4 Ways To Profit From Feed-In Tariffs

Published in Investing on 13 March 2012

Now could be the right time to buy into fuel cell companies.

A new generation of fuel cell-based mCHP (micro Combined Heating and Power) systems are promising to revolutionise the way we power and heat our homes. Several of the companies leading the way are listed in London, have blue-chip backing and currently look very cheap.

What's more, in February, the government announced that the feed-in tariff for electricity generated by qualifying mCHP systems would be increased by 19% from 10.5p/kWh to 12.5p/kWh. The timing could be perfect for residential mCHP product launches.

Efficiency doubled

The efficiency of a conventional fossil fuel power station can be as low as 40%, once wasted heat and transmission loss is taken into account.

The best fuel cell-based mCHP systems are about 60% efficient in generating electricity from gas. This figure then rises to about 80% when the heat generated by the fuel cell is used to provide domestic heating and hot water.

Gas-powered, fuel cell mCHP systems are designed to be fitted in place of a gas central heating boiler. They need the same connections -- electricity, water and gas -- and generate electricity using a controlled reaction between hydrogen and oxygen in the fuel cell.

Four fuel cell contenders

Fuel cell technology has been around for many years now, but the new, small-scale fuel cells now coming to market are mostly based on technology developed in universities in the 1990s.

Some of the companies involved are privately held and off-limits to private investors, but I've managed to find four AIM-listed companies that do have a real chance of success:

1. Ceres Power

Ceres Power Holdings (LSE: CWR) has its roots in research carried out at London's Imperial College in the 1990s. It was founded in 2001 and floated in 2004.

Ceres Power's main product is a home CHP system that's designed to be a direct replacement fit for a wall-mounted gas boiler -- 1.5m boilers are fitted every year in the UK.

Centrica (LSE: CNA) owns a 10% stake in Ceres and it has partnerships with British Gas, Calor Gas and Bord Gáis Éireann for trials of its mCHP product, with conditional future orders of 73,500 units.

Last year, Ceres Power's field trials with British Gas revealed problems with the mCHP units, delaying progress. However, Ceres has since found itself a new CEO, improved its product and is preparing to start a new round of field trials.

In the meantime, shares in Ceres Power can be had for 10p each, valuing the company at less than £9m -- substantially less than its £26m of net current assets.

Check the interim results, due this month, for a progress update.

2. Ceramic Fuel Cells Ltd

Ceramic Fuel Cells Ltd (LSE: CFU) is an Australian company that already has products on the market. Like Ceres Power, it has partnerships and open orders with a number of utilities, including E.ON UK, plus German and Dutch electricity companies.

Ceramic Fuels is also aiming at the OEM market, selling a core fuel cell system that boiler manufacturers can package into home mCHP units. This approach means that it can benefit from other companies' established retail brands, providing good growth potential.

Sales are currently rising fast, albeit from a low, loss-making starting point.

3. ITM Power

ITM Power (LSE: ITM) floated in 2004 and has maintained a £50m+ capitalisation while recording virtually zero revenue ever since.

Rather than exclusively focusing on mCHP, ITM's products are focused on the hydrogen economy -- the idea that hydrogen will replace fossil fuels to a great extent. Its products include hydrogen generation and storage solutions, as well as fuel cell products.

Blue-chip names such as SSE (LSE: SSE), Cable & Wireless (LSE: CW), Johnson Matthey (LSE: JMAT) and Carillion (LSE: CLLN) feature on ITM's list of trial partners, and its share price has risen strongly recently, following a number of new deals.

4. Intelligent Energy

Intelligent Energy has products aimed at several fuel cell markets, including the distributed generation (home) market. It has not yet floated but has arranged for an AIM placement. CEO Henri Winand says that an IPO will take place when it "makes sense".

The company was spun off from Loughborough University and is focused on developing 'clean engine building blocks': proven technology that can be licensed to customers for OEM use.

ARMHoldings (LSE: ARM) has used a similar approach very successfully, and concentrating on licensing intellectual property should help Intelligent Energy grow and become profitable.

One to watch -- although I would probably wait for the post-IPO dip before buying.

Buying Into mCHP

Although any technology that relies on government subsidy to make it viable carries an extra element of risk, the reality is that new technology often needs this assistance to help it scale to a profitable level.

As has happened with the solar industry, the increase in feed-in tariff for mCHP could come at just the right time to help get fuel cell mCHP systems off the ground and make them more commercially viable.

I think that there is a lot of money to be made from fuel cells, but when and where is uncertain. Invest small unless you have a crystal ball!

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Comments

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chubbybrown 14 Mar 2012 , 7:11pm

Ordinary boiler £1600
Baxi ecogen boiler £5300 10% fits
its got a long way to go
any prices for the ceres unit anyone?

Erdingtonian 15 Mar 2012 , 5:10pm

There are other means of reaching these types of efficiency, it depends what proves most economic. Combined cycle plants (gas turbine and steam turbine) are reaching 60% efficiency on natural gas and are already installed for mains supply. Other options for home generation are the Whispergen Stirling engine based system and Honda's Atkinson like I.C. engine based system.

jestermana 15 Mar 2012 , 9:03pm

'mCHP boilers cost around 500-1,000 pounds more than a conventional boiler but consumers should still start generating a profit after five years, said Bob Flint, commercial director for Ceres Power.'

No mention in this artical to AIM listed Energetix (EGX) who have signed Agreements with Color Gas; Carillion and Scotish Power ??

malcolmcochran 26 Feb 2014 , 2:42pm

Just like solar panels (in the right country), we can argue about cost-effectiveness at the level of our wallets, or knock on effects, or "saving the planet."

One problem that greater efficiency in energy use is that the Power Companies get less revenue but still have to maintain the grid, power plants, etc. Alternative sources of energy aggravate this disconnect. E.ON seeks to help by providing neat little gas-to-electricity generators for building complexes (cheap heating a by-product). Is E.ON a Buy??

Going further, at the "saving the planet" level, hydrogen seems to me to be a real solution. I could expand too much, but a big problem (lets say in the UK) is that "Everyone switches on the light at the same time." This is a nightmare for Providers, and costs a lot to deal with, day in, day out.

Hydrogen is the best "buffer" to this. You make H2 and store it - yet to be determined how, exactly, but in big tanks - and turn it into instant electricity when the grid load increases. That will work.

Also, electricity is only about 20% (not sure of this) of UK power needs. Most is gas. So when there is dsurplus wind/wave or more esp nuclear power, it goes into the ultra-vast gas grid as hydrogen. Remember, before natural gas, coal gas was CO and H2, and no-one worried.

So when people complain about the unpredictability of wind power, etc, H2 can solve the problem. The Germans are acting on this. Whitehall might get the idea.

But which company? I have plumped for ITM.L but there are many uncertainties.

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