Memorandum submitted by Ceres Power Ltd (GJS32)

Summary

1. Ceres Power welcomes this inquiry by the Environmental Audit Committee. The UK faces a number of energy and economic policy challenges over the next few decades, including green job creation, industrial up-skilling and encouraging low carbon investment in a recession. Fuel cell micro-CHP, as a low carbon microgeneration technology, should play an important role in helping Government rise to these challenges but, in order for this to happen, the policy conditions must be right.

2. The Government must follow up on high level announcements with detailed measures that provide industry and investors with reassurance. Budget 2009 promised £1.4 billion of extra, targeted support in the low-carbon sector but lacks sufficient information on how it will be spent. Government should provide fiscal support and help to fill the investment gap resulting from the economic downturn fiscal support. This could be achieved through the existing R&D tax credit system or by allowing loss-making low-carbon companies to claim immediate cash funding against accumulated tax losses.

3. Ceres Power hopes that Government will provide the necessary policy support to products currently in the product development phase to help them reach the mass market, enabling UK plc to benefit from the resulting jobs and economic growth whilst remaining at the forefront of technological development. These include our proposed measures addressing a range of problems we face that highlight the need for Government policy intervention to improve and enlarge the skills base for the UK environmental industries.

Who we are

4. Ceres Power is a UK-based AIM-quoted alternative energy company that is developing a small scale combined heat and power unit for residential applications. This 'micro-CHP' product uses fuel cells rather than engine technology such as a Stirling Engine and therefore has very different and beneficial characteristics. Ceres Power has secured major distribution agreements with British Gas and Calor which will enable their residential customers to enjoy convenient, low carbon, cost-competitive energy using environmentally friendly products. It is also developing a low-carbon energy security product for EDF Energy Networks. We would be more than happy to provide further evidence to the Committee on the potential of fuel cell micro-CHP.

5. We are proud of our place amongst world-leading alternative energy companies able to support UK competitiveness. Following our signaled investment commitment to building a high-value mass manufacturing plant located in the UK, Ceres Power wishes to avoid UK companies losing their competitive advantage or relocating to more supportive countries. Our group will then be able to provide the material benefits to UK energy policy goals of reduced customer energy bills, major carbon savings and more secure energy supplies.

The economic and social benefit of planned green investments

6. Microgeneration products, such as fuel cell micro-CHP, could provide 30-40% of the UK's electricity needs according to a study informing the Government's sector strategy from the Energy Saving Trust and could therefore make a vital contribution to reaching the Government's target of an 80% reduction in carbon emissions by 2050.

7. The energy saving benefits of Ceres Power products include:

· Reduction in the home's total energy costs (gas + electricity) of around 25% to help affordability and address fuel poverty.

· Carbon emissions reduction of up to 2.5 tCO2 when replacing today's boilers or 40-50% of a typical UK home's footprint.

· A cost effective, mass market way to reduce emissions in as-built and new-build homes.

· Capable of significant impact on the UK's carbon reduction targets, even by 2020 via linkage to boiler replacement cycle with 1.5 million units per year (i.e. 1Gw/yr potential for micro CHP deployment).

The extent to which the changes in public spending will contribute to sustainable development and environmental protection

8. Ceres Power believes that large scale infrastructure projects such as nuclear, renewables and successfully demonstrated Carbon Capture and Storage technology are only part of the solution, and only part of the opportunity in building a low carbon economy.

9. Fuel cell micro-CHP was not directly assigned funding under the Budget 2009 despite facing large funding challenges during its product development phase. However, following its volume market entry in 2011, it will start to reduce carbon emissions into the long-term as a result of displacing peaking plant which will be high carbon for decades to come. Its value is reinforced by the costs and difficulties of decarbonising the grid. It should also be born in mind that micro-CHP's fuel type can also decarbonise (i.e. to biogas, H2) on the same sort of timeframe as the electricity grid can decarbonise, therefore it has a role to play for decades to come (easily to 2030-50).

The Government's long-term policy framework

10. The Government's long-term policy framework can encourage low carbon investment and increase employment in environmental industries and their associated supply chains. Environmental regulations, tax changes and new market instruments can create the conditions under which microgeneration companies such as Ceres Power can continue to lead in new low carbon products and services.

11. New market instruments rightly form a central element of the Government's energy policy framework. The Government's outlined plans for a feed in tariff in the Energy Act 2008 and restated its commitment to introduce them in its Heat and Energy Saving Strategy (DECC, 2009): "The new financial incentives planned to promote renewable heat generation (the RHI) and small-scale low carbon electricity generation (feed-in tariffs, or FITs) will help households who wish to generate their own low carbon energy to overcome some of the upfront costs of installations." FITs for micro-CHP will help deliver the country's energy policy goals through accelerating these products uptake in mass market volumes and should be designed with this objective in mind and aim to deliver cost-effective CO2 savings Micro-CHP offers the potential for excellent value for money in terms of £ per tonne of carbon saved and technology cost assumptions rightly form a key input into the FIT model when determining its level of support for individual technologies.

12. Tax changes can encourage low carbon investment through use of the existing corporation tax systemsto bridge funding gaps and meet added supply chain demands created by the credit crunch. In the case of Ceres Power as well as many other environmental industries this could assist in making available the necessary funding to support the product development phase through to market launch.

13. The following are examples of how this could be achieved:

· Extend the existing R&D tax credit system to enable claims to be made against a much broader range of expenditure and against part-funded development programmes.

· Allow loss-making low carbon companies to claim immediate cash funding against accumulated tax losses rather than offset these tax losses against future taxable profits. This could be achieved by the companies issuing an environmental industry bond secured on the accumulated tax losses and to sell these green bonds to the Bank of England as part of the current quantitative easing programme. The bond could be repaid by the company at any time (e.g. through an equity/debt refinancing when markets recover) or out of the future taxable profits of the business.

14. When Government considers further changes to the long-term policy framework it should not stifle deployment of new technologies simply because the policy has not caught up. Several potential instances of this potential risk relate to DECC's Heat and Energy Saving Strategy and are concerning to Ceres Power:

· Design of the extended CERT (Carbon Emissions Reduction Target) and CESP (Community Energy Saving Programme) should not prohibit or discourage the introduction of new and innovative products which may come on line before December 2012. CERT and CESP must plan to actively support and incentivise product innovations that are highly likely to become available during the lifetime of these policies.

· Greater uplifts for microgeneration technologies are needed to incentivise uptake in CERT and CESP. Failure to increase the uplifts, or at the very least provide a more accurate comparison of the carbon benefits of microgeneration with respect to more traditional CERT measures, will extend the poor uptake of microgeneration technologies under the current CERT arrangements.

15. Coordinated support across the Government policy framework is vital. Should the Government decide to use the enabling legislation and introduce FIT reward for micro-CHP, it is imperative that this is integrated and works in tandem with any obligation on energy suppliers through CERT and CESP or its successors. Promotion of an integrated approach will ensure that fuel cell micro-CHP is effectively supported across a range of policies.

The green fiscal stimulus

16. Government fiscal support is required to support technologies in their product development phase such as fuel cell micro-CHP. A significant proportion of the investment required during this phase is normally provided as investment from supply chain partners. The credit crunch has eliminated the availability of such investment-in-kind due to a collapse in funding for their core operating businesses starving the new technologies of resources. Equity funding is also not available to finance the product development phase of new technologies.

17. The 2009 Budget built on existing Government policies by promising £1.4 billion of extra, targeted support in the low carbon sector, including £70 million for decentralised small-scale and community low carbon energy and £405 million to support low carbon industries and advanced green manufacturing. Little detail on the stimulus package has been provided on this however, giving little reassurance to industry and investors.

18. As unemployment in the UK rises, the economy is desperate for the new jobs that low carbon technologies can provide. For example, Ceres Power has already created nearly 100 jobs in the UK and plans to create further employment. The nature of these jobs that could be accelerated by green fiscal stimulus measures are in high-value R&D manufacturing and engineering, fuel science, product innovation, energy and applied science, and the enabling industry geared to providing innovative products and services. In the case of Ceres Power, this latter category will include electricians and gas appliance fitters whose new green jobs will build on our fuel cell scientists when our micro-CHP product reaches market entry in 2011.

The Low Carbon Industrial Strategy

19. Conditions in the UK need to be right in order that UK plc should benefit from a Low Carbon Industrial Strategy rather than other countries with a more attractive economic climate and approach to regional development funding.

The skills base for UK environmental industries

20. Ceres Power has faced a range of problems that highlight the need for Government policy intervention to improve and enlarge the skills base for the UK environmental industries. Government spending has concentrated on the 3 R's and basic IT skills - an 'educational recovery' plan that contrasts with a pressing need to tackle professional scientific development and facilitate science in a commercial setting. Ceres Power faces the ongoing challenge of specialists not matching our position within the environmental industries - our innovative product is not matched by a human resource whether as an energy scientist or a combined heat and power installer.

21. To enhance the skills base for UK environmental industries Ceres Power suggests the following policy measures are considered:

· Support policies addressing the management development of scientists and engineers to widen their roles and assist their corporate development.

· An international conference bursary scheme to foster UK environmental leadership through learning from international best practice.

· Encouragement of professional support networks.

· NVQ 3+ focussed support.

· Support for environmental industry initiatives to development in-field support infrastructures e.g. the use of equivalent schemes to the existing Microgeneration Certification Scheme to cover new technologies such as fuel cell micro-CHP.

· Creating programmes to encourage multi-skilled tradespeople (e.g. gas fitters and electricians).

22. Ceres Power hopes that such measures could be considered within the remit of the forthcoming DIUS Active Skills paper detailing how the wider skills system will support the Low Carbon Industrial Strategy. We also hope that the Government will respond without delay as was stated in New Industry, New Jobs (April 2009) to the UK Commission for Employment and Skills when it publishes its recommendations for delivering a simplified and effective skills service for business.

2 June 2009