I am very pleased to provide an overview of your Company's activities for the quarter ending 31st December 2016. As we approach the end of the year, it is worth reflecting not just on the previous quarter but also review highlights throughout 2016. The pace of progress this year has been relentless and while there have been a number of significant RNS announcements, I'd like to also use this opportunity to tell you more about some of the progress that we have achieved behind the scenes. I also intend to update the market fully on progress against the eight corporate milestones for 2016 in the New Year.
Agreement with Peel Environmental for Assessment of UK's largest Hydrogen Fuel Cell Project
AFC Energy is proud to be a UK company, which unfortunately over the years has found itself focusing on opportunities for medium and longer term deployment in other corners of the globe. However, in November this year, following meetings with Peel Environmental in Manchester, AFC signed an agreement to assess a substantive fuel cell development opportunity in the heartland of the UK's Northern Powerhouse. The location for the assessment was Peel's Protos Industrial Park located in Chester. The importance of this site for AFC's fuel cell potential lies in a number of areas: firstly, there are a number of industrial hydrogen sources in the Protos vicinity which lends itself to a scalable fuel cell opportunity. Secondly, as owner of the Protos site, Peel, together with its regional contacts and first class permitting and consenting capability, lends itself as an ideal partner for AFC to explore this opportunity and collaborate in the assessment of the UK's largest fuel cell development project at the moment.
Like all of AFC Energy's commercial power development opportunities, the first logical step in advance of deployment is to conduct a holistic scoping of the opportunity before conducting front end engineering studies and ultimately detailed engineering studies leading to procurement and construction. AFC's scoping agreement with Peel will be the first full engineering study conducted by AFC Energy since its founding and will provide the basis for a number of other studies for commercial opportunities internationally which are currently in discussion.
As a UK company, we were looking for the right opportunity to position ourselves in the UK and the Protos project with its proposed phasing of fuel cell projects commencing at 1MW through to an estimated 35MW to 50MW of installed capacity could see not only the development of the UK's largest stationary fuel cell project but also one of the largest in the world.
In time, this could potentially lead to a range of new investment and employment creation opportunities consistent with the UK Government's Northern Powerhouse initiative, which represents a recognition of the scale and potential of the Northern economy, and the objective to achieve significant growth to rebalance the UK economy.
The focus on low carbon generation technologies clearly identifies the region as a national hub for renewable energy and associated supply chains, and the integration of hydrogen fuel cells into the UK regional energy mix creates further opportunities for decarbonisation of the national power sector and clean energy generation in the long term.
AFC Energy has already, in conjunction with Peel, commenced dialogue with stakeholders in the project and will be commencing the detail of the study in January 2017. We look forward to providing you with further updates into next year.
Delivery of Generation 2 Fuel Cell System
On 14 November, AFC announced the successful completion of testing and development of its Generation 2 ("Gen2") fuel cell system and in so doing, delivering the key technical Milestones 1 and 2 of the 2016 Strategic Milestones.
The Gen2 design significantly builds on the system employed in Stade back in January 2016 and incorporates design changes to extend the operating life of the fuel cell stack, while increasing stack availability and reducing stack cost. These features represent three of AFC Energy's key commercialisation metrics.
Evidence of progress in this regard was achieved when the fuel cell system operated continuously for a period in excess of one month and subsequently, for a period in excess of 1,000 hours with a very high availability level at AFC's industrial test facility at Stade.
Hydrogen Quality Requirement Lowered
Since its inception in 2006, AFC Energy has utilised at its Dunsfold offices high quality laboratory grade (99.999%) hydrogen in the development and trialling of its fuel cell systems. It became apparent however following financial modelling that one of the key drivers of economic performance in any fuel cell project was the price paid for hydrogen at the industrial facility. To this extent, it made imminent sense that part of AFC's trialling should, indeed must, include testing the utilisation of hydrogen at lesser grades reflective of industrial hydrogen availability. To the extent AFC's fuel cell was able to utilise lower grade hydrogen, it not only had a potentially significant impact on project economics, but would also materially increase the size of AFC's market potential where hydrogen was produced at source at a lower grade. As part of the Gen2 system testing, we therefore chose to utilise hydrogen at a lower grade to demonstrate one of the key advantages to AFC Energy's fuel cell relative to its competitors.
The successful trial of lower grade hydrogen completed in November 2016 now leads AFC to consider further potential reductions in hydrogen grade to further enhance the commercial opportunities available to us going forward.
Joint Development Agreement with De Nora
Whilst AFC has been in development of its second generation fuel cell technology ("Gen 2") through the majority of 2016, the Company has also been in parallel focussed on a range of incremental enhancements through its Joint Development Agreement with Italy-based Industrie De Nora S.p.A. ("De Nora"). Only a few months after signing the JDA in August 2016, we have successfully undertaken joint testing at AFC's Dunsfold facility of several incremental improvements to the fuel cell based on De Nora's world leading electro-chemistry capability.
De Nora's experience in alkaline electro-catalysts and electro-chemistry, and AFC's experience in alkaline fuel cells are wholly complementary with the Joint Development Agreement benefitting both parties. Several new electrodes have been trialled at Dunsfold and had their short-term power performance evaluated before the programmes moves into durability testing.
De Nora's electrodes have operated for many years in industrial environments globally. We believe the outcomes of this joint collaboration will therefore deliver a technology platform that further enhances the commercialisation timeline and success in the alkaline fuel cell space.
Importantly, De Nora have had two of the world's leading electro-chemists working on this collaboration since August with positive results already beginning to be evidenced. The collaboration continues into 2017 and we look forward to providing further updates on the progress of this workstream in due course.
AFC's funding has been closely monitored over the past year with increasing opportunities to trim cash burn without affecting technical progress identified month on month. The cash position was further enhanced during Q4 2016.
For our EU-funded project Power-Up initiative, AFC received a further payment from the EU's Fuel Cell and Hydrogen Joint Undertaking ("FCH JU"), amounting to €791,000.
We also received €111,000 in new funds related to German VAT paid in previous periods and have outstanding claims in respect of VAT recoverable expected in Q1 2017.
The cash position therefore remains sound going into 2017 with further cash receipts expected from the EU and the UK's R&D tax credit regime throughout the course of the next twelve months.
A snapshot of 2016
Before I go into our intentions for 2017, it would be worth stopping for a minute and reviewing the highlights for the year as a whole. In 2016, we announced a successful Shareholder Offer, appointed a new Nomad and Joint Broker, successfully delivered gross electrical output in excess of 200kW at the KORE fuel cell power plant in Stade, Germany, signed a strategic engineering partnership and services agreement with Germany-based engineering consultancy plantIng to support the optimisation and rollout of AFC's alkaline fuel cell system, announced our Strategic milestones and outcomes to progress towards the commercial deployment of AFC's fuel cell system, we completed the Lanstead equity swap agreement, which combined with our equity placing saw AFC receive a total of £4.7m, received a net cash payment from the European Union's Fuel Cells and Hydrogen Joint Undertaking of €2.052m, completed the design and basic engineering of the Company's new 10kW fuel cell system and, as mentioned above, announced the Strategic Technology collaboration with De Nora; one of the Company's most important collaborations entered into to date.
None of this would have been possible without the selfless commitment of the fantastic team at AFC to whom I extend a sincere thanks for their efforts.
2017 Commitment to Technical Development, Commercial and Strategic Relationships
So next year, we expect to continue to make sound progress with Italy's De Nora and to provide further updates in the New Year. I remain firmly of the view that this collaboration presents a significant opportunity to both parties for the enhancement of respective shareholder value. At the same time, AFC Energy is continuing to progress dialogue with existing, as well as prospective new global industrial partners, which we will announce in due course.
AFC Energy is also excited to be collaborating with Peel Land & Property Group. The Protos strategic site will provide the ideal opportunity for a scaled and commercial hydrogen fuel cell facility that will play an important part in the sustainable powering of the UK's Northern Powerhouse. I am confident that with the mix of skills and capabilities of AFC and Peel, we will deliver a world-class innovative fuel cell project, here in the UK.
While we continue to strive to meet the commitments as stipulated within the milestones set for 2016, talks remain at a highly sensitive stage. Our achievements to date nicely position AFC Energy for delivery of commercial transactions and in turn provide the traction needed with our partners for the deployment of units.
I would like to take this opportunity to thank you, the shareholder, for your continued support and wish all our stakeholders a happy festive season and prosperous 2017.
Chief Executive Officer