Plug Power Inc. (NASDAQ:PLUG) Wolfe Research Utilities, Midstream & Clean Energy Conference October 1, 2024 8:50 AM ET

Company Participants

Julian Nebreda - CEO of Fluence
John Berger - CEO of Sunnova
Jose Luis Crespo - General Manager of Fuel Cell Applications

Conference Call Participants

Unidentified Analyst

On to our next panel, continuing on the Clean Theme. This morning we have some of the kind of key leaders in the Clean Energy Space. I will finish with the mics here first.

So to my left, Julian Nebreda, who is the CEO of Fluence. And then we have got John Berger, CEO of Sunnova, to his left. And then to his left, from Plug Power, Jose Luis Crespo, who is the General Manager of Fuel Cell Applications.

So, thank you, gentlemen, for joining us this morning. And maybe to start off, if each of you could briefly give a brief snapshot of your company, brief snapshot of the investment case, and then we'll open it up for more discussion.

Julian Nebreda

Fluence Energy, we're a battery storage company. We provide battery solutions in front of the meter, utility scales in front of the meter. We are essentially a technology company that provides solutions to our customers.

I think our investment case is a great opportunity of the battery storage market. This market exploded, the technology has matured in a way that has allowed that today regulators globally and customers globally are using this technology efficiently and economically. And the market is in a very, very good position.

We have seen a significant reduction in cost that the more and more business cases are standing up, and we have seen that tremendous demand. And we are in a very unique position with that offering of domestic content in the U.S. and a de-risk solution outside of the U.S. that are -- that we have in the UK to deliver the business cases.

Unidentified Analyst

Great. Yes. Thank you. So we are a behind-the-meter power company. We mainly do residential. We've got a little bit of business market. We operate from Guam to Puerto Rico and Texas to Maine. So about almost all 55 U.S. states and territories. I think we're in 51. Essentially, we finance and make money on the financing spread. We keep the power flowing. So it's our service technicians that are out there repairing systems so the power flows that people pay us, seed financing. And also, it goes with that, you know, repairing after storms. So it's a lot of my technicians are out there fixing systems after the recent hurricanes.

And then lastly, we aggregate and sell capacity and energy into the wholesale system. So that's obviously a growing revenue stream for us. I think the investment thesis is pretty straightforward. Utility rates are moving up. As Julian said, equipment prices, batteries, panels, inverters are moving down pretty decisively. We think that continues to be the case, as Julian indicated. And that creates a wedge that we take a big chunk of that value, if you will, with that wedge.

Reliability is also dropping, as we've seen, on utilities. And so as that takes place, more and more consumers are coming in, just for the reliability reason alone. Again, see utility rates going up and equipment prices moving down. That's going to generate cash flow. And really, that's the focus of the company from the financial aspect is, you know, generating more and more cash based on the operations and the scale that we have as a company.

Jose Luis Crespo

Black Power is the leader in the hydrogen industry. As a company, we have the complete ecosystem for hydrogen. We produce hydrogen ourselves, but we also have the technology to produce hydrogen. We have from the electrolyzer that converts the electron and water into hydrogen, gaseous hydrogen. Then we have liquefiers that actually convert the gaseous hydrogen into liquid. Cryogenic technology to store and transport that liquid hydrogen.

Then we have refueling stations for hydrogen already deployed in the U.S. and in Europe. Mainly, we have about 200 to 220 refueling stations right now already deployed. And then we have the fuel cell technology, which is the part of the company that I am General Manager of, that actually converts that hydrogen into electricity for any applications.

So in the electrolyzer business, we don't only have the technology, as I said, but we also operate already our plant in Georgia that produces 15 tons a day. This is very good for our business because we already deliver 50 tons of hydrogen to our customers ourselves, and that hydrogen now is much more competitive and green. But also for potential customers that want to implement ELX systems because they understand that we already know how to operate a plant like this. And this plant is unique in the world right now. Not a lot of people, not a lot of companies are operating an electrolyzer plant of this size.

In the fuel cell side, we do have already about 50,000 fuel cells already deployed with our customers, mainly in material handling, but we are expanding to other applications. We use our own hydrogen, and we also use hydrogen from the market at the moment. We are growing our production capacity with another plant that is going to come online before the end of the year in Louisiana, and we also have a plant in Tennessee for a total by the end of the year of 40 tons a day of nameplate capacity.

In terms of the investment case, we have spent the entire year in 2024 making the company much more efficient from a cash flow, -- sorry, a cash management perspective and from a margins perspective.

We have spent the entire year working on consolidating rooftops. We've done a little bit of reorganization in the company, and as well, we have gone out there in the market and increased prices with many of our customers, which is already showing in the results on a quarterly basis for the company. We expect that the hydrogen market will start growing again at a high pace once we have the clarifications of the IRA rules, and we will be in the pole position to take advantage of that growth because, as I said, we have a complete ecosystem that brings a lot of value to our customers.

Unidentified Analyst

Great. So maybe just, you each touched on this a little bit, but maybe you could talk to demand trends in your business, and starting with Julian on the storage side, as you mentioned, a lot of growth, although storage still seems to be meaningfully trailing solar and the amount of, and just do you see, how long is it going to take for storage to kind of catch up with all the solar that has been added, continues to be added, and the like?

Julian Nebreda

I would say the following. First on the technology. Today, when we started this technology solution, we were ancillary services, you know, essentially frequency control. Now we are helping integrate solar for renewals, and that's what you're referring to. Well, this technology can do a lot more than that. It can work at the, you know, not only on the residential sector, but even at the utility scale, there are opportunities for this technology to help support the grid in ways that are necessarily, that are independent of renewals.

So that tells you the market is a multiple of what we see today. The market will be a multiple of what the renewal integration market is. So why do we need to get there?

Well, the technology needs to continue, evolving prices need to continue coming down. The technology needs to continue to become more, you know, energy dense, and more, you know, especially the hardware, the software side of it, the co-orchestration of it. So the technology, this is, I think we are just seeing the initial start of what this technology can do for the sector. This is going to change the way grids work. This is going to change the way people consume electricity. This is the way, this is going to change the way people think about their cost of electricity. Over time, it will take maybe 20 years.

What we have seen this year is that because prices have gone down, that process has accelerated significantly. A country like Brazil, I've worked in Brazil for many years, I like that example. Brazil has, you know, it's a hydro system. So it has dams, as you cannot imagine, they serve 60% of their energy through water, probably 60, 65. And when I talked to our batteries with the Brazilian government, you know, a couple of years back, well, we have all the dams. We don't need to reserve any water. We don't need to store any energy. We already have it. Just last week, they issued a new attendance rule. Why?

Because the prices, and now they realize that this technology can help them resolve some of the issues, because batteries can do something that, you know, dams cannot do, which is you can put them wherever you need them, rather than dams are wherever they are, you know, and wherever you can build it. So that tells you just a huge market like Brazil, opening up for this, and for why? Prices are at a point where that technology is going to change their way.

And now, in that case, we are clearly, you know, competing not necessarily with renewal integration. We are competing with the cost of building the grid. So that tells you the great, and this is when we looked at our company, where we had that ambition in mind. We are today working, we started doing frequency control like everybody else. We're now integrating that, renewals, but our thinking goes, it goes beyond this. It goes to the transformation of the power grid and what that will mean.

And the way we think about our product, the way I think about, you know, the customers we work with, our digital roadmap, what we're planning to do, is that, well, I know that the financial markets probably don't look, you know, have a much shorter horizon for their investments, I'm clear on that. But I think it's important for you when you get into this, when you look at these investments, do not think of the short term as your only view. Think about what this will do.

And I think, because of how integral, how important this technology is going to be out of the grid, that we are uniquely positioned. That, you know, being a Western company, based in the U.S., controlling the software, having a diversified supply chain, having a trust relationship with our regulators, with the government, will put us in a very unique position to serve those markets and be their rightful partner as the cost, as our, the system's embarked on, so, yeah.

Unidentified Analyst

Great. John, just, I know you've been more focused this year on bringing the cash flow generation up, but just the demand trends in your markets and just now that financing costs have also started to moderate, are you seeing, and I guess also the shift in the, to the TPO market, are you seeing kind of a re-acceleration in demand growth?

John Berger

Yes. As recently as this morning, I was talking to a dealer, a very important one, and we were talking about the sales trends, and I said, you know, I can see all the analysts arguing about, you know, the market's down, you know, 10, now it's 15 down, now it's 20, now it's 25 down, and that may be the case. We're not seeing any of that and haven't seen that all year.

We've seen sales growth year over year. I was pretty clear in the Q2 call that it was getting out of hand. It was outstripping, our capabilities where we wanted to be given the cash generation targets. We, -- we changed payment terms. We mandated domestic content, which I know made some folks unhappy, for at least a brief bit, but everybody understands this is where things are going.

I'm pleased to report that, and I knew and I've told all of you that that was a bet in terms of sales for starting on September 1st. We did pretty well in sales on September. So, I like where we are. In fact, I was probably towards the high end, candidly, if not a little bit above it, then I thought we'd be.

So, that tells me, look, we got another probably 30, 45 days to work through the physical supply chain. Looks like we're pretty much through the financial side of things, which is extremely painful for those of you who work for banks, you know what I mean, especially in this market. But we've gotten through, if not all of that, we're pretty much almost there.

So, what does that mean? That means that we have collected all the historical monies for the adders for 2023 and ‘24 for energy communities, domestic content cost method, and now we're working on and collected some on domestic content safe harbor method and low, moderate income tax credit. So, once we get through the next two weeks, we'd have collected money from, we expect from every fund from all of those.

So, that's a huge accomplishment. We were at the forefront of that, and I don't mean that in a braggadocios way, because I've got the battle scars to prove it, and it was a painful process, to say the least. We're still going through that in the physical supply chain as, you know, delays in OEM deliveries and so forth on domestic content, but those are measured candidly in days and weeks, not even months at this point. So, again, I think that over the next 30, 45 days, we'll be in a pretty good spot on the physical supply chain, and that will ramp up tremendously.

So, on the overall growth rate, we're going to end up, I think, year over year, we'll probably end up certainly single digits, whether that's mid-single digits or high-single digits’ growth year over year, I don't know. But at this point, we're hearing from a lot of the dealers that October is going to be a huge sales month, and I'm a little like, okay, we got to manage that from a working capital standpoint at the same time we're ramping in this domestic content physical supply chain.

So, we don't see the growth problems, especially as we go into next year. I know a lot of people focus on interest rates and, you know, that coming down. I've said this when interest rates are going up, so I'm going to say it when interest rates are going down, it doesn't impact things on terms of demand as much as you all would think. It just doesn't. What matters is the utility rates.

I'm going to say that over and over again. It matters on the utility rates. No Virginia loans aren't going to come back. Why? Because the domestic content adders are so huge. Are they going to come back to some degree? I guess, sure. We sell some loans, too, but, you know, loans are now 4% to 5% of what we do. And that's pretty consistent with a lot of our major dealers. So, I see more competition next year. We've talked about that, and I do read your stuff, Steve. On Sundays, my wife hates it because it's Sunday morning.

But it, you know, we are going to see some more competition. Do they price more aggressively? Yes, they do. They'll figure out the hard way, but they have backed off. You're right about that, especially NextEra, I can name that name. And so, I think that largely, that's fine. I can't take, nor do I want all the market share that we could pick up. We clearly have picked up. If you say, look, if the market's down 25%, we pick up 5%. On growth, that's a pretty big market share pick up that surprises even me. But, overall, I think that we're headed into a pretty nice, decent year in 2025 for, I think, the industry, but certainly for us.

Unidentified Analyst

And then, Jose, just on, you mentioned when you get the clarity on the tax credits, you see demand inflicting. Maybe you could just give a little more color on, you know, A, what you're expecting to see, and then, what, you know, how do you kind of, what customers, how do you see that playing out?

Jose Luis Crespo

Perfect. I think to kind of set the stage a little bit, one thing that I would like to kind of clarify and make a point of is that today, already, there are companies that are using hundreds of tons of hydrogen. You have refineries, you have fertilizer companies, you have concrete companies that use hundreds of tons of hydrogen. That hydrogen today is gray hydrogen. There is no green hydrogen. So, what we have now is, in the EU, there is a directive to convert at least 42% to 43% of that hydrogen to green hydrogen within, you know, the next few years, by 2030.

That's going to generate an incredible demand for electrolyzers, a way to produce green hydrogen. In the U.S., we have the 45E Clarification Rules that is going to open the floodgates also for those companies to start using electrolyzers to generate green hydrogen. What we have seen is that because we already operate and we have the technology, as I said before, we have the electrolyzer technology, we have the liquefaction technology, we have the Cryotechnology to transport, and we operate already in Georgia a plant with 15 tons a day, many of those customers or potential customers are looking at us and saying, hey, you guys know how to do this. Can you help us for when we start doing these projects, especially when the 45E gets clarified?

With that, we have been able to contract 7.5 gigawatts of basic design packages for these companies. That means that all these companies basically are looking at us and saying, hey, how did you do this? Can you help us to do this?

Once those projects kick off, there is a high probability that if we have designed those projects, we are going to get a big amount of that demand, if we only get 50% of that, that will result in $1 billion in revenues for PLUG. So that's what we see in the next three to five years, the big growth from PLUG is going to be in the ELX market for those type of customers and driven by EU directives and 45E here in the U.S.

After that, in the following years, we're going to see that probably the ELX demand is going to start, you know, leveling off because we're going to have enough production. And what we're going to see is that hydrogen is going to start being looked at and used for utility balancing. Basically, right now, what we have for utility balancing and for some of these applications is bigger plants that are run on natural gas.

And at some point, those bigger plants are going to have to start, you know, going away. Plus, the balancing of the network is going to be even more important when the majority of the power that comes to the network comes from renewables. So we have high power stationary application that we are already implementing in the field, but we're fine-tuning and we're going to have it ready for when that demand comes.

And that's what's going to make the next wave of demand for PLUG, which is going to be in the 2030 timeframe. So between now and 2035 or so, we have a very good plan on how we're going to be growing the company in a very significant way.

Unidentified Analyst

Just one follow-up for John. I was thinking I was going to ask you, and I forgot. Just you mentioned the idea that, hey, it's not about the financing costs, it's about the utility rates. And I'm curious, is there any markets where the utility rate impacts really, let's say this year is really driving your business more, you're seeing that happening in coming months?

John Berger

It has been across the board. Recent price increase, even in Puerto Rico, even with the price of oil falling as much, which frankly took me by surprise, it was a pretty decent one, too. I think 2.9 cents a kilowatt hour. Houston is, Dallas, as you well know, Steve, has gone up tremendously. I was shocked at the retail rates that are down there now. And it doesn't look like it's going down any time soon, at least that's what you would infer from the pricing of NRG and Vistra and so forth, right, in terms of the equity.

Unidentified Analyst

We'll ask them later. We'll ask them later.

John Berger

Yes. You're going to have to wait. I was remarking in the elevator on the way up here, it's really funny, you know, look at what they sell, look at what we sell. It's the same commodity. Tell two cities, I'm just saying, okay? It's the exact same commodity.

In fact, what we sell is even more, you know, reliability, and that's a big deal. Like, if you talk to even generator manufacturers like, you know, with Aaron over at Generac and so forth, a great time for sales, and we certainly see it, is right after hurricane passes, right, or these outages. And there's been quite a bit of them, not as much as everybody thought, including me, this summer, this season, but quite a bit, including recently.

So, yes, thank you. We don't like to see that, that's for certain. But the reliability is becoming an increasing amount of problem, and we're part of filling inside the system. And the higher the rates go, because if you look at what all this CapEx, like, for instance, you know, look at CenterPoint in Houston. Rates are going up. The question is how much, and it's not going to be a small amount.

And that, coupled with, you look at the Northeast, Mid-Atlantic, that's been a really hot market for us. The Home Depot partnership has been, you know, I would say, very successful. California, to the best of the government's ability over there in California, it still keeps growing, why? Because the utilities keep finding excuses, try to blame us, but keep finding excuses to raise rates even further, right? So, it's really been across the board with regards to rate increases and reliability decreases. But I think Texas has been, has got a lot of promise going into ‘25, given what's happened this year. We've seen a lot of strength in the Northeast, Mid-Atlantic, strength in Puerto Rico, strength even out in the West side of things.

Unidentified Analyst

And then when you look at your cost to supply, so, you know, hopefully financing costs have now come down. How about equipment?

John Berger

Equipment costs have come down a lot, and that trend continues, as we were both talking about earlier. I don't see how that trend reverses itself anytime soon. We have a -- I was telling somebody earlier, if it's in the oil market, given the supply-demand imbalance, oil will be trading at 10 bucks or less. I mean, it's that oversupply. It's massive oversupply. And more is coming.

Unidentified Analyst

And that's mainly panels or everything?

John Berger

Everything, everything. I mean, it's everything. It's like you iterate new products, but then who's buying all this other stuff you already have?

Unidentified Analyst

How about labor? Is labor then going up?

John Berger

Labor's kind of gone sideways at worst, maybe down a little bit, you know, as things have loosened up in the labor market quite a bit. And maybe that trend, in my opinion, continues. So, you know, look, I will say another thing that's been, and it's a competitive advantage for us for sure, is like, you know, there are folks, as you referenced, and we were talking about just earlier, that are going to be competitors, you know, the next era and so forth, and, you know, GoodLeap will have a lease sometime soon and so forth.

But at the end of the day, the services to our dealers really is measured in terms of software and the platform and everything else. That gives us a huge competitive edge. I'm not saying we're perfect. We always got to do better. And then the same is true for our customers. How do you get that power flowing again?

So once that storm passes, who's out there fixing this stuff? And with the demise of SunPower and so forth, a lot of folks have found out firsthand portfolio managers, gosh, service is really important. Now you're hearing this cry on the, you know, or on Wall Street, which is, for years, for 12 years, I heard service does, I don't care. It's just a loan fancy, and that's all you guys do. And then now, it's like service matters everything, and to the point where we need backup physical servicing. It's not just collecting the money, but who's going to roll the trucks, you know, to make sure the power flows, to make sure the customer pays.

As you know, Steve, that's been my point the whole time for years and years, and now everybody's figured that out suddenly, just like Wall Street always does. It doesn't care, and then suddenly, it's the biggest and most important thing in the room. So that gives us a huge competitive edge with our competitors, because putting that in place, I mean, think about creating a utility overnight with all the manpower, the systems, the network, the dispatch.

You just, that is really, really difficult, and who does that for me is a former UPS guy. I mean, I hired him away. He's my COO. That was intentional, because I wanted to see what companies out there that can go from home to home and do it efficiently, and that was UPS, Amazon, and FedEx. So I hired somebody there, and that's worked out very, very well.

Unidentified Analyst

Good. So I forgot to mention, for those who came in, that we will open up for questions at the end of the panel, so you can start mulling those over and getting ready for questions. So I'm going to ask one more to folks.

So obviously, there's been a lot of discussion in each of your businesses about, IRA and domestic content, some of the tax benefits, which I think have really started to kind of kick in or hopefully kick in soon for PLUG, but then we have an election about to happen. So we'd love to get your perspectives, maybe starting with Jose, and come this way on what the election means, different scenarios, and not just IRA, but also, you know, obviously, tariffs seem to be a big part of everybody's plans in some way, shape, or form. So what it might mean for your company and how you're thinking about it.

Jose Luis Crespo

So, PLUG has been operating for over 20 years, almost 25 years already, and we've gone through different administrations, republicans and democrats, and what we have seen is that there is bipartisan support for hydrogen. The IRA has already been passed. We don't expect, you know, major changes there, and we expect that the 45E clarifications will come up, hopefully, before the end of the year is kicking off the ELF [ph 0:27:54] market, the electrolyzer market.

We also don't expect tariffs to impact PLUG that much. We've been moving away from China supply chain, and started, you know, using more U.S. content, and therefore, we think we are shielded from that type of risk. So in general, we don't believe that either or administration will make a big difference on the hydrogen policies, and we are always, like we have always done, we work with any of the administrations that come up, to make sure that the hydrogen industry keeps on growing in the U.S.

John Berger

Well, I think most Americans, the vast majority, would love a divided government, no matter who wins, White House. And, you know, I can say that I think that if you know what you're doing, having one party or the other control all three is not good. So that's what I pray for, is a divided government. I have my own personal opinions about who I'd like to see win.

Obviously, it's a very close race, even in the Senate and House races, to decide who does control those respective chambers. I will say that I am surprised, and I think most of you all have taken note at this point, and I will say that my position has not changed over the last year or so, which is that you're seeing a lot of Republicans publicly right before the election say, I'm not going to support a repeal of the IRA or major components. And most recently, Johnson even admitted, like, yeah, it's probably going to be around the edges, right, in terms of changes.

That is because of, you look at, you know, for instance, companies like PLUG with hydrogen and so forth, being in Houston headquartered. I mean, you've got major operations there. You need to move there. You too. You too.

Jose Luis Crespo

They're spending a week a month, so.

John Berger

Okay. All right. Well, that's good. Yeah, I heard that. You know, it's good.

But in all, you know, Houston being the energy capital of the world now, not just the oil and gas, we get to see a lot of different views. And quite candidly, a lot of the oil and gas firms, these are the major contributors.

Let's just get down to brass tacks to the Trump campaign. And the Republicans are in hydrogen, in carbon sequestration, in storage, usually on the big scale, right, like Julian. But when you look at all this, there's so much embedded in that I've spoken with some of the senior politicians on the Republican Party.

And it's like, I didn't realize how in depth this has already become. And so I think that the idea that you can open it up is really not realistic at all. And I think it's going to largely end up being held together no matter what, unless there's a decidedly one of the parties comes in. There's some things that the Democrats want to fix, right, on the IRA itself. So again, I go back, I pray for a divided government. But I think largely we're going to be left intact, and they're going to fight over tax policy and a bunch of other things. And candidly, picking even some of the EV credits that have nothing to do with us out of the, that's not going to move the needle on the tax situation, the deficit situation, right?

Jose Luis Crespo

You know, I don't disagree with what has been said, but I'll tell you our approach to this, which is, you know, we are not in the world, in the business of predicting what's going to happen. Or, you know, ensuring, or, and, you know, it's in a scenario where things don't change. Wonderful.

But what we have tried to do, what we have done for ourselves is to develop a strategy that is resilient to one world where drill, drill, drill, and one world with green, green, green, you know, and, you know, I think that we have built our domestic, in the U.S., this is clearly a U.S. issue, in the U.S., with our domestic content, with the development of our supply chain in the country, with the customers and the markets we are, when we have, you know, done the financial planning and looked at what will happen if the IRA, which is not what we're proposing, but if it were to happen, some of the IRA support goes away and everything is changed with tariffs, you know, how do we work? And we are -- we can meet our commitments either way, either under a potential, you know, red world, you know, drill, drill, drill, or a potential green, green, green.

And that, I think, is what our job is. You know, I don't disagree with the view that it's unlikely that the IRA will change too much, but as I said, we're not in the process of predicting. Where do we see?

We do believe that the U.S. will continue its disengagement with China. The speed will change, depending on how things work out, but it will continue. This is a process that is, I think, that if there is a group of people that make decisions, those people decided that that's what they want to do. We'll see more industrialization in the U.S. I think the U.S. realized they need to bring jobs back to the Rust Belt, and they need to hire people in industrial processes and not only in the services industry. So we'll see that happening. And these are trends that will go over time.

And then, finally, on our technology, the only way to win is to offer a technology that is better, a solution that is better than what everybody else. So, and that's what we are working on, because I think that's, at the end of the day, the concept of resiliency will be based on that, on offering something that is safer, more economic, well-priced, provides services, and can help and provide the reliability and the quality that our customers need. And with that, we believe that that's the recipe for resiliency and the recipe to win.

Unidentified Analyst

Just to follow up on the tariff aspect, or just kind of the anti-China, because we've obviously seen a huge impact on the panel market from that. And then batteries, it just keeps kind of getting noisier and noisier. And we saw, you know, the 301, but with a transition. But just any thoughts on how well the battery market can function to transition away from, I know you've got, you're trying, particularly the cells, just seems really difficult.

Jose Luis Crespo

It will be disruptive, no doubt. So, that's why I think the government has been a lot, but it has been very disruptive for the panel industry. International panel prices are, what, $8 a kilowatt peak, you know, or $0.10.

Julian Nebreda

$0.10 in Europe.

Jose Luis Crespo

$0.10, you know. I don't know how much we're paying today in the U.S.

Julian Nebreda

$0.28 [ph]

Jose Luis Crespo

But it's a significant, yeah, great time. Hey, I think that they have been very disruptive for that market. I think the government has been a little bit more afraid of disrupting the EV, the battery market because of the effect it will have on the EV industry, which at the end of the day, they're employment and people. And I think that the government is going to be a little bit more cautious as we move forward, you know, as they price. And if, clearly, we'll see what happens.

But what I see that speed will change, but I think that where we're heading, it's kind of clear. Yeah. No, speed will change, you know. They will not be, it's unclear how fast it will go. And I'm not, you know, as I said, we're not in the business of predicting. So whatever happens is, but ensuring that you can be resilient no matter what happens. Yeah.

Question-and-Answer Session

Q - Unidentified Analyst

I want to open up for questions from the audience, either for all the panelists or individual ones. Now's your chance. Dave?

Unidentified Analyst

I have a question for you. You talked about the batteries being in grid support, which I assume you mean means a standalone battery installation.

Jose Luis Crespo

Connected to the grid and doing the work of, you know, substations.

Unidentified Analyst

Exactly. Could you talk about what you see as the revenue model or the contract terms? Or how's that?

Jose Luis Crespo

That's what, you know, that has been the main point. We have a solution for transmission support that we have sold in Europe, very efficient. We haven't really sold that in the U.S. that much. Why? Because the regulatory scheme makes it very unattractive for the owners of transmission systems to offer this. Because they cannot own it. Or they are too limited on how they can run it. So I think that hasn't been, that has not been resolved. And that's where I think that we need to.

My own view is that for this to work, the owners of this technology will have to be a utility, a transmission company. So they will have to be able to. And this, the main challenge we have today on that one is that, especially for transmission, is that the regulators do not want transmission operators to either dispatch generation or, you know, manage demand.

And a battery at the end of the day is no more than that. And that has been the main restriction. But I think that still, once that gets resolved, it will, you know, I think this market will explode, you know. But it has been up to, it has been probably the business model this thing here.

But the technology can do it. And when you looked at our pricing, we are looking at the pricing today, where we see prices. And, hey, you can really make the case of it can delay, you know, you can economically delay substations just by putting batteries. You can redesign grids, you know, in economic terms. So there is, the market is there. Can we develop and create the ecosystem to make it happen is where we are?

Unidentified Analyst

So I'm just going to follow up. So Julian, take PJM market. So when PJM identifies a transmission need, they go out and they say, give us your ideas. Like, are batteries able to compete in that or not?

Julian Nebreda

They see their restrictions are. They cannot, I don't know the PJM rules that well. But, you know, either they cannot be bigger than x amount per substation. They cannot be owned by the same owner of the, so what happens? And then they, hey, if you are a transmission operator, what are you going to propose? A line that you can make millions of dollars or a battery that somebody else is going to, you know, is going to be on or is going to be so restricted that at the end doesn't really resolve your problem.

That's the kind of the issue, you know. And every market is a little bit different, the rules. And the rules allowed in the U.S. for batteries to be considered a transmission asset. So that has been done by FERC. Then most of the market have come up with rules of how that happens. But you will read them. You know, it sounds very good until you start reading. But they, this creates so many disincentives for people to own them that it has been a kind of a limitation on how it works.

John Berger

I do think, though, that brings up a great point about the U.S. market, which is different than Europe. I was on the phone talking about the European market, which is much more capitalistic and open. You've heard me talk about this. But I think that we're headed towards a ratepayer revolt in the United States. Rates are moving up decidedly so. We talked about that earlier.

It gives an enormous amount of opportunity for the individual decision maker, whether it's an individual homeowner like myself or the industrial. We're seeing this happen in Texas with seven gigawatts behind the fence generation. It's not just solar and storage. But storage is perfectly fitted to go behind the meter and say, look, I'm not going to let a bunch of bureaucrats that got paid off or whatever, dealing with the utilities. I'm going to go solve this problem myself. And we're seeing that now spread to the industrials because of what's happening in the wholesale market.

And I take a lot of heart in that, that that is the tipping point for a ratepayer revolt, for changes in this country, which we're far, far overdue for. But also an enormous amount of business that he can do in front of the meter and behind the meter.

Unidentified Analyst

I'm going to hire you as my investor. Lex, you lost your job.

Other questions? Dave, you want another one? It's all yours. You got the…

Unidentified Analyst

This one's for Jose. Could you talk about how carbon capture has helped the development of the hydrogen industry, because we've got the best carbon dioxide pipeline network in the world down in the Gulf. And I know there's potential for hydrogen facilities there, even fueled by gas or coal or whatever, because you can sequester the carbon and then you get the credit.

Jose Luis Crespo

Well, I'm not an expert on carbon capture. As I said before, my main concentration is on application. So I use the hydrogen that we produce to power equipment, power different applications.

I think, not being an expert, I think carbon capture is an alternative to clean up some of the production of hydrogen in the market. Not sure how economically that's going to affect the cost of the hydrogen and if it's going to allow for all this other hydrogen produced. In other words, that is not 100% green, you know, get to the market. I don't think that that is covered in the IRA and that they will not be able to get some of the incentives that are in the IRA. And I think that that is what's going to give a competitive advantage to ELX and renewables produce hydrogen. So that's what I can tell you right now on that subject.

Unidentified Analyst

Question over here. Just go ahead.

Unidentified Analyst

Julian, I know it some leverage to the datacenter for the PLUG…

Julian Nebreda

In the U.S.?

Unidentified Analyst

In the U.S. Could you give some examples of some of the project deployments that you're looking at? Are they all in front of the meter or is there some behind the meter?

Julian Nebreda

No, it's all in front of the meter. And it's all -- it's all AES. And Greg, who was here, it's through them. We do not serve data centers directly. We work through IPPs. And we know that when we are bidding into a project or working with them on a project, that the end customer is Amazon or Google or whomever is the data center. We are not serving data centers to them.

And even though, you know, we, it's an attractive market and maybe an opportunity, my view has been that, you know, our, the IPPs who are a very good job putting these projects together, they know how to serve this market well. So serving them is the best way to serve that market. So we don't have a behind the meter solution for data centers.

Unidentified Analyst

If I could just ask a quick follow up on that. So, I mean, as data centers get to the stage whereby they're more industrial deployments than CNI, is storage not potentially, you know,

Julian Nebreda

It could, it could work, yeah. I mean, up to date, we have not, we have to tell you that we have, we do not have any projects that are behind the meter for data centers, more kind of industrial type. But in, you know, clearly our technology, like John was mentioning, is fundamental for any behind the meter solution, because in order to provide the reliability, the 99% or 99, 99% reliability that data centers need, that you will provide, you will need battery storage. The battery storage is the best and most efficient way of firming up capacity.

So, you know, we will have a play, today we have not seen a project today in our pipeline that I can think of, which is a behind the meter, industrial type of solution like you're proposing. Even though from a technology point of view, we could do it, we just, we haven't seen it.

Unidentified Analyst

I'm actually curious, Julian, just, are you starting to see any customers kind of overbuild batteries? You know, basically say, instead of going to do a gas plant, we're going to build three batteries here?

Julian Nebreda

Not, I mean, if they're doing it, they're not telling me, you know? Maybe that's the way I'll put it. They've been very, very active in ensuring their projects are very well designed and for their returns. I think that's where we're going. I mean, we always talked about, a lot of the financial markets were concerned that, and still today, with the prices of batteries, somehow our revenue goals was, we were not going to be able to meet it. My view is that the elasticity of demand to battery storage is so great.

That is, we might, you know, we had a challenge this last quarter of the year, but in the great scope of things, it's, you know, a drain drop in the middle of a hailstorm. It is, you know, the reality is that lower cost of batteries is a tremendous tailwind for this industry. Tremendous tailwind that opens all these business cases. You know, over standing your battery storage. You know, what we have seen is that in markets where we were doing one hour, like in ERCOT [], only one hour, now all market in ERCOT is two to three, the way people are considering. Merchant deals in Europe, where people were doing only one hour.

Now you're seeing everywhere two hours in Australia. And that means that our revenue multiplies. So that tells you the tremendous, and that's only one example. Brazil, we talked about all these things, the tremendous, you know, force behind this industry, which has a negative side. It's becoming a lot more competitive because anybody and their grandfather wants to enter here because they see it's a great opportunity. Okay, great. I love competition. I love it. As long as we win.

As long as we win, I love it. So, hey, that's my team. It was wonderful to see all this competition. Now let's win. Let's use this to ensure that we are better. And there's only one way of winning. Only one way, being better. There's no other way. There's not a, hey, no, no. You have to do better. Better pricing, better quality, better delivery, better reliability, better services, better Investor Relations and support. You have to be better. That's the only way.

John Berger

You know, I totally agree on that.

Julian Nebreda

My brother works with us. So he's our head of product. So, you know, VP of product. That's why I'm joking with John.

John Berger

He'll work for less. The one thing I will say, Steve, is that I do see merchant storage in our sector behind the mirror in Resi is starting, you know, there's a company out there that's doing it a little bit. And we're, you know, my view has been that that's where things are going to go.

And the other thing that couples with that is we are going to see, I think, in the very near future, look at how much what the deployment has done has been in ERCOT for solar and storage, both mostly in front of the meter, but some of the behind the meter, including us. And it is so quick. And with prices coming down on storage, it really opens up, as William was saying, we are going to see the summer peak decimated.

And the winter peak is going to be the most important in ERCOT, I would think, and probably maybe literally within the next two years. And you got to think about that. So the seasonal load shift is the last major challenge for solar and storage, right? So when you look at ERCOT, you say we need 20 gigs of capacity, in our estimate, you know, by the end of the decade. Half is combined cycle gas, especially with the subsidies from the state of Texas, which don't support subsidies at all, but the other half is going to be solar and storage. That together tells you a lot about where this is going to go.

You're going to oversize your solar. You're going to oversize your storage, particularly to be able to deal on the winter side of things. So I think that's where this is all going very quickly. And the lower, at this point, panel prices, inverters, all that stuff, yeah, it goes lower, but it doesn't really matter given where, especially where retail rates are and even wholesale power rates now in places like Texas. It really matters where the storage price goes and the elasticity of demand, as you just said is huge and its really going to have a lot of deployments and it is going to change and it is changing because of the system.

Unidentified Analyst

Well great. Thank you all. Thank you, Julian, thank you, Jose. Thank you, appreciate the panel.