Black_Kira
It is interesting how major new directions in the energy sector take time to mature. Fluence Energy (NASDAQ:FLNC) is a case in point. Formed in 2018 as a JV between Siemens Aktiengesellschaft (OTCPK:SIEGY) and The AES Corporation (AES), each of the participating companies have been involved in opening up energy storage and management for a number of years. Fluence means more focus than having these programs within bigger company structures. Fluence has stayed out of the limelight as it establishes its business and begins to become a significant company in energy storage and management of renewable energy. However a lot has happened since 2018. A key event was an investment by Qatar Investment Authority (Sovereign Wealth Fund of the State of Qatar) of $125 million via a private placement in December 2020 at a valuation of ~$1 billion. Fluence used this investment to strengthen product offerings, especially digital products, and to grow global markets. In November 2021 Fluence raised just short of $1 billion ($998.2 million) from its NASDAQ IPO. It may be that 2022 will be seen as the year that Fluence began to take its place as a pivotal player in the energy storage and management space. The strategic acquisition in April 2022 of AI-enabled Software as a Service company, Nispera, which enhances Fluence’s digital offerings and broadens its customer base, might be a trigger for the wider recognition of Fluence. Here I examine Fluence’s business and give some clues as to why this might be a company for new energy investors to pay attention to.
The business context for a big battery business
We live in amazing times in relation to the power industry. Revolution is a big word but it clearly applies to what is happening with the electricity sector. Everything is getting electrified. This means not just power for lighting and running appliances. Now heating is most efficiently delivered through electric heat pumps (exit natural gas), cooking is becoming electrified (exit natural gas cookers), transport is being electrified through introduction of electric vehicles (exit oil). All of this means more focus on electric power, but here too coal and natural gas are under threat, as the cheapest electric power generation comes from solar PV and wind power, which is being dramatically expanded. The weak link is managing the intermittency of solar PV and wind. This is where big battery storage has a key role.
Of course this is a threat to the fossil fuel industry (coal, natural gas and oil) and the push back from the fossil fuel industry has been intense. However change is happening everywhere, often from unexpected directions. A really good example of the changes that are coming concerns a project from BHE Renewables in West Virginia. BHE Renewables is a Berkshire Hathaway (BRK.A) (BRK.B) Energy business. BHE renewables has just announced a $500 million clean energy project in West Virginia, with the purchase of 2,000 acres of land in Ravenswood West Virginia. The plan is to build a solar PV renewable energy microgrid to power an industrial site, with a Berkshire Hathaway owned titanium-melt facility, Precision Castparts, being the founding customer. BHE Renewables is working with the West Virginia Economic Development Authority to bring other companies to the site and build out the renewable energy infrastructure. To provide 24/7 power this facility is certain to need big battery facilities. The interesting thing about this project is that it is in a very coal loving state that has resisted threats to coal. BHE Renewables (and West Virginia Development Authority) have sidelined West Virginia’s utility regulator, the Public Service Commission, because it would almost certainly have tried to stop the development. The link I have provided makes interesting reading as to how the Department of Economic Development has approached this project. The development is being positioned as interesting to West Virginians for several reasons, firstly because it will provide much needed high tech employment, but also because it will threaten the ever increasing power prices from coal-based PSC power provision.
Fluence products in large energy storage and management of intermittent power
The above is an extreme example of what is happening across the country (and indeed all around the globe) as forward looking power authorities adopt renewable power generation, involving large lithium battery facilities to manage intermittency and optimise renewable power. And the change goes beyond large power authorities as individual businesses begin to explore managing power themselves.
This provides opportunity for Fluence from two directions, Firstly Fluence has a product portfolio in the big battery space with battery “Cubes”, while secondly it brings advanced software to manage the energy fluxes. Fluence has three kinds of Cubes: Gridstack, 2-500+ MW, with 1-6hr discharge for flexible peaking capacity, frequency regulation, renewable integration; Sunstack, PV optimized, DC-coupled energy storage designed to improve and expand solar power generation; and Edgestack, connection-ready commercial and industrial energy storage product for 500+ kW applications, with minimum footprint and rapid deployment.
The BHE Renewables example is unusual, but it is enabled by the core features of Fluence’s business and this change is happening, notwithstanding resistance from the fossil fuel industry and backward looking power authorities. This has to be interesting to forward-looking investors.
Fluence business update
Investors who follow me will be aware that I’m a fan of quarterly earnings transcripts because you get an unfiltered view of how the CEO and management see the company. The Q3 2022 (end of year September 30) transcript of August 2022 and accompanying presentation gave useful insights into Fluence’s business. It came at a time of both CEO and CFO changeover, although the new CEO, Julian Nebreda, is not a new face and indeed he has been involved with Fluence from the beginning and a board member since September 2021. Julian Nebreda has a 20+ year history with one of the founder companies (AES Corporation), with leadership roles in both Europe and the US. Hence there won’t be a change in direction or emphasis that often comes with a new CEO. Nebreda’s focus will be on profitable growth by focusing on three areas: i) supply chains to build competitive advantage from a current challenge; ii) profitability of the product portfolio through strong margins and providing products that customers want; iii) a big focus on the digital offerings. A new role in Fluence is Krishna Vanka’s appointment as Chief Digital Officer.
The new Fluence CFO, Manavendra (Manu) Sial is interesting as he comes after being CFO of SunPower (SPWR), a major US home solar and storage company, for the past four years. He knows the industry well and navigating public company finances in a time of great change.
Nispera acquisition
Nispera, which operates in 25 countries, is similar to part of Fluence’s business in having key applications for monitoring, analyzing and optimizing the performance and value of renewable assets. Nispera uses machine learning to drive value (e.g., forecasting and predictive maintenance for both wind and solar). There is synergy here with the Fluence IQ flagship application. This will allow new (hybrid ) products to be brought to market. There are also cross-selling opportunities from the Nispera acquisition. At the time of acquisition, Nispera had 8GW of renewable assets under management covering 450 global wind and solar projects. This means that Fluence’s renewable assets under management almost doubled to 15.8 GW after the Nispera acquisition.
The acquisition of Nispera in April 2022 involved a cash buyout of ~$30 million for the private investors in Nispera plus issue of restricted stock to the Nispera management team to keep them motivated.
Headwinds
It is no surprise that COVID has dealt up big challenges for companies that put products together and operate in global markets, and this describes the Fluence business. While it delivered $239 million for Q3 2022, gross profit remained negative at -2% due to COVID and shipping related problems. The backlog of $2.1 billion (signed purchase orders or contracted minimum purchase commitments) as of June 30 provides good insight into revenue in the near future. As of June 30 2022 the backlog involves 3.54 GW of energy storage products, 1.85 GW of energy storage service contracts and 4.17 GW of Fluence IQ digital contracts, which include the Nispera business. Fluence ended Q3 2022 with $762 million cash (up 39 million for the quarter).
Batteries
A big deal has been disruption to battery supply, which is largely sourced from China. This has resulted in Force Majeure for several customers. There is recent recovery in battery supply and full recovery from Force Majeure is expected by end of Q1 FY 2023. Reflecting on these problems and also global tensions, Fluence is looking to diversify away from Chinese battery manufacture. The goal is for China to deliver no more than 30% of Fluence’s batteries, but at the moment success is for the rest of world (eg Europe, South Korea) to supply 30% (i.e., China still at 70%) and this seems secure by 2023. The goals are aggressive, as by 2024 the hope is to have China no more than 50%. This comes from both geographical and supplier diversification.
Fluence is setting up contract manufacture (partner not named) of its battery storage Cubes in a new facility in Utah to service the US market, which uses LFP (Lithium Iron Phosphate) battery modules from Chinese company CATL. The plan is to manufacture 75 cubes weekly in the first instance, with a goal of 10 GWh and perhaps as high as 14GWh down the road. Fluence is also establishing spare parts and product testing facilities in the US.
Fluence had 3.6 GW energy storage deployed or contracted (plus a pipeline of 14.2 GW) in 29 countries when it listed in October 2021. By June 30 2022 this had increased to 5.1 GW deployed or contracted and the pipeline had increased to 17.0 GW. This has occurred at a time when there have been many challenges flowing from COVID and supply challenges.
The Inflation Reduction Act 2022 is a big deal for Fluence
Outgoing CEO Manuel Perez Dubuc noted that the historic Inflation Reduction Act 2022, which covers $369 billion for addressing climate change and emissions reductions, is going to substantially increase Fluence’s business in the near term. Indeed this act alone leads to a projected 20% increase in US energy storage capacity (up by 14.3 GW) to 86.1 GW by 2030. That is a lot of energy storage and Fluence plans to win a considerable share of this market.
What the market thinks
Like all things renewable, the perception of Fluence’s business follows market perceptions rather than the bottom line at this stage. The financials are still a sea of red and the share price is down 58% in 2022. Only one Seeking Alpha author provided coverage (strong buy) in the past 30 days, but as befits a major emerging company in a new energy space, it is covered by 18 analysts who are very positive about the company, with eight strong buys, three buys, six hold and just one sell recommendation. I’m with the analysts on this one even though it is always a worry to see share price in poor shape and to make sure that you understand the reasons why.
Conclusion
The bottom line from Fluence’s Q3 2022 transcript was outgoing CFO Denis Fehr’s view that Fluence is early in the energy storage space and the company is very positive about the long term. The early days for Fluence have been about establishing a market position as a leader and he feels that this has been achieved. An example is Fluence’s interest in India, where the company sees 27 GW of storage deployed by 2030. Fluence has done the hard yards early with a technology team in Bangalore and a partnership with NASDAQ-listed ReNew Power (RNW). Fluence is the market leader in Europe for both volume and applications. The European focus is on energy independence and self-reliance and this plays to Fluence’s product portfolio to enhance renewables. The US is going to be a big market with a boost from the Inflation Reduction Act 2022. The company isn’t profitable yet, but it plans to be by 2024. I’m thinking that it will probably get there and in doing so, the share price will no longer be a cause for grief.
I am not a financial advisor, but I follow closely the massive changes happening as the world begins to exit use of fossil fuels for energy and transport. I hope that my comments are useful for you and your financial advisor as you consider your energy and transport investments.
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