Marie Pavlik, CEO of SiliconAurora, addresses three recurring questions related to the Aurora Project near Port Augusta. Watch the full video below.

• – Progressing Aurora Project development 
• – GAS-TESS specifications delivered to SA Water
• – Positive outlook for revenues from evolving energy market and policies 
• – Strong cash position of $5.4m at end quarter 
• – Measures taken to conserve cash in response to market conditions 

Chairman’s letter 

The acquisition of the Aurora Project with development approval attracted considerable interest from large-scale solar developers, utilities and financiers during the quarter. Notwithstanding the coronavirus and economic fallout that have severely restricted travel and communication, our business development team has been undertaking presentations and virtual tours leading to negotiations with potential partners for a Silicon Power Plant. These negotiations are continuing with the aim of reaching an agreement in the current quarter and commencing the first stage 70MW solar PV development with TESS-GRID. As reported below in the business development section, the Company is, therefore, updating the engineering report and has commissioned Electranet to prepare for transmission connection. 

We were also contacted by major institutions assessing the potential for our TESS-GRID technology to improve the economics of their existing renewable projects in Australia and elsewhere. They are assessing the potential for our technology to supplement revenue by selling system strength services from the high-current, fast charging storage, and longer term peak generation from spinning turbines. We are looking forward to progressing these opportunities when travel restrictions ease so their technical teams can inspect the GAS-TESS and evaluate TESS-GRID applications with our engineers. 

The Energy Security Board has just released a series of discussion papers outlining the basis for a market in these critical services that a TESS-GRID can deliver (Renew Economy: “ESB begins push to re-shape markets for a renewables-dominated grid”). Recognising the value of these services will supplement the unique revenue stack and value proposition of our technology. 

As reported below in the operations section, we delivered specifications to SA Water to complete their business case evaluation for engines, solar PV and TESS at the Glenelg Wastewater Treatment Plant. Our evaluation shows that GAS-TESS is a more comprehensive solution in that it does not require gas pre-treatment and completely separates biogas disposal from electricity generation. We assess that the technology provides the greatest benefits when continuously burning gas and operating the turbine to supply plant needs, thereby eliminating any gas flaring and allowing for fast ramping at peak electricity demand and revenue opportunities. Importantly the partnership with SA Water has allowed our engineering team to plan the next stages of the GAS-TESS development to increase efficiencies through design improvements and optimised component selection. 

Encouragingly, the Australian Renewable Energy Agency (ARENA) released an announcement on Tuesday seeking input into Australia’s Bioenergy Roadmap, recognising the undervalued market targeted by the GAS-TESS. It follows a request from the Federal Energy Minister, Angus Taylor in late 2019 to inform policy decisions. 

During the recent quarter, engineering contractors attracted by the TESS and the Aurora Project, have told of poor performance after clients disregarded advice on suitability of certain energy storage devices for their operating environment. They are interested in the TESS as a robust energy storage solution for variable operating conditions, and most engineers would consider that to be a significant consideration in the selection of technologies. 

Our intensive engineering and commercial analysis of the GAS-TESS and studies for a TESS-GRID at the Aurora Project has highlighted a unique position for our technology in the current energy transition and future energy storage landscape. While other technologies can provide electricity storage and generation, our technology must be evaluated in a broader context to appreciate its versatility. For example, it offers independent charging and discharging, multiple choices of energy recovery system, the potential to time-shift biogas electricity generation, charging on AC directly from the grid, provision of grid stability services through instant switching of high alternating current loads and, of course, heat supply. The moves by the Energy Security Board could create new markets for grid services from our innovative TESS-GRID at Aurora and elsewhere. 

In closing, I want to acknowledge the contributors to this new look report, in particular, Engineering – Jordan Parham, Corporate – Penelope Bettison, Business Development -Maretta Layton and Marie Pavlik, and their teams that have continued to deliver for shareholders in the extraordinary disruptive and unrewarding conditions. 

We are all striving to build value for our over 3,300 shareholders. 

CORPORATE OPERATIONS 

1414 Degrees is in a strong financial position with $5.4m in cash at quarter end after receiving its R&D tax rebate in the quarter. The intended raise of $3m through a Share Purchase Plan to fund Aurora project development was cancelled as the evolving Covid-19 crisis and collapse of oil prices reversed investor sentiment. Accordingly, several measures were adopted to defer and reduce expenses while maintaining your Company’s core objectives to progress its technology development and projects, including Aurora. 

The Board and senior management agreed to remuneration cuts of between 25% and 75% and made other staffing changes, including redundancies and reduced hours. 

The reduced hours and remuneration have had an impact on the productivity of the company at a critical time for both commercial development and research and development of our new scalable thermal storage technology.  

In response, as reported in early April, the Board considered issuing shares to staff to top up salary. It was decided that this would be difficult to administer and could be inequitable for shareholders while share prices are impacted by crisis. Instead, it was agreed that the Company’s existing performance rights scheme was an appropriate means to incentivise the delivery of the Company’s programs. Accordingly, in addition to their contractual entitlement, some staff have been offered performance rights linked to their performance or the share price escalation over the four months to July 31 when their Covid-19 interim contracts will expire and the board will again review the situation. 

It is hoped that these measures will maintain workplace productivity to deliver on the opportunities presented by our versatile technology.  

The Company’s IT systems allow staff to work from home if required, and we conducted a successful working from home trial at the declaration of the Covid-19 pandemic. Critical team members continued to work on site at our research facility and the Glenelg Wastewater Treatment Plant. Safety procedures are now fully implemented, and most of the team are onsite. 

ENGINEERING OPERATIONS 

SA Water Glenelg Wastewater Treatment Project  

The Company has continued to engage with SA Water to refine the GAS-TESS design best suited to its Glenelg site requirements. Engineering and finance data for several of these GAS-TESS options have been provided to inform their technical evaluation and business case process. This has focussed on upgrades to the existing Mark I build to deliver a “commercial ready” unit that can provide benefits to the site as soon as possible in the current pandemic restrictions.  

The engineering team has also continued to design a higher specification GAS-TESS Mark II unit, incorporating further developments to enhance commercial viability, particularly focussed on improving the efficiency of the energy recovery system (ERS). These specifications have also been provided to SA Water for consideration under its asset acquisition program.  

Testing of the co-firing burner system showed that it extends the duration of maximum gas stream temperature, and hence turbine electrical output from the GAS-TESS. However, a key limiting factor has been under-performance of the external heat exchanger. It has now been established that it must be operated at a significantly lower temperature than the original specifications provided by the manufacturer, reducing the energy available to the turbine, and lowering its efficiency and energy output. 

With the business case concluded, on site testing has been suspended pending resolution of the heat exchanger performance limitations with the manufacturer.  

GAS-TESS development 

The GAS-TESS device has operated well and is capable of supplying all the heat requirements of the Glenelg site. The gas burners have performed to expectations, cleanly burning the biogas and supplying heat to the thermal storage. As our first longer term operating device, the GAS-TESS has also provided vital specifications for ERS equipment selection. Overall, the trial for SA Water has shown how to increase the electrical output and efficiency to provide a comprehensive solution for wastewater treatment plants, including time shifting of energy value, lower operating costs and gas burning without pre-treatment. 

Research and development 

As previously announced, the Company has responded to capital market and health constraints by deferring manufacture and installation of our new silicon phase change thermal storage for the GAS-TESS. Our technical team have, however, continued intensive testwork on highly scalable systems for containing and storing heat in molten silicon phase changes materials (PCM). This includes collaborating with leading R&D and manufacturing technology partners in Europe to ensure robust thermal storage is ready for deployment on our projects. We are also continuing to collaborate with Australian universities on research to deliver lower cost PCM and storage. 

Our engineering team is also further improving the TESS energy recovery system (ERS) to maximise the efficiency of heat and electricity supply. They are engaging with key equipment suppliers and refining thermodynamic and financial models to select equipment that will be implemented on the GAS-TESS or TESS-GRID. 

TESS-GRID development 

Design and development work on the TESS-GRID is focussed on delivering a pilot unit to the Aurora project site incorporating approximately 40MWh of our scalable silicon thermal storage technology. New concepts for maximising the efficiency of the ERS are being assessed through computational models and in conjunction with equipment providers. Outcomes of these evaluations are being incorporated into the overall project specifications and financial models before commencing detailed engineering. 

Having built and operated two large TESS units over the past two years (TESS-IND and GAS-TESS), we now have a comprehensive data set regarding the performance of the technology, its limitations and lessons learnt to improve its design and operation. As reported early in 2019, there were significant challenges to overcome to deliver silicon storage technology that was scalable and stable for larger TESS operating in hot atmospheric conditions. We therefore brought in qualified team members to lead the intensive technological development that is now delivering a new, improved and scalable silicon PCM and containment solution. 

Similarly, the first builds of the scaled up ERS also did not perform according to expectations. While such results can be anticipated at an early stage of technology development, management was surprised by the extent to which available third-party components limited TESS performance. We therefore augmented our engineering team with specialists who have been evaluating the status of our current devices and third-party components to produce a practical road map for TESS development and commercialisation in the context of our new Aurora project and the Glenelg Wastewater Treatment Plant. The aim is to deliver this in the current quarter.  

BUSINESS DEVELOPMENT 

The potential of the TESS technology and the opportunities opened by the Aurora project have continued to keep our business development team busy. Like many companies, we have had to embrace new ways of working during this unprecedented time and have conducted numerous online meetings, presentations and virtual tours of our technology.  

We have been approached by global companies investigating both the development opportunities of the Aurora project and opportunities the TESS-GRID technology can afford them in the future.  

Stone & Wood project: Last quarter Stone & Wood Murwillumbah brewery were delivered a feasibility study to replace their LPG fuelled steam generation with a TESS-STEAM to produce steam into the existing accumulator. Stone & Wood continue to be very supportive of our technology; however, like many businesses, have found themselves facing a volatile and unknown future in recent times. The parties have agreed to reassess as the situation evolves. In the meantime, we are continuing to engage with the distribution utility for an arrangement that encourages off-peak energy storage. 

SA Water Glenelg Wastewater Treatment Project: SA Water has been supplied with data for their business modelling, and we continue to learn that the strength of the GAS-TESS technology is the ability to provide much more than a gas engine solution for wastewater treatment plants. 

Aurora Project: 1414 Degrees acquired SiliconAurora Pty Ltd to demonstrate 1414 Degrees’ grid scale thermal energy storage in a power station delivering firmed renewable generation. The Company is evaluating staged development scenarios to maximise the current and future revenues from the project.  

The current focus is to partner with established solar PV developers and financiers to develop the first stage of the project, incorporating 70 MW from solar PV and a TESS. The engineering studies for the development approved solar PV are being updated for procurement quoting. Our intention is to incorporate a pilot 35-40 MWh TESS-GRID to be charged from the farm and share the grid connection.  

Electranet has been commissioned to commence work on transmission connection requirements to the site. The site has access to multiple lines giving us the capacity to match the planned stages, up to 400MW. We are working with the South Australian Government to review the granted approvals to ensure they are in line with the proposed stages of development and updating terms where necessary. 

Several energy industry consultants, engaged to assess the economics of the first 70MW stage, presented a variety of commercially viable options based on revenues from Power Purchase Agreements (PPA) and additional revenues from the National Electricity Market. The TESS-GRID delivers emission-free, synchronous inertia and system strength to compensate for asynchronous renewable generation. The high current electrically charging TESS also adds value with its ability to instantly stop and start charging, assisting in managing frequent grid load changes. In comparison, batteries require a rigid charging regime to maintain safe operation and prevent ageing. This charging flexibility of the TESS-GRID can generate revenue from frequency control or demand response services contracted by the Australian Energy Market Operator (AEMO).  

Feasibility: Your Company has advanced a feasibility study for a large South Australian heat user. However, there is uncertainty over their ability to commit to a longer-term agreement in the current market conditions. We will update the market as and when we are able.  

Events: We were due to present and exhibit at several conferences and exhibitions, but all have been postponed. When circumstances allow, we look forward to appearing at OzWater, Australian Energy Storage Conference and Exhibition, Australian Energy Week, the Green Power Festival and others. 

• – Budget review confirms 14D has sufficient funds to maintain technology and project development
• – GAS-TESS business case continuing
• – Strong interest in the Aurora Project
• – Staff and Board cuts

1414 Degrees is pleased to advise that it has reviewed its budgets and can confirm the Company has sufficient funds to maintain its technology and project development. 

Our business case modelling with SA Water for the GAS-TESS integrated into the Glenelg Wastewater Treatment Plant will continue until mid-year after which we are expecting a commercial decision.

Our commercial team has also been working with utilities and financial entities attracted by the TESS-GRID as an energy solution for renewable farms. There is strong interest to develop the Aurora Project in the near term. They have also continued studies with large industrial sites to evaluate emissions reduction strategies with the TESS. 

The Company is adapting to the capital market and business constraints by reducing hours, effecting redundancies and deferring the upgrade of the silicon storage in the GAS-TESS. The board and senior management have participated by agreeing to between 25% to 75% cut in fees and salaries, with the Executive Chairman taking a 50% pay cut. The board will consider issuing shares to key employees to compensate for the reduction in cash salary. 

Although we are anticipating commercial decisions within six months, these measures, if carried forward, would reduce cash outflows by about $2m to support operations into second half 2021.  

1414 Degrees Limited (ASX:14D) announced on Monday 24 February an offer of discounted shares to shareholders so they could support the next phase of its technology roll-out centred on solar generation and storage at the Aurora Project.

However, global economic and market conditions have significantly deteriorated this week and the Company is not going to proceed with the offer. Directors will continue to monitor conditions and note that there is adequate working capital that will be boosted by a $2.748m R&D refund next week.

The SiliconAurora acquisition and plans for 1414 Degrees’ Silicon Power Plant as a heat and power supply solution for industry has prompted major finance and industrial entities to engage with its commercial and business team to study the benefits and applications. At the same time the SiliconAurora team are advancing power and heat offtake sales to drive the project financing.

Management have been undertaking a number of measures that will reduce recurrent expenditure. The Company has leased new premises that will allow it to combine the corporate and engineering teams at one site to ensure common focus on the development and commercialisation of its technology, with the benefit of reducing accommodation costs.

L to R: Dr Kevin Moriarty, CEO of 1414 Degrees and Marie Pavlik, CEO of SiliconAurora Pty Ltd

1414 Degrees Limited (ASX:14D) (Company) is pleased to offer shareholders an opportunity to participate in a Share Purchase Plan (SPP) targeted to raise approximately $3.0 million. 

Under the SPP, eligible shareholders will be invited to subscribe for up to $30,000 of new fully paid ordinary shares in the Company (Shares) at an issue price of $0.16 (16 cents) per new Share, free of all brokerage and commissions. 

Rationale and Use of Proceeds 

The SPP allows eligible shareholders to participate in the Company‘s capital raising program at an integral stage in its development.  

The funds raised in our IPO have been used for the successful demonstration of our electrically charged pilot TESS and the commissioning of the pilot biogas TESS at SA Water‘s Glenelg Wastewater Treatment Plant. Our prospectus plan to develop a grid scale TESS storage solution with the ability to stabilise electricity supply has attracted the interest of industries seeking to reduce their energy costs and carbon emissions. Industry is recognising the benefits of accessing a combination of heat and electricity to maximise the financial value of our technology in their operations. 

The proceeds of the SPP will enable your Company to advance its emissions reduction and grid stability strategy by advancing the development of a silicon power plant, pairing our TESS technology with the large solar PV generation capacity of the recently acquired Aurora Solar Energy Project in Port Augusta, South Australia (Aurora Project). The Aurora Project, to be operated by the Company’s wholly owned subsidiary SiliconAurora Pty Ltd, is planning to electrify heat energy, otherwise produced by fossil fuels, to reduce industrial emissions in the Upper Spencer Gulf region, while simultaneously firming power.   

Proceeds will also be used to fund further upgrades to the GAS-TESS in support of first commercial sales, and for general working capital purposes. 

I encourage all shareholders to take up an allocation under the SPP to enable your Company to realise the potential of its strategy.  

Participation in the SPP is entirely voluntary. 

Share Purchase Plan 

The offer of Shares under the SPP (SPP Offer) is being made exclusively to shareholders who were registered as holders of Shares at 7.00pm (AEDT) on 21 February 2020 (Record Date) and whose registered address is in Australia or New Zealand (Eligible Shareholders).   

The SPP Offer is targeting to raise approximately $3.0 million by way of the issue of 18,750,000 Shares (New Shares) and entitles Eligible Shareholders, irrespective of the size of their shareholding, to purchase up to $30,000 worth of New Shares at an issue price of $0.16 per New Share. The Company may elect to either scale back applications or increase the amount to be raised under the SPP Offer, subject to compliance with applicable regulatory requirements. 

You may apply for parcels of New Shares in $1,000 increments with a minimum investment amount of $1,000, up to a maximum investment of $30,000, without incurring brokerage costs. The issue price of $0.16 per New Share represents a discount of 12% to the volume weighted average price (VWAP) of Shares on the Australian Securities Exchange (ASX) during the 5 trading days immediately prior to the announcement of the SPP Offer on 24 February. 

Full details of the offer will be contained in an offer booklet which is anticipated to be dispatched to Eligible Shareholders on 2 March 2020. 

Key Dates 

The proposed timetable for the SPP Offer is set out below. The Directors reserve the right to vary the dates and times without notice. 

* These dates are indicative only. The Company may vary the dates and times of the SPP Offer without notice by lodging a revised notice with ASX. Eligible Shareholders are encouraged to submit their applications early as the Directors reserve the right to close the SPP Offer early if oversubscribed.  

• • GAS-TESS business case driven by value not efficiency

• • GAS-TESS pilot lessons being used for commercial Mark II model

• • Aurora Solar Energy Project in Port Augusta will be clean power station with TESS-GRID

• • Technology development focus on scaling silicon storage to meet needs of new projects

• • Cash position $3.9m at end quarter and circa $2m R&D refund in process

1414 Degrees is pleased to provide its December 2019 quarterly update.

The quarter saw the maturing of your Company’s strategy of obtaining commercial pilot sites for its devices. As many shareholders would be aware, the industrial scale of the Company’s storage devices means we need to trial them in operating plants that can use both heat and electricity outputs:

• • GAS-TESS: SA Water provided us with the opportunity to trial our prototype GAS-TESS unit at its Glenelg Wastewater Treatment Plant (WWTP), allowing us to determine the operating specifications, and perhaps even more importantly, providing the basis to design and demonstrate a commercial product that can be sold with confidence into the very large wastewater utility market.
• • TESS-GRID: To fulfil our prospectus objective of grid scale storage, we acquired the Aurora Project near Port Augusta and two other solar projects in NSW through the purchase of Solar Reserve’s Australian subsidiary, now renamed SiliconAurora Pty Ltd.
• • TESS-STEAM: In December we delivered the technical feasibility study for a TESS-STEAM pilot at the Stone & Wood brewery in northern New South Wales (originally intended for Pepe’s Ducks).

These projects are critical to your company realising the revenue potential of its technology worldwide. For example, considering the GAS-TESS as a replacement for gas engines used by global wastewater utilities suggests a market potential of billions of dollars. The market for the TESS-GRID is potentially even larger, as the worldwide energy market transitions to increasing amounts of intermittent renewable generation requiring energy storage for reliability.

The basis for this earnings potential, which will be demonstrated through the Aurora Project, is the large number of revenue sources available through its versatility of operation. For example, the TESS-GRID is largely unique in its ability to tap into both recurrent and opportunistic revenue sources, ranging from the sale of heat and electricity under PPA’s to current and future proposed grid stability payments. The latter include robust grid stability services that can only be supplied by turbine generators or synchronous condensers. However, in contrast to turbine generation, the condensers have no ability to provide recurrent income, indeed they are a passive cost of renewable generation.

The TESS-GRID will also be able to charge from the grid at high current flows sourced at times of excess generation – therefore low priced – and regenerate at high rates for longer periods than batteries, while also supplying heat to displace gas and reduce emissions. The Aurora Project will allow us to demonstrate and confirm our product’s potential to a global market.

SA Water Glenelg Wastewater Treatment Project

During the quarter the pilot GAS-TESS Mark 1 (Mk I) at the Glenelg WWTP provided important data and operating specifications to drive its business case. Importantly the lessons learnt from this unit are also being used to define the specifications for the production model of the GAS-TESS Mark II (Mk II). A planned series of capability upgrades commenced with installation and commissioning of a co-firing burner to increase the temperature delivered to the turbine. This new burner system is fully functional with first tests showing an increase in temperature of the gas stream consistent with engineering predictions. This will significantly increase both the power output and efficiency of the turbine. Testing has been suspended while our engineers and the manufacturer resolve a leak in the external heat exchanger. Further improvements of the Mk I are planned, however, some will be best implemented with the optimised Mk II device.

GAS-TESS Business Case: We are expecting that the business case will be ready in time for a midyear decision point for the Mk 1 device. We are progressing with the design of a larger Mk II device, optimised for the plant, for delivery within 12 months of order.

The current pilot device at the Glenelg plant was the result of an invitation from SA Water to trial a TESS at minimal cost to compare with gas engines. The focus is on how to deliver value from biogas, with the added benefit of timeshifting to increase the energy value inherent in the biogas.

We do not yet know the operating efficiency of the gas engines for direct comparison to the TESS in the context of the Glenelg WWTP. The rated electrical efficiency of the engines is not attainable because the biogas has low methane content compared to natural gas. The use of the gas engines is further complicated by the presence of hydrogen sulphide (H2S) and silicones (also known as siloxanes) in the gas. The H2S degrades the gas engine oils, while the silicones oxidise to abrasive silica, causing wear. By contrast, the TESS burners fully combust the biogas without moving parts or lubricants that could be contaminated, and so do not incur the high maintenance costs of the gas engines.

Therefore, the performance of the GAS-TESS should not be measured against the CHP efficiency of the gas engines, but by its ability to timeshift the value of the biogas and reduce operating and maintenance costs compared to engines. The average electricity price profile on the National Electricity Market (NEM) means that the ability to timeshift electricity generation can result in a substantial uplift in value compared to continuous output from engines without energy storage.

I believe this point is not well understood by commentators who focus only on efficiency when comparing our devices to batteries or gas engines. These devices and the TESS have advantages and disadvantages that go beyond just their efficiency as machines. They must be compared in terms of their value in transforming input fuel to output energy. It should be noted that this value is dependent on the operational situation and the timing of energy imports and exports to the electricity market or behind the meter considerations. The graphs below illustrate this principle. Illustration available at https://1414degrees.com.au/gas-tess-illustration/ 

A further complication is that SA Water’s current gas engines are fully integrated into the WWTP whereas the TESS is not. The Glenelg WWTP has also recently installed solar PV generation, further complicating the value calculation – the biogas must be burnt even while the solar PV is generating, and the GAS-TESS will do this and store the energy for regeneration when the sun sets. These considerations explain why the business case is a complicated exercise and how, even though the electrical efficiency of the TESS (like any storage) is less than direct generation in engines, the TESS can generate more revenue. I hope this clarifies that the preparation of the business case must take into account many matters, not the least being maintenance cost. On these considerations we estimate that our business case will be very competitive.

Aurora Solar Energy Project

Your Company acquired the Aurora Solar Energy Project through the acquisition of Solar Reserve Australia II Pty Ltd (renamed to SiliconAurora Pty Ltd) in December. It is approved for a 150MW concentrated solar plant (CSP) plus 70 MW of solar PV. As stage 1, 1414 Degrees is planning to progress with 70MW of Solar PV and then proposes a lower risk staged development of up to 400 MW of solar PV charging several GWh of TESS-GRID modules distributed on the transmission grid. This TESS-GRID storage could also be charged from third party solar and wind farms under PPA, or through electricity purchased on the NEM at times of low demand. Our analysts have been undertaking financial modelling showing positive earnings from multiple sources including network stability revenues, adjusted for current and future trends in the NEM.

The pairing of solar PV generation with 1414 Degrees’ TESS-GRID is a new clean Silicon Power Plant technology offering increased reliability through firmed electricity and heat supply that can be distributed through the network. The ability to timeshift the power supply will mitigate future issues with margin loss factors (MLFs) that are affecting investment in solar projects. The TESS-GRID can also generate revenues from grid stability services in support of new solar PV projects.

1414 Degrees appointed Marie Pavlik as CEO of its subsidiary company, SiliconAurora Pty Ltd, to deliver the Aurora Solar Energy Project. Marie has been working closely with our Business Development Manager, Maretta Layton, meeting with key stakeholders in Port Augusta, including the Council and community.

The Aurora Project is positioned in the “Iron Triangle” industrial area as shown in the illustration below. Over the past two years, our business development team has been contacted by industries seeking to replace gas consumption with emissions free heat from our TESS-GRID. This Project will facilitate our ability to generate recurrent revenue from long term heat contracts with these customers. While there is currently no direct value in emissions reduction in Australia, industries are becoming increasingly aware of the need to address emissions reduction, and we expect that this will lead to new value streams from carbon offsets and air quality measures in the future. We also expect that regulators will move toward providing a charge for storage as a service for grid reliability and security, replacing very substantial government subsidies for construction of pumped hydro and batteries. This will encourage investment in lower cost and environmentally responsible grid stability solutions, such as the TESS-GRID.

Stone & Wood brewery project

During the quarter a feasibility study was prepared and sent to the Stone & Wood brewery management. The study recommended replacing the current LPG heat supply with a TESS-STEAM generating steam into the existing accumulator. Electricity generation would follow in a later stage. Although the efficiency of the device is high, the pricing structure for electricity supply in the New South Wales Government’s distribution grid is not conducive to timeshifting of renewable generation, because the utility charges by the amount of electricity transmitted rather than a connection charge based on the maximum as, for example, is the case in South Australia. Our business development team have contacted the utility to seek an arrangement that encourages offpeak energy storage. This demonstrates the complexity of current business cases based on geographical location, both within Australia and globally for all storage technologies. As part of the transition to renewables, and the recognised need for storage, we expect such market mechanisms will evolve.

Technology

The imminent requirement to deploy large TESS units for the two proposed commercial pilot projects, in addition to the GAS-TESS at Glenelg, has provided further impetus to our core technology team developing larger scale silicon energy storage solutions. To protect our IP, we do not comment in detail on the nature of these exciting initiatives, but they include containment of molten silicon phase change materials (PCMs) in combustion environments from 1000°C to 1500°C, supported by advanced research laboratories in Europe. The scalable storage solution will facilitate higher electrical efficiency and heat output, suitable for both the biogas and the electrically charged versions. The aim is to achieve a rated electrical efficiency of up to 44% from a co-generation turbine system, substantially increasing the competitive position of our CHP solutions.

Finance

During the quarter the Company reviewed its R&D tax structuring with KPMG prior to lodging its FY19 tax return. This review resulted in a decision to recognise R&D assets for tax purposes and consequently depreciate assets over life of the projects. This will change the timing of claims with a likely revision to prior year tax returns and the deferral of some rebates into future years, but is not expected to have a material effect on the total amount of rebates paid to the Company over the project life.

Your company has sufficient cash reserves at present as it awaits payment of its FY19 rebate from the tax office. The magnitude of our tax rebates underscores the fact that our capital requirement on an annual basis is 43% less than the cash expended. Nevertheless, the one-off purchase of the SolarReserve assets depleted cash reserves and working capital is required to advance the Aurora Project to financing and prepare the GAS-TESS business case for decision mid-year. It is therefore appropriate to review the financial outlook for the company.

Capital requirements:

The GAS-TESS project has been funded in partnership with the SA Government Renewable Technology Fund grants scheme with a final grant remittance expected. As part of the business case modelling, our operations team is evaluating the relative merits of expending an additional $1m to substantially upgrade the capability of the current device or preserving capital toward building the optimised Mark II model.

The financial plan for the Aurora Solar Energy Project includes $110 million of loan funding allocated by the federal government for the Port Augusta based CSP project. Our case is that the modularity of the TESS-GRID, and its ability to charge from grid as an alternative power source, provides more reliability and flexibility than the CSP alternative. Moreover, our revised development plan calls for less upfront capital and performance risk compared to the CSP because capital funding is spread over several stages of generation and TESS storage construction. The first stage includes a TESS-GRID pilot to provide confidence for investment in the following stages.

Earnings outlook:

GAS-TESS earnings outlook: Management are confident that the company faces a large uplift in value from the commercialisation of its products. According to the World Biogas Association investment in the Australian global biogas industry was estimated at $3.5 – $5 billion in the five years to 2020. We expect the GAS-TESS to demonstrate commercial readiness early in the next financial year through the sale of the current unit and/or an optimised Mark II version, thereby opening a potential billions of dollars a year global market over coming decades.

TESS-GRID earnings outlook: The TESS-GRID is aimed at a potentially larger worldwide market than the GAS-TESS, as intermittent renewable generation grows and emissions reduction measures include the substantial gas heat market. Further, our technology is likely to be recognised as preferable when the less desirable aspects of current grid stability technologies start to be realised, for example, the environmental costs of mining increasing quantities of battery components and disposal of vast numbers of exhausted batteries. We expect to deploy the TESS-GRID in infrastructure-funded vehicles supported by revenue from heat and electricity sales with additional revenues from grid stability services. SiliconAurora Pty Ltd is the first of these special purpose vehicles (SPVs), and we are working on the business case to present to institutions and shareholders who wish to directly participate in this income stream. The intention is for 1414 Degrees to own the projects through the SPVs, which will be financed by underlying investment vehicles. Solar Reserve used this scheme, registering a financing subsidiary we will rename SiliconAurora Finco.

We are working hard to realise value for shareholders and I look forward to reporting further progress.

Dr Kevin Moriarty

Executive Chairman