by NASA in their Apollo and Gemini space programmes. AFCs were chosen for their ability to operate at ambient temperatures and pressures and the fact that pure de-inonized water and electricity are the main by-products.

But since then alkaline fuel cell has been little developed for several reasons - high hydrogen fuel purity requirements have seemingly implied only specialty industrial applications; a historic reliance on precious metal catalysts has deemed the technology expensive; and the cell type has been recognised as unsuitable for vehicular use. [ref] Fuel Cells Today http://bit.ly/bYJ7HU [/ref] . As a result the market potential has been thought as small leading to a paucity of international alkaline fuel cell investment in favour of newer technologies such as solid oxide (SOFC) and Proton exchange membrane fuel cells (PEMFC). [ref] http://www.fuelcellsuk.org/wp-content/uploads/2009/04/uk-fuel-cell-roadmap.pdf [/ref]

But alkaline fuel cells also appear to have advantages over their peers. These include having among the very highest system and electrical efficiencies of all fuel cells [ref] 60% - compare the internal combustion engine at 30% [/ref] , low operating temperatures, greater reliability and internal temperature control, and an ability to deal with CO2 contamination of the electrolyte. [ref] http://www.afcenergy.com/technology/advantages-of-alkali-fuel-cells/ [/ref] . As a result there is less stress on the surrounding materials, and AFC Energy has been able to develop a cell using much cheaper components - including standard injection moulded plastic.

Some of the improvements that AFC Energy have made to their 3.5KW ‘alpha’ system in recent years apparently include the replacement of platinum containing electrodes with alternatives that cost a fraction of the price, the ability to use air rather than expensive pure oxygen (with the aid of a lime scrubber to remove CO2), and a much improved cell architecture. [ref] House Broker Allenby Capital http://www.allenbycapital.com/research/afcenergy180310.html [/ref] [ref] http://www.afcenergy.com [/ref] .

Industrial Applications
The Chlor-Alkali industry is seen as the ‘low hanging fruit’ of the global hydrogen supply and thus a sizeable opportunity for industrial scale fuel cells. It’s estimated that 12.5% of the hydrogen produced as a by product in the process currently goes to waste [ref] Eurochlor http://www.eurochlor.org/ [/ref] and due to the purity of the hydrogen produced, it’s the ideal input for alkaline fuel cells. AFC Energy estimates that the annual global 1.5 million tonnes of hydrogen produced from this source could potentially contribute 3GW (to confirm) to global power supplies and as a result AFC’s cells have been optioned by Akzo-Nobel, the fourth largest Chlor-Alkali firm in Europe. In October 2009 [ref] http://www.investegate.co.uk/Article.aspx?id=200910130700036557A [/ref] AFC completed a successful field test of their proprietary, lower cost, non-platinum electrodes at Akzo Nobel’s Bitterfield plant in Germany, and signed a letter of intent with INEOS to perform a a similar installation at their plant at Runcorn, Cheshire. [ref] http://www.investegate.co.uk/Article.aspx?id=200908240700168657X [/ref] The company also has an ongoing partnerships with Centrica and the waste to energy sector with Waste2Tricity.

But, speaking with management, it seems that the advent and development of Underground Coal Gasification (UCG) as a process by which previously uneconomic coal seams can be brought to market is developing as a much larger potential opportunity for AFC Energy. The UCG process in a nutshell drills 2 wells into a coal seam, pumping air and oxygen in at one end (the injection well), igniting the coal, combusting and gasifying it in the ground, and driving the gas produced up to the production well and on out to the surface for treatment [ref] Linc Energy http://www.lincenergy.com.au/info-sheet.php [/ref] . It’s a process that creates valuable ‘synthesis-gas’ (syngas) a combination of CO2, H2, CO, N2, CH4 and gaseous hydrocarbons in various proportions, while having a smaller environmental footprint than traditional open pit mining (a so called Clean Coal Technology with 25% less emissions and little scarring of the landscape).

AFC Energy recently announced an initial order and exclusivity agreement with Linc Energy, a $720m market cap Australian company that’s focused on UCG [ref] http://www.investegate.co.uk/Article.aspx?id=200912080707427494D [/ref] . AFC have granted Linc the exclusive rights to use their fuel cells in UCG applications for 24 months within which Linc have an option to extend the exclusivity agreement indefinitely by investing £2.3m in AFC.

Linc Energy is currently testing its UCG capabilities at the Chinchilla Demonstration plant in Australia. The current operation is designed to form the basis for the capital and operating assumptions to support feasibility studies for Linc’s upcoming commercial generator at Walloway Basin - which has confirmed resources of 1 to 1.3 billion tonnes of coal ideally suited to the UCG process. Estimates from Linc Energy suggest that this operation could support an initial 200MW power plant with a lifetime of up to 50 years. Pre production is commencing in 2010 and a Stage 2 investment decision is planned to be made in Q4 2010. [ref] http://www.ecplaza.net/news/0/37207/linc_energy_limited_asxlnc.html [/ref]

The scale of the potential roll out to supply Linc’s UCG development in Australia would suggest a very significant volume ramp in AFC Energy’s manufacturing capabilities. If all goes according to plan, AFC Energy will start building one 50kW unit but according to the house broker, the company would need to ramp production to over 2,000 units annually in 2013 and almost 12,000 in 2021 to fulfil Linc Energy’s plans. [ref] House Broker Allenby Capital http://www.allenbycapital.com/research/afcenergy180310.html [/ref]

WSP as Partner
Having seen the company’s small industrial units at Dunsfold Park, one wonders how they will manage the scale required but appropriately, the company is bringing in outside help. CEL International, a subsidiary of Wsp Group (LON:WSH) , signed a memo of understanding in January [ref] http://www.investegate.co.uk/Article.aspx?id=201001290700113184G [/ref] to provide ‘a range of services to AFC Energy in preparation for full deployment of fuel cell power stations’. The volume ramp numbers have been described by the CEO of CEL as ‘challenging but achievable’ [ref] House Broker Allenby Capital http://www.allenbycapital.com/research/afcenergy180310.html [/ref] while AFC staff internally describe the process as ‘no more challenging than manufacturing fridges’. WSP should be a good partner for AFC Energy as they already have offices in Brisbane, Australia and will deploy the fuel cells on their behalf to Linc Energy’s Chinchilla plant.

In January this year AFC announced that it plans to build a 1MW ‘super green’ power station with WSP and Air Products close to Dunsfold Park. [ref] http://www.investegate.co.uk/Article.aspx?id=201001290700113184G [/ref] Air Products will supply hydrogen,  hydrogen handling equipment and knowhow while  WSP will bring their design, engineering , and project management skills to the project.  AFC Energy has taken over another larger unit at Dunsfold Park in which to work closely with their partners over the specifications for scaling up their fuel cell production. The unit is currently being built to their requirements with a mezzanine installed. This project will highlight engineering, quality control and production issues that may arise in scaling to fulfil any forthcoming bulk orders from their target markets.

Scaleability
While the company has been driving down the cost of the 3.5KW alpha system, the company’s goal is to create a truly scalable large ‘beta’ system that will allow fuel cell modules to be combined in either vertical or horizontal configurations. This scaleability is required to provide the multi-megawatt capabilities that their industrial partners demand at a price of less than $100 per KW. A recent technology review conducted by Dr Jon Helliwell of the Centre for Process Innovation highlighted the progress AFC have made to date in bringing this vision to reality.

“The work carried out on these concepts since the last review indicates that the proposed 50 kW system will be achievable. The CPI believe that the technical development plan prepared by the Company to underpin this work will deliver the required working system.... Although there is further development work to complete, in my view, given the progress I have observed to date, there is no obvious reason why the Company should not be successful in commercialising the system within the two year timeframe it is predicting” [ref] http://www.stockopedia.com/news/announcement/AFC/100413afc000419n.htm?title=afc-energy-plc-independent-technology-review-highlights-progress&date=1271113200 [/ref]

Fuel Cell design
AFC’s fuel cells have been designed in a modular way, with all components serviceable and replaceable to fulfil their goal of building the most cost effective fuel cell solution for the wholesale power generation markets. The difference with alkaline fuel cells (as compared to POMFC or SOFC) is that they run at a lower heat and pressure environment so the materials don’t take as much stress and as the liquid alkaline electrolyte flows the heat and water out of the cell degradation of the electrodes is reduced. In spite of this once deployed in an industrial setting the electrodes will require regular replacement, resulting in a steady stream of income for AFC. One thing that AFC are doing right is focusing on their core circle of competence as technologists and not getting involved in peripheral activities. They plan to outsource the ongoing servicing of their fuel cells to industrial contractors - WSP in Australia - while retaining the IP and thus profit from electrode replacement. The company has informed us that they have 10 patent applications currently in process predominantly focused around the key areas of cell architecture and materials advances.

Financing
According to management, the company has enough cash to see them through to mid 2011, by which point it is hoped that Linc Energy will have made the decision to extend the exclusivity period by exercising their option to invest £2.3m in the company. If all goes according to plan, which is of course a big if considering the delays and setbacks to date, the company believes it may not need any further funding as a further £2m was raised in December 2009 [ref] http://www.investegate.co.uk/Article.aspx?id=200912041353406222D [/ref] with support given notably by Andy Brough of Schroders. [ref] http://www.investegate.co.uk/Article.aspx?id=200912071222056872D [/ref] . Going forward, Linc Energy will pay deposits upfront per MW plus a 10% payment from profit on electricity produced, and an ongoing maintenance contract for MW in operation. As AFC’s technology improves, the electrodes should need to be replaced less frequently and as a result, AFC anticipates their margins will improve over time.

In conclusion
According to long term shareholders, one of AFC Energy’s problems as a small company has been a lack of visibility amongst investors, predominantly being mentioned in specialist rather than mainstream or investment press. While AFC may not be attracting the attention of the Hollywoood glitterati like some of their Silicon Valley peers, they do seem to be tackling pressing real world industrial problems with an innovative technological approach. The next several years will obviously be critical to the roll out and success of AFC Energy - the company is yet to generate any significant revenues and is especially reliant for success on its relationships with their key partners. We will watch with interest whether AFC Energy can deliver on the long-promised dream of the mainstream adoption of fuel cell technologies.