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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the fiscal year ended October 31, 2022
OR
For the transition period from to
Commission file number: 1-14204
FUELCELL ENERGY, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Great Pasture Road
Danbury, Connecticut 06810
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (203) 825-6000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒ No ◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ◻No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,576,676,910 based on the closing sale price of $4.08 as reported on the NASDAQ Global Market.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class Outstanding at December 14, 2022
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DOCUMENT INCORPORATED BY REFERENCE
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Document Parts Into Which Incorporated
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FUELCELL ENERGY, INC.
INDEX
Page
Description Number
Part I
Item 1 Business 3
Item 1A Risk Factors 43
Item 1B Unresolved Staff Comments 61
Item 2 Properties 61
Item 3 Legal Proceedings 62
Item 4 Mine Safety Disclosures 62
Part II
Item 6 Reserved 65
Item 7A Quantitative and Qualitative Disclosures About Market Risk 92
Item 8 Financial Statements and Supplementary Data 94
Item 9A Controls and Procedures 146
Item 9B Other Information 147
Part III
Item 10 Directors, Executive Officers and Corporate Governance 148
Item 11 Executive Compensation 148
Item 14 Principal Accountant Fees and Services 149
Part IV
Item 15 Exhibits and Financial Statement Schedules 150
Signatures 159
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PART I
Item 1.BUSINESS
Index to Item 1. BUSINESS Page
Forward-Looking Statement Disclaimer 4
Risk Factor Summary 6
General Information 8
Business Overview 8
Our History 8
Product Platforms and Applications Overview 9
Our Market Opportunity 10
Our Durable Competitive Advantages 11
Our Commitment to Sustainability 12
Our Business Strategy 12
Our Value Proposition 14
Our Current Products 14
Our Product Platforms and Applications – Current and Future 16
Our Markets 21
Our Business Model 24
Advanced Technologies Programs 25
Company Funded Research and Development 25
Manufacturing and Service Facilities 26
Raw Material Sourcing and Supplier Relationships 27
Engineering, Procurement and Construction 28
Services and Warranty Agreements 28
Competition 28
Backlog 29
License Agreements 30
Regulatory and Legislative Environment 33
Government Regulation 35
Proprietary Rights and Licensed Technology 36
Significant Customers and Information about Geographic Areas 36
Human Capital Resources 37
Available Information 39
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Forward-Looking Statement Disclaimer
This Annual Report on Form 10-K contains statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). All statements other than statements of historical fact included in this Form 10-K, including statements regarding the Company’s future financial condition, results of operations, plans, objectives, expectations, future performance, business operations and business prospects, are forward-looking statements. Words such as “expects,” “anticipates,” “estimates,” “goals,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “seeks,” “will,” “could,” “would,” “may,” “forecast,” and similar expressions and variations of such words are intended to identify forward-looking statements and are included, along with this statement, for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements are neither historical facts, nor assurances of future performance. Instead, such statements are based only on our beliefs, expectations, and assumptions regarding the future. As such, the realization of matters expressed in forward-looking statements involves inherent risks and uncertainties. Such statements relate to, among other things, the following:
● the expected timing of completion of our ongoing projects,
● our business plans and strategies,
● the markets in which we expect to operate,
● the size and scope of our total addressable market opportunity,
● expected operating results such as revenue growth and earnings,
● future funding under Advanced Technologies contracts,
● the expected cost competitiveness of our technology, and
The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results and future events to differ materially from those set forth in or contemplated by the forward-looking statements, including, without limitation, the risks described under Item 1A - Risk Factors of this report and the following factors:
● general risks associated with product development and manufacturing,
● general economic conditions,
● changes in interest rates, which may impact project financing,
● supply chain disruptions,
● changes in the utility regulatory environment,
● rapid technological change,
● competition,
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● market acceptance of our products,
● factors affecting our liquidity position and financial condition,
● government appropriations,
● our ability to successfully market and sell our products internationally,
● our ability to develop new products to achieve our long-term revenue targets,
● our ability to implement our strategy,
● our ability to protect our intellectual property,
● litigation and other proceedings,
● our need for and the availability of additional financing,
● our ability to generate positive cash flow from operations,
● our ability to service our long-term debt,
We cannot assure you that:
● we will be able to meet any of our development or commercialization schedules,
● our SureSource power plants will be commercially successful,
The forward-looking statements contained herein speak only as of the date of this report and readers are cautioned not to place undue reliance on these forward-looking statements. Except for ongoing obligations to disclose material information under the federal securities laws, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.
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Risk Factor Summary
Our business is subject to numerous risks and uncertainties, including those described in Item 1A “Risk Factors”. These risks include, but are not limited to the following:
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● We may be affected by environmental and other governmental regulation.
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General Information
Information contained in this report concerning the electric power supply industry and the distributed generation market, the distributed hydrogen market, the energy storage market and the carbon capture market, our general expectations concerning these industries and markets, and our position within these industries and markets are based on market research, industry publications, other publicly available information and assumptions made by us based on this information and our knowledge of these industries and markets, which we believe to be reasonable. Although we believe that the market research, industry publications and other publicly available information, including the sources that we cite in this report, are reliable, they have not been independently verified by us and, accordingly, we cannot assure you that such information is accurate in all material respects. Our estimates, particularly as they relate to our general expectations concerning the electric power supply industry and the distributed generation market, the distributed hydrogen market, the energy storage market and the carbon capture market, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the section of this report entitled “Item 1A - Risk Factors.”
Unless otherwise specifically noted herein, all degrees refer to Fahrenheit (“F”); kilowatt (“kW”) and megawatt (“MW”) numbers used in this report designate nominal or rated capacity of the referenced power plant which is the design rated output of the referenced power plant as of the date of initiation of commercial operations; “efficiency” or “electrical efficiency” means the ratio of the electrical energy generated in the conversion of a fuel to the total energy contained in the fuel (lower heating value, the standard for power plant generation, assumes the water in the product is in vapor form; as opposed to higher heating value, which assumes the water in the product is in liquid form, net of parasitic load); kW means 1,000 watts; MW means 1,000,000 watts; “kilowatt hour” (“kWh”) is equal to 1kW of power supplied to or taken from an electric circuit steadily for one hour; and one British Thermal Unit (“Btu”) is equal to the amount of heat necessary to raise one pound of pure water from 59oF to 60oF at a specified constant pressure.
All dollar amounts are in U.S. dollars unless otherwise noted.
Business Overview
Headquartered in Danbury, Connecticut, FuelCell Energy has leveraged five decades of research and development to become a global leader in delivering environmentally responsible distributed baseload energy platform solutions through our proprietary fuel cell technology. Our current commercial technology produces electricity, heat, hydrogen, and water while separating carbon for utilization and/or sequestration. We continue to invest in developing and commercializing future technologies expected to add new capabilities to our platforms’ abilities to deliver hydrogen and long duration hydrogen-based energy storage through our solid oxide technologies, as well as further enhance our existing platforms’ carbon capture solutions.
FuelCell Energy is a global leader in sustainable clean energy technologies that address some of the world’s most critical challenges around energy access, security, safety and environmental stewardship. As a leading global manufacturer of proprietary fuel cell technology platforms, FuelCell Energy is uniquely positioned to serve customers worldwide with sustainable products and solutions for industrial and commercial businesses, utilities, governments, and municipalities.
Our History
FuelCell Energy was founded in 1969 by Bernard Baker and Martin Klein, who had a powerful vision for the future of energy. The Company, which is now based in Connecticut, was founded as a New York corporation to provide applied research and development services on a contract basis. The Company completed its initial public offering in 1992 and reincorporated in Delaware in 1999. The Company sold its first commercial fuel cell power platform in 2003 to the Kirin Ichiban Brewery Company in Tokyo, Japan, which utilized biofuels to produce carbon neutral electricity and steam. From the development and commercialization of a new type of battery to the deployment of the initial SureSource platform, FuelCell Energy has been a pioneer in developing technologies focused on solving some of the world’s most critical challenges around safe, reliable clean energy. This history of technological leadership, the diversity of our team, and our team members’ ideas drive our culture of innovation and sense of purpose.
Today, FuelCell Energy is a global clean technology manufacturer of stationary fuel cell energy platforms that decarbonize power and produce hydrogen.
Our purpose is to enable a world empowered by clean energy.
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Product Platforms and Applications Overview
Our product portfolio is based on two electrochemical platforms, carbonate and solid oxide. The platforms are similar in many ways, but they also have unique capabilities. Both platforms can support power generation and combined heat and power applications using a variety of fuels, including natural gas, renewable biogas, and hydrogen. The fuel cells utilized in these platforms react fuel electrochemically, without combusting the fuel, which avoids emissions produced by combustion such as nitrogen oxides (“NOx”), sulfur oxides (“SOx”) and particulates. In the electrochemical process, fuel and air are reacted in separate chambers in the fuel cell stack. The reactions producing CO2 happen before the fuel is mixed with air, and the CO2 is concentrated and therefore easy to capture. Both our carbonate and solid oxide platforms are enabled to capture their own CO2 for use or sequestration before it is emitted into the air. However, our carbonate platforms are unique in their ability to also capture CO2 from an external source, utilizing the flue stream of a power plant or an industrial boiler as a replacement for traditional air intake.
Our solid oxide platform can operate on pure hydrogen fuel. We believe this feature will gain importance in the future as hydrogen becomes more widespread as a fuel, and in the more near term as we work to deploy our technology for hydrogen-based energy storage.
Both platforms can be used in electrolysis, which is the reverse of fuel cell operation – producing hydrogen from power. Carbonate platforms use a mixture of reforming and electrolysis, while solid oxide platforms can be used for pure hydrogen electrolysis.
Our multi-featured platforms can be configured to provide a number of value streams, including electricity, hydrogen, high grade heat (including steam), water and CO2 upgradable to food and beverage grade and/or usable in cement or other industrial products, and to concentrate and separate CO2 from fossil-fueled industrial applications allowing the sequestration and/or utilization of the CO2. We are focused on using our proprietary technology to pursue the following four significant industry applications, each of which we believe is important to the global energy transition and to limiting global warming:
• Distributed generation (commercially available);
• Distributed hydrogen (commercially available);
See the section below entitled “Our Product Platforms and Applications” for more information.
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Our Market Opportunity
Climate initiatives are driving the global push to reduce greenhouse gases, including CO2, NOx and SOx. We believe a large and increasing combined total addressable market (“TAM”) opportunity exists for solutions we currently have commercially available today and those solutions that we are actively developing for commercialization. Through the capabilities of our platforms, we provide clean, reliable baseload power generation (baseload power generation is power generated over a period of time at a steady rate), hydrogen production, high grade heat, isolation and removal of CO2 from exhaust streams, and the ability to use biofuels, renewable natural gas (“RNG”), and a hydrogen-hydrocarbon fuel blend for power generation feedstock. In addition, we are focused on advancing the commercialization of our platform technology to utilize pure hydrogen for baseload power generation and to perform electrolysis to convert water and electricity into hydrogen and to isolate and remove CO2 from external exhaust streams.
Hydrogen enables zero emissions transportation by utilizing a zero-carbon feedstock as the fuel to power cars, trucks, buses, ships, trains, and, in the future, aircraft and other aerospace applications. Hydrogen is also capable of providing the fuel needed to produce high grade heat for industrial applications such as steel and glass production, in addition to its traditional uses for the refining process, in making ammonia, cement, and chemicals, in building heat, for combustion power generation, and even for residential heating.
Hydrogen is also an effective medium for the storage of energy, and we are inthe process of commercializing a highly efficient and environmentally favorable hydrogen-based long-duration energy storage solution. We believe hydrogen-based storage is environmentally superior to a mineral-based storage solution such as lithium-ion batteries. Additionally, through the deployment of our megawatt and sub-megawatt power generation platform solutions, we can deliver the benefits of clean, distributed power generation, including the desirable value stream of thermal energy, and avoid the need for massive, long distance transmission infrastructure and the risks that the traditional transmission grid creates.
CO2 is also a valuable input ingredient in many products and processes. We believe that, by using more CO2 (carbon capture utilization) and emitting less CO2 through the efficiencies of our platforms and by capturing CO2 at the source point, the use of our platforms can positively impact climate change. Our platforms are capable of delivering CO2 for food and beverage use, pH balancing of water supply, extending the shelf life of food vital to global food supply and food security, as a binder in a number of materials from concrete to sustainable building materials and the production of synthetic fuels, polymers and other minerals.
1 See the section entitled “Critical Assumptions and Additional Information Regarding Calculation of our Total Addressable Market Opportunity” on page 39 for important information regarding the sources and assumptions used in estimating the value of these market opportunities
We view TAM as the overall revenue opportunity that is available for a product or solution if 100% market share is achieved. We believe that the combined value of the TAM opportunity for the markets that may be served by our solutions which are commercially available and solutions which are actively under development by the Company is approximately $2 trillion cumulatively from the date hereof through the end of calendar year 2030 (the “Measuring Period”). Our estimate of the combined, cumulative value of our TAM opportunity is based on review and analysis of third-party sources and application of management’s current assumptions and business judgment as to our market opportunities within the markets
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that may be served by the four technology solutions described below. The cumulative TAM number represents the combined estimated total market size over the Measuring Period for the markets which such solutions may serve and is not a projection or estimate of the actual market share that we could achieve or the amount of revenue that could be generated by us in these markets in the Measuring Period. The market opportunities which we believe comprise our combined, cumulative approximately $2 trillion TAM opportunity are described below:
See the section entitled “Critical Assumptions and Additional Information Regarding Calculation of our Total Addressable Market Opportunity” on page 39 for important information regarding the sources and assumptions used in estimating the value of these market opportunities.
See the section below entitled “Our Markets” for information regarding our existing and target markets.
Our Durable Competitive Advantages
Given the long history of investment in and deployment of our solutions, we believe we have the following competitive advantages:
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Our Commitment to Sustainability
We have developed and begun implementing a plan to reduce our carbon emissions to net zero by 2050. As part of this plan, during fiscal year 2022, we:
● Calculated our organizational carbon footprint baseline;
Our platforms have a direct impact on reducing our customers’ Scope 1 and Scope 2 emissions thus lowering the global environmental footprint of baseload power generation. However, our platforms are designed to go beyond power generation, delivering hydrogen, carbon separation, water, and thermal energy in various applications. As a result of our platforms’ ability to deliver multiple value streams, we help our customers reduce their Scope 1 and Scope 2 emissions on-site without buying off-site carbon/environmental offsets, which do not positively impact the local communities’ air quality or emissions. In the future, we plan to commercialize our hydrogen, long-duration energy storage, and carbon capture technologies intended to drive next generation solutions to help customers attain their decarbonization goals.
Our patented products offer a sustainable alternative to traditional internal combustion-based power generation and reliable baseload power compared to intermittent sources such as wind, solar, and run of river hydro power. Traditional power plants create harmful emissions, such as NOx, SOx and particulate matter, that are a serious public health concern and have a direct impact on the communities in which these plants operate. Intermittent sources, generally, avoid fewer emissions than our fuel cell platforms. Alternatively, our energy platforms use a combustion-free power generation process that is virtually free of pollutants. When a fuel is combusted (as in traditional power generation), carbon is emitted in addition to SOx, NOx, and other particulates. When intermittent power sources go offline because the sun is not shining, the wind is not blowing, or water is not flowing, they rely on traditional fossil-fueled power resources such as coal and natural gas to provide electricity. Our platforms are highly efficient and environmentally friendly products that support the “Triple Bottom Line” concept of sustainability, consisting of environmental, social, and economic considerations.
As an enterprise, we are proud that, in October 2018, we were certified ISO 14001:2015 compliant, having demonstrated the establishment of and adherence to an environmental management system standard. We believe that we are the only fuel cell manufacturer to have received this certification.
Our commitment to sustainability is also evident in the design, manufacturing, installation and on-going servicing of our fuel cell energy platforms, which are engineered for the circular economy. For example, when our platforms reach the end of their useful lives, we have the capability to refurbish and re-use certain parts and also recycle more than 90% by weight of what we cannot re-use. This is a departure from combustion-based, wind, and solar power generation methods that typically produce a significant amount of unrecyclable waste which increases landfill use. The balance of plant (“BOP”) is designed to have an operating life of 25-to-30 years, at which time metalssuch as steel and copper are reclaimed for scrap value. For context, by weight, approximately 93% of the entire energy platform can be re-used or recycled at the end of its useful life.
Our Business Strategy
In 2019, we launched our “Powerhouse” strategy to strengthen our business, maximize operational efficiencies and position us for future growth. Having made substantial progress in achieving key initiatives under the original three pillars of our strategy, last year we updated the three key pillars of our strategy to “Grow, Scale and Innovate.” Under these three pillars, we will focus on:
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Grow — Penetrate Significant Market Opportunities
Scale — Scale Our Existing Platform to Support Growth
Innovate — Innovate for the Future
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Our Value Proposition
We are working to deploy our unique and differentiated energy solutions to help customers decarbonize power and produce hydrogen, improving access, cost, resiliency, and sustainability of the energy that powers their lives and businesses. Our commitment to delivering our value proposition drives our strategic focus that advances our work and delivers value to our customers.
This is how we measure value to our customers:
Our Current Products
Our core fuel cell products offer clean, highly efficient and affordable power generation and thermal value streams, while our enhanced products offer additional value streams such as hydrogen, water, thermal energy, and carbon separation for customers. The platforms are scalable for smaller sub-megawatt applications to multi-megawatt utility applications, microgrid applications, distributed hydrogen, or use of the platform’s thermal attributes for on-site heat and chilling applications for a broad range of applications.
Our commercial platforms include:
● SureSource 1500TM, our 1.4 MW platform,
● SureSource 3000TM, our 2.8 MW platform,
● SureSource 4000TM, our 3.7 MW high efficiency platform,
● SureSource 250TM (Europe only), our 250 kW platform,
● SureSource 400TM (Europe only), our 400 kW platform, and
The applications supported by these platforms include:
● Combined heat and power (“CHP”),
● Microgrid,
● Distributed hydrogen, electricity, and water (also referred to as Trigen),
Our global SureSource product line is uniformly based on the same carbonate fuel cell technology, and offers the following advantages:
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Product Efficiency and Effectiveness
The electrical efficiency of our carbonate fuel cell solutions ranges from approximately 47% to 60% upon initial operations of our platforms depending on the configuration. When configured for CHP, our system efficiencies can potentially reach up to 90%, depending on the application. Our solutions are designed to deliver high electrical efficiency where the power is used, avoiding transmission. Transmission line losses average about 5% for the U.S. grid, which represents inefficiency, resulting in additional emissions and a hidden cost to utility customers. In addition, overhead transmission lines have been shown to contribute to the ignition of wildfires in certain geographies, causing significant damage and loss of homes and life.
We are targeting very high efficiencies for our solid oxide platforms, which are currently under development. In fuel cell mode, we are targeting efficiencies in the low to high 60% range depending on the fuel type. In electrolysis mode, we are targeting electrical efficiency of about 90%, increasing to approximately 100% when augmented by externally supplied waste heat. In reversible mode, we expect round trip efficiencies in the high 60% range.
We have demonstrated up to 95% carbon capture from simulated coal power plant sources while simultaneously producing baseload power. For harder to capture streams, such as natural gas power generation or industrial boiler capture, we can achieve similarly high capture levels but with reduced power output. Our development work with EMTEC is focused on maximizing power output capabilities at high capture levels. We believe we will be able to operate at capture levels of 90% or better at economically acceptable power output levels with industrial boiler sources, and, with continued development, we expect to be able to cost-effectively capture high percentages of carbon from lower concentration streams in the future.
Our Product Platforms and Applications – Current and Future
We are focused on using our proprietary technology to pursue the following four significant industry applications to decarbonize power and produce hydrogen:
• Distributed generation (commercially available);
• Distributed hydrogen (commercially available);
Distributed Generation
Our proprietary, patented SureSource platforms generate electricity directly from a hydrogen-rich fuel, such as biogas, renewable natural gas, natural gas or an up to 50% blend of hydrogen and natural gas. This multi-fuel capability enables the SureSource platform to leverage the established natural gas infrastructure that is readily available in our existing and target markets, compared to some types of fuel cells that can only operate on high purity hydrogen. Our proprietary technology also allows us to utilize on-site biogas, renewable natural gas or a hydrogen and natural gas blend, the application of which is rapidly expanding around the world, to fuel our platforms.
We market different configurations and applications of our SureSource platform to meet specific market needs, including:
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by our fuel cells can be used to produce hot water or steam or to drive high efficiency absorption chillers for cooling applications for commercial and industrial customers. The SureSource platform can also deliver hydrogen and carbon dioxide for beverage and food production in addition to other industrial uses. Carbon separated can also be sequestered depending upon the use case.
Distributed Hydrogen
SureSource platforms are configurable to deliver on-site hydrogen for transportation, industrial applications, natural gas blending, repowering combustion-based equipment with zero carbon hydrogen, and other uses. The SureSource Hydrogen platform utilizes proprietary fuel cells configured to simultaneously generate three value streams — power generation, hydrogen, and water. When operated on biogas or renewable natural gas, SureSource Hydrogen systems produce renewable hydrogen, also known as Green Hydrogen, but, even when fueled with natural gas, our platforms produce hydrogen with a lower carbon and criteria pollutant impact when compared to conventional steam methane reforming (“SMR”) applications because of the use of internal heat compared to burning fuel in the case of SMRs. Heat and steam are byproducts of fuel cell operation, allowing Trigen platforms to produce hydrogen without water consumption (in fact with net water production, making our Trigen platform a unique platform for hydrogen production) and with a low carbon footprint. Adding carbon separation or carbon capture to the SureSource Hydrogen platform when fueled with natural gas will deliver Blue Hydrogen (i.e., hydrogen produced with carbon capture). The following figure illustrates the concept of the SureSource Hydrogen platform and identifies typical applications for our distributed hydrogen application.
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Trigen Distributed Hydrogen Platform
Solid Oxide Technology - Long Duration Hydrogen-Based Energy Storage and Electrolysis
We are in the process of commercializing a solution for long duration energy storage using our proprietary solid oxide electrolysis technology which is expected to enable production of hydrogen with high electrical efficiency. We believe that our platform will deliver higher efficiency than our competitors and competing technologies with or without the addition of waste heat.
Our solid oxide stacks are designed to alternate between electrolysis and power generation mode, with one of our design goals being improved integration of intermittent wind and solar power generation sources into the modern electrical grid via long duration storage of energy. Hydrogen-based long duration energy storage has the ability to transform the way intermittent resources are supported today as an alternative to combustion energy sources for continuous power. Instead of producing power from fuel and air, a solid oxide fuel cell stack in electrolysis mode splits water into hydrogen and oxygen using supplied carbon-free electricity. The hydrogen can be stored as compressed gas, creating the ability to produce a virtually limitless supply. When the grid needs to discharge power, the stored hydrogen will be sent back to the same solid oxide stacks, which react it with air to produce power and to regenerate the water, which will be stored for the next cycle.
Long duration hydrogen-based energy storage can be achieved without the need to add excessive amounts of conventional battery capacity, a capacity that is reliant on rare earth minerals such as lithium and cobalt, both of which have supply constraints for broad adoption, require extensive mining, present long-term disposal challenges post-use, and are impacted by geopolitical risks associated with supply and mineral processing. The Democratic Republic of the Congo and People’s Republic of China (“China”) were collectively responsible for approximately 70% and 60% of global production of cobalt and rare earth elements, respectively, in 2019. High levels of production concentration, compounded by complex supply chains, increase the risks that could arise from physical disruption, trade restrictions or other developments in major producing countries, jeopardizing energy security.
Long duration hydrogen-based energy storage is expected to be required at large scale in order to manage the forecasted high penetration of intermittent renewable resources globally, and we believe the water/hydrogen-based approach of our
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solid oxide fuel cell/solid oxide electrolysis cell/reversible solid oxide fuel cell technology has the potential to be a key enabler of long duration hydrogen-based energy storage. Hydrogen can be produced locally, is less reliant on energy transition minerals and is regenerative. We believe hydrogen as an energy storage medium is superior to mineral-based storage platforms.
We are also developing advanced electrolysis systems based on our solid oxide electrolysis platform, which can operate at higher electrical efficiency than currently available electrolysis technologies. The largest factor in the cost of electrolysis-produced hydrogen is the cost of electricity. Consequently, efficiency is one of the most effective ways to lower cost. We believe our solid oxide platform is among the most efficient available electrolysis technologies. This is expected to translate to a 20% to 30% lower cost of hydrogen compared to lower efficiency and low-temperature electrolysis. We believe our solid oxide platform offers one of the best chances of achieving the $1 USD per kg levelized cost of hydrogen targeted by the U.S. Department of Energy by 2050. Applications for this technology include centralized large scale hydrogen production from grid-scale renewables or nuclear power, and decentralized hydrogen production for industrial, transportation, repowered combustion generation assets, and synthetic or sustainable fuels for use in aviation and other applications.
During fiscal year 2022, we operated a sub scale demonstration project of our solid oxide electrolysis technology in our Danbury test facility. We have been awarded a pilot program to provide a packaged 150 kg/day system for demonstration at Idaho National Laboratory. Idaho National Laboratory is currently conducting stack tests to evaluate performance and durability and we expect our solid oxide electrolysis technology to be placed in service during fiscal year 2023.
We have recently completed conversion of the Danbury electrolysis demonstration system to a reversible system, adding equipment for supply of hydrogen to the stack to make power. We have begun testing the system in RSOFC mode, alternating the test stack between production of hydrogen in electrolysis mode and consumption of hydrogen in fuel cell mode. This is an extension of previous tests with single cells or smaller stacks which demonstrated stable operation in RSOFC mode.
During fiscal year 2022, we entered into an agreement with Trinity College in Hartford, Connecticut, for the purchase of our first 250 kW solid oxide fuel cell power generation system. Power and heat produced from the platform will be used at Trinity’s campus in Hartford, Connecticut, to lower energy cost and enhance energy reliability and security. This solid oxide fuel cell power generation system is expected to be installed late in fiscal year 2023. Our solid oxide platform is manufactured at our manufacturing and research and development facility in Calgary, Alberta, Canada. While we are currently accepting orders for our solid oxide platform, the timing of delivery of future orders will depend on our ability to increase production capacity to meet anticipated demand.
Carbon Capture, Separation and Utilization
The production of additional baseload power during the carbon capture process, as opposed to consuming power, differentiates the SureSource Capture system from other forms of carbon capture offerings. This added revenue attribute could make the SureSource Capture system more cost effective than other systems which are being considered, or are currently in use, for carbon capture. SureSource Capture systems can be implemented incrementally, managing capital outlay to match decarbonization objectives and regulatory requirements. Since our solution generates a return on capital resulting from the fuel cell's production of electricity compared to an increase in operating expense incurred by other carbon capture technologies, it can extend the life of existing power plants and industrial facilities.
We have a Joint Development Agreement with EMTEC, which first became effective on October 31, 2019 and was executed in fiscal year 2020 (as amended from time to time, the “EMTEC Joint Development Agreement”). Under this agreement, we have engaged in exclusive research and development efforts with
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EMTEC to evaluate and develop new and/or improved carbonate fuel cells to reduce carbon dioxide emissions from industrial and power sources. Since April 30, 2022, we have been operating under the second extension to the EMTEC Joint Development Agreement, which was to run through December 31, 2022 and allowed for the continuation of research intended to enable us and EMTEC to: (i) gain an improved understanding of the fuel cell operating envelope for various carbon capture applications; and (ii) complete data collection to support the project gate decision to use the developed technology in a Company fuel cell module demonstration for capturing carbon at ExxonMobil’s Rotterdam facility. In addition, under this second extension, we and EMTEC agreed to conduct a joint market study to (a) define application opportunities, commercialization strategies, and development requirements, (b) identify partners for potential pilot/demonstration projects, and (c) assess fuel cell/stack/module manufacturing scale-up and cost reduction. As of October 31, 2022, we were still collaborating with EMTEC on the joint market study, which was completed in early fiscal year 2023. On December 19, 2022, we and EMTEC entered into a third amendment to and extension of the EMTEC Joint Development Agreement, effective December 1, 2022, which extends the term through August 31, 2023 (unless terminated earlier) and is intended to (I) allow for continuation of research that would enable us and EMTEC to finalize data collection in support of the project gate decision to use the developed technology in a Company fuel cell module demonstration for capturing carbon at ExxonMobil’s Rotterdam facility, (II) allow for the continuation of the development, engineering and mechanical derisking of the Generation 2 Technology fuel cell module prototype, and (III) allow for studying the manufacturing scale-up and cost reduction of a commercial Generation 2 Technology fuel cell carbon capture facility.
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Carbon separated from our platforms can also be sequestered in instances where the project does not include a use for carbon.
Our Markets
We target distinct markets and applications, including:
● Utilities and independent power producers;
● Industrial process applications;
● Education and health care;
● Data centers and communication;
● Wastewater treatment;
● Government;
● Commercial and hospitality;
● Microgrids;
● Continuous manufacturing;
● Hydrogen transportation; and
● Food and beverage.
The utilities and independent power producer market has historically been our largest market with customers that include utilities on the East and West coasts of the United States, such as UIL Holdings Corporation, Inc. (owned by Avangrid,
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Inc., a wholly owned subsidiary of Iberdrola), the Long Island Power Authority (“LIPA”) and Southern California Edison. In Europe, utility customers include E.ON Connecting Energies, one of the largest utilities in the world. In South Korea, we are contracted to operate and maintain a 20 MW power plant project (comprised of five SureSource 3000 plants) for Korea Southern Power Company (“KOSPO”). In addition, as of October 31, 2022, our platform technology is deployed across South Korea at another 7 sites totaling more than 144 MW through our previous relationship with POSCO Energy Co., Ltd. (“POSCO Energy”). Upgrading each of those sites over time with new stacks would require us to produce more than 116 MW of stack replacements at our manufacturing facility in Torrington, which does not include the 28 MW of stack replacements which were delivered to KFC in fiscal year 2022.
Our SureSource power platforms are producing power for a variety of industrial, commercial, municipal and government customers, including manufacturing facilities, pharmaceutical processing facilities, universities, healthcare facilities and wastewater treatment facilities. These institutions expect efficient, clean and continuous power to reduce operating expenses, reduce greenhouse gas emissions and avoid pollutant emissions to meet their sustainability goals, while boosting resiliency and limiting dependence on the distribution grid. CHP applications further support economic and sustainability initiatives by minimizing or avoiding the use of combustion-based boilers for heat. Our SureSource power platforms are unique in their ability to run on biogas.
We market our products primarily in the United States, Europe and South Korea, and we are also pursuing expanding opportunities in other countries around the world.
We target for expansion and development markets and geographic regions that:
● Benefit from and value clean distributed generation;
● Have a need for distributed hydrogen for transportation or industry;
● Are committed to reducing their Scope 1 and Scope 2 emissions.
Our business model focuses on providing these markets and geographic regions with highly efficient and affordable distributed generation that delivers de-centralized power in a low-carbon, virtually pollutant-free manner. Geographic markets that meet these criteria and where we are already well established include the Northeastern United States and California. We have also installed and are operating plants in Europe and Asia, mainly South Korea, in addition to North America.
We have made significant progress in reducing costs and creating markets since the commercialization of our products in 2003, with more than 220 MW of our SureSource technology installed and operating as of October 31, 2022.
We believe that we can accelerate and expand the adoption of our distributed power generation solutions through:
● further reductions in the total cost of ownership;
● continued improvements in product quality, power efficiency, and stack life;
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● geographic and segment expansion;
● working to increase demand for on-site generation and microgrid expansion; and
Increasing Biogas Application Market Demand
With the growing market for anaerobic digestion (the production of biogas from the breakdown of biodegradable materials in the absence of oxygen) and increasingly stringent regulations regarding air quality, we see a growing market opportunity that we believe is perfectly suited for our fuel cell design. SureSource power platforms operating on biogas are an especially compelling value proposition as they convert a waste product into clean electricity and heat, while reducing or eliminating flaring, which addresses certain economic, environmental, and sustainability challenges faced by our customers and the communities in which they operate.
Biogas is generated by the decay of organic material (i.e., biomass). This decaying organic material releases methane, or biogas. As a harmful greenhouse gas, biogas cannot be released directly into the atmosphere. Flaring of biogas creates pollutants and wastes this potential fuel source. Capturing and using biogas as a fuel addresses these challenges and provides a carbon-neutral renewable fuel source. Our patented, proprietary clean-up skid, SureSource TreatmentTM, provides an economical and reliable system for treating biogas for use on-site at the biogas production facility. Examples of producers of biogas as part of their operations include wastewater treatment facilities, food and beverage processors and agricultural operations.
Our SureSource power platforms convert this biogas into electricity and heat efficiently and economically. Wastewater treatment facilities with anaerobic digesters are an attractive market for our SureSource solution including the power platform as well as treatment of the biogas. Many wastewater treatment plants currently flare biogas produced in the anaerobic digestion process, emitting NOx, SOx and particulate matter into the atmosphere, which does not meet many air quality regulations. Since our fuel cells operate on the biogas produced by the wastewater treatment process and the heat is used to support daily operations at the wastewater treatment facility, the overall thermal efficiency of these installations is high, supporting economics and sustainability. In addition, the fuel cell does not emit the harmful NOx, SOx and particulate matter that come out of a flare or that would result from the use of traditional combustion-based power generation. The unique chemistry of carbonate fuel cells allows them to use low Btu on-site biogas with no reduction in output or efficiency compared to operation on natural gas. We have developed proprietary biogas cleanup and contaminant monitoring equipment which, combined with the inherent suitability of the carbonate fuel cell chemistry, gives us an advantage in on-site biogas applications. Our SureSource 1500 and SureSource 3000 power platforms were the first systems certified to California Air Resource Board emissions standards under the Distributed Generation Certification Program for operation with on-site biogas within the state of California.
Microgrid and resiliency applications
Our fuel cell solutions are also well suited for microgrid applications, either as the sole source of power generation or integrated with other forms of power generation. We have fuel cells operating as microgrids at universities and municipalities, including one university microgrid owned by Clearway Energy and a municipal-based microgrid owned by UIL Holdings Corporation, in addition to the microgrid at a municipal location in Santa Rita, California. For the municipal-based system in Woodbridge, Connecticut owned by UIL Holdings Corporation, under normal operation, the fuel cell supplies power to the grid. If the grid is disrupted, the fuel cell plant will automatically disconnect from the grid and power a number of critical municipal buildings. Heat from this municipal-based fuel cell platform is used by the local high school. Our fuel cell based microgrids have also continued to operate during public safety power shutoffs events in California.
Levelized Cost of Energy
Our fuel cell projects deliver power at a rate comparable to pricing from the grid in our targeted markets. Policy programs that help to support adoption of clean distributed power generation often lead to below-grid pricing. We measure power costs by calculating the Levelized Cost of Energy (“LCOE”) over the life of the project.
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There are several primary elements to LCOE for our fuel cell projects, including:
• Capital cost;
• Operations and maintenance cost; and
• Fuel expense.
Given the level of integration in our business model of manufacturing, installing and operating fuel cell power platforms, there are multiple areas and opportunities for cost reductions. We are actively managing and reducing costs in all three LCOE areas, including cost reduction initiatives with respect to system components and raw materials, advanced lean manufacturing principles, improvements in lifetime product costs through continued system and platform engineering, and improvements in output and efficiency. We are also investing in platform design to reduce overall EPC cost associated with the installation of our platforms.
Our Business Model
Our business model is based on multiple revenue streams, targeting both recurring revenue and non-recurring revenue. Recurring revenue is delivered through recurring electricity, capacity, and renewable energy credit sales under power purchase agreements (“PPAs”) and tariffs for projects we retain in our generation operating portfolio, as well as service revenue, mainly through long-term service agreements. Non-recurring revenue is generated through power platform and component sales, as well as from public and private industry research contracts related to the development of our Advanced Technologies (which are discussed in more detail below).
We are a complete solutions provider for our platform solutions, controlling the design, sales, manufacturing, installation, operations, and maintenance of our patented fuel cell technology under long-term power purchase and service agreements. When utilizing long-term PPAs, the end-user of the power or utility hosts the installation and only pays for power as it is delivered, avoiding up-front capital investment. We also develop projects and sell equipment directly to customers, providing a complete solution of engineering, installing, and servicing the fuel cell power plant under an engineering, procurement, and construction agreement (“EPC”) and a long-term maintenance and service agreement. (See the sections below entitled “Engineering, Procurement and Construction” and “Service and Warranty Agreements” for more information.) We maintain the long-term recurring service obligation and associated revenues running conterminous with the life of such projects.
Historically, in the United States, customers or developers typically purchased our fuel cell power plants outright. As the size of our fuel cell projects has grown and the availability of project capital has improved, project structures in the U.S. have transitioned predominantly to PPAs. Customers and developers generally have the option to either purchase our fuel cell platforms outright or enter into a PPA under which the customer or developer (i.e. the end-user of the power) commits to purchase power as it is produced for an extended period of time, typically 10 to 20 years. We may elect to retain ownership of a project or we may elect to sell all or some of the project to a third party. If a project or project asset is sold, revenue from the sale is recognized and reflected in the Product revenues line item of our Consolidated Statements of Operations and Comprehensive Loss, and we recognize revenue separately for the long-term maintenance and service agreement with respect to the project over the term of that agreement. If a project is retained, we recognize electricity, capacity and/or renewable energy credits monthly over the term of the PPA. We report the financial performance of retained projects as Generation revenues and Cost of generation revenues in our Consolidated Statements of Operations and Comprehensive Loss.
Our decision to retain certain projects is based in part on the recurring, predictable cash flows these projects can offer us, the proliferation of PPAs in the industry and the potential access to capital. Retaining PPAs affords us the full benefit of future cash flows under the PPAs, which are expected to be higher than if we sell the projects, although it requires more upfront capital investment and financing. As of October 31, 2022, our operating portfolio of retained projects totaled 36.3 MW with an additional 26.8 MW under development or construction. We plan to continue to grow this portfolio prudently and in a balanced manner, while also selling projects to customers or project investors when selling presents the best value and opportunity for our capital needs or meets the customer’s desired ownership structure.
We operate and maintain our project platforms for the life of the project regardless of the ownership structure. For all operating fuel cell platforms not operating under a PPA, customers enter into long-term service agreements with us, some of which have terms of up to 20 years. We report the revenue earned under long-term maintenance and service agreements as Service agreements revenues in our Consolidated Statements of Operations and Comprehensive Loss.
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Internationally, South Korea and Europe have historically been product sale markets for the Company; however, prior to fiscal year 2022, we had not recognized meaningful product sales revenues in these geographies since 2018. Our activities in South Korea were impacted by our prior dispute with POSCO Energy and, until fiscal year 2021, we moderated our investment in business development in Europe due to limited resources. During fiscal year 2022, our commercial team renewed its sales efforts in both markets. Increasing product sales is a focus area for fiscal year 2023 and beyond. As a result of entering into a settlement agreement with POSCO Energy and its subsidiary, Korea Fuel Cell Co., Ltd. (“KFC”), on December 20, 2021 (the “Settlement Agreement”), we have confirmed our full access to the South Korean and broader Asian markets for sales of our products and we are aggressively pursuing sales in these markets, which we see as key to our future growth. (See the section below entitled “License Agreements— License Agreements and Settlement Agreement with POSCO Energy” for more information related to the terms of the Settlement Agreement.)
Advanced Technologies Programs
Our Advanced Technologies programs include research and development and demonstration programs funded by third parties. We undertake both privately funded and publicly funded research and development to develop and grow these opportunities, reduce product and output costs, and expand our technology portfolio. Our Advanced Technologies programs are currently focused on developing and commercializing solutions that advance solid oxide fuel cells, distributed hydrogen, and carbon capture. We report the revenue earned under these programs as Advanced Technologies contract revenues in our Consolidated Statements of Operations and Comprehensive Loss.
We have historically worked on technology development with various U.S. government departments and agencies, including the DOE, the Department of Defense (“DOD”), the Environmental Protection Agency (“EPA”), the Defense Advanced Research Projects Agency (“DARPA”), the Office of Naval Research (“ONR”), and the National Aeronautics and Space Administration (“NASA”). Government funding, principally from the DOE, provided 6%, 9% and 6% of our revenue for the fiscal years ended October 31, 2022, 2021, and 2020, respectively.
We have been working with EMTEC since 2013 to develop and commercialize our carbon capture solution which is an application of our core carbonate technology.
Beyond the DOE and EMTEC funding, we intend to prudently invest capital to accelerate commercialization of solid oxide fuel cells, carbon capture and separation, and long-duration energy storage solutions, as discussed below in more detail in the section entitled “Company Funded Research and Development”.
Company Funded Research and Development
In addition to research and development performed under research contracts, including, as described under the heading “Advanced Technologies Programs” above, we also fund our own research and development activities to support the commercial fleet with product enhancements and improvements. We work to continuously improve and mature our products and implement lessons learned into our product designs and manufacturing process subsequent to introduction. We also continue to invest in improvement initiatives with respect to our core molten carbonate technology. For example, we have identified improvement opportunities ranging from improved thermal management by reducing internal temperature to improving the performance of our electrical balance of plant and implemented design changes to our commercial platforms which are expected to improve overall product performance.
As it relates to our fuel cell modules, these improvements center around delivering more uniform temperature distribution within the stack modules with the intent of improving output over the life of the modules to achieve the product’s expected design life. Continued extension of design life and output of our modules over time is a core research and development focus. In addition, we are also investing in commercializing technologies such as carbon capture and separation, solid oxide fuel cells, and solid oxide electrolysis cells for hydrogen production and energy storage as we believe these technologies represent significant future market opportunities. To further accelerate commercialization activity for our solid oxide platform, we commenced the design and construction of two advanced prototypes targeted for fiscal year 2023 completion: (i) a 250 kW power generation platform, and (ii) a 1 MW high-efficiency electrolysis platform.
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Company funded research and development is included in Research and development expenses (operating expenses) in our consolidated financial statements. The total research and development expenditures in the Consolidated Statements of Operations and Comprehensive Loss, including third party and Company-funded expenditures, are as follows:
Years Ended October 31,
Cost of Advanced Technologies contract revenues $ 15,184 $ 16,496 $ 16,254
Manufacturing and Service Facilities
We operate a 167,000 square-foot manufacturing facility in Torrington, Connecticut where we produce the individual cell packages and assemble fuel cell modules for our carbonate fuel cell products. This facility also houses our global service center. Our completed modules are conditioned in Torrington and shipped directly to customer sites. We continue to make investments in various manufacturing areas to improve production throughput and annualized production rate. As of October 31, 2022, the Torrington facility was operating at a 45 MW per year annualized production rate on a single production shift. Maximum annualized capacity (module manufacturing, final assembly, testing and conditioning) is 100 MW per year under the Torrington facility’s current configuration when being fully utilized. The Torrington facility is sized to accommodate the eventual annualized production capacity of up to 200 MW per year with additional capital investment in machinery, equipment, tooling and inventory. We continue to invest in manufacturing capability, including through the installation of new fuel cell conditioning equipment. Additionally, we expect to complete the construction of an on-site fuel cell demonstration and test unit in fiscal year 2023. This platform will allow for component testing, with the goal of accelerating the integration of alternate suppliers, and will allow prospective customers to observe demonstrated capabilities of the fuel cell platform, such as carbon separation.
We design and manufacture the core SureSource fuel cell components that are stacked on top of each other to build a fuel cell stack. For megawatt-scale power plants, four fuel cell stacks are combined to build a 1.4 MW fuel cell module. To complete the power platform, the fuel cell module or modules are combined with the balance of plant (“BOP”). The mechanical BOP processes the incoming fuel such as natural gas or biogas and includes various fuel handling and processing equipment such as pipes and blowers. The electrical BOP processes the power generated for use by the customer and includes electrical interface equipment such as an inverter. The BOP components are either purchased directly from suppliers or the manufacturing is outsourced based on our designs and specifications. This strategy allows us to leverage our manufacturing capacity, focusing on the critical aspects of the power plant where we have specialized knowledge and expertise and possess extensive intellectual property. BOP components are shipped directly to a project site and are then assembled with the fuel cell module into a complete power plant.
The Torrington production and service facility and the Danbury corporate headquarters and research and development facility are ISO 9001:2015 and ISO 14001:2015 certified and our Field Service operation (which maintains the installed fleet of our platforms) is ISO 9001:2015 certified, reinforcing the tenets of our quality management system and our core values of safety, continuous improvement, and commitment to quality, environmental stewardship, and customer satisfaction. Sustainability is promoted throughout our organization. We manufacture SureSource products and manage them through end-of-life using environmentally friendly business processes and practices, certified to ISO 14001:2015. We continually strive to improve how we plan and execute across the entire product life cycle. We maintain a chain of custody and responsibility of our SureSource products throughout the product life cycle and strive for “cradle-to-cradle” sustainable business practices, incorporating sustainability in our corporate culture. We utilize “Design for Environment” principles in the design, manufacture, installation and servicing of our power platforms. Design for Environment principles aim to reduce the overall human health and environmental impact of a product, process or service, when such impacts are considered across the product’s lifecycle. When our platforms reach the end of their useful lives, we can refurbish and re-use certain parts and then recycle most of what we cannot re-use. By weight, approximately 93% of the entire power plant can be re-used or recycled at the end of its useful life.
Our manufacturing and research and development facility in Calgary, Alberta, Canada is focused on the engineering and development of our solid oxide fuel cell (“SOFC”) and SOEC technologies. This facility also houses our SOFC and SOEC stack research and development effort and includes equipment for the manufacturing of solid oxide cells and stacks, including advanced manufacturing capabilities. We are making additional investment in the Calgary facility to establish a
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center of competence and excellence for solid oxide cell and stack research and manufacturing. This facility includes equipment for the manufacturing of solid oxide cells and stacks, including an advanced automated stack manufacturing line which has been developed to ensure that the labor and overhead which are required to produce these technologies are optimized for efficiency and complement the low direct material cost of the stack. As of October 31, 2022, this facility is capable of producing 1 MW per year of SOFC or approximately 4 MW per year of SOEC. We are investing in expanding this facility with the goal of increasing its production capacity to 10 MW per year of SOFC or 40 MW per year of SOEC, and we expect this expansion to be complete by the middle of fiscal year 2024. In parallel, we are also expanding our Connecticut manufacturing activities and evaluating additional U.S. locations in anticipation of increased production volume.
We have a manufacturing and service facility in Taufkirchen, Germany that has the capability to perform final module assembly for up to 20 MW per year of sub-megawatt fuel cell power platforms to service the European market. Our European service activities are also operated out of this location. Our operations in Europe are certified under both ISO 9001:2015 and ISO 14001:2015.
As we continue our focus on business growth in Europe, we plan to expand our existing manufacturing and assembly capabilities to match demand for our existing platforms and to support and fulfill the demand we expect to be associated with the future commercialization of our solid oxide and carbon capture offerings. We will continue to focus our manufacturing strategy on core strengths and competencies while further leveraging strategic outsourcing and supply partnering in support of increasing scale and speed to market.
In Asia, we previously relied on our relationship with POSCO Energy to serve the Asian market. Through that relationship, POSCO Energy manufactured the fuel cells to be used by customers in Asia, as well as operated and maintained fuel cell installations in the South Korean market. Now that we have entered into a settlement agreement with POSCO Energy, we plan to explore manufacturing and assembly opportunities across Asia to achieve more efficient product manufacturing and supply chain operations, as well as meet the increasing government requirements for the inclusion of locally sourced content and components in order to benefit from enhanced clean energy investment incentives.
Raw Material Sourcing and Supplier Relationships
We use various commercially available raw materials and components to construct a fuel cell module, including nickel and stainless steel, which are key inputs in our manufacturing process. Our fuel cell stack raw materials are sourced from multiple vendors and are not considered precious metals. We have a global integrated supply chain with qualified sources of supply, many of which are located locally in the regions in which we have established manufacturing and service operations including Europe and Asia. We have not sourced or procured, and do not source or procure, directly or indirectly, any materials from Russia.
Despite a somewhat volatile nickel market and increased pricing pressure on stainless steel direct materials, we have employed strategic inventory purchases, negotiated fixed-price supply contracts, and employed financial hedges to help mitigate the impact to our product cost and improve financial planning. We have implemented several initiatives to mitigate the effect of impacts associated with extended lead times for materials and components by optimizing domestic supplier shipping volumes, leveraging competition across multiple qualified freight forwarders, establishing selective direct relationships with steamship lines, and aggregating shipments with qualified suppliers.
From time to time, we may enter into over-the-counter financial hedges to mitigate market price volatility associated with our underlying physical commodity exposure (and other asset classes) consistent with our Financial Risk Management Policy. These hedges are non-speculative in nature, are entered into with investment grade-rated multinational financial institutions and are governed under the terms of the International Swaps and Derivative Association.
While we manufacture the fuel cells in our Torrington facility, the electrical and mechanical BOPs are assembled by and procured from several suppliers. All of our suppliers must undergo a stringent and rigorous qualification process. We continually evaluate and qualify new suppliers as we diversify our supplier base in our pursuit of lower costs, security of supply, and consistent quality. We purchase mechanical and electrical BOP components from third party vendors, based on our own proprietary designs.
Assuring the absence of conflict minerals in our power platforms is a continuing initiative. Our fuel cells, including the fuel cell components and completed fuel cell module, do not utilize any 3TG minerals (i.e., tin, tungsten, tantalum and gold) that are classified as conflict minerals. We utilize componentry in the BOP such as computer circuit boards that
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utilize trace amounts of 3TG minerals. For perspective, total shipments in fiscal year 2021 weighed approximately 4.6 million pounds, of which only 30.0 pounds, or 0.000667%, represented 3TG minerals, so the presence of these minerals is negligible. Our conflict mineral disclosure filed with the Securities and Exchange Commission (“SEC”) on Form SD contains specific information on the actions we are taking to avoid the use of conflict minerals.
Overall, as we continue to grow our business, we remain focused on improving quality, increasing the competitive supply landscape, maintaining existing supplier relationships, as well as building strong new key supplier relationships to expand our supply chain options.
Engineering, Procurement and Construction
We provide customers with complete turn-key solutions, including development, engineering, procurement, construction, interconnection and operations for our fuel cell projects. We have developed relationships with many design firms and licensed general contractors and have a repeatable, safe, and efficient execution philosophy that has been successfully demonstrated in numerous jurisdictions, both domestically and abroad, all with an exemplary safety record. The ability to rapidly and safely execute installations minimizes high-cost construction period financing and can assist customers in certain situations when the commercial operations date for a project is time sensitive.
Services and Warranty Agreements
We offer a comprehensive portfolio of services, including engineering, project management and installation, and long-term operating and maintenance programs, including trained technicians that remotely monitor and operate our platforms around the world, 24 hours a day and 365 days a year. We directly employ field technicians to service the power platforms and maintain service centers near our customers to support the high availability of our platforms.
For all operating fuel cell platforms not under a PPA, customers purchase long-term service agreements (“LTSAs”), some of which have terms of up to 20 years. Pricing for LTSAs is based upon the value of service assurance and the markets in which we compete and includes all future maintenance and fuel cell module exchanges. Each model of our SureSource power platform has a target design life of 25-to-30 years. The fuel cell modules, with legacy modules having a 5-year target cell design life and current production modules having a 7-year target cell design life, go through periodic replacement, while the BOP systems, which consist of conventional mechanical and electrical equipment, are maintained over the life of the project.
Under the typical provisions of both our LTSAs and PPAs, we provide services to monitor, operate and maintain power platforms to meet specified performance levels. Operations and maintenance are key drivers for power platforms to deliver their projected revenue and cash flows. The service aspects of our business model provide a recurring and predictable revenue stream for the Company. We have committed future production for scheduled fuel cell module exchanges under LTSAs and PPAs through the year which have expiration dates through 2042. The pricing structure of the LTSAs incorporates these scheduled fuel cell module exchanges and the committed nature of this production facilitates our production planning. Many of our PPAs and LTSAs include guarantees for system performance, including electrical output and heat rate. Should the power platform not meet the minimum performance levels, we may be required to replace the fuel cell module with a new or used replacement module and/or pay performance penalties. Our goal is to optimize the power platforms to meet expected operating parameters throughout their contracted service terms.
In addition to our service agreements, we provide a warranty for our products against manufacturing or performance defects for a specific period of time. The warranty term in the U.S. is typically 15 months after shipment or 12 months after acceptance of our products. We accrue for estimated future warranty costs based on historical experience.
Competition
The market for clean energy is highly competitive. Many factors, including government incentives and specific market dynamics, affect how clean energy can deliver outcomes for customers in a given region. While clean energy often competes against the electric grid, which is readily available to prospective customers and supplied by traditional centralized power plants, including coal, gas, hydro, and nuclear plants, clean energy is increasingly able to compete with the grid and long-distance transmission of electricity in terms of levelized cost of electricity. Clean energy sources that
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customers may consider beyond our solutions include products such as wind turbines, solar arrays, and hydro facilities, as well as a range of hydrogen and fuel cell solutions from both incumbent and developing competitors.
Our platforms are based on a range of technologies and target a variety of applications, each of which have incumbent and developing competitors. Several companies in the U.S. are engaged in fuel cell development, although, to our knowledge, we are the only domestic company engaged in manufacturing and deployment of stationary natural gas or biogas fueled carbonate fuel cells. In addition to different types of stationary fuel cells, some other technologies that compete in the distributed generation marketplace include micro-turbines, turbines, and reciprocating gas engines.
Our stationary fuel cell platforms also compete against large scale solar and wind technologies, although we complement the unreliable intermittent nature of solar and wind power with the continuous, reliable power output of our fuel cells. Utility scale solar and wind power require specific geographies and weather profiles, transmission for utility-scale applications, and a source of back up capacity for when the sun or wind is not available. They also require a significant amount of land compared to our fuel cell power plants, making it difficult to site megawatt-class solar and wind projects in urban areas. While fuel cells emit negligible amounts of NOx, SOx and particulate matter, fuel cells do emit some carbon dioxide when fueled with natural gas or carbon-neutral biogas (although, while operating on biogas, the platform’s emissions would be considered carbon neutral), but in both cases less per kWh than other less-efficient systems. In many markets, baseload fuel cells avoid more emissions than wind or solar systems of similar capacity because they operate for many more hours of the day compared to these intermittent resources.
Product development cycles are long and product quality and efficiency are critical to success. Research and development investments are crucial in this business, as are focused intellectual property strategies and protection of such, as new technologies and solutions could make our solutions less competitive.
We continue to invest in exploring new ways of further improving the efficiency and effectiveness of our platforms. Our objective is to continue to improve our competitive position, including innovating in areas such as offering multiple platform solutions, and methods for producing clean hydrogen, solid oxide, and carbon separation and carbon capture in order to add value for customers looking for clean and renewable energy and to aid in their decarbonization goals.
Backlog
Backlog represents definitive agreements executed by the Company and our customers. Project awards are not included in our backlog.
Backlog as of October 31, 2022 and 2021 consisted of the following (in thousands):
Commercial:
Product $ 9,065 $ —
Advanced Technologies
U.S. Government - Unfunded 1,190 220
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Service and generation backlog as of October 31, 2022 had a weighted average term of approximately 17 years, with weighting based on dollar backlog and utility service contracts of up to 20 years in duration at inception. Generally, our government funded and privately funded research and development contracts are subject to the risk of termination at the convenience of the contract counterparty.
Generation backlog is the largest component of our total commercial backlog, reflecting revenues from projects with PPAs in place and of which we have retained ownership. Under a PPA, the utility or end-user of the power (and other attributes such as capacity and renewable energy credits) commits to purchase power as it is produced for an extended period of time, typically 10-to-20 years. With the project being retained, electricity, capacity and/or renewable energy credits are recognized monthly over the term of the PPA. We report the financial performance of retained project assets as generation revenue and cost of generation revenues.