Whitefish, MT / May 28, 2014 / EuroSite Power Inc. (OTCQB: EUSP), a 70.7%-owned subsidiary of American DG Energy Inc. (NYSE MKT: ADGE), has the potential for solid long-term growth in the rapidly developing cogeneration market as an owner/operator of on-site combined heat and power (CHP) solutions, which capture what is otherwise wasted heat energy in order to vastly improve overall operating efficiency. The core UK/Europe target market for EUSP is both broad and growing, driven in large part by favorable EU sustainability initiatives stretching back to the 2004 CHP Directive, and more recently realized in both the Energy Efficiency Plan 2011 and subsequent 2012 Energy Efficiency Directive (EED). The EU is clearly hammering out a more comprehensive energy efficiency strategy via the EED, fusing energy efficiency into one coherent structure. The numerous incentives, rebates and other forms of support made available for CHP systems in particular has ignited a firestorm of activity in the sector across Europe.
In fact, a new report by RnRMarketResearch.com out just last month indicates that Europe's CHP industry footprint is set to climb at a 3.2% CAGR over the next six years, reaching 245 GW of installed capacity by 2020. Germany, the top CHP market in Europe, holds about 36% market share for industrial and utility applications and plans to double the use of cogeneration for electricity production to 25% by 2020, with the attractive long-term savings of such upgrades from using waste heat to do district heating being a major driving factor. Europe is expected to lead the larger global CHP systems market, whose value is set to hit $11.2B by 2022 according to a Pike Research report.
EuroSite Power has homed in on the target demographics here with unique features like guaranteed fixed percentage discounts on energy generated on a per-type basis when compared to current prices for gas or electricity (from 5% to over 15% when compared to local utilities), and the company even offers a full range of gas-engine driven chillers, in addition to high-efficiency heat pump systems, in order to capture maximum market share in its space. The benefits of generating heat and electricity on-site via highly efficient CHP systems like EUSP's microgrid-compatible InVerde 100 unit (100 kWe continuous/205 kW heat) are numerous, and one of the primary drivers of adoption, has been increasing emphasis on emissions.
Business owners literally have zero upfront costs as EuroSite Power's On-Site Utility™ solutions covers all system costs including engineering, equipment, and installation of the CHP unit. EuroSite Power also pays for the natural gas inputs and system upkeep as part of its long-term contract agreements. The customer simply receives a bill for the energy produced on-site. Savvy investors will note that EUSP's approach strips out much of the volatility typically associated with operators in this sector, generating amply predictable, long-term cash flow and allowing for more accurate financial modeling by analysts and investors. It is also key to note that On-Site Utility isn't a finance lease and thus doesn't show up on the customer's balance sheet as added borrowing or affect their credit status, which is another significant draw.
It’s little wonder that EUSP is turning heads, especially in prime target segments like hotels, health clubs/leisure centers, healthcare centers, and multi-unit residential sites, where such robust supply solutions really get a chance to shine. In fact, EUSP just signed a $22.09M deal to install CHP systems at seven of the Topland Group's UK hotels, for a total of 860 kW. Topland Group is a major player in the commercial real estate market as one of the biggest privately-owned international investment groups, with some 270 properties worth around £4B and a long, successful track-record in hotels. This 15-year Topland contract is estimated to produce over 11.25M kWh per year and take the equivalent of 428 cars off the road (roughly 2.034k tonnes of CO2), while EUSP's capacity footprint jumps to 3,088 kW total, with a contract booking value of around $89.35M.
On the regulatory front, the UN's climate science body, the Intergovernmental Panel on Climate Change (IPCC), recently discussed their now complete seven-year update on the problem of climate change (PDF) and some possible endpoint solutions to it, issuing a call for a fundamental decarbonization and decentralization of electricity generation, fueled by the roll out of innovative technologies. The report puts forth a major departure from existing policy directives like cap-and-trade which admittedly have failed to yield compelling results. Notably, the global market influences of slowing growth in the Chinese economy have actually accelerated growth in the CHP sector as businesses look to shore up costs while reducing their emissions to meet new governmental targets. China's latest Five-Year Plan, which calls for some 1k decentralized energy projects in just the next two years, runs parallel to the IPCC's thinking, with a decided emphasis on simultaneously addressing growing energy demand and a deteriorating environment.
The CHP equipment market in China as a whole was up 20% to around $4.5B in 2011 alone according to China Strategic Research. Majors like Siemens AG (NYSE: SI), who snapped up the first of China's new decentralized energy demonstration projects back in December of 2013, as well as the likes of General Electric (NYSE: GE) and Caterpillar (NYSE: CAT), are focused on the high-end gas turbine and internal combustion engine segments and are already experiencing considerable upside from China's policies. Simultaneously, these majors are clearing the way for CHP owner/operators like EUSP to get a solid foothold in the largely ignored small-scale CHP space. Mutual UN members Europe and China are in concert at an even more fundamental market level as well, with business owners in Europe similarly focusing on shoring up capital outlays for heat and energy in a manner that also allows them to offset the impact of climate change-related legislation to their bottom-lines. Indeed, as the higher-resolution image of CHP efficiency materializes ever more distinctly before the eyes of business owners in both China and Europe, the global marketplace for CHP solution providers will continue to blossom, further enhanced by increasingly intense background noise from consumers who are concerned about the effects of climate change.
Data out of the International Energy Agency on the growth of CHP utilization indicates that it could reduce the level of global greenhouse gas emissions some 4% by 2015 and up to 10% by 2030, or an overall cost reduction of some $795B, making it a very attractive vector for legislators to emphasize. The real value in EUSP is the potential for growth in coming years as the regulatory environment continues to heat up, further mandating CHP adoption by businesses throughout the UK and Europe amid a growth curve which has already started a stampede into more efficient heat and power solutions, particularly those capable of offsetting climate change-related taxation at the same time. A focus on the smaller-scale market and top-shelf maintenance/support also places EUSP comfortably in another weight division from the big boys like GE and Siemens, giving investors a much more accessible way to play the underlying trends which show no signs of altering for the foreseeable future as Europe doubles down on decentralized, low-emission energy.
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