2G Energy has entered the heat pump business. The demand for this machinery has recently been subject to strong fluctuations for a variety of reasons. It is therefore a risky expansion of the product range, even if CFO Friedrich Pehle plays this down with reference to the major synergies that would result from the combination with the company's core business – the production of combined heat and power plants (CHP).

In an interview with Börsen-Zeitung, he makes it clear that, in his view, demand for heat pumps has to increase by the end of the decade, as otherwise the transformation to a lower-emission economy will fail, and the climate targets set by the German government will not be met. In addition, without CHP units and heat pumps, it will not be possible to cover the shortage of energy, especially electricity, which will become increasingly apparent in the coming years.

2G currently offers combined heat and power plants for decentralised energy supply, which isn't much of a marketing term. „The English say Combined Heat and Power, or CHP for short," Pehle explains, which is a bit more of a common expression. „Heat pumps – as the name suggests– are about heat.“

The name „2G“ is derived from the first letters of the surnames of the two company founders Ludger Gausling and Christian Grotholt (and is therefore also pronounced in German). Grotholt is CEO of 2G, while Gausling has retired from the company.

„Sometimes CHP units and heat pumps complement each other, sometimes they don't,“ admits Pehle. „If you're keen on the electricity, but also have a use for the heat from the CHP, then you won't install a heat pump because your heat requirements are already covered by the CHP. You will be using the waste product of the CHP, so to speak. If, on the other hand, you have high electricity and heat requirements, then the combination of CHP and heat pump is ideal.“

In future, 2G Energy will offer the combination of CHP and heat pump as a ready-to-use „Green Cube“. However, this should be seen as a „complementary offer to the individual CHP and heat pump units“, emphasises Pehle. The CFO is not afraid of a cannibalisation effect: „We don't see anyone giving up the CHP unit in favour of a heat pump," he says. “Conversely, "people only buy a CHP unit in exceptional cases if they mainly need heat.“

Various scenarios can be designed in the combination of CHP and heat pump. „A CHP unit doesn't always have to produce electricity to fuel the heat pump,“ says Pehle. „Think of a cold spring or autumn night, for example, when you need thermal energy but the electricity is quite cheap because there's a lot of wind. Then the CHP unit stops and you would buy the cheap electricity on the open market and use it to produce the heat you need. Conversely, if you have mild nights and otherwise calm, grey autumn weather – no sun, no wind – then the heat from the CHP unit is enough for you and you either use the electricity yourself or sell it.“ Of course, combinations are also possible, as the storage level and the temperature of the CHP unit need to be taken into account.

Of course, 2G's heat pump business is basically still something for the future: „We will be offering heat pumps from this year,“ Pehle clarifies, „and they will be delivered from 2025. In 2025, turnover from heat pumps will still be less than 10 million euros, but in the following year it will be "well over 10 million euros“. In the long term, however, sales in the core markets, the G7 countries, will be at the same level as sales of CHP units, the CFO predicts.

Last year, the revenue of 2G Energy, which has so far been a single-product company – albeit with a number of different aggregates, as Pehle emphasises – was 365 million euros. This represents an increase of 16.8% compared to 2022. In his presentation at a Spring conference in Frankfurt, which was organised by the financial intermediary Equity Forum, Pehle broke down the revenue: According to this, around 200 million euros came from the sale of CHPs and around 165 million euros from the sale of spare parts. Operating earnings (earnings before interest and taxes, EBIT) climbed to 27.6 (previous year: 22.0) million euros in 2023, improving the EBIT margin to 7.6 (7.0)%.

For the current year, the Executive Board is forecasting sales of between 360 and 390 million euros with an EBIT margin of 8.5% to 10.0%. For 2025, sales of 390 to 450 million euros are forecast.

At 69.5 (68.5) million euros, 2G expanded on the „very high sales level of the previous year“ in the first quarter. With a very similar distribution of revenues between combined heat and power plants (mainly CHP) and services (around 40%) and between domestic and foreign revenues (60-65% to 35-40%), the improved cost of materials ratio, which has „normalised“ to 64.5% (69.0%), largely impacted on EBIT. This was positive at 0.9 million euros in the first calendar quarter of this year, following minus 0.2 million euros in the same period of the previous year.

„The markets for CHP units and heat pumps will grow structurally,“ Pehle is certain, because "in Germany and in large parts of Europe, there will be a shortfall in the electricity supply towards the end of the decade.“ His argument is convincing: „If we shut down a number of power plants and at the same time have major delays in both grid expansion and power plant construction, and at the same time electricity consumption rises sharply – partly due to the transition to electromobility – then even the regulator without engineering training can say that this can't work.“

„Even today, green electricity is not enough to supply all electric vehicles and heat pumps,“ says the 2G CFO and concludes: „Every additional electric car and every new heat pump – at least in winter – will be powered by electricity generated from fossil fuels. And that for a long time to come.“

The energy shortage over the past two years – caused by Russia's attack on Ukraine and the sanctions imposed by the West – has been compensated for very pragmatically by the state with more coal and more gas, but the EU's CO2 pricing is the law, and Germany won't be able to just smile and ignore that fact.

Even if Germany has a powerful voice in the EU, „the CO2 mechanism will not be cancelled for Germany,“ Pehle is convinced. „But then coal-based electricity production will become practically unaffordable –which will make business with CHP plants much easier because they produce fewer emissions overall and, above all, work much more efficiently, partly because they also utilise heat.“

The CFO paints a dramatic picture in the medium to long term: „In view of the foreseeable electricity shortfall, and the massive increase in production costs, as coal and gas-fired power plants will probably have to continue to operate, the price of electricity will be very high at the end of the decade compared to today's price," he says.

Pehle is convinced that the future belongs to decentralised energy supply. He joins a long line of energy experts from science and politics. The planning and construction times alone did not allow for any other solution. It takes around ten years from the first planning step to commissioning for a modern gas-fired power plant, while the time span for a CHP plant – for a hospital, for example – is between three and six months. The CFO's forecast is that in an average German city, there will no longer be one or two centralised power plants that supply everything, but rather many small islands with CHP plants and heat pumps that supply hospitals, sewage treatment plants, larger businesses, etc.

However, Pehle believes that this will not be enough: „We won't be able to avoid saving electricity either. Even if it's through the unpopular speed limits on the motorway or even industrial production breaks in winter.“

Apart from procurement and production, there are very concrete problems for the long-term supply of electricity and heat: „Everyone always talks about the lack of tradespeople when it comes to installing or connecting heat pumps. But the second major bottleneck over the next few years will be planning offices and engineers. After all, someone has to translate the heat plans that are drawn up in the municipalities into a concrete construction plan and then supervise the construction. And that won't be the civil servants who usually manage cycle paths.“

At company level, there is another important point in favour of entering the heat pump market: „It should not significantly increase the complexity of our business,“ says Pehle. This is because „there are a lot of similarities between heat pumps and CHP units – from business initiation and project planning to construction, services and scrapping. Although the motor and compressor are different, they are not as different as many people think. And in both cases, CHP and heat pump, we buy from the same suppliers, for example when it comes to the generator, the electric motor or the cylinders.“

2G's product portfolio includes systems with an electrical output of between 20 and 4,500 kilowatts. The CHP units sold achieve overall efficiencies of between 85% and over 90% thanks to the combined heat and power principle. The thermal output of the large heat pumps ranges from 100 to 2,600 kilowatts.

For historical reasons, the largest customer for CHP units is the biogas sector. It accounts for more than 40 per cent of 2G's demand now that biogas is experiencing „a certain renaissance“ in Germany. According to Pehle, this is followed by the manufacturing industry (24%) and municipal utilities (11%), with their landfill sites and sewage treatment plants.

Pehle also beats the advertising drum. Although gas is used as an input for the company's CHP units, 2G's CHP units work with all types of gas, including natural gas, biogas and other lean gases such as landfill gas, sewage gas, mine gas and biomethane, unlike its competitors.

In addition, a sequential switch to up to 100% hydrogen is possible if the corresponding supply is available. However, the CFO is under no illusions in this regard: „I don't see us being able to get hydrogen at reasonable prices on every corner as early as 2030. In view of our own painful experiences with the construction of a hydrogen pipeline at the company headquarters in Heek, I can't imagine that.“ Nevertheless, Pehle is convinced „that we are two to four years ahead of our competitors in this area because we started working with hydrogen much earlier“.

Pehle estimates that around 25 to 28 companies in Germany offer CHP units. However, the list is getting shorter, „because highly specialised companies that only focus on biogas, for example, cannot keep up with the emissions regulations, because they are overwhelmed by digitalisation or because they cannot achieve economies of scale due to a lack of internationalisation.“ However, Pehle believes that consolidating the industry through M&A is „difficult because, on the one hand, the entrepreneurial complexity increases greatly and, on the other hand, it is also very difficult to merge the companies.“

The market for CHP units in Germany is dominated by four suppliers, which together serve more than three quarters of demand: Innio Jenbacher, based in Austria and owned by the financial investor Advent, the Caterpillar subsidiary MWM (formerly: Motorenwerke Mannheim), 2G and MTU Onsite Energy, which belongs to the Rolls-Royce Power Systems group.

„We are the last noteworthy CHP provider in Germany that still comes from the project side. Our competitors now all come from the engine sector. This gives us a huge advantage when it comes to containerising the CHP unit,“ says Pehle. The situation is similar with heat pumps: „Those who offer large heat pumps come from the mass market. In terms of thinking, they are interested in utilising factory capacities, whereas we have the project approach. This will give us a colossal competitive advantage as the bottleneck in planning offices becomes more apparent in the second half of the decade.“

A potential problem for 2G is that some of the engine suppliers are also the biggest competitors in the CHP market: Jenbacher, MWM and Rolls-Royce Power Systems. But Pehle points out the differences: „These engine manufacturers have CHP units as an additional sales channel – in other words, they process some of their engines into CHP units. But these divisions are generally not particularly popular in the companies concerned, because they actually want to build and sell engines and nothing else – with the exception of Jenbacher, which takes the CHP business seriously.“

2G was founded in 1995 and floated on the stock exchange in 2007. The company's shares are traded over the counter and are listed in the „Scale“ segment of the Frankfurt Stock Exchange. The market capitalisation of 2G Energy is around 470 million euros. Co-founder and CEO Christian Grotholt holds 29.6% of the shares. Co-founder Ludger Gausling, who has completely withdrawn from the management of 2G, still holds 15.5%, according to Pehle. Otherwise, no investor owns more than 2.5% of the shares. The relatively high capitalisation for an OTC stock and the sufficient free float of 55% have led to 2G being included in the Scale 30 selection index - although there are only 46 stocks in the Scale segment in total.