Ceramic Fuel Cells (CFCL) announced a partnership with a Scottish installation company to put 65 of its micro combined heat and power units in schools, university buildings and social housing across the UK. The British/Australian company’s world-leading BlueGEN product will generate electricity and hot water using mains gas. This deal will virtually double the number of BlueGENs in the UK,complementing growing sales in Germany. Similar deals with UK public sector institutions are expected in the next year.

A refrigerator-sized Blue|GEN fuel cell generating electricity from gas

CFCL has one of the most developed fuel cell technologies in the world. But at £17,000 for a machine that will generate about 1.5 kilowatts of electricity and 500 watts of heat, the BlueGEN is still extremely expensive. Very roughly, it costs ten times as much per kilowatt as a gas-fired power station. So why should we be interested in this apparently uncompetitive product?

First of all, the BlueGEN is another example of a generation technology that sits at the end of the electricity network. But unlike solar or small wind, it provides genuine baseload power. The unit sits in storerooms or garages and works with high reliability every hour of the year. At over 60% efficiency in converting mains gas to electricity, it matches or exceeds the largest new gas power plants. And it captures another 20% of the energy in gas and stores it as hot water. If we are going to continue to use gas, this is perhaps the most efficient technology in the world for converting it to useful sources of energy. BlueGEN is the best way of using ‘green’ gas produced from sewage waste, anaerobic digestion or biological methanation. Combine it with a well-installed heat pump in a properly insulated home, and it makes for a truly low-carbon option.

On the Dutch island of Ameland, BlueGENs also operate as grid stability aids, modulating output in response to variations of the power coming from a local 5 MW solar farm as clouds pass over the sun. In the UK, it may be that BlueGENs will also eventually work to help stabilise local arms of power grids as PV penetration increases. But the underlying economics today work best if the machines operate at full tilt all day and every day.

In the transition to fully decentralised generation, CFCL’s product will play an important role. The company has now sold about 500 units in Europe, most of which are in Germany. As it expands its sales, prices will come down to more reasonable levels, meaning it can eventually compete with large power plants. But even at the moment, BlueGEN gets a relatively low feed-in tariff of about 13p a kilowatt hour, no more than small scale domestic PV. And fuel cells only get this fee for ten years, half the length of time of PV. Th

Second, the recent contract win in the UK demonstrates a vital requirement for sales of some lower carbon products. Often, the buyer has to be an extremely credit risk and thus, almost inevitably, in the public sector. The point is this: few users are likely to be able to afford the full cost of this machine. It has to be financed by private capital and then leased to the institution getting benefit from it. Unless that institution is secure in its ability to pay its debts, no source of capital will provide money for investments that need decades to repay their financing. The same is true with on-building PV. Hence the rush to put solar on social housing, with several large financing deals announced in the last weeks.

Third, the returns for the funders of a UK BlueGEN are not overwhelming but are nevertheless good enough to secure financing from outside capital . The feed-in tariff payments will pay not quite pay back the cost of the device over the course of the ten year tariff life. (However, the actual amounts paid in FITs will rise by RPI, and this is a vital feature of the BlueGEN financing deals, as suggested in the last paragraph of this note). The other dividend to investors comes from the difference between the cost of electricity generated by the BlueGEN and the standard commercial price. This is shown in the table.

BlueGEN economics

A. Purchase

Cost price to retail purchaser of 1.5 kW unit - £17,000

Hours of operation a year - 8,500 plus

kWh produced in typical year - 12,750

Value of FIT payments at 13.24p per kWh - £1,688

FIT payments over ten year life of FITs, assuming no RPI inflation - £16,880

B. Electricity cost savings

Amount of gas needed to produce 12,750 kWh of electricity at 60% efficiency - 21,250 kWh

Cost of gas at 3p/kWh - £637.50

Value of electricity produced at 10p/ kWh - £1,275

Saving - £637.50

£600 or so is a slim yearly margin to a provider of up to £17,000 of capital. (The end user will get roughly £200 of free hot water, slightly bumping up the total returns to the parties in the deal). There’s maintenance costs to consider on top. However the most interesting thing about the deal just announced by CFCL is that so far unnamed capital providers have been prepared to stump up the £1m+ that is required to install 65 BlueGENs. This is another example of how negative real yields on government bonds are diverting some investors into apparently low-return, but inflation protected, assets. It may also be relevant that FITs rise annually by RPI, which is an artificially high measure of inflation, helping make small scale generation more attractive. Perhaps we should welcome this. However perhaps we should be troubled that many low carbon investments are now nothing more than financial instruments reliant on low interest rates.