The agreement will see the development of a micro-CHP product operating on liquefied petroleum gas (LPG) which the two companies believe will be attractive to properties which are 'off gas' – not on the mains natural gas grid.
A joint announcement by Calor and Ceres Power said it would be targeting homes and small businesses which use oil, solid fuel or conventional electrical heating alongside existing LPG customers.
The LPG CHP system will use the same core technology that Ceres Power has developed as part of its existing mains natural gas CHP programme with British Gas.
It will generate electricity while also delivering all a home's heating and hot water.
The companies estimate there are two million off gas and homes and small businesses in the UK and more than 100 million across Europe.
Under the terms of this new Agreement Calor will pay £2.5 million to Ceres Power in milestone payments during the development and trialling of the LPG CHP product including an up-front payment of £1 million.
In addition, Calor has placed a call-off order for 20,000 LPG CHP Products in total over a five-year period for the UK market, conditional upon successful completion of the initial development phase and agreement of standard commercial terms for product supply.
Subject to Calor meeting annual minimum order volumes, Ceres has agreed to sell the LPG CHP product to Calor for the UK market on an exclusive basis for a five year period anticipated to begin in 2012.
Ceres Power retains the right to supply and distribute LPG CHP products anywhere else in the world and the right to exploit its innovative fuel cell technology in other applications globally including in the UK.
Peter Bance, Ceres Power chief executive, said: “We are delighted to have formed this relationship with Calor which builds on Ceres Power’s experience in LPG and uses our core technology platform’s fuel flexibility to open up substantial new markets.
'We are confident that this new LPG CHP product has real potential both here in the UK and across many other territories including Europe, North America and Asia.
“This contract helps further underpin our investment in the Mother Plant that will create new skilled ‘green collar’ jobs in the UK.”
Stephen Rennie, Calor managing director, said: “We look forward to bringing this product to residential and small business customers as part of our strategy to provide green energy solutions to the rural market.”
British Gas is already committed to buying a minimum of 37,500 CHP products over a four year period if the initial development phase is successful and commercial terms are agreed.