Fusion Fuel Green PLC (HTOO) Management on Q2 2021 Results - Earnings Call Transcript

Aug. 17, 2021 6:14 PM ETFusion Fuel Green PLC (HTOO), HTOOW
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Fusion Fuel Green PLC (NASDAQ:HTOO) Q2 2021 Earnings Conference Call August 17, 2021 10:00 AM ET

Company Participants

Benjamin Schwarz - Head of Investor Relations

Frederico Figueira de Chaves - Director and Chief Financial Officer

Joao Wahnon - Director and Chief of Business Development

Jaime Silva - Director and Chief Technology Officer

Conference Call Participants

Benjamin Schwarz

Hello. Welcome everyone. Just a brief disclaimer before we begin. I'd like to first remind everyone, this call may contain forward-looking statements, including but not limited to the company's expectations or predictions of financial and business performance, which are based on numerous assumptions about sales, margins, competitive factors, energy performance and other factors, which cannot be predicted.

Forward-looking statements are inherently subject to risks, uncertainties and assumptions, and they are not guarantees of performance. I encourage you to read disclaimer slide in the investor presentation for discussion of the risks that may affect our business or may cause our assumptions to prove incorrect. The company is under no obligation and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Okay. Great. So, welcome again to Fusion Fuel Green PLC's Second Quarter 2021 Update. Thank you for joining us today. My name is Benjamin Schwartz and I'm Head of Investor Relations at Fusion Fuel.

Just a quick rundown of the plan for the next hour. I will hand it off to the team for discussion of financial results and operational highlights for the quarter. Then we will open up the floor for a moderated Q&A session with the management team and Fusion Fuel's Chairman.

A quick reminder to please submit your questions in the Q&A box, or alternatively you can submit them via email to ir@fusion-fuel.eu. So, without further ado, I'll pass it over to Fusion Fuel CFO, Frederico Figueira de Chaves to kick off our discussion of the second quarter.

Frederico Figueira de Chaves

Great. Thank you very much. And I am not sure if slides are up. There we go. Thank you. So good afternoon, everyone. Thank you for joining us today. We're looking forward to share with you the latest and greatest over here at Fusion Fuel.

Before we get into the details of our business, I'll briefly recap what we're all about for any newcomers and provide some color also on recent market developments. So just to remind everyone we're a company dedicated to the creation of green hydrogen production solutions. Our flagship HEVO-SOLAR solution combines a concentrated photovoltaic solar panel with a proprietary miniaturized pen based electrolyzer, which creates a fully integrated off-grid modular and scalable green hydrogen generator. That is highly cost efficient. I think I hit all the buzzwords there, but they will be in those special cycles on the slides, so keep remember integrated unit, miniaturized electrolyzer and off-grid and that business is critical to our competitive advantage.

To speak a little bit about what's been happening in the market that's impacted the hydrogen market overall for both grey, brown and green hydrogen. The cost of grey hydrogen is largely driven by the cost of natural gas. As you can see on the chart on the left-hand natural gas over the last 18 months or so has had a significant increase, within the last 12 months alone a 770% increase in the cost of natural gas here in Europe. That is a direct -- there's a direct relation between the cost of natural gas and the cost of grey hydrogen, meaning that the gap -- the cost gap between grey and green has at least temporarily shrunk. But we believe that in the coming years, this gap will continue to shrink, especially given the carbon emission charges that are expected to not only continue in Europe, but also increase that value. So, green hydrogen has probably never been as well positioned in the competitive landscape as it is today.

On the right-hand side, you see the electricity costs in the Iberian markets. So, in Portugal and Spain and the last 12 months, electricity prices have increased roughly 350%. This is -- and you can see the volatility of that movement there on the chart. Now for -- this can be a significant issue for centralized electrolyzers that are on-grid. Want not only to deal with the volatility and the cost of green hydrogen, but also in the increase of cost of green hydrogen that this represents. So, this showcases the advantages of having green hydrogen production solutions that are either off-grid with a dedicated power generation source or fully integrated like our HEVO-SOLAR solution. So we -- right now, we seem to be in quite a sweet spot in the market with both grid becoming more expensive, and off-grid having a significant competitive advantage.

Now to a little recap of the second quarter highlights. I will just touch upon the ones that we don't mention in the slides later. And the only reason for those is that we've actually already mentioned them in the first quarter slides as part of subsequent events.

We did announce a partnership or an agreement with Elecnor to develop green hydrogen projects in Spain. We also now announced a partnership with CCC to develop green hydrogen projects in the Middle East, as specifically looking at doing demonstrator plant in three of the Middle Eastern markets. And we've also -- we also announced agreement with Ampol to install demonstrator plant in Australia at Lytton refinery.

We'll provide more details on the other points during this presentation. And if anyone is curious to learn more about the three, I just mentioned, as I mentioned, they are all in our first quarter results presentation that's on our websites.

On the financials. We have modest revenues and costs of sales in the second quarter relating to the provision of custom made parts and components to our production partner. This is the same as the first quarter. You see that the numbers between revenues and cost of sales match exactly. This is just for us, the strategic provisioning of custom made parts to our production partner. So this relationship will continue throughout 2021.

For the total operating expenses, we split these into cash and non-cash expenses for the transparency and to better monitor the actual activities of the business. The shared based expenses are related to last year's transaction. These charges relate to potential share and warrant obligations from the merger agreement. These are non-cash expenses, and they will continue into tune of 2022.

The operating cash based expenses are driven by payroll, both internal and external staff, and then followed by insurance, office and land resources and legal costs. We'd have had also some FX charges in there as well.

Another one cash impact, which is the last line, just a little pre-tax income is the value of all warrants, which we need to revalue each quarter. And we need to recognize the difference in the P&L. In Q1, we've had a substantial positive impact from those, just on an accounting basis. In Q2, we had a modest negative impact again on an accounting basis.

What you see on the last line is a substantial change to our cash. Cash balance is reduced by around €11.5 million. This is largely driven by two main factors. One is the purchase of the Benavente facility, our future production facility for around €5 million. We will then to -- in the midterm secure lending facility against that. So, we would hope to recover some of that liquidity draining that happened there. but we believe we made a very -- not only strategic purchase, but even a very good purchase in terms of the asset value there.

Around €4 million of that cash also went to the purchase of components and raw materials to be used in our production process. And these are large purchase orders, especially given the longer lead times we've been seeing in the markets. We've made sure also to purchase some very large orders through to try and secure as much of the supply chain as we can. Just on our shares and warrants outstanding, there's been no change from the first quarter. We've had no warrant conversion in the second quarter. So just provide that transparency.

So before we take you through our business update, we'd like to share some photos of the activities that have been happening in the recent months, namely the development of our Evora plant and the launch of Morocco project and our new factory.

So we see here the ever development and construction of this project is Portugal's first solar to hydrogen project. During -- as we're rolling out, we also had a visit from Portugal's Minister of the Environment and Energy Transition and the Secretary of State for Energy. This is a strategic important project here in Portugal. We also then had the announcement of our Hevo ammonia Morocco project, with his excellency, the Minister of Energy Mines and The Environment. This is the largest green hydrogen and green ammonia project announced to-date in Morocco. And lastly, we have the Benavente facility as it was bought, which -- with needing extensive renovation, which has since kicked off with reparations, full change of the entire flooring. And so, also very large space in which the flooring is now complete. And we are continuing establishing station and bars cleaning.

So as we have always done, we start with a slide that we showed in January of the three key milestones that we set for ourselves in 2021. So, apologies if this is repetition for everyone, but for good or bad, we will keep presenting our progress against these three milestones throughout this year. So, these just a recap. This is the go-live of our Evora plant. This is to prove the industrial scale effectiveness of our technology, and to establish a track record for technology capability.

The second was the signing of strategic MOUs and the signing of confirmed via hydrogen purchase agreements or technology purchase orders, so that we would have those confirmed revenues and orders coming through in the coming years. And the last is the production -- the creation of our own production facility, which is obviously the Benavente facility and the initiatives -- the target we had to have -- come online at year-end. So, we'll go through each of those during this presentation.

So start with Evora. Evora is our utility scale demonstrator, strategically important for us to show interested parties to come and validate our technology. For Phase 1, all of the solar trackers are installed. The water hydrant management systems are in place. The fuel cell from Ballard has been delivered. We can already produce green hydrogen for testing purposes. We have had issues with the delivery of membranes, which means that we are still rolling out HEVOs to the systems, as the membranes arrive. We intend to pass for commissioning of the plants at some point next month. For Phase 2, civil construction is well underway. Structures are to be erected this and the next month. And HEVOs to be rolled out as soon as the membrane deliveries allowed.

For Evora this is probably something that a lot of you were waiting for, and we're also very happy to be sharing this news. We asked an independent lab to come to Evora and validate the performance of our solar to green hydrogen production. In Evora, our R&D team actually installed the next-generation of HEVOs. So, if you are seeing -- as a reminder, many of you have seen this what I have in my hand is actually the original sort of HEVO solution.

We haven't shared this before, but a new latest and greatest HEVO is a little less photogenic, sort of the earlier cousin of the previous one. But it's substantially more powerful. So, this is actually the HEVO that has gone into the installed in Evora.

So, we are thrilled to announce and to communicate that the independent lab has confirmed that the generation of the new, let's say, earlier HEVO is about -- has a 10% increase in performance from the previous version. And it's also a 10% increase in performance from what we had assumed in our 2021 plan. So, we're thrilled with all the ways that the R&D team has been able to do on that and delivered with that increased performance.

So, with -- now an update on our production that facility. As I mentioned before, we have purchased the Benavente production facility with a size to grow up to an output of around 500 megawatts electrolyzer capacity in 2025. As you saw in the photos renovation, well underway, next steps is for the clean room to be installed. So that then the first production lines and also begin installation.

As we have seen where we hadn't had confirmation, recently the providers of some of the equivalent of the robotized lines have informed us of delays of delivery, which means we have to push the go-live of the facility to sometime in the third quarter of next year. So, this is one of the disappointment developments, but let's say, with the constraints that we're seeing globally with all sorts of semiconductor and other components, not a particular surprise. In the meantime, we'll continue to use the outsource production facility that we have today.

We've also experienced a number of disruptions to our own supply chain, ranging from higher raw material costs, limited volumes of delivery, and at times also quality issues. So, we've had even components which have a sort of static sense error rate, which we have to send back.

To supports and modification to the latest HEVO and the significant short term supplier constraints, we need to revise down our 2021 production guidance for between 150 to 200 solar units this year, down from 600. These will be HEVO-SOLAR with the new HEVO technology, but still a lower production target than previously announced. We're working with our suppliers to unlock the constraints that we've seen this year for 2022.

However, due to the delay the Benavente being up and running, we also have to revise our 2022 production targets down to 2,000 to 2,500 units down from about 4,700. This is the total production of our production partner facility, as well as the partial year production at Benavente. There will be no change to 2023 and subsequent years given the Benavente will then -- by then be fully up and running.

This has minimal impact on our announced business plan targets in terms of net income, even for 2022. What we will see in 2022 is also benefits of some grants that we will mention in a few minutes, and financial aid for the Benavente development. As a reminder the Benavente facility we can apply for financial aid for substantial amounts of those costs where we could get up to 25% for financial aid on that development costs.

Now for business development, I will pass you to Joao.

Joao Wahnon

Hi. I'd like a thank you for attending our company results presentation. At the past months we're especially active in the pursuit of our strategic plan to develop the green hydrogen projects, which you find as priority for negotiation of MoUs and HPAs with some of the world's leading companies involved in oil and gas and ammonia business.

As mentioned before, our initial strategy was to develop the hydrogen projects and solidify our presence in Southern Europe, mainly Portugal, Spain, and Greece, and in the North of Africa, more precisely in Morocco with increased interest from several other countries in the world. We could participate our international growth and start developing business in different geographies. Our HEVO technology has a tremendous advantage when compared to other naturalizes since we produce green hydrogen directly from the compression of solar radiation, allowing from one site to reach the highest efficiency and lowest levelized cost, but also allowing to develop projects in locations completely off-grid.

Additionally, our technology is most suitable for the world regions with higher levels of direct solar radiation, which are the regions that have been announced. The biggest green hydrogen projects today, such as Australia and USA, where we already incorporated Fusion Fuel Australia and Fusion Fuel USA, and also mainly region India and Chile, where we are negotiating the first demonstration projects.

Now the presentation of our business activity and starting in Southern Europe, by Portugal. We are moving forward. We are our nature short-term demonstrator plants in the south of the country, which altogether represented installation of around 300 HEVOs or meaning 7.5 megawatts. We are also developing five green hydrogen projects in the Sines area, which altogether represents installation of around 25,000 HEVO-SOLAR and 600 megawatts. The green hydrogen produced will be mostly injected in the natural gas pipelines -- two weeks with natural gas will be used to produce green ammonia will be used as a hydrogen carrier to be exported in the north of Europe, to be sold in bottles to supply industry, and also to supply hydrogen refueling stations and the development in Portugal.

For the development of this Sines project, we are securing around 800 hectares of land, and we are starting the permitting process for the first projects that will be installed in 2022 and 2023. The purchase we are submitted to European funds, funding programs available for decarbonization, which I will explain in more detail in the next slides.

In Spain, the strategy is the same as the one we defined for Portugal. We are developing demonstration plants, which altogether represents installation of 325 HEVO-SOLARs, which is the same as say around 8.2 megawatts equally. We established a partnership cooperation for the installation of several hydrogen refueling stations. We expect to announce the first project soon.

We are also under negotiations with some of the most important oil and gas companies to develop green hydrogen project, which represents the supply and installation of around 30,000 HEVO-SOLARs, which means around 750 megawatts in the next five years. For that purpose, we are also negotiating and securing land for more than 1,500 hectares to install the projects. We expect to announce the first EPC contract and HPA very soon. Again, the projects will be submitted to European funds programs available for decarbonization.

In Greece, negotiations are undergoing with an oil and gas company to develop green hydrogen project. We expect to announce the selection of the first demonstration plant very soon. In Morocco, we've been especially active. We are developing an amazing project to produce 31,000 tons of green hydrogen, which will be used in the production of 180,000 tons of green ammonia under the partnership with two important global companies. I will explain the project when I refer in the next slides.

Then we have Australia, which is the priority market for Fusion Fuel. Due to the favorable conditions in terms of solar radiation, that allow reaching the lowest levelized cost of hydrogen in the world today. We recently incorporated Fusion Fuel Australia, and we are under negotiations for the development of our first demonstration project we involved.

In the USA, as it is fairly promising market for the green hydrogen -- for the development of green hydrogen projects. Last quarter, we incorporated Fusion Fuel USA, and we already submitted an expression of interest to The Department of Energy for the development of a project in California, taking advantage of the high levels of solar radiation in the central California that will allow us to obtain a very low levelized cost of hydrogen for the supply of hydrogen refueling stations for fuel cell electric vehicles.

Additionally, we are developing the business in other markets, such as MENA region countries, where we mentioned we have developed a cooperation with CCC, global EPC contractor to develop green hydrogen project in the region. We are in the negotiation to install green hydrogen projects in several countries, such as United Arab Emirates, Oman and Qatar and most recently in Egypt.

In India, we developed the cooperation with BGR Energy. Again, it's a global EPC contractor from India to develop green hydrogen in the country. Negotiations are undergoing to install green hydrogen demonstration plant in the Gujarat state. In South America, we are in -- having negotiations with a strong developed installed green hydrogen project in Atacama.

Now, more detailed information. In Portugal, we submitted three hydrogen projects to pursue, which is Portugal's Operational Program for Sustainability and Efficient Use of Resources. The first project is being developed by Fusion Fuel is called HEVO-Sul and consists of installation of 178 HEVO-SOLARs to produce 480 tons of green hydrogen per year to be mixed and injected in natural gas and to produce green ammonia. The project has a global investment from around €8 million, and very recently received the approval from Portugal for a grant of €4.3 million. To get grant approval, we have to demonstrate that the land install the project and off-take of the green hydrogen were already secured. With the second and third projects, we will act only as technology supplier. The second project is being developed by PRIO Energy, a Portuguese company that is distributes and commercializes liquids fuels. It consists on installation and the supply and food installation of 62 HEVOs with a roughly -- rough estimation value of €2.4 million. The third project is more or less the same, but it will be developed by KEME Energy. Again, it will be 62 HEVO-SOLARs and more or less the same investment as PRIO Energy.

Additionally, our HEVO-Sines project which consists of installation of 25,000 HEVO-SOLAR units of around 600 megawatts will be developed within the next five years. It was recognized by the Portuguese government as one of the top projects out of 74 applicants eligible as each site project, which means important project of common European interests. We expect the final recognition of our projects by European Commission as an EPC project until the end of this year.

Now, Morocco. As has explained before, we are developing a project which we called Hevo Ammonia project, consistent of the installation of a green hydrogen plant to produce 31,000 tons in the center of Morocco that will be used to produce 180,000 tons of green ammonia and will abate 280,000 tons of CO2 per year. The project was recently announced in the public ceremony in Rabat, hosted by The Minister of Energy and Mines and has a global investment of more than $850 million.

The project would be jointly developed by Fusion Fuel and Consolidated Contractors Company, a global EPC contractor and Vitol, one of the world’s leading energy and commodities company that will manage the off-take of the green ammonia and the monetization of the certificates of origin. The green ammonia will be used for local fertilizer industry and to be exported as hydrogen carrier for the North of Europe, where it will be quite to obtain again, green hydrogen to be mixed in the natural gas and be injected in the natural gas grid and to be exported to the North of Europe to be sold through potential industries. The golden project will be developed in the next five years, but we really expect to start construction of Phase 1 consisting of installation of 180 HEVO-SOLARs and next year with the aim to commission before the end of 2022.

Frederico Figueira de Chaves

Thank you, Joao. So, I'll just quickly recap on our 2021 milestones. This is again the repetitive slide for the most of all. Evora plant go-live, as mentioned before, I would hope to have Phase 1 ready to be commissioned we hope in September, with Phase 2 construction well underway and surely as soon as the membranes allow also ask the commissioning of Phase 2. The Evora plant is already working as it's -- with its intended purpose of facilitating the technology demonstration to clients, which is why we believe that we're also in a good position to start signing the HPAs and confined orders. We've already signed significant MoUs as we mentioned throughout this presentation with Ampol, Elecnor, CCC, Vito and so on.

So we have a strong -- very strong partner bench. And now we're moving into the HPAs, also with POSEUR projects, major step forward already there with that project confirmed. And now with Evora, we hope to be able to share with you some very good news in the coming months.

Production facility, obviously we're happy with the better product performance and better product will be coming out with the production facility, but disappointed that we have to delay the go-live into the sort of third quarter of 2022. We will obviously do whatever we can to speed that up. And we will, in the meantime, continue to count on our production partners to deliver for the projects in the meantime.

Right now, we have -- we can open up for the Q&A. With me, obviously there is Joao. Also have here Andre. Andre joined us as our Head of -- our Chief Production Officer a couple of weeks ago. The Benavente project will be fully his going forward. So, he'll be one working the miracles to get that faster. On the phone, we also have Jaime, our CTO, and we have Jeffrey, our Chairman as well. I believe people can type in their questions and then ready to answer the questions whenever you are.

Question-and-Answer Session

A - Benjamin Schwarz

Okay. Great. Thanks. Handful of questions [technical difficulty] So we'll go in order that the questions were asked. Just waiting to see if Jaime and Jeffrey are on. Great. So actually the first one is for Jaime. So, the expected technical lifetime of the HEVO-SOLAR units?

Jaime Silva

Yes. Good afternoon to everyone. The HEVO-SOLAR units are designed for 25 years with air on the steel structure and models concentrated models and so on. So they are preparing to have an operation to the 25 years, considering that the most critical issues regarding the membranes are [indiscernible] every seven years. So, the system during the lifetime will have two [indiscernible] off the back part of the HEVOs and their costs is included in the operation and maintenance costs for the lifetime when we calculate the hydrogen costs that variable to reach in a specific location with a specific radiation, solar radiation.

Benjamin Schwarz

Sticking with technology. So the question about the design improvements, have these -- I think alluded to this, have improved efficiency, lowered production costs, lowered raw material requirements? If you could talk a little bit more about those design improvements from gen one to gen two.

Jaime Silva

Yes. The design that and the implementation and testing may never has created a series of optimizations mainly on the water distribution network and the hydrogen collecting networks, that has allowed us, even considering the state of the raw material globally on the market to have some improvements in system. The improvement on the efficiency is not an improvement of efficiency, but it's an improvement of hours that system is able to operate in and allow radiation. So, the total, in fact, give us the result of around 10% more. As explained in the third-party testing performance, that performance tests were made in a very simple concept, how much sand comes from the -- from the sky and how much hydrogen comes from the output. So it was -- with calibrated equipment, measuring both managed by an LBT laboratory that when best known as LBT laboratories and that performance was moving through some period -- continuous period and also involving concepts of radiation variation and so on. So, it's a very simple concept what the energy I have from the sand, how much hydrogen has been produced, and the results were a little bit higher than the numbers that we are considering for next year.

Benjamin Schwarz

Great. One more question for you before I share the love, a question about water needs, how is the deionized water sourced for the Evora project? And more broadly, how much will water availability and water scarcity factor into projects in other locations.

Jaime Silva

Exactly. The water -- we need water with some sort of purity. We need t to deionize the water and clean it. So the type of process used depends strongly from the water source on that location. Specifically, in Evora, we get water from the ground. It's a very brown water with a lot of iron and so on. So, in the plants, the water is cleaned with a specific materials a specific equipments that we designed for that specific water, it's on the full power plant on a ring with ability of around 500 microsiemens. So it goes inside the ring at 500 microsiemens, goes outside the ring with 600 microsiemens. So, it's enough for the requirements of -- it's even better from the minimal requirements of HEVO-SOLAR, but it's always a customized solution project-by-project, depends if the water is available from the network, if we have to bring it through from the ground, if we have to bring it from the sea, that is an additional process to purify the water and so on. So, it's a custom solution is not a solution that works for all. It's a custom solution designed for the type of water of that specific location. And Evora was already a strong challenge because the water was not so good.

Benjamin Schwarz

Great. Thanks, Jaime. So I'm going to throw Andre into the fire here only two weeks after he's joined, but he can feel free to join in as well. So it's a question about the production capacity would that Benavente facility from 2023, until it's fully built out.

Frederico Figueira de Chaves

So, Ben, you said the production facility could up evolving in 2023?

Benjamin Schwarz

Correct.

Frederico Figueira de Chaves

So, well, I'll answer that to not throw Andre too early to the work. The production facility for 2023 is planned to have around about 9,700 units, HEVO-SOLAR units.

Benjamin Schwarz

Great. Thanks. So with reference to the investments made in raw material purchases, inventory in response to those shortages, how many HEVO-SOLAR units can be manufactured with stock today?

Frederico Figueira de Chaves

Well, it all depends on the arrival of the membranes. So we have a number of stocks for substantially more HEVO-SOLARs than that were announced when we will produce. But there are a couple of critical components that obviously are the missing pieces. The main challenge we have which is obviously, as I mentioned before, the membranes, we're having a lots of a high degree of flaws in the membranes that are arriving to us, which is leading us to send a significant number back. Our manufacturing partner is looking to increase production as fast as they can, but that is one of the critical -- also next we have that in addition to the lens, obviously the lens production for the solar constringent piece has been a challenge with some of our providers and even -- and throughout the year at times even obtaining the raw material. So, we have been trying to stock up. We've been purchasing the raw material as the year has gone through, but we have for -- some of the metal far more for 600 and more HEVO-SOLARs. So wherever we can, we are building up a strategic stock, but unfortunately all you need is one or two components to fall short that you have in HEVO-SOLAR.

Benjamin Schwarz

Great. Thanks Frederico. We received a question on the expected economics of HPAs, both for Fusion as well as for the customer [technical difficulty] how's that work, the purchase price.

Frederico Figueira de Chaves

So, I will talk about the -- for Fusion Fuel. I’ll Joao talk about the economics on the client side to the price of hydrogen and so on. On our side, as we have announced from the start for HPAs, what we aim to do is to target on rather than an IRR basis around 22% that is our target for the HPAs and then rate somewhere between around 9% to 10% on the other basis.

Joao Wahnon

When they see projects direct off-taker of the hydrogen, they don't look so much an IRR for the hydrogen that produces. But that calculation is based on the levelized costs of hydrogen. So normally our clients, most of them, they use this contract of 5%. So it means that the levelized costs of hydrogen is calculated considering discount rate of 5%, some other elements that are willing to sell projects to supply green hydrogen to the final off-take, they would want a more or less the same type of IRRs that we are assuming internally in Fusion Fuel.

Frederico Figueira de Chaves

I will just also add for the clients, part of their levelized cost of hydrogen will be anywhere in the amount of [technical difficulty]. So that is -- can be a substantial variation in the levelized cost of hydrogen at the end.

Benjamin Schwarz

Great. Thanks. Sticking with material, given the recent approval of [technical difficulty] in the Gulf region.

Frederico Figueira de Chaves

Sorry, Ben, we can't hear you.

Benjamin Schwarz

He has a question about given the proof of concept, at Evora, are we seeing more interest coming from companies in the Gulf region?

Joao Wahnon

Yes. Of course, Evora project was very important just for us to demonstrate a real project we would say demonstrate performance. We will demonstrate degradation, and we will then say [indiscernible] of the system. As soon as we demonstrate that and all of this performance is calculated based on the solar -- that the level of solar radiation, and temperature and humidity, of course, when we go to these other geographies, it's just making the calculations, revising for -- with the local solar radiation and local temperature. So, it’s very important.

Frederico Figueira de Chaves

So we have -- to confirm, we have received increase interest, not only from the MENA region, I would say from many -- all the regions as Jaime mentioned, as we went through the map. We have had policies interested in visits from across the board.

Benjamin Schwarz

Great. A question here, either for Jaime or for Frederico, perhaps what is behind the 25% increase that you mentioned in raw material costs? Is it driven primarily by polysilicon costs or other components?

Jaime Silva

No. I gave you two examples. The aluminium since October last year until yesterday has rising 51%. Steel is around 40%. So you have raw materials, traditional raw materials that are used in the huge amount of industries that are facing, right now, a strong increase for several reasons. In Europe, one of them is related with the impart import taxes that European Commission created to aluminium coming from China. And that explodes immediately -- and/or this to buy materials. They are more, but only these two are materials that -- we use a lot in our tracking system, in our models and so on.

We also have a strong increase in the novel metals that we use, like gold. We use gold like platina, like iridium, all them rising a lot. And the third group is related to electronics. Electronics are right now the main problem on electronic components are not so increasing on costs, but the availability. So we are facing strong difficulties to negotiate with the suppliers and to keep our share intact during a long period, some of them are not accepting long orders. They do not know what will going to happen. So they accept short orders. So it is a fight from the processing department to try to secure as much material as possible. There is no idea when this is going to finish. If it's going to finish the one year, in two years, in six months or in more period, for sure it cannot be sustainable. A lot of industries will go away, will face strong difficulties if this raw materials keep increasing. And we have our purchasing department just fighting to keep the -- to security as much product as possible in order to avoid the shortage, or at least not avoiding, but minimize shortage.

Benjamin Schwarz

Thanks, Jaime. And the subject of supply chain issues, how critical do you see those issues? Might they endanger or delay upcoming projects and potentially scare customers?

Jaime Silva

This is affecting all the value chain, not affecting owing is. The only thing we can do right now and as we have predicted in beginning of the year, each to go to the market and buy, buy, buy, and the secure mainly the raw materials. There was one question. They ask it for how much, how many HEVOs we have inside in raw material. We cannot say like that exactly, but we can say that still we have for a huge amount of them because we are securing what we are afraid that becomes more easily shortage. Anyway, right now, we are already preparing the stocks for the plans of next year, but it's a fight -- continuous fight.

Joao Wahnon

When we say that the clients, they are afraid of the delay, to-date, most of the off-takers of hydrogen, they are really afraid of increase of the price of natural gas, increase the price of electricity. So, the increase of the CO2 tax emissions. So what you see today is that one year ago, most of the big consumers of hydrogen were looking just for the grey hydrogen. Today they are all starting to look much more -- in much more detail to the green hydrogen, because they are more -- when they contract for hydrogen project, they will stabilize the price at least for the next 15 to 25 years. Because most of the -- as we explained before, as we work off-grid, most of the costs of our hydrogen is just the investment that is done at the beginning of the project. So, yes, they are afraid about small delays, but they know the future will be much more complex if they remain on the green hydrogen.

Benjamin Schwarz

Thanks, Joao. I guess jumping off of that, especially in light of the report that came out recently about blue hydrogen, this is a pretty straight forward question. Do you have an estimation of CO2 equivalent emissions per kilogram of hydrogen for a HEVO-SOLAR module?

Frederico Figueira de Chaves

I think our -- on a running basis, we don't have CO2 impact. That said, the -- we have not yet calculated the CO2 footprint of producing the unit. So, I'm not sure what the question was on the actual production of the unit, but if we're just thinking of green hydrogen versus blue hydrogen, carbon emissions involved in our process as it was.

Benjamin Schwarz

Yeah.

Jaime Silva

On the other side, we are delivering a huge amount of oxygen to the air. I will say that when HEVO-SOLAR is able to deliver it to the air same oxygen, that's around 80 big trees in period. So, we are not emitting CO2 and we are delivering oxygen back.

Benjamin Schwarz

Great. Frederico, in light of the updated forecast, what is your view on liquidity going forward?

Frederico Figueira de Chaves

So, the updated forecast actually in a way helped our liquidity situation because most of the projects we wanted to do in 2021 and also the majority of the 2022 were in development, which requires significant capital injection or capital investment from our side. The reduction of that deliverable also reduces the actual cash output and investment that we need to meet in the same years. What we have done for 2022 with a production reduction is that we produced more of the production going to our projects versus the third-party purchase targets. So that the sort of one-off revenues that you see with sell of the hydro generator, we hope to have those lessons active in 2022. And we will likely take more of that sort of a reduction in investment in deployment of HEVO-SOLAR in the projects as we would own and operates ourselves. But there's -- we would like to have done some more and to produce more. But on the up side, it actually produces a bit of pressure on our liquidity position.

Benjamin Schwarz

Thanks Frederico. A couple of questions here about hydrogen storage and hydrogen compression. So for -- how do you store hydrogen for electricity production at Evora? And what are your storage capacities in Evora?

Jaime Silva

In Evora, we have an inline system that has two levels of compressor. The first level, it's a level that allows to equate to the solar radiation variation like a buffer and second level will store in vessels of 300 bars. The full valve [ph] is connected to the storage vessels and then start to breaking at night. So, in fact, we are receiving solar radiation during the day and the delivering electricity at night, is working like a similar concepts of solar li batteries, but with a completely different approach off the energy vehicle used. So, it's a practical inline system that delivers some hours later the average and that has been produced. It is not the big storage. It is able to storage around two, three days maximum. But the license we have is that we can only deliver the electricity when sun went down. So during the night, in some way to accommodate the difference of renewable energy at night and day.

So it's a prototype project. It is a demonstration project. In fact, behind the compressor it is exactly equal to any other project. The users of hydrogen in this particular case is electricity at night. And it's a simple. In this project, we will also test not now after commission a different situation of connecting directly when HEVO and the full valve [ph] so it will also allow us to create a new product. Any way, it is yes.

Benjamin Schwarz

And following up on that and Amit Dayal [ph] in here. So, for HEVO- SOLAR Sines or for the green gas Phase 2 of Evora, what pressure is required for blending in the natural gas network?

Joao Wahnon

You see we produce the hydrogen. We take the hydrogen out. Today we take the hydrogen -- in gas take the hydrogen pressure, and then it is compressed and restored in vessels. The fact, the compression needed -- depends on the off-taker. So when we -- for instance, when we inject hydrogen into a refinery, we need to supply the hydrogen at the pressure of around 29 to 30 bars. If we want to supply hydrogen for hydrogen refilling station, we have the best solution -- economic solution is to supply the hydrogen already up 300 bars. So in the case of Sines, there's several possibilities. So you can inject in low pressure, medium pressure or high pressure. Some -- for the first project Sines, this is low pressure. So we will inject 10 bars, but high pressure we may inject 60 bars. So it really depends on the quantities and what pipeline we are injecting in.

The question is, in order to allow us to compress more or less, we have to install some compression systems and storage to store the hydrogen compress to be injected and normally in a constant flow, because we cannot inject the hydrogen and according to the hydrogen that is being produced in a day time. So we have always to start this hydrogen and compress it and injected in a constant flow.

Benjamin Schwarz

Thank you, Joao. So coming up here on the top of the hour. But a couple more questions to squeeze in here. There is a question on the ISQ tests, that there are three different tests. Part one is done and completed successfully. What do the subsequent tests two and three focused on?

Jaime Silva

No. The first one is the one that easier performance. So this is the real test. The remaining -- the remaining two, when is to measure the quality of the hydrogen. So if we produce hydrogen with 99.5 or 98.5, wherever, and third one is a longer period. So what we have agreed with them -- and it's is a test of several days in a continuous way producing hydrogen, resisting and also recording the wake-up and the lie down of the system. So, in the morning when the sun is already at five degrees, system will wake up, keeps producing during full day, and the goes down in the end of the day. So it's a continuous period, so it's no more than -- is equal to the first one for -- that for a longer period and covering the wake up and the lie down of the system.

Benjamin Schwarz

Great. Thank you, Jaime. A couple more questions. One of the competitive landscape, who do you see as your biggest competitors, if any? I'll open it up to anybody who wants to answer.

Frederico Figueira de Chaves

So, I'll take that on the competitive landscape. I'd say it's pretty clear who the large providers of electrolyzers and so on, are in the space and large phase of hydrogen, significantly larger than we are. However, what's the way -- one of the particular sort of advantages that we have is, we are designing our own projects. So, when we're growing up with the projects, we are partnering up with the clients, we are partnering up with the off-taker, and then the majority of cases, we're actually designing the projects hand-in-hand with them. So, it's more than we are going into a competitive bidding situation with the competition at this point. That will likely come as the market develops. But as this is such a new market with so much interest, I believe this is generally the case for many of the players as well. I don't think we need that. But it is -- I wouldn't say that we are coming up against and picturing one technology against the other at this point in time.

Benjamin Schwarz

Okay. Thanks Frederico. So, we're coming up here on the top of the hour. So, I think I'll -- we'll wrap up our Q2 update call here. For those questions that are here, that we didn't get to, please feel free to reach out to ir@fusion-fuel.eu, and we'll do our best to answer those questions. And otherwise, I thank you for joining us. We look forward to keeping you updated.

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