AFC Energy Regulatory News (AFC)

AFC Energy Quarterly Newsletter - March 2015 - Replacement of word 'annual'

Dear Shareholder,

I hope you found our inaugural quarterly newsletter helpful. It is my intention to keep you informed of developments that have taken place and also give you a bit more information about what to expect over the coming months. In that newsletter, I took the opportunity to introduce myself and clearly state my intention to initiate an aggressive commercialisation strategy for AFC's technology platform andcapitalise on the immediate opportunities for AFC within the emerging hydrogen economy. For me, it's important that AFC continues to regain and build on its credibility not only with investors, but also with the global fuel cell market and with our partners internationally.

To this end, when commencing at AFC as Chief Executive in December 2014, I set myself four targets to be delivered within the first quarter of 2015:

1. Re-establish clarity and focus on the timeline for execution of the POWER-UP programme at Stade and deliver on the 101 fuel cell stack;

2. Obtain our first building permit at Stade;

3. Execute an agreement to deliver AFC's first commercial fuel cell project before the end of March 2015; and;

4. Re-engage with institutional investors and the private client broker community to reinstate a clear business plan and objectives for the Company over the next 12 months.

I'm pleased to say that we've now achieved each of these key objectives. The next 12 months (and indeed the next quarter) will no doubt carry a number of challenges in meeting a highly aggressive deployment programme, but as ever, I remain confident of success.

I hope this newsletter provides some further colour on the past three months and what we might expect looking forward.

101 cell stack trial

So earlier this month, AFC announced the successful trial of the 101 fuel cell stack in Germany. What does this actually mean? Well, for the first time we now have our fundamental building block of an AFC fuel cell system up and running. With the operability of the building block demonstrated, AFC is confident it will achieve its goal of a full 24 cartridge commercial 240kW KORE system operating and generating electricity revenues before the end of calendar year 2015.

Whilst I made note of this in the announcement a few weeks back, I don't want to understate or undervalue the amount of effort and time that went into the development of this stack by the AFC technical team in an extraordinarily short period of time - I congratulate them all for their efforts in this regard.

An important point which comes out of this 101 cell trial is the fact that whilst in the past AFC has focused on the development and deployment of its 240kW KORE system, which still remains an important product in the large-scale fuel cell industrial market, we are now able to say with some confidence that we have a fuel cell cartridge which, with the correct balance of plant, can deliver smaller scale market opportunities which AFC previously has not sought to exploit. Following announcement of this milestone, prospective partners and customers have already made approaches on the potential for systems scaled between 10kW and 240kW: this is potentially a new and exciting market for us to now consider.  

POWER-UP

As part of the 11-milestone programme announced on 8 December regarding the roll out of AFC's Stade 240kW KORE system, I'm pleased we have now achieved five of the milestones and remain on target for the remaining six by the end of the year.

The balance of plant is under construction and is scheduled to be completed over the next few months. Work is also underway in preparing for the manufacture of the necessary number of fuel cell cartridges, which will be delivered out of AFC's facilities in Dunsfold, UK.

I announced on 26 March the fact that we have now received the first partial building permit from the Stade permitting authorities, which is a significant milestone for the Company, project and the technology. We now expect to commence construction on site in the first week of April 2015.

We continue to hold discussions with German utilities for the potential power offtakes for electricity generated from the KORE system at Stade. The offtake arrangement will provide valuable learnings into the dispatch of the fuel cell derived power into the German power grid.

Samyoung-Changshin Deal

The day after the successful 101 cell stack trial release, we announced a historic formal Project Development Agreement (PDA) with two South Korean partners: Samyoung Corporation and Changshin Chemical Co. for the deployment of an initial 50MW of fuel cell generation capacity in Daesan, Korea. All three partners will be taking equity stakes with AFC at 40%, Samyoung at 45% and Changshin at 15%.

The first phase of the project is to supply 5 MW by the end of 2016 (subject to permitting), which will indicatively require AFC selling 20 KORE systems into the joint venture. The second phase for the remaining 45 MW is planned to be in place by the end of 2019 (again subject to permitting).

A lot of international attention has been received from the announcement of this deal and has triggered interest from other prospective partners and participants across the manufacturing and production supply chain.

There are a number of important next steps in this deal which we now need to start moving forward on. These include firming up on the detail behind sourcing the fuel cell systems and our global supply chain, which is likely to see AFC go to market for pricing from prospective suppliers over the coming months for production capability for the Korean and subsequent projects. We are also addressing the issue of funding for the project. We have a number of options available to us with regards to funding which I am exploring at present, so as we progress through the feasibility studies with regards to the Korean project, we hope to in parallel be further developing and refining our strategy with regards to each of these issues. Importantly, these are all challenges associated with the commercialisation of new technologies and which in and of themselves, create great learning opportunities for AFC and our partners.

Again, I would like to thank both Mr. Dong Heum Keum, President and Chief Executive Officer of Samyoung and Mr. Sang Do Bae, Chairman of Changshin for their commitment and vision to this project.

Moving forward

We have a lot of expected news flow coming up over the next few months, both in the development of the POWER-UP project, and in regards further growth in our project pipeline. With the Samyoung-Changshin project now moving forward with negotiations on the suite of project agreements expected to commence over the next quarter, whilst in parallel continuing to work on engineering and costing studies for the project, we hope to see good progress over the next quarter as well. As mentioned, we are also working on concluding further commercial agreements around the world and hope to be making further announcement in this respect.

Ultimately, having seen the potential opportunities for AFC and its leading alkaline fuel cell technologies, not only in Korea, but internationally, I firmly believe that we will be able to achieve our target of 1 GW (1,000 MW) of capacity under development by the end of 2020.

Yours sincerely,

Adam Bond

Chief Executive Officer