SMALL CAP IDEA: Active Energy Group

Amid the broader discussions around renewable energy sources – where the lion’s share of attention is lavished upon wind, solar and hydro-power – biomass has often been relegated to the margins.

Active Energy (AEG) is challenging that narrative with its innovative CoalSwitch technology, positioning biomass fuel as a front-and-centre solution to a world grappling with fossil fuel dependency.

The existing biomass fuels landscape is dominated by wood-based white pellets, which were designed to be a stopgap measure on the road to complete fossil fuel independence.

‘Twenty-five years on and they are still here,’ says Michael Rowan, AEG’s chief executive.

The UK’s largest power station operator, Drax, has spent billions retrofitting its plant to become the nation’s largest consumer of white pellets.

The existing biomass fuels landscape is dominated by wood-based white pellets, which were designed to be a stopgap measure on the road to complete fossil fuel independence 

While it provides a handy source of green electricity to the grid, the feedstock is fraught with multiple challenges.

Its utility is undermined by high moisture content, lower energy density, and logistical hurdles in transport and storage.

By contrast, AEG’s CoalSwitch, which uses wood remnants such as sawdust and forestry residuals such as treetops and branches, is tailored to overcome these limitations.

Created using a ‘baking’ process, the black pellets offer a fuel solution with significantly lower moisture content, improved energy density, and enhanced transport and storage logistics than the current feedstock.

More than just an improvement over traditional biomass, CoalSwitch offers a unique competitive advantage.

It is engineered to co-fire with coal or serve as a drop-in replacement, thus allowing existing power plants to reduce their carbon footprints without undertaking costly retrofitting operations.

Importantly, CoalSwitch could allow businesses of all sizes to significantly reduce their carbon footprint.

This distinct selling point sets AEG apart in the biomass fuels market, giving it a potent lever in the shift towards greener energy.

Impressively, CoalSwitch achieves 93 per cent of the normal heating values with a significant reduction of ash deposits of up to 77 per cent.

It not only enhances environmental sustainability but also provides logistical ease.

Fossil fuels: Glencore has done exceptionally well from record prices for thermal coal, while other mining industry players have sold or spun off their coal operations

It can be co-fired at any blend rate with traditional coal and can be transported, stored, and ground in existing equipment.

This compatibility removes the need for costly retrofits to existing coal plants, making the AEG innovation a practical and cost-effective solution for businesses.

But what really sets the AEG product apart is its outstanding performance data from co-firing tests and analysis.

Its environmentally friendly profile, demonstrated by a 99 per cent reduction in the life-cycle emissions of coal burning and double-digit reductions in nitrogen oxides (NOx) and sulphur oxides (SOx), make it an attractive alternative to coal.

In terms of cost-effectiveness, it disrupts the traditional cost model, not just in power stations but energy-intensive industries such as steel, cement, pulp and paper.

With the total cost on a par with coal, no capital expenditure is required for compliance, while the pellets are likely to attract carbon credits of up to US$90 a tonne in the States.

Soon this won’t be mere postulation: AEG’s technology is about to be put to the test in a real-world scenario.

The company has established an active test programme to co-fire coal and CoalSwitch, resulting in immediate environmental and emissions benefits.

The first commercial plant for production is currently under construction near the town of Ashland in the US state of Maine, in partnership with Player Design and with the first production anticipated in the third quarter.

Initial production is expected to be in the order of 35,000 tonnes a year.

‘We are looking to expand that,’ says CEO Rowan. ‘We’d love to really get the site up to 100,000 tonnes a year. That will be the goal.’

AEG’s ambitions don’t stop there. According to the company’s corporate presentation, it is looking to get output up to 500,000 tonnes by 2025 by opening further facilities.

To commercialise the technology, Rowan and the board have conceived a multi-pronged strategy.

Initially, the plan revolves around manufacturing black pellets at facilities such as Ashland and distributing them to power generation plants and heavy industries globally.

At around US$15million of capex, it isn’t cheap to build a plant; however, it is not prohibitively expensive.

And these are cash-generating businesses that could be built using project finance once the concept is fully understood.

Simultaneously, AEG is setting its sights on establishing strategic alliances, incorporating joint ventures and site development partnerships.

The company anticipates that these collaborations will enhance its production capabilities and broaden the distribution network.

Additionally, it intends to license its technology to other firms, acknowledging the impracticality of meeting the entire global demand for pellets single-handedly. This approach will enable other companies to manufacture them independently,

Despite the considerable progress made with CoalSwitch, AEG considers the technology as merely the first phase in the ongoing development of sustainable biomass fuels.

The company is committed to continuous research and development to ensure it stays at the cutting edge of the industry, with plans to explore processes such as torrefaction and fuel innovations like biochar and biocarbon.

Such a continuous evolution would reflect AEG’s objective to partake in the entire industry’s journey, from the most rudimentary fuels to the most advanced, becoming a recognised authority in the sector.

‘In some respects, I think we as a company are just on the second lap of the race so far as the technology is concerned,’ says Rowan.

It has been a long run road to get to this point in the journey for AEG, which some will remember for an ill-fated foray under former management into forestry in Ukraine.

The last results reveal the extent of the work carried out to clean up, refinance and reset the story. That effort was shouldered by Rowan and his finance chief Michelle Fagan.

Financially, the biggest upside from those efforts was the US$2.6million the company had in the bank at the end of 2022.

‘The goal was to have enough to get to first production,’ says Rowan. ‘At that point, we get a sense check of how the opportunities will then come together.’

You suspect the proof-of-concept the Ashland plant will provide should substantially de-risk AEG.

Investors will be hoping it also marks an inflexion point for the valuation of the company, which, even after a year-to-date 55 per cent rise in the stock price, is still only worth £11million at 6.8p.

It’s hard to benchmark AEG against anything listed on the stock market – either here or in the US.

Instead, Rowan pitches the investment story thus: ‘This is your only real chance to get exposure into a biomass sector.

‘There’s a load of wind and solar plays out there. If you think biomass also has a future, then in AEG you have scarcity value in that.’

To read more small-cap news click here (www.proactiveinvestors.co.uk)