Hydrogen Combustion Engines with Westport Fuel Systems

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David Johnson, CEO of Westport Fuel Systems joins Cowen’s sustainability & mobility technology analyst Jeff Osborne to discuss Westport’s offerings in fuel injection systems leveraging lower carbon fuels ranging from natural gas, biomethane, and the evolving hydrogen market.

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Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights, and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Jeff Osborne:

I’m your host today, Jeff Osborne, managing director, and equity research analyst focused on the sustainability, and mobility technology sectors. We are going to dive into engine emissions today, and in particular, exploring the transition away from diesel to using bio-gas, bio-methane, and hydrogen as a fuel in traditional engines. Over the past decade, investors have focused on fuel cells, but there is a role to play for hydrogen in use for traditional engines, for trucks, buses, and other applications. To discuss this further, we are pleased to host David Johnson, CEO of Westport Fuel Systems. David has a storied career in engineering, and operational roles for leading engine makers, ranging from Ford, General Motors, and Navistar, and has been at the helm of Westport for the past four years.

Before we get into the interview, let’s talk about the background of Westport. Westport is a tier one supplier for engine components that address a variety of fuels with a focus on environmental benefits, and transportation. Investors historically have focused on the company largely as a natural gas beneficiary with their HPDI, or high pressure direct injection system technology. The company also plays a role in Europe, and other regions with compression management and injector systems for LPG, and other gaseous fuels. Now let’s dive into the podcast with David to dig into this market opportunity, and during our conversation I will interject as I want you to not only listen to David’s perspective, but appreciate my key take aways as well. Thanks, David, for joining us. Westport is doing a lot of development on hydrogen HPDI. Do you mind, David, walking me through the work you’ve done thus far?

David Johnson:

Be my pleasure. So, I would tell you that the first round of work we did is really all around combustion, basically demonstrating that we could deliver on emissions, and performance, and efficiency. And this is really where we discovered a tremendous opportunity that HPDI presents with hydrogen because we demonstrated more performance, and more efficiency in the Dyno cell. From there, actually, we’ve gone on, we’ve been talking to customers, and working with customers, so we’ve done that with multiple engines, so not just the first one we did, but I’ve done others including the one that we renounced recently with Scania, where we demonstrated this fantastic result of 51.5% break thermal efficiency, which is some kind of record with hydrogen as far as we know. The other work that we’ve been doing is really demonstrating how this engine that works so well in the Dyno also works not just well, but phenomenally well, and easily in vehicles.

So we took a production vehicle that used our HPDI system and we retrofitted that vehicle with hydrogen storage, and a hydrogen fuel system leading to that existing natural gas injectors that we have in production today. And we’ve demonstrated that vehicle tows a load, hauls real well, drives well, good, and quiet. Drivability, and we’ve been handing the keys to people. So, those are kind of the things that we’ve been doing to get to this point. And really from there, it’s on to really optimization of the system, including demonstrating that we can meet tailpipe emission, and having the right after treatment, and all those steps you do to bring the product to production.

Jeff Osborne:

Excellent. Certainly you guys have had a lot of press releases showing the progress, but for investors listening in to this podcast, who else is using or developing this technology?

David Johnson:

Well, really, it’s an exclusive club. And what that means basically is it’s Westport Fuel Systems, it’s our technology patent, and proprietary technology, and we’re using that with our customers. So, we have, I’ll say, our existing customers, and our customer in China, Weichai Power, made an announcement just last week of their records setting performance with natural gas. But of course hydrogen’s also of interest in China. We’ve done the work with Scania, we’ve got a project that we’re running in Austria with our partners AVL, and their partner TUPY. So, we’ve got a number of projects underway with different customers, but it’s always Westport with our customers because it is our technology.

And I think your investors might see, Jeff, that there are a lot of, let’s say, an increasing number of announcements about hydrogen engines, but I’ll tell you, if that announcement doesn’t include Westport, it’s likely it’s a spark ignited engine, which is a completely different way to run an engine. It’s basically the difference between a gasoline engine, and a diesel engine in terms of how the engine runs. So, it’s far less efficient, and includes all sorts of changes to the engine that with HBI, you don’t need to do. So this is a very important differentiator that hopefully we can talk a bit more about later in the call.

Jeff Osborne:

Yeah, definitely would love to flesh that out. Truck manufacturers don’t talk a lot about their tests with hydrogen ice vehicles. Why do you think this is, and is sentiment changing in your view? Also, newcomers in the truck world seem to rely on fuel cells instead. What’s your opinion on those?

David Johnson:

Yeah, so, firstly, I think it’s interesting the, I’ll call it the behavior of the OEMs, and how they act in the industry. And from all my experience working with the OEMs earlier in my career, it’s a normal thing for OEMs to talk about two things. One thing they talk about is what do they have in production, and for sale today, because they want to move the hardware, and sell product, that’s in their interest, of course. The other thing they like to talk about is what is, let’s say, exciting, or popular in the moment. And because that gets some investor interest, and other interests, but sometimes they don’t talk about the things that are really the meat, and potatoes of the business, because that’s not for sale right now, and it’s not so exciting. But I think this is where we’re changing, and you asked about what’s changing right now.

I think people are getting super excited about what HPDI, what our product does with hydrogen in an internal combustion engine, because it really addresses a lot of the challenges that we’ve historically seen. We means engine developers, have historically seen with trying to use hydrogen, and internal combustion engines with a spark plug. It’s super challenging. That’s changing right now as people begin to understand through the messaging we’ve been taking to the marketplace, and places like the Hanover Truck Show, and other places that are beginning to understand what this really means, and how important it’s going to be. And I think that really brings me to fuel cells you asked about. Fundamentally, for a long time when anybody ever said hydrogen, the only use for that hydrogen was in a fuel cell.

It was kind of like they were almost synonyms from one or the other. You sell hydrogen, you mean fuel cell. I think we’re really showing now that there are multiple ways to use hydrogen, and frankly that using HPDI with an internal combustion engine is a better way to use it in some applications. Those applications tend to be the highest loaded applications, and we could talk about what that means, and how that looks, but fundamentally that’s a real big opportunity, and is changing the conversation right now.

Jeff Osborne:

Well, excellent. Since you opened the door there, I would love to understand on the hydrogen HPDI side, and fuel cell trucks, what are the applications that one might be better than the other? Are there different applications that work better in your view? I just want to try to make it as fair, and balanced as possible.

David Johnson:

For sure. The technologies are different. Fundamentally, if you look at, and I think what underpins all of this, what really matters is how efficient the technologies are at getting the most out of the fuel. That’s why we talked in our press release recently about the Scania result, because it’s such a big number for efficiency compared to what we’re used to in the world of converting fuels into motive force for a vehicle. And so this is the fundamental of everything we talk about is how efficient is it? And there’s a difference between fuel cells, and internal combustion engines. Just in general, fuel cells are most efficient when they’re lightly loaded. So when they’re doing the least amount of work, just kind of calmly working, they’re really, really efficient. But when you load them up, the efficiency drops off quite dramatically. That’s opposite to how engines work.

When engines are doing very little work, they’re relatively inefficient, but when you load them up, they get very efficient. And so there is, therefore, as a result of this different behavior of these two different devices, fuel cells and engines, high load applications are going to lend themselves towards internal combustion engines. Lower load applications are going to lend themselves towards fuel cells. And I think this is pretty straightforward, and let’s say not in dispute it’s just fundamental. So, that’s where we get really excited about the opportunity for hydrogen with HPDI on an internal combustion engine for long haul heavy-duty trucking. That’s really the fundamental difference that drives it. The second element of that is then, okay, tell me about the cost. And the cost really matters, of course, in terms of what applications can afford it, and what other alternatives are that really gets into the business side of the equation.

Jeff Osborne:

Digging in a bit more, what’s the expertise that Westport can rely on when it comes to hydrogen engine development?

David Johnson:

This is something that we’re trying to help the market understand well. What is Westport’s position that we play on the field? Where are we playing? We’re a specialist in gaseous fuels, right? So, gaseous fuels means everything that isn’t a liquid. So, hydrogen falls into that category. And while we take liquified natural gas, and liquified hydrogen by the time we’re using it in a fuel cell, or an internal combustion entrance, it’s a gas. And these gases, they’re different than liquid fuels like gasoline, and diesel because that fuel is compressible, and how it leaks, and how it behaves, and how you manage it, and how you store it, and how you deliver it to an engine, or a fuel cell is dramatically different than what you do with liquid fuels. So that’s the fundamental. And we’ve been in the business of delivering gaseous fuels for internal combustion engines, and fuel cells for decades.

This is not new business for us, it’s not novel for us, it’s our core skill, and expertise. So earlier in our discussion we were talking about using hydrogen in internal combustion engines. Well, you’ve got to run models, you’ve got to do simulation, you’ve got to do testing. Those are our core competencies. We have, really, what I would call the most state-of-the-art models for modeling combustion, and internal combustion engine of gases, including hydrogen. And actually before we did the testing in the Dyno cell, we start doing that kind of modeling. So, these are the kinds of core experiences and capabilities that Westport has. And you go into our Dyno cells. I mean, I think probably there’s nowhere else in the world that has more Dyno cells capable of running hydrogen HPDI than we do at Westport Fuel Systems. So, this is what we bring to the marketplace, OEM supplier partners, and everybody else. This is our unique specialty.

Jeff Osborne:

Excellent. You mentioned a couple terms earlier in the conversation that maybe we can flesh out a bit more in depth here, but on engine performance around hydrogen would love to understand spark ignited versus HPDI. Maybe just define the difference between the two for our listeners that might not be familiar with your historical presence there. And then on hydrogen engines in particular, the concept’s been around for a while, it’s been susceptible to engine knock. I’m just curious how you’re modeling in the Dyno cells that you mentioned, you’re addressing engine knock, and performance in general.

David Johnson:

Yeah, no this is, and I apologize in advance for how complex this may seem, and I’ll try to make it as simple as I can. But fundamentally, when we run engines with the spark plug, we mix the air in the fuel before we compress it, before the piston comes up, to get that ready for combustion. And that works well with gasoline as an example, and it works well with propane as an example of fuel that we’re a specialist in. It doesn’t work so well with hydrogen, because hydrogen likes to explode very quickly in the presence of air. So, because of this challenge of hydrogen, it becomes a challenge for a sparking netted engine. You really have to do special, and extraordinary things on a sparking netted engine in order to try to make hydrogen work well. And let me just bring that to a point.

There have been announcements. Companies are out there saying, “Hey, I’ve got a hydrogen internal combustion engine available for you today.” And those engines, I read about one recently is making 200 kilowatts. Okay, 200 kilowatts. Call it what you like, it’s the power output of the engine. That same engine when you run on diesel makes almost 300 kilowatts. So, if you run it on diesel, it makes 300 kilowatts, and then you go to hydrogen, it only makes 200 kilowatts. You’re taking away a significant capability that the engine would otherwise offer. And I ask you, if someone came to you today and said, “Hey, I’ll give you a new engine in your vehicle and it’s going to have 30% less power, do you want it?” Most people are going to say no. And certainly the trucking business, they’re going to say no. And then if you say to them, “Oh, and by the way, I have to change a lot of things in those engines. I have to change the pistons, I have to change the cylinder heads, I have to change the turbocharges, I have to add a throttle, I have to change the controls.”

There’s a lot of change required. The contrast with that is HPDI, where we really don’t change almost anything on the engine. We just swap in new injectors that are proprietary, and patented HPDI injectors. And with that we preserve everything on that diesel engine, and just change the injectors, and change the fuel. And we can run that engine just like a diesel engine, but with the hydrogen in HPDI, and by doing so, we unlock more power, more torque, more efficiency. And that’s going to be really, really important because we need to get the most efficiency out of the hydrogen, because at least for the short term, it’s going to be expensive. So, we really need that efficiency in order to make this a viable technology going forward in from a commercial standpoint. So, there’s a big difference between spark ignited hydrogen, and HPDI hydrogen, and this is something I’m spending a lot of time helping people understand what that difference is today, and what it can be in the future as we develop the technologies.

Jeff Osborne:

Yeah, there’s definitely a lot of parallels to the investor awareness, I think in the 2013 to 15 timeframe with your HPDI natural gas developments versus some of the announcements out there as well. And I imagine similar issues will transpire here.

David Johnson:

Yeah, for sure. I mean, I think it was really almost startling for me when we took our truck to the Hanover Truck Show in September. And as I talked to really savvy people leading the industry about what we are offering with hydrogen, we naturally talked about what we have in production already with natural gas, and HPDI. And that, that technology, those products that are using our natural gas HPDI solution have a dramatic performance advantage, and efficiency advantage versus spark ignited, natural gas engines. We saw recently a publication where that difference, that efficiency difference was about 30%. And typically the torque advantage where we can offer more torque, in a spark ignited, natural gas engine will offer less torque. That advantage tends to be about 15%. So, you’ve got really big differences with natural gas today that will get bigger, a bigger performance advantage when we move to hydrogen.

Jeff Osborne:

Got it. No, that’s helpful. Maybe double clicking out one level here with all the conversation thus far has been on trucks, and maybe I would just like to better appreciate why you’re targeting trucks with hydrogen, say versus passenger car, which certainly you have a big presence in Italy, and other countries around the world with gaseous fuels other than hydrogen, but maybe just zero in on that if you could.

David Johnson:

Yeah, for sure. There’s a couple of really good reasons. First of all, it really goes to the application itself. So, we talked earlier about how hydrogen, or excuse me internal combustion engines have higher efficiency at higher loads. So, if we think about trucks, and what do trucks do, and I’m really talking now most specifically about what we call heavy duty, long haul trucking. These are the trucks that move about 80% of the freight in the world at some point in time finds itself on a truck going from point A to point B. In many cases that point A to point B is hundreds, or even thousands of miles. It’s going a long way. And because of that high load, heavy application, heavy weight of those that freight, and then how far it goes, you really need a high performance, high efficiency diesel engine. But that creates a problem.

The problem is that diesel contains a lot of carbon. And so as we try to decarbonize that transportation, we talk about these applications, heavy, high load, long duration applications as being hard to decarbonize. And the reason we say it’s hard to decarbonize is because the diesel engine with diesel fuel is really good, in terms of its performance and its efficiency. Unfortunately, it’s really bad with respect to CO2 emissions. So if someone could say, well, can you use a zero carbon fuel, and have the same kind of performance, wouldn’t that be like an ideal solution? And we think yes, yes, it’s exactly an ideal solution. So, to your point on passenger cars, when we say, “Hey, there’s about 5% of the vehicles, these heavy-duty long haul trucks that make 20% of the emissions”, that means there’s 95% of the vehicles, passenger vehicles that are 80% of the emissions of the CO2 emissions.

So, they’re not unimportant, but they’re not as hard to decarbonize. We have the hybrid solutions, we have battery electric solutions, we have fuel cell vehicles already. And so these applications to one degree, or another do work. And so as we look at the space of all the applications that are out there, it’s the heavy-duty long haul that are the hardest decarbonize, and for which internal combustion engines with our HPDI system, and hydrogen offer just a tremendous promise.

Jeff Osborne:

As you heard from David, low cost hydrogen that is made available from the IRA, and infrastructure bill will open up more corridors for hydrogen applications, including trucking. While most investors have only paid attention to developments in the fuel cell market, the use of hydrogen in traditional internal combustion engines is possible with only slight modifications of the fuel injector system as well as storage tanks. David did a nice job highlighting key differences in spark ignited fuel injector systems versus Westport’s proprietary HPDI technology. Let’s continue with the podcast and explore bio-methane in greater detail, which presents a nice zero carbon fuel in select areas of the globe where available.

Maybe switching gears a touch here, would love to flesh out biogas, bio-methane, and how those are viable for transportation. I think a lot of investors view it as sort of binary, either your diesel, or your natural gas, or potentially hydrogen way off in the future. But in recent earnings calls and other literature that you folks have put out, you’ve been highlighting the fuel market to a greater degree as some of that production capacity has come online. So, maybe just touch on what you’re seeing there, and how important that is to the industry.

David Johnson:

I think the thing that’s maybe surprising to many people is that just a few years ago, there were all sorts of indications that there really wasn’t that much biogas. So, what is biogas? First of all, biogas basically is methane, but the source of that methane isn’t coming out of the ground like a fossil fuel, but actually is coming from a landfill, it’s coming from a wastewater treatment plant, it’s coming from a dairy farm. So, there’s lots of different sources of methane. And today, most of that methane that’s not going into the system. It just going into the atmosphere, and actually it’s really, really bad. So methane in the atmosphere, whatever the source is bad, we should avoid that at all costs. So if we can capture that methane, put it in a bottle, put it in a truck, put it in the pipeline, then it becomes biogas that we talk about.

We’d call it renewable natural gas, bio-methane, bio-LNG, lots of different names, but it’s all the same stuff. And the lovely part about that is that we have this environmental benefit of capturing it, and keeping it from going in the atmosphere, but it’s almost like a free fuel, it’s otherwise wasted. So, if you capture it takes a little bit to capture it of course, but if you capture it, reprocess, put it back in the pipeline, we can use it. And then it displaces fossil natural gas, and we use it the same way in the engines, and vehicles that we make today. So it’s fully transparent to the vehicle and the engine, the fuel tank, it’s methane just like as if it was natural gas, but it’s this free biogas. So, that’s really about, so one of the things that we’ve been saying is, “Hey, this really biogas is the hydrogen that’s available today”, right?

Because it can super decarbonize transportation, it’s available. And now we’re discovering, gosh, we actually have a lot of it. In places like California and in Denmark and in Germany, more, and more there’s increasing percentage of the total gas, that’s supplied to transportation that’s actually biogas. So, a few years ago, shell made a commitment to build new LNG stations in Germany, and supply them with fuel that had a net zero carbon effect because it was a mix of biogas, and fossil natural gas that in the end is zero net gas to the atmosphere, net CO2 gas to the atmosphere. Just today I heard that the Shell made a purchase of a company in Denmark that supplies biogas two billion purchase of a biogas company to put in a Shell’s portfolio.

So, you can see that the world is really getting their arms around the ability to use what would otherwise be wasted, displacing fossil natural gas. And for Westport, this is a beautiful thing because everything that we’ve produced that runs on natural gas today can run on biogas today. So, there’s no waiting, right? And every truck and every car that we’ve built that runs on natural gas today, when it fills up a biogas, it’s even cleaner than it was the day before. So this is really a great story for us.

Jeff Osborne:

I’m just curious on the regulatory side, maybe we can dive into that. What potential regulatory changes would be most impactful in supporting HPDI for long haul heavy-duty trucking? And what role do you anticipate Westport’s going to play? Do you have a big lobbying arm? And maybe just to follow up as well, if I could insert on the biogas side, do you find the regulatory awareness of biogas is as high as say hydrogen, or net gas CNG LNG was?

David Johnson:

Yeah, this is a really important part of, let’s say, the whole system, and the regulations that drive our industry. In general, we find that emissions regulations on trucks, and cars are helping us, right? They’re commanding, and demanding cleaner, and cleaner vehicles. That’s our business. We do that work by using cleaner fuels. So, in general, the regulations are helpful for us, but the details really matter. So, as an example, we’re just talking about biogas. In a lot of cases, regulations today don’t recognize biogas, and the benefits that it brings. And so we really think regulators need to do some work on that to say, “Hey, this thing is not an annoyance or a small thing. It’s actually big and powerful. It’s free energy that is better for the environment that can be used in vehicles today.” So let’s figure out how to change the regulations to take that into account.

That’s one element. Another element is there has been, as we talked earlier, this idea that if you say hydrogen, that means fuel cell, and some of that thinking, and let’s say historical idea of hydrogen means fuel cell has been put into language, and regulations that say, we’ll give you an incentive for a fuel cell vehicle. Well, wait a minute. That precludes the internal combustion engine. And we just said it’s a cheaper way to get better performance and great efficiency, and we can do it faster. So, these are areas where regulations do need tuning, do need developing. And so we’ve taken it upon ourself, and I would love to tell you, I have a huge team doing this work all the time. What I have to say is we have a very effective team. So, recently after we were at the Hanover Truck Show in September, we took that truck to Brussels, and we met with members of parliament there and helped them understand, and the regulators, and talked to them about, showed them the technology of the vehicle and what we’re doing, and what the impact can be.

We then took that truck to Berlin, and showed the German members of parliament, and other interested parties, it’s an important place in the world to talk about what’s possible with hydrogen internal combustion engines using HPDI. We also had a truck that we took to Washington DC, and we talked to regulators there, and we’ve taken the truck to California. So this is something we are doing, and I’d like to say we’re being very powerful. We’re being very effective because we have a great team. But it’s a small effort. And I think what’s really going to help that is as companies, our customers, those partners we’re working with to develop these engines, and bring them to market, get behind that effort, and bring their horsepower to the discussion, and say, “No, no, really pay attention to this. Make sure the regulations don’t preclude it.” I mean basically anywhere in the world where we’re saying internal combustion engines are a bad idea, we should get rid of them, and biogas is meaning this and we shouldn’t pay any attention. This is just totally wrongheaded in both ways.

Jeff Osborne:

Maybe we could stay in Europe, David, and they’ve put out some very strict CO2 emission reduction goals around 2025, and 2030. I was wondering if we can flesh out bio-LNG and the inclusion of bio-methane to allow fleets to reach the target. You mentioned you were at the Hanover show recently. I’m just curious how meaningful this could be for Westport, and for you folks to benefit. And then what is the role that European regulators, and OEMs are going to play around hydrogen in decarbonizing there? You’ve seen a lot of focus with the green power initiatives, the Repower EU initiative in particular around green hydrogen in Europe. So, I’m just curious, a two part question, maybe we can touch on the 2025 targets and then 2030 and then…

David Johnson:

Yep. It’s been really interesting to observe through the various crises that we’ve had that the regulations that you’re talking about in Europe for CO2, they haven’t gotten any looser. They haven’t been delayed, actually they’re getting tighter, and tighter. So, just to put some numbers on it for your audience, basically for commercial vehicles, as an example, the OEMs, right, the Daimlers, the Volvos, the IVECOs, the companies that make trucks, and sell trucks in Europe need to reduce by 2025, the CO2 profile, and the composition of their fleet that they produce, and sell, they need to reduce it by 15% CO2. So the industry did, the regulators did a baseline setting in 2019, and 2020, which created this baseline. And from that baseline, everybody needs to reduce by 15% on CO2. So, if we think about what does biogas potentially mean in that equation, well, what it potentially means is that you can go and fill up at a Shell station that offers net zero gas, and have a zero added into your equation right now.

That’s the idea. We’re not quite there yet, because the regulations don’t reflect the effects of biogas. But HPDI with natural gas already gets you to a 15% reduction in CO2 just by itself on one vehicle from a diesel to a natural gas gets you that 15% already. Of course, if we use hydrogen, a zero carbon fuel, we’re talking about a 98% reduction in CO2, from a diesel to a hydrogen HPDI equipped truck. So, really, really impactful in the equation, and I need to point it out, one of the things that OEMs do, in terms of responding to this regulation, is they look for what is the way I can meet the regulation, and keep my business running profitably, and successfully from a financial perspective. So they’re looking for the low cost way to respond to the regulation, and still satisfy their customers.

So when you think about hydrogen HPDI, and what that could do for the industry, you could really compare it to a battery electric vehicle, and say instead of hundreds of thousands of dollars for a battery electric vehicle, you can have a hydrogen HPDI truck for a fraction of price, and have this significant beneficial effect on that CO2 average. By the way, just to come back to the numbers, 2025 is a 15% reduction. 2030 is a 30% reduction. On passenger car, the regulations are even tougher, talking like 55% reductions. So, there’s a real big push, and I haven’t heard anyone who’s talking about any relaxation of that. Everything is like how can’t we go faster? What can we do to support the industry to go faster? And so when we go to Brussels with our truck, and talk about hydrogen, HPDI, the MPs, they get really interested in this, because this is a practical way to do it right now, and both meet regulations but also be very effective environmentally, and economically.

Jeff Osborne:

David, and I explored how biogas, and bio-methane have an increasing role to play as a fuel for heavy-duty, high horse power engines. However, regulators are still coming out round to the potential use cases, and political support. Investors need to monitor developments on the regulatory front as this could free up increased subsidies, and other political support for ICE engines leveraging bio-methane fuels in the future. Key markets to watch in the near term are the US, and Europe with potential upside coming from India, and China. California has a robust biogas infrastructure in place, and state level LCFS credits to promote it to use. But other markets have minimal market mechanisms to promote growth. Using biogas is a way to get to a carbon neutral fuel immediately, which is very topical for Europe, given fleet mandates that tighten up in 2025.

Yeah, certainly the political side of Europe, despite the chaos, and energy crisis has been pedaled to the metal both on the energy generation, and mobility mandates certainly will benefit you folks over time. I’m just curious, coming out of the IAA show at the Hanover Messe, I unfortunately couldn’t make it this year, but I’m curious with the higher price of natural gas, are you seeing fleets, and OEM say maybe I’ll use ICE for now, and the 2025 targets still two, three years out? I think many investors that I speak with were of the view prior to the war in Ukraine that natural gas was sort of the mandate, or I should say the objective for 2025, and maybe hydrogen, and battery electric was the 2030 target. And now with natural gas being a bit more challenged economically, and just availability wise, maybe the puck is sort of going to where bio-methane, and bio-LNG, and biogas is. But I’m just curious, what is the pulse, or the tone of OEMs that you’ve spoken to both at the show, and afterwards?

David Johnson:

Yeah, this was a really great show. We had very interesting conversations, but I would tell you the industry is stressed, right? The industry is stressed because they see these targets on the horizon coming from regulators. And I’ll tell you that they agree with it. They’re like, “Yes, we need to do this.” But then they’re saying, “Now how do we do it? What does that cost me? What does that cost my customers? What is [inaudible 00:32:25]” These are vehicles long, all heavy-duty trucks that have work to do, there’s freight that needs to get moved, and that’s not going away. Even more urgent, we get supply chain challenges, and everything else. So, I would tell you that the industry is stressed because the dates are coming closer, the regulations are coming into force in just a couple of years. And so as a result they’re getting far more practical.

Practical means they haven’t seen the incentives that are going to work at scale. You can incentivize a hundred, or even a thousand trucks, but when you start talking about incentivizing hundreds of thousands of trucks a year, this gets super expensive super fast. So, we need those economical solutions. So, in the discussions I had with OEMs at the Hanover Truck Show, they were all very interested, really, to learn what hydrogen HPDI, and natural gas HPDI offer, including the biogas today, right? That it’s not some future technology that we can actually hand the keys. There’s freight being moved today, driving on biogas. I was recently in Japan meeting with OEMs, and Japan doesn’t have a lot of biogas going on. And I had specific questions from companies there, customers about, “Hey, how does Denmark, and how does Sweden, and Norway, how do they have this high biogas rate, and what can we do to build such a thing in Japan so that we can have those same kind of environmental benefits?”

Because they’re really, really scratching their heads around how can we possibly make battery electric vehicles, and fuel cell vehicles the core, the solution on an economic way, not just for the OEMs that make the vehicles but also for their customers who have to buy them, and use them. So, this is the quandary, and the stress that’s on. And so we had a very positive response because we’re standing in front of the engine at our stand in Andover pointing it to them, saying it’s the same engine. We don’t change the piston. It’s not just the same engine as the natural gas engine, it’s the same engine as the diesel engine. The only thing you change is the fuel injection system, and you supply it a different fuel, be that fossil natural gas, biogas, or hydrogen.

Jeff Osborne:

Yeah, definitely, Japan’s a unique case study for sure, but great to hear of the positive developments coming out of the show, wish it could have been there. As you move towards commercialization of the hydrogen HPDI system in sort of the 2025, 2027 timeframe that you’ve talked about in the past, what are the main milestones that we should be watching? Maybe let’s just touch on that, and then area would be, what’s the best way to monitor the development, and validation cycle? Certainly, you folks are now putting out press releases with some of the OEMs you’re working with. I imagine there’s others that maybe aren’t in the public do domain, but maybe we can start there. And then I have one more aspect to that question as well.

David Johnson:

We are a tier one supplier, so we have to make sure that we keep our customers happy with everything we do. And so you’ve seen in some of our announcements in the past where we’re not able to say who the customer is, and other announcements where we are able to say. So, I think we’ll continue to do our best to get the news out there, and respect our customer’s desire, regarded their confidentiality. But fundamentally we have, I would say, more customers who are interested in telling about their hydrogen HPDI development because it is so exciting, it is so meaningful, and it is the future. And this really opens up the door for our US, and our customers to bring a natural gas product to the marketplace first, use it with biogas, and then get to hydrogen in the longer term future.

So I think you’ll see we’ll have more and more announcements through the years. Used to be we only talked about one customer, one market, and now we’re talking about multiple customers, and more developments. And so it’s getting more, and more interesting step by step as we do more of these projects. And working with our team to make sure we have the capacity to respond to all of our customers is an important part of what I do on a daily basis. But fundamentally there’s those developments, and I think for this 25 to 27 timeframe, we should have some fleet demonstrations. You’ve seen that with fuel cells, you’ve seen that with other technologies. We’ve put a demonstrator two demonstrator vehicles already on the road. We need some fleet demonstrators. Of course those fleet demonstrators for hydrogen as an example, need a fuel source.

So, I think everybody in the investment community’s been hearing about all the announcements done by great companies like Plug Power, and Shell, and BP, and everybody else saying “Here’s where we’re going to build hydrogen infrastructure.” And we’ve got the new IRA with billions of dollars for hydrogen hubs in North America. So, I think as those fuel sources, and distribution comes into being, there will be announcements that come along saying, and we’re going to use these kinds of trucks there with Westport’s HPDI, and that’ll be really super exciting for us to get some vehicles with early demonstration, early feedback. And I think we’re going to find people super excited about what they’re driving because when we drive it, and show it to our customers already, they’re super excited about it.

Jeff Osborne:

That’s helpful. Maybe just the last part on the validation cycle, and sort of competitive dynamics front, is there any difference in your view of the time to market for spark ignited hydrogen? Is that easier to do, or do you anticipate those trucks being on the road prior to you folks, and maybe you’re just shortly thereafter, or would they coincide in a similar timeframe? I mean, from my perspective, the fuel cell trucks are mostly late 24 really, into 25, and beyond as well. If you just look at what say Daimler, and Volvo are doing, or what Nicola, and some of the other companies are doing, I’m just curious what your perspective is on Spark ignited versus HPDI.

David Johnson:

Well, I think one of the things that we… The first step in that is to understand what it takes to make a hydrogen HPDI engine. And really it is, it’s a diesel engine fitted with our fuel system, and attached to hydrogen storage. So the hydrogen storage is coming along. It’s the same kind of storage that we’ll use as fuel cells used. So, that’s the same timeline. But in terms of spark ignited engine, you’re talking about significant development activity, because you’ve got to change the piston. It runs like a gasoline engine, doesn’t run like a diesel engine so you’re changing the piston to a lower compression ratio. You’re changing the cylinder head because you’re going to have higher combustion temperatures, and you have different combustion dynamics that you need to put it in place because it really runs like a gasoline engine, not a diesel engine.

So, it’s a different combustion system. You’ve got to change the turbocharges because now you’ve got to run super lean to try, and avoid knock, because you’ve got this problem mixing hydrogen. So, there’s a lot of change, hardware change, which means investment. And then when you’re all said, and done with that investment to create a spark ignited hydrogen engine, you end up with an engine that may have 30% lower performance, and dramatically less efficiency. So, you’re spending a lot of money to come up with an inferior product, basically. That’s where we think hydrogen HPDI really shines is that basically we’re using the same engine. Of course there’s development and validation due to get production.

It’s not like we can just bolt it onto the garage, and go out there other than a demonstration vehicle. So, that still needs to be done, and that will take some time, but I think there’s a far less manufacturing investment to be done. And then really talking about getting those fleets out there with the demonstrator vehicles, tens, hundreds of demonstrated vehicles, and then going on to high volume production. When we talk about high volume production, the capacity, the manufacturing capacity to support that is already in place. We have it already for HPDI, our customers have it already for the engines, the transmissions are unchanged, the vehicle’s largely unchanged. So, it can be a much, much faster way to bring clean zero carbon fueled product to the marketplace.

Jeff Osborne:

That’s great. Maybe just to wrap up here, if we were to reconvene in a year from now, what are the one, or two things investors in your mind should be monitoring? And what do you think are the biggest accomplishments that you’ll have during that time?

David Johnson:

I think we’ll have a lot to look back on a year from now, and say, “We got that done. We got that done. We’ve announced this. We did this.” So, there is a lot in the pipeline. Our time this year in really introducing, and educating customers, and the market in general about our technology has been super fruitful. We’ve added people to manage all that demand, and I expect that to bear fruit in terms of contracts that get announced, and work that gets done on the way towards, as I mentioned earlier, fleets of vehicles demonstrating it, and then production intent programs for the future. So, really, the advent here of a number of factors, the emissions regulations we talked about earlier, the challenges economically, and technically of fuel cells, and battery electric in long haul heavy trucking. The capability we’ve demonstrated with hydrogen HPDI puts us in a great position to make a lot of progress, and acceleration of our vision to bring HPDI to the marketplace broadly for hydrogen in the future, but natural gas, and biogas today.

Jeff Osborne:

Well, excellent. Thanks, David, for joining us on another edition of the Cowen Insights podcast. I appreciate you taking time out of your busy day.

David Johnson:

My pleasure, Jeff. Thanks. Great to see you,

Jeff Osborne:

In the last few minutes of my time with Westport, we dug into the timeline to commercialization of the HPDI engine, and some of the milestones to watch. In addition, there are some items outside of Westport control that need to play out, notably, hydrogen infrastructure development. Catalysts for the hydrogen sector in the coming two to three years are growth of the green hydrogen economy. Since 2019, 34 countries have developed national strategies around hydrogen, and we expect many more to come. The EU now has a green hydrogen growth target for 2030 that has quadrupled to 10 million metric tons, or equivalent to about 100 gigawatts of electrolyzer capacity. Given the company’s 2025 to 2027 commercialization timeline, we see this infrastructure build out aligning well with fuel availability in both the US, and Europe.

To recap our event in a nutshell, Westport provided an insightful update on the company’s historical focus on natural gas fuel, and its transition towards lower carbon solutions like biogas, and ultimately hydrogen. Bio-methane is a ready now alternative fuel that can deliver a net zero carbon transportation fuel today. We see very healthy OEM interest in hydrogen technology in general. Given over 30 countries of laid out hydrogen pathways for the decarbonization plans, and billions of dollars of capital is pouring into the industry, the next 12 to 24 months will provide many guideposts to the pace of commercialization as well as regulatory acceptance for this transition that are important for investors to monitor.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.


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