Storing energy with silicon

Kevin Moriarty is the Executive Chairman of 1414 Degrees, which is a new company that listed last year in September, and it’s in the energy storing business and it stores it by melting silicon.

The 1414 Degrees refers to the point at which silicon melts. That’s the story with the company, it’s got a commercial plant now finally built in South Australia with SA Water where they’re using gas methane from the waste to melt the silicon and they’re selling back electricity and heat.

They’re basically in the heat and electricity business, although they are doing some straightforward electricity arbitrage, that is buying solar in the middle of the day when it’s cheap electricity and selling it at night when it’s expensive.

There is a bit of cash potentially coming from that and they will start earning cash from SA Water, but the really big potential for this business is to start really selling to all water utilities, greenhouses etc. 

The devices work best if they’re selling electricity and heat, but Kevin says they can also just make money out of selling electricity, so well worth looking at this business. The shares listed last year at 35 cents and they’re now about 28 cents or so, so they’ve come down. It hasn’t been a wonderful experience for the initial investors but it’s very much a long-term play, this.

Here’s Kevin Moriarty, the Executive Chairman of 1414 Degrees.

Kevin, I wonder if we could just start with your cash position before we get onto the products. You ended the last quarter with $12 million roughly in cash and you burnt in about that end of quarter, just a bit less than $1 million a month. So I just wonder is that still the situation or has the cash burn bumped up a bit lately?

No, the cash burn has reduced. We’ll be making an official announcement with the quarterly shortly, later this month. But I can tell you, no, it’s considerably less than that on a monthly basis. The reason is that we’ve commissioned and built the device such as the gas test, so we don’t have big outlays at the moment.

I just thought you might be spending more on running that gas test pilot or that plant, but maybe not?

Not really, no. It’s a matter of staffing it and we are just waiting on SA Water to get their gas meters into place, so they can actually – we can go through a sort of commercial trial which is where they’ll charge us for the gas and we will sell them back the electricity that we generate, and the hot water.

I wouldn’t mind getting onto the detail of that in a moment, but I just want to finish on the gas situation. I mean, the problem – not necessarily a problem as I see it – the issue is you IPO’d last year at 35 cents and now the stock price is under 30 cents, which means that I imagine you’re not going to be in a hurry to raise anymore equity, or you’d rather not I presume at these prices, but the problem is the market has and your share price has been a bit soft so I wonder whether at some point you’re going to have to raise money at something like 25 or 28 cents?

We have no plans to, nor do we need to. As I said, our expenditures have reduced and what we’re doing is getting ready to actually earn revenues from both the electrically charged device that we’re rebuilding at our South Wing Workshops, and we’re going to connect back to the grid and start energy trading, and buying low, selling high. We’ll be, as I said, starting the commercial settlements which will involve earning revenues with SA Water. We want to get those on board first so we can start demonstrating the revenue earning ability of our systems. That means the model’s changed – well, we’ve accelerated what was in the prospectus in terms of getting on the market much earlier than we had supposed.

Okay, let’s take those two things one at a time. The buy low, sell high situation, you’ll be doing that with your machine that you’ve got in your premises, is that right?

That’s right, yes.

And so, basically you’ll be playing arbitrage between solar in the middle of the day and the higher prices at night, is that right?

In principle, yes. There’s also wind at night. Last week the prices were negative here because when the storms were coming in, the wind turbines were producing more power than could be used. That’s not a daily effect of course but you do get the early hours of the morning with lots of wind in South Australia, and as you say, with more and more solar going on we see quite a brighter future for providing that sort of firming up renewable energy supplies and appropriate rewards.

What’s the capacity of that storage facility and how much can you make from it?

That’s to be found out. We’ve got models for it and we’ll say more on the market – I can’t talk about it now – but we are preparing those. I’ve just taken on a new finance analyst who’s looking at all the markets and predictions. But it does look healthy for us, put it that way, or we wouldn’t be bothering to do it. There’s a lot of arbitrage on the market.

You can share some of the modelling with us, can’t you? Come on!

No, not without putting it out to the whole shareholder base, but certainly from what I’ve said in the past and the quarterlies and so on, it’s something we are very actively exploring. There’s actually a much bigger model and what you need to understand, it’s built around providing energy solutions to people. What we’ve found is, industries have come to us, and smaller end energy retailers, and they’re having trouble providing the sort of renewable packages they’d like and pricing they’d like to their supplier, that’s the retailers. In terms of the industry, they want to hook into renewable supply but they need to time shift it to suit their production cycles.

What they don’t want to do is necessarily buy a bit of equipment to do it. If they’ve got any extra profits, they want to put them into expanding their businesses naturally. What they’re saying to us is this, give us an energy solution that’s better than what we’ve got now, and you work out how to finance it. What we’ll do is give you a long-term contract for heat and electricity. We’ve been modelling that up, we’ll be releasing those results probably in a few months’ time. Put it this way, it’s a solution for the future.

Let’s get this clear then. What you would do is you would do a deal with a factory, say, where you would install a piece of kit that you’d make, the silicon storage facility…

The test, yeah.

And you would own that piece of kit, would you and sell them both heat and power – and would you have to buy the power to do that or would they?

Yes. What we do – and this was in a recent presentation we released to the ASX, so I can talk about it…

Yes, I read the presentation and couldn’t understand a word of it, so there you go.

That’s because it was meant to be talked to, of course. We gave it up in Hong Kong to a lot of investors and the reason we did was, there’s a lot of investment money looking for longer-term contracted solutions and that’s what we can do. What we can do is buy power, make power purchase agreements with renewable sources or aggregators of those, and we can then provide firm contracts to end users such as maybe an agri business like a glass house business or an energy retailer like I was describing or a factory, as you say. Because what they want is reliable low cost supply. Our storage let’s us do that, but it also let’s us become part of the overall national electricity market. We’re effectively going to be electrifying the heat energy these people are using in the factories which is currently provided by gas and particularly if its LPG or their very expensive end of the gas market.

There’s many elements to the model and it’s why we’re calling it an energy solution, but there’s a lot of investors that want to get involved with that. They like the idea of long-term infrastructure investments.

Are you going to put individual pieces of equipment up for investment, that people will be able to invest directly into those things rather than your company?

No – yes, well what we’ll do is we’ll be selling them into a special purpose vehicles which will be setup for each viable situation and the investors will be able to invest into those SPVs. It might be a company for example or it might be an unincorporated vehicle, but it will be setup specifically to provide these solutions. We will have a share of it, so will the investors, and in some cases so will some of the customers who have been interested, energy retailers for example would want to try and be part of that as well.

Give us an idea of the cost scale – if you were supplying a solution to, say, a big greenhouse business that’s growing tomatoes or something, how much would the thing cost to put in? What’s the capital base of the SPV that you’re talking about?

There’s a big range. One we’re looking at the moment for a brewery alongside this electricity retailer we’re talking about, the cost is probably just in the single digit millions. We haven’t fully scoped it so we’re not sure precisely, but it isn’t large. Harrop, the international engineering company approached us saying they thought that our solution would work well for glass houses, and so they’ve scoped out a situation similar to the ones you see around the country now that are using the concentrated solar thermal solutions. The cost of the actual energy infrastructure we’d need is of the order of $20-30m dollars for one of those glass house farms, so it’s not again, huge, in terms of the long-term contracts.

Do you have to sell both heat and electricity out of it in order to get the right internal rate of return?

Yes – well, not necessarily. Electricity only does work in the current extreme markets we have in Australia where the arbitrage – the difference is quite big and likely to get bigger in the next few years. Our ultimate aim though is to reduce that arbitrage by actually providing more and more storage on the grid and that’s of course behind some of the governments and other solutions, why they want to put batteries in and so on. But we think we can be very much a part of that and we can do something far more than pumped hydro because we actually can take people off gas. This is something that hasn’t yet dawned on the regulators or their governments and so on, but there’s actually a much bigger solution, a much bigger market in the heat market and lets you reduce emissions at the same time. But, we’ve got to walk before we run and these glass house style energy solutions I just described, the one for the brewery and what we’re doing with SA Water at Glenelg is all going to put this on the map as a very, very, we think, viable solution that’s going to change the way people look at electricity only. Batteries and that would be – they have a place but not necessarily the solution for everybody.

That presentation you refer to shows that your solution is quite a bit more expensive than pumped hydro and will be so for decades to come. Is that not a problem?

Not at all, because our system can be – that was only on a single cycle basis and it was not taking into account a lot of things. It was basically as I said when I’m talking to the presentations, comparing apples, oranges and quinces. The batteries have a place. If you want a quick burst of power, great, and they’re probably the most cost effective solution. If you want seasonal storage and so on, pumped hydro works. But if you want something that you can plug in that works around the clock, 24/7, 365 days a year, batteries don’t cut it and pumped hydros – you can’t locate next to an industry, it doesn’t do anything for heat.

Those are electricity-only solutions, so we’re not trying to compete with batteries and pumped hydro, we just think that we will be able to reduce the need for those and the market for those by dealing with the heat needs of society at the same time. It’s really – we’re not trying to say we’re in competition, we’re not. There’s a place for all those things but currently nobody’s really considering ours.

Are you going to go into arbitrage business yourself? I mean, you’re sort of doing that a bit now, aren’t you?

No, our pilots will test that out, yes, but what we want to do is go into – I wouldn’t call it the arbitrage, I’d call it the firming renewable business because you get all sorts of fees in addition to the arbitrage for firming up the grid and we’ll have synchronic generation from our turbines and so on. There’s multiple revenue streams from this. But the whole purpose is we’re not trying to compete with the energy retailers of Macquarie Bank and so on who are all trading energy. There’s people that will do that and hedge themselves financially. What we can do is use our machines to provide a physical hedge. When its prices are low, we’re storing the energy and then we can put it back.

We’re not having to buy financial instruments which is adding to the cost, firming up renewables. We’ll be able to basically have a physical hedge and we want to build that up to the many, many gigawatt hours over the next 10 years. That then means the arbitrage potential starts to disappear and you are left with the potential to actually fund batteries and thermal energy storage systems like ours as necessary infrastructure, network infrastructure. And that’s our aim, is to prove it to the point where it becomes a very cheap way of firming up renewables and reducing the price of the energy for everyone.

Have you been talking to AEMO about this?

Yes. In fact, AEMO’s local manager attended a talk I gave. Yes, but AEMO are very much interested in solutions for this summer and just keeping the thing going. The big solutions, whether it be pumped hydro in our system and so on, are going to take some time to roll out. But we do want to put ourselves on the map. What we’re doing at the moment, Alan, is putting ourselves on the map to show this technology can work, it can do what it says it can do, and it starts to be considered as a serious contender for a different way of integrated heat and electricity solutions.

It seems to me that the deal you’ve got with SA Water in Glenelg is also a form of arbitrage in that you’re buying the methane gas off the waste and you’re selling them back electricity, so you’re converting the gas into electricity, is that right?

Correct, and also heat. We supply them with two sources of hot water which they use for their speeding up all the bugs digesting. So, we supply one constant source from the heat exchanges and the burners and another source from the waste heat of the turbine. It’s a three products coming off that. I should point out though that they came to us with this idea and this is, shall we say, an experiment. What they really want to do – and they’re already actually burning the gas and generating electricity, what they can’t do is time shift it. They have to burn the gas as it’s produced. What they want to do, there’s times in the day when electricity prices, like in a big heat-wave, can go to $15,000 dollars a megawatt hour and they’re exposed to that. What it does is allow them to even out their energy prices.

They approached us and said, we think your device could do a lot better job than we’re doing, both at the efficiency of burning and using the gas, and secondly, in generating, time-shifting the electricity. Their initiative is called a zero-net energy cost, so what they are doing is trying to effectively arbitrage, but get that time-shifting. We’re doing it with them and for them as a partner, and it gives us the opportunity to test out the machine in a real life situation.

Are they going to get zero net energy cost out of it?

It’s part of a much bigger scheme which is costing hundreds of millions of dollars. They’re putting in solar and this and other initiatives to try and use – time-shift their pumping and all sorts of arrangements to get that cost down, because they’re the state’s biggest or second biggest electricity user. I think you’ll find in Victoria, Melbourne Water are probably the second or third in the state too. Water utilities, because of all their sewage pumps and so on, water pumps and many other water treatment facilities, they are huge users of electricity, so they get burnt by the wholesale prices when they go high.

And are your devices an essential part of what SA Water’s doing? Is there an alternative to your melting silicon device or not?

Not for the provision of heat and electricity, no. They could put in batteries, in fact they are putting in batteries and they said to me at the opening of our gas test, they said, ‘We’re putting in $30 million dollars’ worth of batteries and the problem is, we’ve worked out, because of our intensive usage, in three years’ time, the capacity of those batteries will be down to 20%.’ They’re not viewing battery as a long-term solution to their energy storage and nor should anyone.

Do your devices degrade like that?

No. They’re built to last indefinitely.

If this works with SA Water, which it sounds like it is, is that going to be something that Melbourne Water and Sydney Water and all the rest of them snap up, come to see you, or what?

Yes, Melbourne Water have already paid for a feasibility study on it, yes. Water utilities tend to follow one another, so successful trial at Glenelg – and this is why I liked it so much – opens the door to utilities world-wide. Waste management as well that take methane gas out of old waste dumps and so on would also be interested. The market is really big. Currently, waste water utilities and similar currently generate about something like 7 terawatt hours – I may have that number wrong – a lot of energy already in engines, and the problem they’ve got is those engines cost them pretty much the same in maintenance because of the nasty gasses they’re burning as the money they make. They have to burn the gas in general, or they have to flare it, because it’s methane, so they have to do something with it but at the moment it’s not particularly cost effective. That’s why lost of countries and lots of dumps through Asia and that, at the moment they just flare the gas or they don’t even bother treating it. A low-cost, reliable, long-term solution – and I mean low operating cost – could open up a much, much bigger market than currently exists.

Could you just run us quickly through your patent protection situation?

Yes. We’ve got several patents we’re preparing, we’ve got several which are currently under open inspection application under the ITC regime, that’s the international convention. And we have granted patent for in the first designs we produced in a lot of countries – the US, Australia, China and so on… This information’s available in the prospectus. So we’ve got it actively…

I know, but it’s not going to be too hard for Chinese businesses or the Chinese Government to copy what you’re doing and blow you out of the water really, they could do that.

You could argue that, but they would have trouble if they tried to go offshore with it. But secondly, because we would be protecting our patent, we’re already engaged in some minor litigation about somebody else trying to patent something we consider to be a part of ours. We mentioned this in the prospectus. That wasn’t Chinese, that was Australian. You’ve always got to put aside some money for patent protection. There’s no doubt about it. But one of the best protections is to have a bunch of trade secrets and what I can tell you is, even if you looked at our patents, you wouldn’t necessarily be able to do them. You’d need to probably pull one apart, and we’re not about to sell them to anybody, pull them apart to see exactly how we do it and what we do.

Fair enough. All right, I think I’m done, Kevin. Thanks very much.

My pleasure, Alan.

That was Kevin Moriarty, the Executive Chairman of 1414 Degrees.