Q2 2023 Net Power LLC Earnings Call

Operator: Greetings. Welcome to the NET Power Inc. Q2 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Bryce Mendes, Director, Investor Relations. Thank you. You may begin.

Speaker 1: Greetings. Welcome to the NetPower Inc. second quarter 2023 earnings call. At this time all participants are in a listen only mode.

Speaker 1: A question and answer session will follow the formal presentation.

Speaker 1: If anyone should require operator assistance during the call, please press star zero on your telephone keypad.

Speaker 1: As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Bryce Mendes, Director and Investor Relations. Thank you, you may be getting.

Bryce Mendes: Good morning, everyone, and welcome to NET Power's Q2 2023 earnings conference call. With me on the call today, we have our Chief Executive Officer, Danny Rice, our President and Chief Operating Officer, Brian Allen, and our Chief Financial Officer, Aakash Patel. This morning, we issued our earnings release for the Q2 2023, which can be found on our investor relations website along with this presentation at ir.netpower.com. During this call, our remarks and responses to questions may include forward-looking statements. Actual results may materially differ from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. With that, I'll now pass it over to Danny Rice, NET Power's Chief Executive Officer.

Speaker 2: Good morning, everyone, and welcome to NetPower's second quarter, 2022, Earnings Conference Call. With me on the call today, we have our Chief Executive Officer, Danny Rice, our President and Chief Operating Officer, Brian Allen, and our Chief Financial Officer, Occox Fittel. This morning, we issued our Earnings release for the second quarter of 2020.

Speaker 2: During this call, our remarks and responses to questions may include forward-looking statements.

Actual results may materially defer from those stated or implied by forward looking statements to risks and uncertainties associated with our business.

These risks and uncertainties are discussed in our SEC file links.

Please note that we assume no obligation to update any forward-looking statements.

Danny Rice: Thanks, Bryce. Hello, everyone. Welcome to NET Power's inaugural earnings call. Many of you have been following the NET Power story since we announced the transaction to take NET Power public back in December 2022. For all the new investors in NET Power, I'd like to provide a brief introduction to the NET Power story and an overview of our technology. Brian and I will provide an operational update and discuss our corporate strategy before passing the call over to Aakash to discuss our financial results for the quarter. We're going to reference a few of the slides in the presentation we posted to our website this morning, I advise you to have those slides open and follow along. First, let me set the stage a little bit and give some background to the opportunity as we see it.

With that, I'll now pass it over to Danny Rice, NetPowers Chief Executive Officer.

Thanks, Bryce. Hello, everyone. Welcome to NetPower's inaugural earnings call. Many of you have been following the NetPower story since we announced the transaction to take NetPower public back in December 2022. But for all the new investors in NetPower, I'd like to provide a brief introduction to the NetPower story and an overview of our technology.

Brian and I will then provide an operational update and discuss our corporate strategy before passing the call over to a coach to discuss our financial results for the quarter. We're going to reference a few of the slides in the presentation we post into our website this morning so I advise you to have those slides open and follow along. But first, let me set the stage a little bit and give some background to the opportunity as we see it.

Danny Rice: It's been six years since my last earnings call. Back then, during my time running Rice Energy, we unlocked the supply potential of US natural gas, which has become the lowest cost source of energy in the US and the world. As a result, here in the US, natural gas replaced coal as the number one source of power generation and has been the number one driver of lowering US CO2 emissions. Lowering the cost of power and lowering the emissions from power, that is our North Star. We're here again on the public stage continuing this mission with a technology that gets us even closer to that North Star. NET Power, a technology that transforms natural gas into one of the cleanest sources of low-cost power anywhere on the planet.

It's been six years since my last earnings call. Back then during my time running Rice Energy we unlocked the supply potential of U.S. natural gas which has become the lowest cost source of energy in the U.S. and the world. As a result here in the U.S. natural gas replaced coal as the number one source of power generation in the world.

and has been the number one driver of lowering USC or two emissions. Lowering the cost of power and lowering the emissions from power that is our North Star. So we hear again on the public stage containing this mission with a technology that gets us even closer to that North Star. Net power, a technology that transforms the natural gas into one of the cleanest sources of water.

Danny Rice: Before we jump into the details of the technology and the process we're making on commercialization, let's start with a little background on how we got here. I joined NET Power as CEO upon the successful close of the business combination between NET Power and Rice Acquisition Corp. II on 8 June 2023. We formed Rice Acquisition on the premise that energy demand will continue to grow on every corner of Earth, and it's imperative we continue to develop new sources of low-cost energy to meet this growing demand. With growing trends in electrification of everything, more and more of that energy demand shifts to the grid. At Rice Acquisition Corp, we specifically set out to find the best technology to generate this low-emission power without compromising energy affordability or reliability. There were four key tenets to our assessment. How reliable is this power?

Let's start with a little background how we got here.

I joined NetPower's CDO upon the successful close of the business combination between NetPower and RICE acquisition corp2 on June 8th this year. We formed RICE acquisition on the premise that energy demand will continue to grow on every corner of Earth and it's imperative we continue to develop new sources of low cost energy to meet this growing demand.

and with growing trends and electrification of everything, more and more of that energy demand shifts to the grid.

So our Rice Acquisition Corp, we specifically set up to find the best technology to generate this low emission power without compromising energy affordability or reliability.

Danny Rice: How affordable is it? What's the carbon intensity? What's the technological maturity? The solution we chose had to be better than the status quo across the board, and it had to be commercial this decade. With this criteria in hand, we proceeded to evaluate all sources of power. We looked at nuclear, both conventional and small modular reactors. We looked at all shades of hydrogen. We evaluated geothermal, hydro. We evaluated post-combustion carbon capture. Suffice to say, we looked at it all. There's a time and a place for each of these technologies, and while we believe in an all-of-the-above approach, we must first prioritize and pursue the ones that reduce costs and reduce emissions. None of those technologies I just mentioned do both.

So there were four key tenets to our assessment.

How reliable is this power? How affordable is it? What's the carbon intensity and what's the technological maturity?

The solution we chose had to be better than the status quo across the board and it had to be commercial this decade. With this criteria in hand we proceeded to evaluate all sources of power. We looked at nuclear, both conventional and small modular reactors. We looked at all shades of hydrogen. We evaluated geothermal, hydro. And then you have this company in its own little bucket, Net Power, which a decade ago invented a new way to generate low cost power from natural gas with no emissions. Knowing what we know now about natural gas, we have over a century's worth of very well known, very low cost natural gas that is the feedstock to this Net Power cycle. In terms of technological maturity, the Net Power team has spent the last 12 years designing the technology and ultimately proved it at a sufficient scale to conclude its technology will work at grid scale size.

Danny Rice: You have this company in its own little bucket, NET Power, which a decade ago invented a new way to generate low-cost power from natural gas with no emissions. Knowing what we know now about natural gas, we have over a century's worth of very well-known, very low-cost natural gas that is the feedstock to this NET Power cycle. In terms of technological maturity, the NET Power team had spent the last 12 years designing the technology and ultimately proved it at a sufficient scale to conclude its technology will work at grid-scale size. Here we have a better way to generate power using natural gas that creates no emissions.

So here we have a better way to generate power using natural gas that creates no emissions. And with the existing incentives that we have here in the United States, the IRA, and 45Q, not only can a net power plant be a source of clean, reliable energy, but can also be more affordable than the carbon mining alternative.

Danny Rice: With the existing incentives that we have here in the United States through the IRA and 45Q, not only can a NET Power plant be a source of clean, reliable energy, but it can also be more affordable than the carbon-emitting alternative. That's really the macro setup for this company, and it's a pretty special position for us to be in. To really contextualize our thesis, I'll direct you to slide six of our investor presentation posted to our website this morning. The Y-axis is levelized cost of electricity stated in dollars per megawatt hour. This figure is the price at which the asset owner needs to sell their electricity in order to generate a 10% return on their investment. The X-axis represents life cycle emissions in grams of CO2 equivalent per kilowatt hour of electricity produced.

So that's really the macro setup for this company and it's a pretty special position for us to be in. So to really contextualize our thesis, I'll direct you to slide six of our investor presentation posted to our website this morning.

The Y-axis is levelized cost of electricity stated in dollars per megawatt hour. This figure is the price at which the asset owner needs to sell their electricity in order to generate a 10% return on their investment.

The x-axis represents life cycle emissions in grams of CO2 equivalent per kilowatt hour of electricity produced. This is the amount of CO2 emissions turning these raw materials into power.

We should want to get closer to zero cost, zero mission power. That in itself will never exist, but that is the direction we should be heading.

Danny Rice: This is the amount of CO2 emissions turning these raw materials into power. We should want to get closer to zero cost, zero emission power. That in itself will never exist, but that is the direction we should be heading. To get you oriented, the yellow circle in the center of the chart is where we are in the US today. Our grid system has an average carbon intensity of 390 grams per kilowatt-hour and an average cost of power of $52 per megawatt-hour. For context, a decade ago, that yellow dot was up and to the right, higher cost and higher carbon intensity. Because of coal to gas switching, we witnessed a meaningful reduction in both cost and emissions.

So to get you oriented, the yellow circle in the center of the chart is where we are in the US today. Our grid system has an average carbon intensity of 390 grams per kilowatt hour and an average cost of power of $52 per megawatt hour. For context, a decade ago that yellow dot was up and to the right.

higher cost, and higher carbon intensity. But because of coal-to-gas switching, we witnessed a meaningful reduction in both carbon emissions.

So on this chart, we've plotted all of the possible sources of scalable power that we have at our disposal, and you can visually see the potential trade-offs.

You can reduce emissions with nuclear and renewables like wind and solar, but it comes at a markedly higher cost of power and in the case of renewables, challenges with reliability even with batteries. You can reduce emissions with nuclear and renewables like wind and solar, but it comes

Danny Rice: On this chart, we've plotted all of the possible sources of scalable power that we have at our disposal, and you can visually see the potential trade-offs. You can reduce emissions with nuclear and renewables like wind and solar, but it comes at a markedly higher cost of power, and in the case of renewables, challenges with reliability, even with batteries. Look at where NET Power lands on this chart. Our first utility scale plant, which will inherently be the most expensive plant we ever manufacture, delivers the same cost as our grid today, but with markedly lower life cycle emissions. Our first plant is more than half the price of new nuclear and delivers the same reliable around-the-clock clean power. As we scale into manufacturing mode, our plant CapEx will go down and our cost of power drops dramatically into a quadrant all by itself.

But look at where NetPower lands on this chart.

Our first utility scale plant, which will inherently be the most expensive plant we ever manufactured, delivers the same cost as our grid today, but with markedly lower life cycle emissions.

Our first plant is more than half the price of nuclear and delivers the same reliable around the clock clean power. And as we scale into manufacturing mode, our plant capex will go down and our cost of power drops dramatically into a quadrant all by itself. Meaningfully lower emissions and meaningfully lower costs than any source of power today.

Danny Rice: Meaningfully lower emissions and meaningfully lower costs than any source of power today. That's why we're all in on NET Power, more affordable, cleaner, and with 24-hour reliability without compromise. It's worth noting this is a map of the United States grid, and every country will look different. Some countries will have a lower cost of coal power, a higher cost of gas power, a higher cost of renewables, et cetera. Deploying just in the US market will keep NET Power busy for decades. We estimate that replacing every retiring base load power plant in the US over the next 20 years would require over 1,300 NET Power plants. The prize here in the US is incredibly beneficial to all our stakeholders, the consumer, the environment, our customers, and our shareholders.

This is a map of the United States grid and every country will look different. Some countries will have a lower cost of coal power, a higher cost of gas power, a higher cost of renewables, et cetera. But deploying just in the US market will keep net power busy for decades. We estimate that replacing every retiring base load power plant in the US over the next 20 years.

the consumer, the environment, our customers, and our shareholders.

Turning to slide seven, the best way we can describe the macro environment for power generation is a growing tug of war between two camps. On one side, the regulatory regimes tasked with driving a reduction in future emissions and on the other side, the electricity grid operators tasked with ensuring access to reliable and affordable power. For more information, visit www.fema.gov

Danny Rice: Turning to slide seven, the best way we can describe the macro environment for power generation is a growing tug of war between two camps. On one side, the regulatory regimes tasked with driving a reduction in future emissions, and on the other side, the electricity grid operators tasked with ensuring access to reliable and affordable power. Right now, there's no single solution that satisfies both sides, and again, is where NET Power fits in. On the regulatory side, the EPA recently proposed new carbon emission standards for current and new fossil fuel-fired power plants. The proposed rules recommend that large-scale base load coal and gas power plants capture or eliminate 95% of their emissions by 2035. There's no technology able to do this today, and the only solution coming down the pipe that we think will be able to do this is NET Power.

Right now, there's no single solution that satisfies both sides, and again, is where net power fits in.

On the regulatory side, the EPA recently proposed new carbon emission standards for current and new fossil fuel fired power plants.

The proposed rules recommend that large-scale base load coal and gas power plants capture or eliminate 95% of their emissions by 2035. Now there's no technology able to do this today and the only solution coming down the pike that we think will be able to do this is net power. Interestingly net power with the technology referenced more than any other in the EPA report is having the ability to meet their standards.

which we agree. On the industry side, grid operators across the U.S. are making siren calls that we're not building enough reliable dispatchable power capacity to replace the existing aging fleet across the U.S., which will cause issues for cost and access to power down the road.

Danny Rice: Interestingly, NET Power was the technology referenced more than any other in the EPA report as having the ability to meet their standards, which we agree. On the industry side, grid operators across the US are making siren calls that we're not building enough reliable dispatchable power capacity to replace the existing aging fleet across the US, which will cause issues for cost and access to power down the road. The average coal-fired power plant in the US is over 40 years old. Same with nuclear. Natural gas plants are approaching 30 years of age on average. These plants are unable to operate for another 10 to 20 years, and new plants will need to be built. However, they're not. Why? It's a combination of uncertainty with future potential regulations, which has a chilling effect on building new base load today. EPA's proposed rules are a good example of that.

The average coal-fired power plant in the US is over 40 years old. Same with nuclear. Metro gas plants are approaching 30 years of age in average.

Danny Rice: No one wants to build new carbon-emitting base load today if they're needing to comply or shut down within the next decade. It's also the growing renewable penetration that's eating into these base load plants' operational capacity factors. Uncertainty in where capacity factors will be in the future has a similar chilling effect on new investment in these base load power plants. These system operators are raising their hand saying they see a major shortage of new dispatchable power being built, which will inevitably cause major reliability and cost issues down the road. For example, PJM, the United States' largest grid operator, recently released a study announcing 40 GW of base load power generation, largely coal and gas, on their system will likely be retired by 2030, and there's only 4 GW of new base load in the interconnect queue.

Danny Rice: This is really problematic for future grid reliability, and PJM is not alone here. The vast majority of grid operators in the US have signaled the same concern. When we think about future-proofing power generation, we would consider NET Power the most future-proof power plant solution. Not only does it eliminate the CO2 emissions, but we also have no major sources of air pollutants like NOx and SOx, which is entirely within EPA's purview. When we put it all together, NET Power is the only solution we see that gives both sides what they want: reliable, low cost, and clean power. The energy trifecta is quickly becoming the driver of demand, and NET Power is preparing to deliver this at scale. On the next slide, we'll briefly walk you through our technology. The NET Power cycle is a patented oxy-combustion supercritical CO2 power generation cycle.

Danny Rice: It is important to note that this is not a retrofit system added to existing power plants. This is an entirely new plant. A new NET Power cycle that produces clean electricity using natural gas feedstock. The cycle begins with oxy-combustion. First, an air separation unit, or ASU, captures the oxygen from the air. Air is 78% nitrogen, and we do not let this nitrogen into the combustion chamber. This eliminates the formation of NOx and air pollutant. This is unique to NET Power. Natural gas has nearly no sulfur also, there is no SOx formed either. Before the process is even started, we have already eliminated the two primary sources of air pollution from power generation. We take this captured oxygen, nearly 3,800 tons per day, and combust it with 45 million cubic feet per day of natural gas.

Danny Rice: This oxy-combustion process produces three things: a whole lot of energy, carbon dioxide, and water. At this stage in the process, the carbon dioxide is in a dense phase, commonly known as supercritical state. Supercritical CO2 is a superior working fluid to spin the turbine blades to generate nearly 300 MW of clean electricity per hour and transmit it to the grid. With the power generated, we take the CO2 water mixture and reduce the temperature and pressure in order to remove the water, leaving us with a pure stream of CO2, nearly 900,000 tons per year that is ready to be sequestered, no post-processing required. We believe this process to be the most cost-effective way to capture CO2 from gas power generation. Where do we think NET Power plants make good economic sense? We really need three things. First, we need access to natural gas.

Danny Rice: The lower the cost, the better. Second, we need demand for power. This is a grid-scale clean power, and the larger the power demand, the more plants we can deploy in fleet configurations. The higher the price for power, the better. When we couple gas prices with power prices, we have what's commonly known as spark spread, which is really the economic margin from converting gas' energy into power. This varies from region to region and country to country. Third, we need a place to permanently and safely store the CO2. The most proven and effective place to store CO2 is deep underground, where that CO2 will stay forever. We want high porosity, high permeability geologic formations typically found in sedimentary basins. Many countries across the world have instituted an economic incentive to store CO2 as well.

Danny Rice: When we put it all together, the US, Canada, and the Middle East look to be really promising markets. Southeast Asia is also very promising long term, as is Europe. As we've highlighted in prior presentations, the US is the most exciting. We have the world's largest supply of low-cost gas for the next century. It's the world's second-largest power market with an aging baseload fleet that will need to be replaced very soon, the equivalent of nearly 1,300 NET Power plants, as I mentioned before. The US also possesses the world's most prolific CO2 storage potential as well, enough to store CO2 for over 300,000 NET Power plants. In addition, the Inflation Reduction Act 45Q provides $85 per ton for each ton of CO2 sequestered.

Danny Rice: This incentive will be key to catalyzing demand, which in turn enables us to scale up and reduce our plant CapEx over time. In time, we expect the cost of the plant could be fully underwritten just by the 45Q. Think about that for a second and how profound that can be. Clean, reliable power is free upside. We're excited about the opportunity in front of us. Yes, there is substantial economic upside to be captured, but most importantly, there is a potential for massive emissions reductions globally as a result of correctly deploying this technology at scale. Now that it's really on us to get this right as we shift our focus to global commercialization. We're fortunate to have supportive owners and strategic partners representing some of the largest energy complexes in the world.

Danny Rice: They are fantastic champions of our technology and their domain expertise has been, and will continue to be, an invaluable part of our path to commercialization. A majority of these owners have been with NET Power for several years and have been instrumental in providing the capital and expertise we needed to develop and validate our technology. We've conducted multiple testing campaigns at our 50-megawatt thermal test facility in La Porte, Texas, just outside of Houston. We broke ground on the facility in 2016, achieved first fire in 2018, and successfully synced to the ERCOT grid in 2021. We've validated the necessary temperatures, pressures, and chemistries needed to move forward with our utility scale plant and have built out an elaborate proprietary control system.

Danny Rice: It's worth noting that while our utility scale plant is an 11x scale-up in thermal input relative to La Porte, it is only expected to be a 3x scale-up in land footprint, thanks to the energy-dense properties of the supercritical CO2 working fluid. Now on to corporate strategy. Over the past several months, we've spent a lot of time synthesizing our technology, the market opportunity, and long-term vision into a long-term plan. We developed this three-pillared corporate strategy that will really be the foundation of our focus. While this might appear simple and obvious on purpose, the intent is to ensure our capital allocation and the decisions we make over the next several years are fully aligned with our long-term vision. It also serves as a helpful tool to establish alignment amongst all our stakeholders, current and future, with where we are today and where we're going.

Danny Rice: The first pillar is to develop improved NET Power's technology at the utility scale. To achieve this, we will continue to progress our joint development program with Baker Hughes. Together with Baker, we plan on conducting several testing campaigns at La Porte in 2024 and 2025, which will provide invaluable operational data ahead of deploying our first utility scale package targeted for 2026. As we progress through FEED, we are concurrently issuing RFQs for long lead equipment and negotiating supply and offtake agreements for natural gas, water, power, and CO2. This will form the basis for project financing and bring the first project to final investment decision in 2024. Finally, the ultimate goal for the first utility scale deployment will be to construct and operate with a focus on clean, reliable, and safe operations, as it will serve as the launch point for all future deployments.

Danny Rice: The second pillar of our corporate strategy is to build the project backlog. Because we own the IP to this technology, it provides us immense latitude with how we bring our plants to market. In one hand, we have the ability to follow the traditional licensing model. In the other hand, we have the ability to originate projects in order to accelerate development and cut down the time from FID to COD. Collectively, these two models will enable us to accelerate and ramp plant deployments across a range of geographies, domestically and abroad. This is not just another power plant. Yes, this is a clean, reliable, cost-effective power plant, but CO2 sequestration is a major part of our economic proposition and the entirety of our environmental value proposition. We are currently undertaking this mapping exercise to determine the intrinsic value of our plants in every single market.

Danny Rice: Proximity to CO2 sink and proximity to grid are very important, both for economic reasons, and social. We want to minimize our surface impact wherever we can. We're going through this exercise today to identify the areas where both the subsurface is conducive to CO2 sequestration and the electric transmission network exists above ground within high spark spread regions. These are the areas of our focus. It goes beyond that. This is grid-scale power plants, and locating dozens of these plants in many states has the potential to fully eliminate all power emissions and get to true net-zero grid without compromising cost or reliability of power. This planning exercise we're conducting isn't just for identifying sites for individual plants, but rather developing master plans for statewide deployments, starting from the CO2 storage and working our way outwards.

Danny Rice: We want to set our customers up for success. Their teamwork building here in NET Power will be a combination of surface and subsurface experts to ensure our plants are deployed from a methodical, thoughtful plan. Our focus over the next few years is to convert this information into full-scale deployment plans for each region, such that when our first plant comes online, we have clear visibility where to deploy the next 100 plants. This is where our origination will play an outsized role in setting the table for future deployments, lining up the CO2 sequestration, securing the surface rights for plant sites, going through the steps to connect to the regional grid system, and forming strategic partnerships with a variety of stakeholders to set these projects up for success.

Danny Rice: With this approach, we believe we will accelerate deployment of NET Power's technology in the most cost-effective and responsible manner for the benefit of our customers, the communities where these plants will be located, and our owners. Importantly, this can all be done with limited capital allocation prior to the first utility scale plant coming online. Our goal is to have a robust backlog that creates pathways to state-level decarbonization by the time that first plant comes online. Finally, the third pillar is to prepare for manufacturing mode, similar to the IP giving us creative control over how we go to market.