The Exchanges

Q So you're in the process of securing customers. As you say, these are kind of long lead times, and, um, was there sort of a specific signal you were waiting for with respect to your customer acquisition before you pulled the trigger on building the manufacturing plant, or were those almost independent journeys for you?

A Yeah, um, we were looking for signals, um, and, and we got them in the form of capacity reservation agreements. So, you know, we have a number of, of these agreements with various, um, project developers, um, I'll name a few that are public. Intersect Power, AES, um, are a couple that we have agreements with. Basically, they say, look, um, we'll put some cash down to reserve your manufacturing capacity over the next few years so that we have access to your technology, um, in our projects. Um, now that only works in a, in a seller's market, right? A market where people are anticipating that, um, That demand for the, the product, the electrolyzer in this case, will outstrip the available supply of technology that meets their needs. And at the time we signed these agreements, it was a seller's market, and so we were able to pull it off, and that was the demand signal that kind of put the wind in our sails to build the factory and, and, uh, and start to scale it up. Things change quickly, right? It's not a seller's market in electrolytic hydrogen anymore. At least not for the time being. We've definitely come out of hype mode, and we're in hydrogen disillusionment mode right now, I think, globally.

AI assessment note: “we got them in the form of capacity reservation agreements.”

Q And so the next decision you made was to build a manufacturing plant for your electrolyzers. So talk about that decision. Was that sort of like very obviously the next phase, or did you consider kind of building a hundred megawatt project before you built a manufacturing facility? How did you think about that next step?

A The cell technology is bespoke. It's, you know, invented by us. It, it can only be made by us. Um, we did not see, and we're not interested in Um, an outsourcing approach to build cells and stacks, and so, uh, even to get to the 10 megawatt facility, we needed a manufacturing operation. We made these full-scale devices in R&D labs in, uh, they happened to be in Natick, Massachusetts, for about a year, but at the same time, we, we were searching for, ultimately found, and, and built out our manufacturing facility down the road in a town called Devons, Mass. We come from a Co-founders and I come from a manufacturing background at First Solar. Building a factory is a big thing. It's a heavy undertaking, um, but it was a necessary step to proving out the technology because, look, I mean, making something work in the lab is one thing. Making it work in a manufacturing environment at a throughput that, that is realistic and at a cost structure that works for the business, that's a whole nother matter.

AI assessment note: “it was a necessary step to proving out the technology”

Q And so, how have you been thinking about lining up customers As you go into building this pilot line and ultimately this bigger manufacturing facility, like at what point did you start actually trying to line customers up for electrolyzers?

A Oh, we've been, we've been out selling for, I'd say, two years now. Laura, one thing I'll, I'll note here is that for a thing at the scale we're making at a hundred megawatt electrolyzer plant, uh, the sales cycles are very, very long, um, because they're tied to project development Life cycles and project development at this scale can take anywhere from three to five years. So our customers journey is quite long and their technology selection occurs partway through that journey, but then there's a lot more to be done before they reach what's called financial investment decision, FID, which in commercial terms means in order for us. And then we have to produce the electrolyzer, deliver it, commission it, Before it goes into operation. We didn't discuss this, but, uh, worth noting here, we at Electric Hydrogen are not a producer of hydrogen. We produce the equipment, the technology that enables other people to produce hydrogen at their projects. Those project sites can be, um, they can be in a refinery, they can be at an ammonia plant, they can be, uh, an e-methanol facility, uh, they could be an ESAF, uh, sustainable aviation fuel facility, uh, et cetera, et cetera.

AI assessment note: “we've been out selling for, I'd say, two years now.”

Q is. And when you go talk to an equipment financier, you basically want to have the opposite argument, right? Because they want to know that they can resell this and it's going to be easy for someone else to use and it's low risk and all these other things. So how did you think about that dichotomy and where do you think you fall on that actual technology risk spectrum?

A Yeah, you're right. Venture capital wants a moat, right? A technology moat in our case. You know, what's special about you? What can you defend? Um, and that, that does on the face of it seem to be a conflict. We always have taken the position, and again, this is learning from our experience in manufacturing and solar. We've always taken the position that it's in our interest to leverage as much as possible existing solutions, particularly manufacturing solutions from nearby industries. Lots of people in the world use membranes for different things, like water purification, for example. Can we borrow, adapt manufacturing technology, process technology from those industries to our needs? So the approach we've always taken is avoid customization of equipment wherever possible. Use standard off-the-shelf equipment. You know, it can always be configured, so you'd consider that more tooling, but use available equipment that's well-proven, well-demonstrated, With all the bugs and kinks worked out of it, adapted to our needs. Uh, and that fits very well with the capital financing, the equipment financing approach.

AI assessment note: “avoid customization of equipment wherever possible. Use standard off-the-shelf equipment.”

Q Well, so let's get into the details of this. So you mentioned that you, you essentially needed to build a sort of small amount of manufacturing capacity just to be able to get to your 10 megawatt demo. Is that right?

A Yeah. So in our manufacturing facility, we built a pilot line. And so think, you can sometimes think of a manufacturing facility as multiple parallel lines, um, feeding into, you know, into larger unit operations. Um, we built a pilot line for the Critical piece of the technology, which is really the membrane electrode assembly and some of the other components, um, and started to exercise it. It took maybe six months, I'd say, to root out all the issues, to debug that process, which, you know, you find all sorts of things when you do this, uh, because you no longer have PhDs building something, you have technicians building them and it's a whole nother animal. So yeah. That's, that's what we had to go through to, um, to start to produce at a scale sufficient to, uh, feed both our, our 10 megawatt pilot plant in San Jose, but also, uh, to continue to iterate on the technology and improve its performance and reliability. Um, we're now in the phase of ramping up the capacity on that line to produce commercial volumes.

AI assessment note: “Yeah. So in our manufacturing facility, we built a pilot line.”

Q that's probably real and meaningful, that, that maybe folks are thinking less about hydrogen production for, for some serious reasons, and also that just, you know, hype bursts eventually, whether or not it should. So can you say a little bit more about, like, what you think is the shape Of this trough of disillusionment, what you're seeing out there in the market, and how that's affecting your strategy now?

A So I think, as it stands today, people should be disillusioned with electrolytic hydrogen. It is too expensive. And for me, that's no surprise. In fact, we started the company specifically to address that problem. Electrolyzers today in the 2000 dollars a kilowatt range, they're too expensive to produce economically viable Green hydrogen. And we're seeing this in projects all through the world. So where green hydrogen projects are being built, they're being built at price points that don't really make economic sense without massive subsidy support. And policy makers are seeing this and realizing, oh, well, maybe this isn't really affordable, right? Maybe this is, maybe this is a little harder than we thought. We should scale back our ambitions. Our technology and our product Reduces that cost by 50% and gets us into the ballpark where green hydrogen becomes economically viable with moderate subsidy and support, and once we get to scale, it'll get even better from there. So I think a future where, where e-molecules are at parity with their fossil alternatives is actually achievable, but we have to take bolder steps, particularly on technology and cost reduction, in order to get there.

AI assessment note: “Electrolyzers today in the 2000 dollars a kilowatt range, they're too expensive”

Q Okay, so you're ready to go build your manufacturing plant, you've got financing for it, but obviously you also need customers to be ultimately really buying this. And it's not straightforward for them to figure out how to finance a hundred megawatt electrolyzer. So how did you go about securing your customers and thinking about the financing that they were going to need in order to actually build these?

A There's this thing that you've heard about, bankability, right? What does that mean? Is it, it means, is it technology financeable? Will an infrastructure capital provider, equity and debt, will they put their money to work to Build one of these things. And the answer is large scale green hydrogen is not bankable today. So who's going to buy if they're dependent on project finance? Most project developers use project finance. They don't buy and build on their own balance sheet. They partner with, with capital, with capital providers to do that. And so, you know, as we talk to potential customers, the interest in our product Was very strong. Our price point is unbeatable and enables a lot of projects to actually economically work, whereas otherwise they wouldn't. But geez, yeah, we're not sure we can finance it. So as you think about that problem and, you know, we, we learned more and more talking to more and more customers, we, we recognized what we needed was what's called a balance sheet buyer, right? This is somebody who's willing to buy using their own capital, not going to a bank, a project finance bank. And, you know, why, why is that interesting? It's interesting because generally there's somebody at a company like that who can determine that the risk is worth taking. In comes the billionaire. So there are very few people, actually, there are very few companies and poten…

AI assessment note: “we recognized what we needed was what's called a balance sheet buyer”

Q hype cycle that Rafi mentioned at the top? Well, the next phase was about to make things difficult. Obviously, as you're getting started, The very first thing you build is not about to be a hundred megawatt electrolyzer. So can you talk about your pilot projects? How did you decide to size them? How did you finance them? What were these projects like and what did they prove for you?

A I haven't mentioned this, but an electrolysis device is called a stack because it's like a stack of pancakes. Each pancake in the stack is a cell. Many of those pancakes stacked up makes a stack. The stack is the, the unit of operation. It's the device that That produces hydrogen from water and electricity. As we scaled it up, uh, the stack technology became proven and we needed platforms. Well, not proven. The stack technology became like materialized and we needed, um, test systems in order to validate that it works the way we expect it to work. So the first thing we built was, um, was a 330 kilowatt test system. Just a test system in the lab, and think of that as a way to test a few of these cells at a time. We got a bunch of run runtime under our belts there, and then we put our minds to building a larger system at a megawatt scale. The megawatt scale is still a small fraction of the capacity of our stack, but it's the next thing we built. We built that, operated it for a while, and then decided It's time to produce a large-scale system that represents the repeat unit that will be, um, produced in our hundred megawatt plant. So our hundred megawatt plant is not one stack. It's a repeat of stacks and power conversion, and so we built that repeat unit, uh, in San Jose. It's a 10 megawatt scale, um, electrolyzer. It's operating today, and Have utilized that to prove out the st…

AI assessment note: “the first thing we built was, um, was a 330 kilowatt test system.”

Q So say a bit more about kind of how you went about searching for customers. Were you looking for those with big balance sheets and or for those that really had a big risk appetite? And then say more about this elusive billionaire. What sort of industry were they in? What, what exactly was their skin in this game when it came to hydrogen production?

A We spend a lot of time thinking about why does the customer's project make sense? Because if it doesn't make sense, it really actually probably won't get built. Even today, the world of electrolytic hydrogen is full of projects that shouldn't get built. Right now, the green hydrogen or electrolytic hydrogen market is extremely subsidy dependent. The industry hasn't scaled yet. We haven't gotten down our cost curve, and so the end product is considerably more expensive than the fossil alternative, and hence requires some sort of, uh, policy To drive its adoption. Either a carrot or a stick. But, um, what we found is that that in and of itself is not sufficient to cause, uh, end user to buy. Uh, so ammonia is used to make fertilizer. The fertilizer industry has no compulsion or real kind of soft motivation to decarbonize. Interestingly, by the time ammonia gets turned into fertilizer, gets turned into food, that Ultimately gets sold to consumers, right? No one really cares through that whole supply chain whether the ammonia was high or low emission. And so even though there's relatively low switching cost, ammonia producers are not interested in taking the risk of switching from fossil to green or clean. And we found that not only here in the U.S., but around the world, actually. In Europe, on the other hand, they have both Subsidies, support mechanisms, and also, uh, compulsions…

AI assessment note: “That's The kind of driver that we think makes projects work”