AFC Energy Quarterly Newsletter - September 2017

Dear Shareholder,

I am pleased to provide an overview of the Company's activities for the quarter ended 30 September 2017.

As we proceed into the final quarter of 2017, we are also commencing the final stage of AFC Energy’s three-year accelerated path to a commercial fuel cell technology platform. I am pleased to confirm we remain on track!

2017 10 02 092432Throughout the course of Q4 2017, I will be providing you with updates on progress made, further demonstrating the game changing nature of our technology within the international power market.

Within the scope of this quarterly newsletter however, I wish to highlight the following key developments that are now coming together in support of this outcome:

  • Longevity of fuel cell electrodes, a key driver of cost reduction, on an extrapolated basis, continues to materially improve with 2017 targets well within sight and likely to be exceeded;
  • These same electrodes developed with Industrie De Nora (“De Nora”) under our Joint Development Agreement (“JDA”) are now engineered and fully integrated into the AFC Energy fuel cell stack with excellent results from industrial-scale sized electrodes validated in Surrey;
  • Introduction of AFC Energy’s newly designed fuel cell stack without solid nickel substrate frames, now demonstrated both at laboratory scale and industrial scale with improvement in stack performance – while reducing stack costs by up to 30%;
  • Balance of plant design optimisation now completed and implemented at Stade, capable of accepting new full-scale fuel cell stacks for longevity validation during Q4 2017;
  • Clarity over roadmap to a power generation cost from the AFC Energy fuel cell stack of less than

US$0.10 / kWh;

  • Completion of engineering scoping study at Covestro’s Brunsbuttel industrial park incorporating design of AFC Energy’s first 1MWe fuel cell system;
  • Visit by De Nora CEO to AFC Energy’s Surrey head office to inspect progress made in the first twelve months of the JDA, and progressing negotiations towards an electrode supply agreement;
  • Invitation from De Nora to present at their October 2017 “invitation only” conference in the United States to existing and prospective clients across the global chlor alkali industry where De Nora are the leading provider of electrodes to over 50% of the industry.

Importantly, over the past few months, several new initiatives have commenced within the team that have the potential to provide new and exciting opportunities for AFC Energy as it commences commercial technology deployment. These initiatives could again materially revolutionise the scale of opportunity within the hydrogen economy in which we are investing today whilst building on our core technology platform. But more on that later.

I trust you can sense the important progress made by the Company and its partners over the past quarter as we continue to consolidate efforts towards a commercial fuel cell stack by the end of the calendar year. I hope this newsletter provides an overview of these developments and their importance to the success of our commercialisation programme.

Fuel Cell Development

As I highlighted in the June 2017 Quarterly Newsletter, the collaboration with De Nora is of specific importance to the achievement of our accelerated commercialisation roadmap outlined almost three years ago. We are now well and truly focussed on scale up of results achieved by our two companies “in the lab” into an industrial scale fuel cell system.

Importantly, in fully integrating the new JDA electrode into the AFC Energy fuel cell stack, certain design changes were instigated including removal of the solid nickel substrate and replacing this with a plastic frame with the electrode adhered within the frame. This change has now been fully tested with immense success resulting not only in an improvement in fuel cell performance, but also a material reduction in stack cost of up to 30%.

These electrodes and new stack design are currently in operation at AFC Energy’s facility in Surrey. Accordingly, we remain focused on delivering the following outcomes by the end of this year;

  • Achieve full integration of commercial fuel cell electrodes into the AFC Energy stack design and

delivering operational results from this stack at our facility in Stade, Germany.

  • With successful electrode integration complete, finalise our design for a commercial fuel cell electrode architecture and stack design that is capable of mass production with warranted performance metrics. As you will have noted from previous newsletters, we have already achieved three out of the five commercialisation metrics. Our scoping study at Covestro is demonstrating that the cost targets are achievable, and the joint work with De Nora is surpassing the expectations of both parties regarding longevity forecasts.
  • Develop dialogue with De Nora for the terms related to a mass electrode manufacturing agreement.

I am very excited by the progress we continue to make, as we move steadily through the plans I communicated in the June Quarterly Newsletter. Further details on this progress are provided below.

Finalisation of Balance of Plant (BoP) Changes at Stade

In the June Quarterly Newsletter, I mentioned that we had completed the design changes that were needed to upgrade the BoP. The construction of these changes has now been completed – whilst not extensive they were difficult to design and construct within the limited space envelope available. ‘Dry’ commissioning of the changes has been completed and the facility is ready to accept the upgraded stack and cartridge during Q4 2017.

But why make changes to a facility that had previously worked? In summary, our intention is to achieve the key driver to enable deployment of power projects globally … commercial viability. The changes made not only enable the acceptance of the newly designed fuel cell stacks referred to above, but also enhance the system for longer term commercial operation in a way that maximises the chances of a successful commercial and affordable fuel cell operation.

The initial fuel cell deployed at Stade provided AFC Energy with a tremendous reference site for a static fuel cell power generation plant, but at the time of commissioning, did not fully address all the metrics of commercialisation. We are now addressing these issues which will play into the demonstration of a commercial fuel cell platform during Q4 2017.

We are also in the process of closing out project Power-Up. We will imminently be submitting our final report to the EU Fuel Cell and Hydrogen Joint Undertaking. Doing so will facilitate the release of funds due to AFC Energy, and its partners, under project Power-Up.

Commercialisation Metrics - P.L.A.C.E.

I spoke about these commercialisation metrics at the AGM earlier this year and as a reminder of their meaning, the P.L.A.C.E. metrics are as follows;

P – Performance - achieve > 10 kW / cartridge (achieved)

L – Longevity - achieve electrode longevity of > 1-year operation (key cost driver)

A – Availability - up to 98% in a normal operating year (achieved)

C – Cost - lifetime cost of electricity target <US$ 0.10 / kWh (on track)

E – Efficiency - electrochemical conversion efficiency for hydrogen > 60% (achieved)

Following the commissioning of the initial plant at Stade and then in what you may recall was referred to as the Gen. 2.0 work, we were able to deliver three out of five of the metrics. This was a great place to be at the end of 2016, but we needed to progress further. To be able to generate competitive clean baseload power we needed to take steps to achieve the Longevity and Cost targets.

De Nora JDA Agreement - Update

We entered into our JDA agreement with De Nora so that we could look at electrode development work in a collaborative manner. De Nora, in their normal business sector, are the leader in electrode supply to the Chlor Alkali industry where they offer industry-leading warranties to the performance of their electrodes. We are seeking to mirror these characteristics to AFC Energy’s fuel cell system and to our customers and partners.

The benefit of the JDA is not only do we seek to deliver this year an initial one-year operational life of our electrodes, but through collaboration, we are now starting to look towards two-year operational lives with a line of sight to a four-year economic operational electrode life.

The ability to deliver this extended operational lifetime in our electrodes is the critical factor in reducing the levelized cost of power to less than US$ 0.10 / kWh. This would be an incredible outcome not only for AFC Energy, but for the fuel cell industry and the wider hydrogen economy, and will put our technology on a comparable footing with other low carbon, baseload power generation technologies.

Working with De Nora, we are confident this is a credible outcome that is now within reach, and to the extent AFC Energy can offer a warranted electrode life of up to four years, not only will we see the financeability of the technology enhanced for commercial project deployment, but we should also see an enhancement to margins and financial return to shareholders in the medium term.

Completion of Covestro 1 MWe Design Basis Engineering Study

After Stade, we wanted to design a fuel cell plant that could provide clean baseload power at 1MWe output, as a repeated design basis that could meet the increasing scaled size of our partner’s and prospective partner’s commercial projects.

Following the recent engineering and scoping study, conducted at Covestro’s Brunsbuttel industrial park in Germany, we have now completed the design basis for a 1MWe power project. Not only does this design basis incorporate the learnings form Stade, it also contributes to our ability to improve the cost metric through the benefit of economies of scale. Specifically, the results of the study are that we now not only have a view of cost of power production at < US$ 0.10 / kWh but are in line of sight of the CAPEX levels equivalent to those norms for established thermal generation. Both of these outcomes are a landmark achievement for AFC Energy.

Having completed the engineering and scoping study, we will shortly commence dialogue with Covestro with regards the next steps towards project delivery.

Home and Away

Closer to home, at Dunsfold, we continue to make progress – using the outcomes from the Covestro scoping study – on the Front-End Engineering and Design study for the 1MWe micro-grid scheme. The difference with this scenario, compared to a typical chlor alkali opportunity, is that the hydrogen will need to be generated via steam methane reforming of bio-methane. This poses additional challenges which we are in the process of addressing. Both Covestro and Dunsfold project opportunities are being developed in conjunction with discussions ongoing in Korea, the Middle East and in the North West of England at Peel Environmental’s Protos site.

We have also been undertaking initial study work to assess how we can provide clean back-up power generation via fuel cell utilisation. Normally this type of back-up power is met through the application of diesel generators – however, the AFC Energy option study has addressed this issue by looking at a modularised 80 – 160 KW solution with the hydrogen fuel source being derived from cracked ammonia. This work is being finalised and is targeting a market segment that, globally, is worth more than US$20billion.

In addition to these prospects we have also been busy, as usual, with our ongoing research efforts and have recently published our first scientific paper, “In-operando optical observations of alkaline fuel cell electrode surfaces during harsh cycling tests”. I bring this to your attention as it underlines the nature and expanse of the type of ongoing test work needed to bring our product to market.

Further afield we have been invited to speak at the De Nora Chlorine / Chlorate Seminar in Cleveland, USA. This seminar is a bi-annual event organised by De Nora for their customers in the chlor alkali sector. The global chlor alkali market has long been a key target of AFC Energy and this represents a fantastic opportunity for us to present the solution our product offers to the leading players in that sector helping them to take greater control of their energy needs. The invitation not only underlines the close relationship we have with De Nora but also validates our working arrangement with the market leader for electrode supply to the chlor alkali sector.

In conclusion, I trust you will see from the overview contained in this Newsletter that there are many aspects of our ongoing work that are extremely exciting in providing a market leading clean energy generation displacement technology, providing us with an excellent launch platform for a fuel cell that meets the commercial standards we have set ourselves.

I wish you all a pleasant Autumn, Yours sincerely,

Adam Bond

Chief Executive Officer