Using our established service relationships, we plan to take excess capacity from our cogeneration systems and enroll this into the utility demand response programs. To help us do this, we recently launched a self-learning intelligence system to control our cogeneration and chiller fleet. This has some wide-ranging capabilities that I’ll talk about shortly. The last phase is to use financing as a strategic tool to increase incremental sales using cooling as a service. If customers are able to upgrade their chiller plant using the savings from our product and ongoing maintenance is included, I believe this will act as a catalyst for growth. As I mentioned earlier, we recently launched our self-learning intelligent control for cogeneration and chiller systems.
This does three critical things. The first is that it learns a building seasonal load profile so it maximizes run hours of equipment and also reduces the amount of energy that customers need to buy from the utility. So you can see by the chart on the left, you can see that the amount of power being bought from the utility is being minimized and the majority of the power in the building is coming from the CHP system. By increasing run hours, it helps the customer increase savings and increases our service revenue. The second is that it allows us to enroll systems into utility demand response programs. When utilities are short of power, we can ramp up hundreds of machines simultaneously to behave like a virtual power plant and be paid by the utility.
The last primarily applies in the case of our hybrid chiller. We can arbitrage operating in electric versus gas depending on time of day to optimize savings and greenhouse gas emissions. I’d now like to talk a little bit about cooling as a service. Chillers and boilers have a finite life, so buildings have to replace boilers and chillers periodically. Given that this is a large capital expense, in many cases, customers choose lower first-cost alternatives and suffer the penalty of higher operating costs and higher greenhouse gas footprint. In this model, the customer uses the energy savings from our equipment to pay for the capital recovery of the upgrade. Maintenance can also be included as part of the monthly payment so the customer has a convenient way to own and operate a chiller plant.
We are working with financing partners presently to secure projects under this model. As projects are signed, I will keep investors updated. We expect this model to convert more of our pipeline where first-cost acts as a barrier to sales. I’d like to summarize to say that we are continuing to increase our recurring revenue stream. This is critical to reaching profitability. We are going to make operating cost reductions over the next two quarters. We are specified on multiple larger projects, so we expect to see product revenue rise in the second half of the year. As some of these other developments come to fruition, I will keep investors updated via press releases or, if needed a, – on follow-on earnings calls. At this point, I’ll open the floor to any questions.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Alexander Blanton with Clear Harbor Asset Management. Please proceed with your questions.
Alexander Blanton: Good morning.
Abinand Rangesh: Good morning, Alex.
Alexander Blanton: My first question is you mentioned at the beginning of the call, headwinds in New York City and cancellations of contracts. What is the reason for that?
Abinand Rangesh: So I believe a large portion of that is driven by New York City becoming very, very anti-gas. And in particular, some of the city housing agencies becoming very anti-gas. We used to see a combination of projects, both from co-op and condos directly, as well as a lot of low-income housing projects which were specified by engineers, but then the projects were then funded by New York City HUD. And right now, cogeneration is no longer seen by the city as a viable way to reduce greenhouse gas emissions despite the fact that there are significant greenhouse gas emissions. And as a result, those cogeneration sections are being canceled from projects that were developed and actually, in some cases, have gone out to bid contractors had been selected.
Alexander Blanton: Well, given that you can reduce the greenhouse gas emissions substantially or almost completely, is New York City anti-science? What is the reason that they’re doing this?
Abinand Rangesh: Yes. So this is something that – it’s hard to tell, but I think there is – what is happening in the background is we are working with other CHP lobbying groups to make this case. I believe there will be exemptions made, especially under Local Law 97 for cogeneration products because right now, there really isn’t that many alternatives and we’re seeing huge increases in cost of power in New York City. So I think this sentiment may shift. But at this point, unfortunately, we are seeing projects getting canceled as a result. I mean, that was – we had a lot of these in our pipeline. They were well along the way and some of these got canceled right at the Q3 – end of Q3, early Q4.
Alexander Blanton: Are the cancellations driven by local political considerations? The city government ordered the buildings to cancel the contract?
Abinand Rangesh: So it is being driven, in some cases, by the local political considerations by New York City. Because these projects, a lot of these were paid, the funding comes from the city itself. So they are essentially pulling the plug on any funding for cogeneration built into building redevelopments and improvements.
