ITM Power Plc AIM Admission Document

‘‘POS Regulations’’‘‘Shareholder’’ or ‘‘Member’’‘‘Share Options’’‘‘subsidiary’’ and ‘‘subsidiaryundertaking’’‘‘UK Listing Authority’’‘‘US’’ or ‘‘USA’’ or‘‘United States’’the Public O¡ers of Securities Regulations 1995 (as amended)a holder of issued Ordinary Sharesthe share options granted by the Company, further details of which arecontained in paragraph 9 of Part VI of this documenthave the meanings given to them respectively by the Actthe Financial Services Authority acting in its capacity as the competentauthority for the purposes of Part V of the Financial Services andMarkets Act 2000the United States of America, its territories and possessions, any stateof the United States of America and the District of Columbia and allother areas subject to its jurisdiction5

PTFER&DScreen printingSodium borohydrideSPE or Solid PolymerElectrolyteStackUPSexchange membrane. The fuel cells typically run at low temperatures(51208C)polytetra£uoroethylene is a £uorocarbon polymer made of a carbonbackbone chain with two £uorine atoms attached to each carbon atom.It is sold under the trade name Te£on TMresearch and developmenta manufacturing technique for fuel cell components that involvesprinting layers onto a £at surfacea salt with an anion of boron and hydrogen (BH - 4 )asaconcentratedaqueous solution it is a possible fuel for an alkaline fuel cellasolid polymeric electrolyte membrane which can transport protons(H + ) or hydroxide ions (OH 7 ) depending on its composition andreaction conditions (PEM is a special case of this)individual fuel cells connected together to form a fuel cell stackuninterruptable power supply7

and OEMs to deliver low cost solutions, although there may be occasions where low volume high marginproduction would be undertaken.ITM envisages that revenues will primarily be generated via four main avenues:. joint ventures;. licensing;. grant funding; and. niche manufacturing opportunities.Details and reasons of the PlacingThe Group will raise not less than »7,000,000 and up to »10,000,000 by the issue of up to 20,000,000 PlacingShares at the Placing Price. Assuming Maximum Subscription, the Placing Shares will representapproximately 21.9 per cent. of the Company’s issued share capital. Assuming Minimum Subscription, thePlacing Shares will represent approximately 16.4 per cent. of the Company’s issued share capital. Theestimated net proceeds of the Placing receivable by the Group of »6,165,000 (on the basis of MinimumSubscription) will be used to provide additional working capital to the Group for the protection of its IP, thedevelopment of the Group’s products and technology, the recruitment of additional sta¡ in key areas and theprovision of improved facilities.9

PART IINFORMATION ON THE GROUP1. IntroductionITM intends to become a leading technical innovator of fuel cell and electrolyser technologies for thehydrogen economy.ITM’s approach has considerable potential bene¢ts over existing fuel cell technology. ITM’s technology isfounded upon a family of patent protected, low-cost hydrophilic materials and a patented productionprocess.The Group intends to use its technology to address two principal areas:. the supply of clean fuel when and where necessary by electrolysis; and. the regeneration of electricity as necessary by the use of fuel cells.ITM’s plan is based upon three core targeted development programmes, utilising its patents, which it isintended will run in parallel:. development of a £exible ‘‘shock-resistant’’ fuel cell with a power output of 20W by June 2005;. development of a rigid fuel cell with a power output of 250W by December 2005; and. development of an electrolyser with a 250W input power rating by December 2005 and a 500W inputpower rating by June 2006.Subsequently, ITM anticipates that from these three programmes, application-speci¢c prototypes will bedeveloped. These prototypes will be used as demonstration units to help secure licence agreements and jointventure programmes.ITM has already produced and tested working but low rated laboratory examples of devices which representstarting points for two of the three targeted programme areas.2. History and BackgroundITM was incorporated in England and Wales on 17 April 2000 and in June 2001 acquired the intellectualproperty rights resulting from an EPSRC funded research programme (1995 to 2001), which was carried outunder the supervision of Dr Donald Highgate, a polymer expert and an ITM founder shareholder. Thisprogramme studied new electrically conductive polymer materials and production methods for use in themanufacture of low-cost fuel cells. A ¢rst round funding of ITM was completed in early 2002 to validate andextend the results of the EPSRC programme. A UK patent protecting technology in respect of fuel cells andelectrolysers was granted to ITM in September 2003. ITM has also ¢led an equivalent US patent applicationand, via the PCT process, a number of regional/national patent applications all of which are pending. Aspart of the PCT application a search by the European Patent O⁄ce only revealed prior art of backgroundrelevance (see IP section on page 18).The Company was incorporated in March 2004 for the purposes of raising funds for ITM through theAdmission and the Placing. On 29 April 2004 the entire issued share capital of ITM was acquired by theCompany by way of a share for share exchange pursuant to which the shareholders of ITM became theshareholders of the Company and ITM became the wholly-owned subsidiary of the Company.3. The Hydrogen EconomyThe future shape of the energy industry is being driven predominantly by the growth in the global demandfor energy, the diminishing reserves of oil and by the environmental impact of burning fossil fuels. Hydrogenis an abundant element in the universe but it is reactive and so on Earth it is normally tied chemically tocarbon (e.g. as oil) or oxygen (as water). Its potential for use as a totally ‘‘clean’’ fuel has given rise to theconcept of the ‘‘hydrogen economy’’, where it can be used to make electricity in an electrochemical processby means of a fuel cell. For hydrogen to be ‘‘clean’’ it must be made from renewable energy inputs (such aswind, solar and wave power). These energy sources vary over short periods of time and require a storagesystem to enable their output to provide a reliable and commercially attractive energy supply. Electrolysers(which produce hydrogen from electricity and water) are therefore a vital technology if the hydrogeneconomy is to evolve and become commercially successful.11

Fuel cells have many potential applications such as transport, on site power generation (distributed power)and portable appliances. There are a number of fuel cell types of which the PEM fuel cell is widely regardedas the most practical technology for many applications. However, a conventional PEM fuel cell has arelatively complex system architecture and expensive components resulting in a number of fundamentalconstraints to immediate growth in their uptake, most importantly, high cost of components andmanufacture. PEM fuel cells developed so far are currently estimated to cost several thousand dollars peroutput kW (for example, in February 2004 the US Department of Energy estimated the current cost of a fuelcell to be approximately $3,000 per output kW) whereas petrol engines are currently estimated at $50 peroutput kW.4. ITM Technical HistoryAt the heart of a PEM fuel cell and crucial to the process is a polymer membrane which, in conventional fuelcells, is made from expensive proprietary £uorocarbon material which must be kept wet in order to operate.In 1995 Dr Donald Highgate recognised an opportunity to use his background in hydrophilic polymerchemistry to investigate and develop a new class of low-cost membrane polymers. He then applied thisknowledge to simplify fuel cell architecture by devising an in situ manufacturing process, which couldsigni¢cantly reduce its costs in mass production.By 2001 a range of polymer materials had been developed which demonstrated higher electrical (ionic)conductivity than a per£uorinated polymer used in state-of-the-art PEM fuel cells, and signi¢cantly thepossibility of controlling the water management of the resulting membrane. Following this a prototype MEAwas made by the in situ method and it produced an electrical current. ITM then acquired by assignment theIP arising from the research programme.Following ¢rst round funding ITM began work on testing these materials for longevity and furtherdeveloping the in situ manufacturing process, as well as redesigning the architecture of fuel cell systems. Theresults to date support the view that ITM’s approach could in the long term reduce Stack costs to under$100 per output kW to be competitive with conventional petrol engines.In September 2003 ITM was granted a UK patent (No. 2380055) which protects its core technology.Results to date have shown that ITM technology has a wide ranging potential to contribute to thetechnology of:. electrolysers for hydrogen production;. SPE fuel cells capable of using either hydrogen or methanol;. shaped and £exible fuel cells and Stacks; and. a low pollution production and reclamation lifecycle in particular facilitating the recycling of platinumand other expensive catalyst materials.ITM’s polymer developments coupled with its manufacturing techniques o¡er the potential to simplify theproduction of fuel cells and electrolysers and could be engineered to eliminate a number of proprietarycomponents which other PEM fuel cell companies may need to buy in. The Group is therefore in a positionto control its costs through its proprietary technology.The Group has the opportunity to become a key contributor to future energy storage, power systemmanagement, energy distribution and use within the hydrogen economy.12

5. Existing Fuel Cell TechnologyFigure 1: The Conventional PEM Fuel CellConventional PEM fuel cells consist of a multi-layered sandwich structure as illustrated above. This internalstructure is assembled from discrete elements. The MEA is bonded using heat and pressure, before beingplaced between the gas manifolds. The whole structure is then sealed against gas leakage to form a single cell.The chemical reaction in a single hydrogen-oxygen PEM fuel cell can only produce a small voltage (thetheoretical maximum is approximately 1.2 volts but in practice less than 1 volt is normal). Therefore, formost applications it is normal to assemble a number of cells in series to form a Stack. Stacks of up to 100 cellsare often arranged in electrical series, all requiring interconnection for gas distribution and electrical output.When used in series, failure in one cell can lead to failure of the whole Stack.Figure 2: Conventional PEM Stack ArchitectureThe combination of complex systems architecture, sophisticated manufacturing processes and the currentmaterials used is costly. This results in the high cost of current PEM fuel cells, estimated at several thousanddollars per output kW, split between component and assembly costs. It is ITM’s belief that this high cost,compared with petrol engines, is a major factor that has limited the uptake of the technology.13

Furthermore, the Directors consider that this unit cost is not likely to be signi¢cantly reduced by economiesof large-scale manufacture. This was highlighted in a 2001 presentation by Dr Peter Teagan of Arthur DLittle (Grove Fuel Cell Conference) who stated that:‘‘. . . increased production alone will not however, lead to acceptable cost structures if the basictechnology platforms are inherently costly due to some combination of the extensive use of costlymaterials, complex systems architectures andsophisticated manufacturing processes’’.Existing costs are high due to:. high cost input materials including £uorinated membrane materials and noble metal catalysts;. complex, high precision engineering in both the manufacture of the cell components and theirassembly; and. complex assembly of cells into useable Stacks.Other major factors restricting the uptake of fuel cells are the availability and the cost of high purityhydrogen, normally preferred as the fuel. At present, most hydrogen is made by processing oil or natural gas.The alternative involves the use of an electrolyser, which is e¡ectively a ‘‘reverse’’ fuel cell which takeselectricity and water and produces hydrogen and oxygen. For similar reasons, costs of production of PEMelectrolysers are high and estimated to be in excess of $1,000 per input kW.ITM’s technology addresses the principal cost elements set out above and therefore has application both to theprovision of hydrogen fuel by electrolysis and its re-conversion in a SPE fuel cell.6. ITM’s Fuel Cell SolutionITM has made signi¢cant advances in SPE fuel cell technology. Research and development has successfullyconcentrated on three main areas:. the creation of a new class of low cost, hydrocarbon based, ionically conductive, hydrophilic polymermaterials which can be based upon either acid or alkaline chemistries, thus potentially increasing thechoice of catalyst;. a process by which these materials can be employed in the production of MEAs, shaped fuel cells,£exible fuel cells and entire Stacks; and. the application of these materials and processes to the manufacture of low cost electrolysers forhydrogen production.An advantage of the ITM materials is that they can be introduced into the cell(s) during production in aliquid form so that they £ow into the intricate geometry of the cell structure. The liquid is then polymerised insitu to form a solid polymer membrane.The technology enables ITM to produce a CISTACK 1 Stack, which is a Stack containing a number ofindividual MEAs which may include the gas passages cast in situ, thus avoiding the need for a conventionalmanifold.The core technology is protected by UK Patent No. 2380055 (and equivalent European, Eurasian and othernational applications).(i) Materials. the polymers are made from widely available and low cost hydrocarbon materials;. the polymers have higher ionic conductivity than a per£uorinated polymer used in state-of-the-artPEM fuel cells;. the membrane o¡ers the potential to achieve a lower environmental impact over its life cycle ascompared with current materials containing £uorine. This may allow easier extraction and re-cycling ofthe high cost platinum catalysts;. the polymer is inherently hydrophilic and thus has an a⁄nity for water which reduces the need tomaintain fuel gas hydration and the possibility of MEA failure by drying and ‘‘burn out’’; and. the polymers can be formulated to make either acid or alkaline membranes. Because both acid oralkaline membranes can be formulated, ITM prefers the more general name SPE instead of PEM.14

(ii) Process and Cell ArchitectureThe technology allows £exibility in design: the cells could be manufactured in many shapes or sizes and couldbe literally £exible if required for portable or vibration resistant applications.A signi¢cant factor a¡ecting the e⁄ciency of a conventional PEM fuel cell is the contact made at a molecularlevel between the membrane, the catalyst electrode and the fuel. An important innovation in the ITMtechnology is the ability to introduce the ‘‘membrane’’ as a liquid for later polymerisation to an SPE (acid oralkaline as necessary) while in situ. This technique allows for:. excellent contact to be made between the catalyst electrode and the polymer;. the sealing of gas £ow paths as a consequence of the introduction of the SPE precursor liquid;. Stacks of individual MEAs to be processed simultaneously; and. the casting of gas distribution passages within the SPE material itself.Figure 3: ITM’s CISTACK 1 Stack In-Situ Production Integral Membrane/Electrode Stack FabricationThe process method also enables SPE materials to be cast to ¢t any suitable moulding cavity meaning thatthere is considerable scope to the shape of the membrane. This should be particularly valuable in portableappliances such as mobile phones, laptops, military and other ¢eld applications where there is a need forlightweight individual power packs.15

(iii) Fuel Cell Stack ProductionThe ITM manufacturing process can also be applied to Stack manufacture so that production may beundertaken in a simpli¢ed process thereby avoiding the high cost of complex conventional MEA Stackassembly. A Stack can be produced using the in situ process as illustrated below.Figure 4: ITM in situ manufacturing process illustrationA basic ITM CISTACK Õ Stack is depicted below. The ionomer is ITM’s liquid monomer material, which isinjected into a mould and polymerised in situ. The casting is then removed leaving space for the hydrogenand oxygen manifolds that fuel ITM’s CISTACK Õ Stack. The electrical connectors attach to the catalystlayer for each MEA and collect the electricity generated. The exhaust represents the £ow of unused gases,and as with conventional PEM fuel cell designs, these unused gases can be recycled.Figures 5: ITM CISTACK Õ Stack16

Figure 6: Photograph of ITM fuel cell StackReaders are referred to the independent technical due diligence report in Part III(A) of this document. Thereport was commissioned by Durlacher and was prepared by Professor Derek Pletcher and HeatherHaydock. Professor Derek Pletcher is an expert in the ¢eld of electrochemistry and electrochemicaltechnology (including fuel cells), while Heather Haydock is a principal consultant for Future EnergySolutions and has 13 years’ experience in transport and energy technology assessment and policy support.7. Existing Electrolyser TechnologyWater electrolysis to produce gaseous hydrogen and oxygen is a long-established process. The waterelectrolyser essentially takes in pure water and DC electricity and outputs hydrogen and oxygen: it is thereverse of a hydrogen fuel cell. Electrolyser technology may be implemented at a variety of scales whereverelectricity is available.There are presently two principal types of commercial electrolyser:. a device based upon a circulating liquid electrolyte, normally alkaline. These systems are well suited tolarge central production requirements and in alkaline form achieve high e⁄ciencies, approaching90 per cent. They are, however, costly and being a mature technology the potential for signi¢cant costreduction would appear to be small. The output gas is typically only 99.8 per cent. pure hydrogen; and. a PEM device, which is normally constructed in a very similar way to that of a PEM fuel cell. For thisreason, £uorocarbon-based ionomers dominate most designs of PEM electrolyser. PEM devices canoperate at much higher current densities (1-2 A/cm 2 ) than alkaline electrolysers, with conversione⁄ciencies ranging from 50^90 per cent., but cannot yet achieve high e⁄ciencies at high currentdensities. PEM devices produce hydrogen at very high purity (typically 99.999 per cent.) and can bemade in a range of scales, but as in the case of the PEM fuel cell the cost of conventional membranebased systems appears to be uncommercial other than for niche (mainly military) applications.8. ITM’s Electrolyser SolutionThe material content and production methods used in an SPE electrolyser are very similar to those employedin an SPE fuel cell, and ITM’s approach may be summarised as:. replacement of the membrane material (normally per£uorinated membrane) with a low costhydrocarbon hydrophilic material;. replacement of the complex and cumbersome discrete cell and cell Stack production process by theITM in situ process as described above; and17

. further development of the ITM patented ‘‘alkaline’’ hydrophilic membrane material, with theobjective of facilitating the use of non-platinum catalyst systems.ITM has recently constructed a trial Stack and operated it as a 70W electrolyser. In addition, the ITMmaterial has been operated at a current density in excess of 1A/cm 2 ,acurrent density comparable with thatused in PEM electrolyser systems using a state-of-the-art per£uorinated membrane.Readers are referred to the independent technical due diligence report in Part III(B) of this document. Thereport was commissioned by Durlacher and was prepared by Professor Marcus Newborough, whoseexpertise includes micro combined heat and power systems, electrolysers and combined electrolyser/fuel-cellsystems, demand-side management in the electricity sector, and intelligent low-carbon homes. He has beenprincipal investigator of over 30 research contracts and has published in excess of 60 academic papers.9. Intellectual Property RightsITM’s patent attorneys have reported on the ITM intellectual property strategy and portfolio. The grantingof British patent No. 2380055 resulted from the application made on 7 September 2001. The patent coversITM’s core technology: an MEA comprising electrodes and ITM’s membrane (either acid or alkaline) andITM’s in situ process of MEA manufacture. Equivalent applications have been made in the US and, via thePCT process, in Australia, Canada, China, India, Japan, South Korea, Mexico, New Zealand, South Africaand at the European Patent O⁄ce and the Eurasian Patent O⁄ce. The international search report preparedby the European Patent O⁄ce as part of the PCT process only revealed prior art of background relevanceand none of direct relevance to the applications. Your attention is, however, drawn to the risk factors set outin Part II of this document which contains certain speci¢c information about a United States patent held by athird party relating to particular polymer compositions.Although it has not been raised by any patent o⁄ce, ITM Power is aware that certain elements of theinvention covered by UK Patent 2380055 were described publicly, inter alia, atthe 5th Grove Fuel CellSymposium in 1997. This disclosure is described in the patent speci¢cation and the corresponding PCTapplication and ITM has been advised that the disclosure did not provide su⁄cient information to render theUK patent or its foreign equivalents invalid.The position regarding intellectual property will continue to be re-assessed at regular intervals and in closeconsultation with patent attorneys and solicitors. Patent protection will continue to be an essential aspect ofthe Group’s intellectual property policy. Filings have been made relating to the use of ITM’s core technologyas an electrolyser.It is anticipated that the applications for further patents covering other aspects of the materials and processeswill be made. In addition, it is anticipated that the intellectual property will continue to be developed inrelation to speci¢c applications of the technology. This intellectual property is expected to includemanufacturing process patents deriving from the development of prototypes. Where this is developed incollaboration with a partner, ITM intends where possible to retain su⁄cient intellectual property rights toallow it to take advantage of signi¢cant commercial opportunities.ITM has two trade mark registrations in the UK for CISTACK Õ and CMEA Õ , both in class 9 covering,inter alia, fuel cells and electrolysers.10. Business ModelThe main focus of the business strategy is in developing ITM technology so that the Group can become aninnovative solution provider for low cost fuel cells and electrolysers. Concentrating on achieving improvedoutput and e⁄ciency should result in a variety of cells and Stacks, which should be suitable for deployment ina wide range of products including, for example, portable power requirements (e.g. laptops, mobile phones),domestic power plants, UPS systems, distributed (non-grid) power, motor cars and other forms of transport.ITM intends to build income streams from a variety of sources as the advantages of ITM systems arerecognised. ITM does not intend to become a large scale manufacturer but will seek to join industry partnersand OEMs to deliver low cost solutions, although there may be occasions where low volume high marginproduction would be undertaken.It is therefore envisaged that revenues will primarily be generated via four main avenues:. joint ventures;. licensing;18

. grant funding; and. niche manufacturing opportunities.The Directors believe that because ITM possesses intellectual property in both the material and productionareas, it is well placed to position itself at many stages in the existing fuel cell and electrolyser industries.ITM proposes to develop electrolysers able to provide for the fuel requirements of the Group’s fuel cells. Thisis expected to enable ITM to o¡er a ‘‘self-contained’’ route to commercialisation of both technologies.11. DirectorsStephen Leigh Massey (age 46) joined the board of ITM as non-executive chairman in February 2004. Priorto joining ITM, he was chairman and chief executive o⁄cer of Prudential-Bache International Ltd, asubsidiary of Prudential Securities Group Inc., a major global ¢nancial services organisation. Mr Masseywas a director of Prudential Securities Group Inc. and responsible for its activities outside the US.Mr Massey is also a founding director of Harvington Properties Ltd (since 1984) and is currently chairmanof Eden Group Plc, a City based ¢nancial services organisation. He has a degree in Politics, Philosophy andEconomics from Oxford University.Francis James Heathcote (age 47) joined the board of ITM as a non-executive director in March 2002 andwas appointed chief executive o⁄cer in May 2003. Mr Heathcote is a chartered accountant with extensiveexperience of global capital markets and the hydrogen economy. He was a senior vice president of DrexelBurnham Lambert and executive vice president of Prudential-Bache Securities (U.K.) Inc. before movinginto fund management and founding the Katalyst Hydrogen Fund. The fund specialised in investments inhydrogen technologies.Dr Donald James Highgate (age 63) co-founded ITM and serves as research director. Dr Highgate is anexpert in the area of hydrophilic polymers. He combined a consultancy activity with a successful commercialcareer in the contact lens industry. He continued as a consultant physicist in the development of hydrophilicmaterials for use in biomedical systems including intra-ocular lenses and other medical products forcommercial organisations. Until founding ITM he was Visiting Director of Studies in the Department ofApplied Energy at Cran¢eld University, and Visiting Senior Research Fellow at the University of Surrey.Dr Highgate has been involved in fuel cell research since 1995.Dr Jonathan Anthony Lloyd (age 57) co-founded ITM and serves as engineering director. Dr Lloyd is amechanical engineer with considerable industrial and consultancy experience with Babcock, Vickers andPerkins Engines. In 1995 he began collaborating with Dr Highgate at Cran¢eld University. He is nowresponsible for the engineering development of hydrophilic polymer applications. As engineering director hewill continue to be responsible for design and prototype production, including liaising with academicinstitutions where he has a number of contacts.John Alan David Wreford (age 62) co-founded ITM and serves as ¢nance director. Mr Wreford is achartered accountant with considerable professional and commercial experience. He worked for severalyears with international accountants KPMG before becoming ¢nance director of The Beeson Group, whichlater became part of Hillsdown Holdings. He was co-founder and managing director of Titus¢eld Ltd, a startup company backed by venture capitalists 3i. It is now considered a leader in its sector involved in developingand manufacturing food ingredients sold to UK, EC and other international food corporations. Hisconsultancy roles have included work with Stork Diesel in the Netherlands, and Phillips Telecoms.Charles Gervas Adrian Steele (age 61) joined the board of ITM in March 2002 as a non-executive director. Aquali¢ed solicitor, Mr Steele has been actively involved in venture capital investment for a number of years,and has considerable experience in developing start-up companies. He was co-founder and chairman ofseveral companies including the Aspect Group of Companies and Sinclair International Ltd. He is currentlychairman of Prospero Ltd. Previously, Mr Steele founded and became senior partner of Steele & Co, asolicitors’ practice specialising in company and commercial law.Peter Kendal Hargreaves (age 57) joined the board of ITM in February 2004 as a non-executive director.After qualifying as a chartered accountant he was employed by KPMG, Unisys and Whitbread andCompany Limited. In 1981 he founded the national investment brokerage Hargreaves Lansdown PLC wherehe remains as chief executive o⁄cer.19

12. Corporate GovernanceIt is the Board’s intention, that, in so far as it is reasonably practicable, it will comply with the CombinedCode prepared by the Committee on Corporate Governance and which is appended to the Listing Rules ofthe UK Listing Authority, as amended from time to time. Where full compliance is not appropriate due tothe size of the Group, the Board will have regard to guidance issued by the Quoted Companies Alliance.The Board has established an audit committee, a remuneration committee and a nomination committee toeach of which duties and responsibilities have been formally delegated. Each committee is chaired by StephenMassey who is assisted by one executive and one non-executive director.Following Admission, the Board will consider further appointments of non-executive directors withexperience of particular relevance to the Company.13. Details of the PlacingAssuming Maximum Subscription the Placing Shares will represent approximately 21.9 per cent. of theCompany’s issued share capital and approximately 16.4 per cent. on the basis of Minimum Subscription. ThePlacing Shares are being issued by the Company to raise not less than »7,000,000, and up to »10,000,000prior to expenses.Pursuant to the Placing Agreement, Durlacher has conditionally agreed to use its reasonable endeavours toprocure Placees for the Placing Shares at the Placing Price. As at the date of this document Durlacher hasreceived ¢rm commitments from Placees to subscribe for Placing Shares in an amount equal to the MinimumSubscription subject, inter alia, toAdmission. The Placing Shares are being placed by Durlacher, acting asthe Company’s agent, with institutional and other investors. The Placing is not underwritten and isconditional, inter alia, upon:. the Placing Agreement becoming unconditional and not having been terminated in accordance with itsterms prior to Admission; and. Admission becoming e¡ective not later than 11 June 2004, or such later date as Durlacher and theCompany may agree, being not later than 30 June 2004.Application will be made to the London Stock Exchange for the issued share capital of the Company to beadmitted to trading on AIM. Admission is expected to become e¡ective and dealings in the Ordinary Sharesare expected to commence on 11 June 2004. No temporary documents of title will be issued.Further details of the Placing Agreement are set out in paragraph 11 of Part VI of this document.14. Reasons for the Admission, the Placing and use of ProceedsThe Directors believe that the Admission will raise the status and market pro¢le of the Group, promotingawareness of ITM’s proprietary technology and strengthen the Group’s ability to secure licensingagreements for its technology.In addition, the Directors believe that the Admission will provide liquidity and a value for the Group’s equitywhich, in conjunction with the Share Options, will help the Group to continue to attract and motivate highcalibre employees.It is intended that the net proceeds available to the Company from the Placing will be used to provideadditional working capital to the Group for the protection of its IP, the development of the Group’s productsand technology, the recruitment of additional sta¡ in key areas and the provision of improved facilities.20

15. Financial Results, Current Trading and ProspectsA summary of the trading record of ITM Fuel Cells for the three accounting periods ended 30 April 2001,30 April 2002, 30 April 2003 and the audited non statutory ¢nancial statements for the eight months ended31 December 2003, which has been extracted from the accountants’ report on the Group set out in Part IV ofthis document is set out below:Year ended30 April2001*»Year ended30 April2002»Year ended30 April2003»8monthsto31 December2003»Administrative expenses ö (96,276) (691,695) (586,312)Operating loss ö (96,276) (681,886) (424,527)Loss on ordinary activities before taxation ö (88,850) (648,648) (415,693)Loss on ordinary activities after taxation ö (88,850) (566,212) (382,498)*Represents the period from incorporation (17 April 2000) to 30 April 2001. ITM commenced operations on 6 March 2002.Further ¢nancial information and audited interim ¢nancial results of ITM Fuel Cells are set out in Part IV ofthis document covering the three ¢nancial years ended 30 April 2003 and the audited interim ¢nancial resultsfor the eight months ended 31 December 2003. In addition an unaudited pro forma statement of net assets isset out in Part V of this document.Due to ITM’s stage in development the Group does not currently generate revenue, however ITM isreceiving grant funding from the DTI for research into alcohol based fuel cells. To date, ITM has beenfocused on research and development in its core areas enabling it to develop demonstrable prototypes tofacilitate its move to AIM.Following the Group’s fundraising and Admission, the Group intends to focus upon three core areas ofresearch and development, which, utilising its patents, the Directors intend to run in parallel, being:. development of £exible ‘‘shock resistant’’ SPE fuel cells using ITM’s materials and in situmanufacturing process, with power outputs of 20W by June 2005;. development of rigid SPE fuel cells using ITM’s materials and traditional fuel cell manufacturingprocess with a power output of 250W by December 2005; and. development of an electrolyser with a 250W input power rating by December 2005 and 500W inputpower rating by June 2006.Subsequently, ITM anticipates that from these three programmes, application-speci¢c prototypes will bedeveloped. These prototypes will be used as demonstration units to help secure licence agreements and jointventure programmes. The Directors hope to agree a joint venture and/or signing a licensing contract with astrategic partner within 18 months from the date of Admission.ITM has already produced and tested working but low rated laboratory examples of devices which representstarting points for two of the three targeted programme areas.16. Share OptionsThe Directors believe it is important for the success and growth of the Group to employ highly motivatedpersonnel and that equity incentives are valuable in attracting, retaining and rewarding sta¡. The Directorsintend that the potential bene¢ts of share ownership will be available to key personnel.For so long as the Company continues to be eligible to grant options under the Enterprise ManagementInitiative, the Directors intend to provide incentives to qualifying directors and employees of the Group bygranting options approved by the remuneration committee under that legislation on a case by case basis,subject to such terms and performance criteria as it considers appropriate in each case. Details of the shareoptions already granted are set out in paragraph 9 of Part VI this document.17. Dividend PolicyThe Group is at an early stage of its development and has yet to generate revenues. As such the payment ofdividends is most unlikely in the medium term.21

18. TaxationYour attention is drawn to the section headed ‘‘United Kingdom Taxation’’ set out in paragraph 14 ofPart VI of this document. If you are in any doubt regarding your tax position, you should contact yourprofessional adviser without delay.VCT and EIS statusThe Company has received provisional con¢rmation from the Inland Revenue that an investment in thePlacing Shares will be regarded as a qualifying holding for the purposes of investment by a Venture CapitalTrust.The Company has received provisional con¢rmation from the Inland Revenue that the present activities andorganisation of the Company (with regard to its status as a company quoted on AIM) will enable it to countas a qualifying company for the purposes of the EIS Rules, and the Placing Shares should be eligible shares,for the purposes of Enterprise Investment Scheme Relief.19. CRESTThe Company’s articles of association permit shares to be evidenced in uncerti¢cated form in accordancewith the CREST Regulations. In accordance with these regulations, the Board has resolved to apply toCRESTCo Limited for the title to the Ordinary Shares, in issue or to be issued, to be transferred by means ofthe CREST paperless system. CREST is a mandatory system and, subject to certain limitations, holders ofOrdinary Shares may choose to receive share certi¢cates or to hold Ordinary Shares in uncerti¢cated form.Accordingly, settlement of transactions in Ordinary Shares following Admission may take place within theCREST system.20. Lock-up UndertakingsSave for John Wreford in respect of 455,000 Ordinary Shares which are the subject of an existing option infavour of a third party, each of the Directors and Shareholder employees has given an undertaking not tosell, transfer or otherwise dispose of any Ordinary Shares or interest in Ordinary Shares held on Admissionfor a period of 12 months from the date of Admission (‘‘Lock Up Date’’) without the prior written consent ofDurlacher, providing Durlacher continues to act as the Company’s nominated adviser and broker.In addition, other holders of Ordinary Shares comprising 10.3 per cent. of the ordinary share capital atAdmission (assuming Maximum Subscription) have agreed that, providing Durlacher continues to act as theCompany’s nominated adviser and broker, they will not dispose of any Ordinary Shares in which they areinterested (or any interest therein) until the date falling 12 months after the date of Admission. Throughoutthis period Durlacher, subject to the AIM Rules, may give such Shareholders the opportunity to sell theirOrdinary Shares through Durlacher in order to satisfy investor demand for the Ordinary Shares in themarket.Furthermore, for a period of 12 months after the Lock Up Date such Shareholders and each of the Directorsand Shareholder employees have agreed not to dispose of any of their Ordinary Shares other than throughDurlacher, providing Durlacher continues to act as the Company’s nominated adviser and broker. Anydisposal permitted by Durlacher during this period by any of such Shareholders, the Directors or theShareholder employees will be made through Durlacher in such orderly manner as they reasonablydetermine.The Ordinary Shares in issue at Admission (assuming Maximum Subscription) which will be subject to suchrestrictions account for approximately 64.2 per cent. of the Company’s issued share capital. Further detailsof these lock-in arrangements are contained in paragraphs 11.2 and 11.5 of Part VI of this document.21. Additional InformationYour attention if drawn to Parts II to VI of this document which provide additional information on theCompany.22

PART IIRISK FACTORSAn investment in Ordinary Shares involves a high degree or risk. Accordingly, prospective investors inOrdinary Shares should consider the speci¢c risk factors set out below in additional to the other informationcontained in this document before investing in Ordinary Shares. The Directors consider the following risks andother factors to be the most signi¢cant to potential investors in the Company, but the risks listed do notnecessarily comprise all those associated with an investment in the Company and are not set out in anyparticular order of priority. Additional risks and uncertainties not presently known to the Directors may alsohave an adverse a¡ect on the Group’s business.The Group’s business, ¢nancial condition, capital resources, results or future operations could be materiallyadversely a¡ected by the occurrence of any of the risks described below. In such case, the market price of theOrdinary Shares could decline due to any of these risks and investors could lose all or part of their investment.Potential Investors are accordingly advised to consult a person authorised under the Financial Services andMarkets Act 2000 who specialises in advising in investments of this kind before making any investmentdecisions.The Group may not be able to achieve commercialisation ofitsproducts in the timetable it anticipates, orat all.ITM Power cannot guarantee that the Group will be able to develop commercially viable fuel cell andelectrolyser products in the timetable anticipated, or at all. The commercialisation of the Group’s fuel celland electrolyser products requires substantial technological advances to improve the e⁄ciency, functionality,reliability, cost and performance of these products and to develop commercially viable processes for theseproducts. Speci¢c examples are given in the Reports set out in Part III of this document. ITM Power cannotguarantee that the Group will be able to develop the technology necessary for commercialisation of its fuelcell and electrolyser products, or that it will be able to acquire or license the required technology from thirdparties. Developing the technology for commercialisation requires substantial capital, and ITM Powercannot provide any assurance that the Group will be able to generate or secure su⁄cient funding on termsacceptable to ITM Power to pursue the Group’s commercialisation plans and the possibility that the Groupmay therefore have to seek further equity ¢nance in the medium term cannot therefore be discounted. Inaddition, before the Group releases any product to market, it needs to subject it to numerous ¢eld tests.These ¢eld tests may encounter problems and delays for a number of reasons, many of which are beyond theGroup’s control. If these ¢eld tests reveal technical defects or reveal that the Group’s products do not meetperformance goals, including useful life and reliability, the commercialisation schedule could be delayed, andpotential purchasers, licensees or joint venture partners may decline to purchase or use the Group’s systemsand products.The commercialisation of the Group’s fuel cell and electrolyser products also depends upon the abilitysigni¢cantly to reduce the costs of these systems and products, since they are currently substantially moreexpensive than systems and products based on existing technologies, such as the internal combustion engine.ITM Power cannot provide any assurance that the Group will be able su⁄ciently to reduce the cost of thesesystems and products without reducing their performance, reliability and longevity, which would adverselya¡ect purchasers’, licensees’ or joint venture partners’ willingness to buy or use the systems and products.The Group has incurred, and expects to continue to incur, substantial losses.The Group has incurred substantial losses to date and expects losses and cash expenditure to continue until itachieves commercialisation and begins licensing and entering into joint ventures in respect of its fuel cell andelectrolyser products.Amass market for the Group’s products may never develop or may take longer to develop than anticipated.The Group’s fuel cell and electrolyser products represent emerging markets, and the Group does not knowwhether end-users will want to use them. The development of a mass market for the Group’s fuel cell andelectrolyser products may be a¡ected by many factors, some of which are beyond its control, including theemergence of newer, more competitive technologies and products, the future cost of fuels used by theGroup’s systems, regulatory requirements, consumer perceptions of the safety of its products and relatedfuels, and consumer reluctance to buy a new product.23

If a mass market fails to develop or develops more slowly than anticipated, the Group may be unable torecover the losses it will have incurred in the development of its products and may never achieve pro¢tability.In addition, ITM Power cannot guarantee that the Group will continue to develop, manufacture or marketits products or components if market conditions do not support the continuation of the product orcomponent.The Group is dependent upon external OEMs to purchase certain of its products.To be commercially useful, certain of the Group’s fuel cell and electrolyser products will need to beintegrated into products manufactured by OEMs. There is no guarantee that OEMs will manufactureappropriate products or, if they do manufacture such products, that they will choose to use ITM fuel cell andelectrolyser products. Any integration, design, manufacturing or marketing problems encountered by OEMscould adversely a¡ect the market for ITM fuel cell and electrolyser products and the Group’s ¢nancialresults.The Group depends on its intellectual property and its failuretoprotect that intellectual property couldadversely a¡ect the Group’s future growth and success.ITM Power cannot be certain that the steps ITM has taken to protect its intellectual property rights will beadequate or that third parties will not infringe its rights. The patent applications are all at an early stage ofprosecution. At this stage, except in relation to patents already granted, it is not possible to statecategorically that patent protection will be obtained. The ability to obtain patents in the fuel cell andelectrolyser industries involves complex legal and factual questions. As a result, patents may not be grantedunder pending or future applications, patents may not be su⁄ciently broad in scope to exclude competitors,or patents owned or obtained by competitors may adversely a¡ect the Group’s business. As the patentapplication process is lengthy, there may be unpublished patent applications pending of which the Group isunaware which could a¡ect its business by rendering ITM’s own patents invalid or by blocking the Group’suse of its technology.Although it has not been raised by any patent o⁄ce, ITM Power is aware that certain elements of theinvention covered by UK Patent 2380055 were described publicly, inter alia, atthe 5th Grove Fuel CellSymposium in 1997. This disclosure is described in the patent speci¢cation and the corresponding PCTapplication and ITM has been advised that the disclosure did not provide su⁄cient information to render theUK patent or its foreign equivalents invalid.ITM’s patent attorneys are quali¢ed to advise on European patents. Where searches have identi¢ed patentsor applications of potential relevance which, in Europe, ITM does not infringe there may be equivalent USpatents or applications which, although drafted with the same or similar scope, would require the opinion ofaUSpatent attorney for quali¢ed advice in that regard. No such advice has been sought or obtained by ITM.The Group may be involved in intellectual property litigation that causes it to incur signi¢cant expenses orprevents it from developing or selling its products.The Group may become subject to lawsuits in which it is alleged that ITM has infringed the intellectualproperty rights of others or commence lawsuits against others who the Group believe are infringing ITM’srights. The Group’s involvement in intellectual property litigation could result in signi¢cant expense,adversely a¡ecting the development or sales of the challenged product or intellectual property and divertingthe e¡orts of technical and management personnel, whether or not such litigation is resolved in the Group’sfavour. In the event of an adverse outcome as a defendant in any such litigation, the Group may, amongother things, be required to:. pay substantial damages;. cease the development, manufacture, use, sale or importation of products that infringe upon otherpatented intellectual property;. expend signi¢cant resources to develop or acquire non-infringing intellectual property;. discontinue processes incorporating infringing technology; or. obtain licenses to the infringed intellectual property.There is no assurance that the Group would be successful in any development or acquisition of noninfringingintellectual property or that licences to the infringed intellectual property would be available uponreasonable terms. Any such development, acquisition or licence could require the expenditure of substantialtime and other resources and could delay the commercialisation of the Group’s products and have a materialadverse e¡ect on its business and ¢nancial results.24

The Directors are aware of a United States patent held by a third party relating to particular polymercompositions. ITM has a wide range of potential polymer formulations. Based on the Directors’ currentunderstanding of the structure of ITM’s polymers, the Directors believe that some, if not all, of thesepolymers are outside the claims of the patent. The choice of polymers eventually determined to be mostappropriate for exploitation in the United States will need to be made considering the broadest valid claimsof the patent and the availability of any licence.Competing power technologies.As fuel cell and electrolyser products have the potential to replace existing power products, competition forthe Group’s products will come from current power technologies, from improvements to current powertechnologies and from new alternative power technologies, including other types of fuel cells andelectrolysers or from other self-contained energy systems such as sono-fusion. Each of the Group’s targetmarkets is currently serviced by existing manufacturers with existing customers and suppliers. Thesemanufacturers use proven and widely accepted technologies such as internal combustion engines andturbines as well as coal, oil and nuclear powered generators.Additionally, there are competitors working on developing technologies other than fuel cells (such asadvanced batteries, super-capacitors and hybrid battery/internal combustion engines) in each of the Group’stargeted markets. Some of these technologies may be as capable of ful¢lling existing and proposed regulatoryrequirements as the ITM fuel cell.Within each of the ITM fuel cell and electrolysers products markets, we also have a large number ofcompetitors. Around the world, corporations, national laboratories and universities are actively engaged inthe development and manufacture of fuel cell and electrolysers products and components. Each of thesecompetitors has the potential to capture market share in each of the Group’s target markets.Emerging or entirely new technologies, such as ‘‘cold fusion’’, may obviate the need for both existingmethods of energy storage and electrical power generation and those proposed for the hydrogen economysuch as electrolysers and fuel cells.Many of the Group’s competitors have ¢nancial resources, customer bases, businesses or other resources,which give them signi¢cant competitive advantages over the Group.The Group could lose or fail to attract the personnel necessary to run its business.The Group’s success depends in large part on its ability to attract and retain key management, engineering,scienti¢c, manufacturing and operating personnel. As the Group expands it will require more skilledpersonnel. Recruiting personnel for the fuel cell and electrolyser industries is highly competitive. There is noguarantee that the Group will be able to attract and retain quali¢ed executive, managerial and technicalpersonnel needed for its business. Failure to attract or retain quali¢ed personnel could have a materialadverse e¡ect on the Group’s business.The Group could be liable for environmental damages resulting from its research, development ormanufacturing operations.The Group’s business exposes it to the risk of harmful substances escaping into the environment, resulting inpersonal injury or loss of life, damage to or destruction of property and natural resource damage. Dependingon the nature of the claim, the Group’s current insurance policies may not adequately reimburse it for costsincurred in settling environmental damage claims, and in some instances, it may not be reimbursed at all. TheGroup’s business is subject to numerous laws and regulations that govern environmental protection andhuman health and safety. These laws and regulations have changed frequently in the past and it is reasonableto expect additional and more stringent changes in the future. The Group’s operations may not comply withfuture laws and regulations, and the Group may be required to make signi¢cant unanticipated capital andoperating expenditures. If the Group fails to comply with applicable environmental laws and regulations,governmental authorities may seek to impose ¢nes and penalties on it or to revoke or deny the issuance orrenewal of operating permits and private parties may seek damages from us. Under those circumstances, theGroup might be required to curtail or cease operations, conduct site remediation or other corrective action,or pay substantial damage claims.ITM products use inherently dangerous, £ammable fuels,whichcould subject the Group’s business to productliability claims.The Group’s business exposes it to potential product liability claims that are inherent in products that usehydrogen. ITM electrolysers generate hydrogen from water. Hydrogen is a £ammable gas and therefore apotentially dangerous product. ITM fuel cells use hydrogen or alcohol which are £ammable and therefore25

potentially dangerous. Any accidents involving the Group’s products or other hydrogen-based productscould materially impede widespread market acceptance and demand for the Group’s fuel cells andelectrolyser products. In addition, the Group may be held responsible for damages beyond the scope of itsinsurance coverage. The Group also cannot predict whether it will be able to maintain insurance coverage onacceptable terms.Regulatory changeThe Group’s strategy has been formulated in the light of the current regulatory and legal environment andlikely future changes. The regulatory and legal environment may change and this change may have a materialadverse impact upon the Group’s business and prospects.26

PART III ATECHNICAL DUE DILIGENCE REPORT ON FUEL CELLSTechnical Due DiligenceReport on ITM Power PlcDevelopment ProgrammeAreportproduced by Future Energy Solutionsand the Electrochemical Consultancy LtdFebruary 200427

Executive SummaryThis report summarises an assessment of the novelty, maturity and attractiveness of the fuel cell technologyunder development by ITM Fuel Cells Limited (‘‘ITM’’) by independent experts from Future EnergySolutions and the Electrochemical Consultancy Ltd. The work has involved a review of relevant literature,interviews with key members of itm’s management team, a tour of facilities at itm, a meeting with itm’spatent agent and a review of relevant documents.The report provides an introduction to present fuel cell technology and assesses the novelty of itm’stechnologies, its progress to date and the challenges for the future. It also addresses intellectual propertyissues.The potential markets for proton exchange membrane (PEM) fuel cells are very large as they are seen as ahighly promising technology for stationary power generation, transport and portable power applications.However, PEM fuel cells cannot currently be manufactured at a su⁄ciently low price for commercialapplications, largely because of the high price of the membrane electrode assembly (MEA). The mainchallenges for fuel cell developers are to signi¢cantly reduce the costs of membranes and electrocatalysts, andimprove fuel cell performance.itm has a UK patent that covers a family of novel polymer membrane materials and a novel method forproducing an MEA. To the best of the authors’ knowledge, this patent has been subject to all the necessaryin-depth checks by the British and European patent o⁄ces and is robust.itm’s membrane polymer materials are distinctly di¡erent from those commercially available. Potentially,their membranes are signi¢cantly cheaper than those presently used in PEM fuel cells and the polymers haveproperties that suggest that they might ultimately give enhanced performance in fuel cell conditions.However, itm is not yet in a position to market or exploit membranes. The techniques for polymerisationneed to be optimised, thinner membranes need to be produced, the in£uence of polymer compositions onperformance needs to be investigated and properties/performance need to be de¢ned in a much wider rangeof conditions.itm also has some interesting and novel concepts related to the fabrication of both MEAs and fuel cell stacks.These have the objective of simplifying the manufacturing process and thereby reducing the cost. MEAs havebeen produced and tested and show reasonable performance in fuel cells. Once again, further laboratorywork is necessary to bring the performance up to industry expectations, to reduce the thickness of thepolymer in the MEA and to decrease the precious metal catalyst loadings. The procedure for fabricatingcomplete fuel cell stacks has been demonstrated with some small laboratory units but the development is notyet at a stage where its potential or cost can be assessed.Overall, the authors believe that itm has technology that could impact positively the development ofeconomic fuel cells. Their programmes are all at a relatively early stage and substantial laboratory workneeds to be concluded successfully before any product can be brought to market. To maximise the chances ofsuccess, the development programme should be selective and targeted on speci¢c market goals.28

Contents1. Introduction1.1 Aims & scope1.2 About the authors2. Fuel Cells ^ The Present Situation2.1 Current technology2.2 Water electrolysers3. Polymer Technology3.1 Novelty of the itm polymers3.2 Progress to date on polymer technology3.3 Challenges for the future polymer technology4. Manufacturing Technology4.1 Novelty of the itm MEA/stack manufacturing technology4.2 Progress to date on manufacturing technology4.3 Challenges for the future on manufacturing technology5. Intellectual Property6. Conclusions7. Glossary and Further Information7.1 Glossary of terms7.2 Further information29

1. IntroductionThis report provides an assessment of the novelty, maturity and attractiveness of itm’s fuel cell technology byindependent experts from Future Energy Solutions and the Electrochemical Consultancy Ltd.1.1 Aims & scopeThe overall aim of this technical due diligence report is to assess the technical claims made by itm Ltd. Thescope was extended to investigate all the proprietary fuel cell technology itm has acquired and developed todate and to consider the speci¢c advantages or disadvantages for commercialisation within fuel cellapplications.The assessment itself has drawn upon the authors’ knowledge of fuel cell technologies and markets andincluded a review of the relevant literature, interviews with key members of itm’s management team, a tourof facilities at itm. The review team were shown an itm Powerpoint presentation, technical documents, patentdocuments, a patent review and a ¢nal report of a Research Council contract carried out at the University ofSurrey.This report comprises six sections in addition to this introduction. Section 2 provides an introduction topresent fuel cell technology. Section 3 addresses the novelty of itm’s polymer technology, its progress to dateand the challenges for the future. Section 4 addresses the novelty of itm’s fuel cell manufacturing technology,its progress to date and the challenges for the future. Section 5 considers intellectual property issues.Section 6 summarises the main conclusions from the assessment. Finally, Section 7 provides a glossary andlists sources of information on fuel cells.1.2 About the authorsHeather Haydock of Future Energy Solutions and Derek Pletcher of the Electrochemical Consultancy Ltdhave undertaken this assessment.Heather HaydockHeather is an experienced consultant and project manager with 13 years’ experience in transport and energytechnology assessment and policy support. Before moving into her current role as Principal Consultant forTechnology Policy within Future Energy Solutions, a trading name of AEA Technology Plc, Heather spentsix years managing the fuel cell programme for the UK Department of Trade and Industry. She maintains akeen interest in fuel cell technology and is Secretary to the International Energy Agency (IEA) AdvancedFuel Cells Executive Committee. Heather has provided fuel cell consultancy support to the UK Government,European Commission, US Department of Energy, IEA and other clients. She has a degree in ChemicalEngineering and an MBA.Future Energy Solutions provides independent assessments of new and renewable energy technologies topublic and private sector customers, including ¢nancing organisations. It also has a long history of providingsupport to central Government, particularly through the DTI Renewable Energy R&D Programme. Thisprogramme has supported the research and development of fuel cells since 1991, including basic research,component development and systems studies.Derek PletcherDerek Pletcher has been a member of the Electrochemistry Group in the University of Southampton since1967, leading research projects in electrochemistry and electrochemical technology (including fuel cells). Hehas been a Professor since 1994 and is currently Head of the Electrochemistry and Surface Science Groupcontaining approximately 50 people. He is the author of more than 300 papers in scienti¢c journals and fourbooks (including Industrial Electrochemistry and A First Course in Ion permeable Membranes). TheElectrochemical Consultancy Ltd (formed in 1989) is jointly owned by Gill and Derek Pletcher and throughthis Company, Derek has substantial experience of consulting for clients in the UK, USA and Europe (mostrecently, France and Holland); recent topics include batteries, membrane technology, sensors,electrosynthesis and nanotechnology. The Company has also organised in-house courses for companies andinternational conferences in Europe and USA on electrochemical topics including fuel cells.2. Fuel Cells ^ The Present SituationIt is now accepted that fuel cells are paramount to securing an infrastructure for sustainable energy, enablingsmaller and lighter electronic devices and permitting the development of non-polluting modes oftransportation. As a result, many government laboratories, companies and academic institutions throughout30

the world are carrying out extensive research programs. This remarkably high level of activity is readilygauged through the number of government initiatives, International Conferences, scienti¢c papers and websites devoted to fuel cells. Some useful websites in order to obtain a preliminary appreciation of the fuel cellbusiness include:www.fuelcelltoday.comwww.fuelcells.orgwww.h2fc.comwww.fuelcell.comwww.MarketResearch.comwww.nfcrc.uni.eduA further selection of sources is listed in Section 7.2.1 Current technologyFour types of fuel cells, based on di¡erent chemistries and approaches to the technology, have now reached astage of development where they are being marketed or, more commonly, operated on a trial basis on asigni¢cant scale. These are termed:. Phosphoric acid fuel cells (PAFC). Molten carbonate fuel cells (MCFC). Solid oxide fuel cells (SOFC). Proton Exchange Membrane fuel cells (PEMFC)Target applications include power generation, energy storage, vehicle traction, portable devices and militarydemands for portable/remote power.It is now widely acknowledged that PEM fuel cells have signi¢cant potential advantages in many of theseapplications because they are compact, inherently safer and operate closer to ambient temperatures. Indeed,they are probably the only viable option for portable devices and the very large transportation market.The heart of the PEM fuel cell is the MEA (membrane electrode assembly). The MEA consists of a thin ¢lmof ion conducting polymer (the membrane) coated on each side with electrocatalyst layers (the electrodes)and the goal is to provide a high area and e¡ective three phase interface between reactant gas, catalyst andpolymer electrolyte. MEAs are then contacted by current collectors and gas distribution channels to form asingle cell, see Figure 1. For the purposes of this report, the key components of the MEA are (i) themembrane (a ¢lm of ion, usually proton, conducting polymer) and (ii) the electrodes (layers of dispersedprecious metal electrocatalysts on carbon powder and binding agents).MEAs are commonly manufactured with an area up to one metre squared and further scaling is achieved byassembling a number of cells (10^100) into a single unit known as a fuel cell stack. The cells are electricallyconnected to give the required energy and power output; the electrical connection may be in series or paralleldepending whether a high voltage or high current is demanded.Figure 1: Key components of a unit PEM fuel cell.PEM fuel cells generate their electrical energy by ‘‘burning’’ a fuel with oxygen or air but, unlike thermaltechnology, the reduction of oxygen and the oxidation of the fuel occurs at spatially separated sites, the gas/electrocatalyst/polymer interfaces on the two sides of the polymer electrolyte layer. In order to achieve highrates of the two reactions (hence, high energy and power densities), e¡ective membranes and electrocatalystsare essential. Electrocatalysts are currently, and likely to remain, very expensive precious metals/alloys suchas platinum. The fuels most commonly employed for fuel cells are hydrogen and methanol with otherorganics such as formic acid reserved for specialist applications. Most scientists consider liquid fuels such asmethanol as more suited to small portable devices. Some even suggest that methanol is the more realistic fuelfor near-term transport applications, as it is more readily transported and distributed to the customer. The31

overriding disadvantage of methanol as a fuel is that it does not avoid carbon dioxide emissions. Hydrogengives the best fuel cell performance and is considered most suitable for large scale facilities with the potentialfor automobiles, buses, boats and planes, once safety, storage and distribution issues associated withhydrogen are resolved. The key advantage of hydrogen/oxygen fuel cells is that they generate power withoutpoint-of-use greenhouse gas emissions. Hydrogen can be produced from a number of sources includingelectrolysis of water and chemical processing (reforming) of hydrocarbon fuels such as natural gas ormethanol.State-of-the-art hydrogen PEM fuel cells are fabricated with Na¢on TM membranes. Na¢on TM is aper£uorinated polymer manufactured by Dupont and marketed at a current price of over $500/m 2 . Carbonpowders coated with dispersed precious metal catalyst are then formulated into an ink with solvent andbinding agent and screen printed onto the membrane to form the MEA. Current platinum metal loadings arearound 0.5 mg/cm 2 of membrane and loadings below 0.2 mg/cm 2 are routinely targeted. Such MEAs aresubstantially too expensive to be considered economic for most fuel cell applications, except premium powerand water supply for space craft. Hence, there is a clear need for both cheaper membranes and cheaperelectrocatalyst. The latter can be achieved either employing non-precious metal catalysts or decreasing thecatalyst loading.In addition, it is widely accepted that the performance of PEM fuel cells needs to be improved. Mostimportantly, even hydrogen/oxygen fuel cells deliver only about 60 per cent. of the energy predictedtheoretically. This results from inherent de¢ciencies in the chemical activity of the catalysts, especially foroxygen reduction. Another problem with the electrocatalysts is poisoning or loss of activity. This is a majorfactor in fuel cells with hydrocarbon-derived fuels and also in hydrogen fed cells if the hydrogen contains anyimpurities. Even 100 ppm carbon monoxide in the hydrogen is a serious problem and hence the operation ofthe fuel cell demands extensive puri¢cation of hydrogen from many sources.Whilst researchers have made almost no progress in identifying better catalysts, catalyst e⁄ciency is beingaddressed in several ways. A preferred approach is to increase the operating temperature from the present,60^908C, to 120^1808C. However, this rules out the use of per£uorinated polymers such as Na¢on TMbecause of loss of water and consequent loss of conductivity. Both cost considerations and the desire tooperate at higher temperatures is driving the development of alternative membrane polymers usually basedon hydrocarbon polymers and several such polymers are presently being tested.All components in fuel cells need to be made from materials that are more durable so that the operationallives of fuel cells are extended. The target for transport applications is 5000 hours operation whilst forstationary power generation applications the target will be several years of continuous operation.There are also signi¢cant issues relating to the design of PEM fuel cells stacks including current collectors,inter-cell connection, the e⁄cient distribution of gaseous reactant to all the PEM surface and both heat andwater management. To some extent, cost reduction can also be approached through new technology for thefabrication of the fuel cell components, fuel cell units and stacks. MEAs can now be mass-produced andseveral companies are involved in such innovation.The present cost of PEM fuel cells is estimated as several thousands of dollars per kW. Table 1 shows theexpected breakdown of costs of a 50 kW PEM fuel cell stack in volume manufacture, as determined by astudy for the US Department of Energy (USDOE) by TIAX (previously Arthur D Little). These ¢guresassume a catalyst loading of 0.8 mg/cm 2 platinum and a cell voltage of 0.8V at 250 mW/cm 2 . The totalpredicted cost of the stack shown in Table 1 ($182/kW) is much higher than the $50/kW target cost fortransport applications. Hence, this study con¢rms that economies of scale in the manufacturing processeswill not be su⁄cient to bridge this gap. Therefore, the development of cheaper materials and fabricationtechniques will be necessary.The membrane cost projection of $56/kW corresponds to about $100/m 2 of Na¢on TM membrane,compared to a current cost for Na¢on TM of about $500/m 2 . For transport applications, USDOE is targeting$5/kW for the membrane, which represents an order of magnitude reduction on what is possible withNa¢on TM ,even when produced on a very large scale.32

Table 1: Cost breakdown for a 50kW PEM fuel cell stack (2001 costs)ComponentCost $/kW%oftotalcostMembrane 56 1 31%Anode catalyst 43 24%Cathode catalyst 40 22%Gas di¡usion layer 14 8%Bipolar coolant 11 6%Bipolar interconnect 11 6%Other components 7 4%Total stack cost 1821 Projected cost equivalent to $100/m 2 of Na¢on TM compared to the current cost for Na¢on TM of about $500/m 2 .(Source: Tiax 2002 1 )Stack cost and performance targets for di¡erent PEM fuel cell applications are shown in Table 2. Most ofthese ¢gures are taken from USDOE programme targets. They represent what is required to entercommercial markets in direct competition with existing technologies such as internal combustion engines.We have only limited information on the cost and performance targets for fuel cells in military applicationssuch as the portable backpack application that is of interest to itm. However, it could be speculated that thecost targets for military applications would be less demanding while certain performance targets such aspower, weight, reliability and operating temperature range would be more demanding.Table 2: Cost and performance targets for PEM fuel cellsStack parameterTransport(family car)Micro-scalepowergeneration(Small hotel)Portablepower(laptop/mobile phone)Stack power (kW) 50-80 1-20 50.1Stack cost ($/kW) 45 180 Up to 5,000Stack power density (kW/litre) 1.0 0.5 Varies withStack lifetime (hours) 5,000 40,000 application(Source: USDOE ^ various presentations)It can be seen that substantial reductions in the cost of membrane, catalyst and production techniques areessential for most markets. This must be accompanied by a signi¢cant improvement in performance. Theshortcomings (as well as the advantages) of PEM fuel cells have led to very large R & D programmes fundedby both Governments (especially in the USA and Japan) and companies to address these cost issues. Therehave been large teams focused on PEM fuel innovation in National Laboratories (e.g. Los Alamos), withincompanies with potential applications (e.g. almost all the automobile companies), within componentsuppliers (e.g. Dupont, Johnson Matthey, Gore), fuel cell focused companies (e.g. Ballard, PlugPower,Lynntech) and small companies with speci¢c concepts. There have also been university groups withsigni¢cant e¡orts (e.g. Case Western Reserve University, University of Connecticut, Pennsylvania StateUniversity in the USA, Universities of Newcastle and Southampton in the UK).Despite this high level of R & D activity, problems remain with both electrocatalysts and membrane.Solutions to the problems have proven hard to de¢ne and there is still a need for new ideas, successful newmaterials and simpler fabrication techniques. Certainly, there will be substantial rewards for successful newinnovation and there are opportunities for new entrants to the business. Any one R & D Group, however,cannot expect to solve all the problems and small companies must integrate their technology into the widerfuel cell community.2.2 Water electrolysersIn a PEM fuel cell, hydrogen and oxygen are combined to give water with an output of energy. A waterelectrolyser carries out the reverse chemistry; energy is put into a cell to convert water to hydrogen andoxygen. The combination of a water electrolyser and fuel cell is a technology for energy storage; moreover,energy storage is an essential component of an electricity supply based on sustainable primary generation(wind, wave or solar) in order to bu¡er generation and the demand from consumers. Water electrolysis is1 Cost Analyses of Fuel Cell Stacks/Systems presented at 2003 Hydrogen and Fuel Cells Merit Review Meeting33

also an essential element of a hydrogen economy. While the really large markets for water electrolysers lie inthe future, there are existing markets, for example, in the chemical industry for high purity hydrogen and/oroxygen and in submarines for the supply of oxygen for breathing.For electrolysis cells, the MEA unit is usually called a SPE (solid polymer electrolyte) and SPE cells havebeen developed for water electrolysis and certain industrial processes. For example, Dupont have developeda process for the recovery of chlorine from waste hydrogen chloride from vinyl chloride and chlorinatedsolvents manufacture. Again, SPE cells are fabricated by coating a membrane with electrocatalyst layers. Inthe case of water electrolysers, however, there is a competing technology based on cells with a liquid, alkalineelectrolyte; this has the advantage that non-precious metal catalysts can be employed. A SPE waterelectrolyser has the same components as a PEM fuel cell. The dominant performance factors are cost andenergy e⁄ciency. The needs are similar, cheaper membranes and cheaper, more e⁄cient electrocatalysts.Most of the discussion above is again relevant and it is clear that new, enhanced performance componentsand new fabrication technologies would be most welcome. Several companies supply water electrolysers.3. Polymer Technology3.1 Novelty of the itm polymersThere are currently approximately a dozen companies marketing ion conducting membranes for use aselectrolytes/separators for fuel cells, electrolytic cells and electrodialysis. These membranes all have ionicgroups bonded via sidechains to a polymer backbone and by selection of the charge on these ionic groups, themembranes allow the selective transport of either cations or anions when an electric ¢eld is applied across themembrane. Such membranes are commonly classi¢ed into two types due to the nature of the polymerbackbone:. Per£uorinated ^ based on polymers with fully £uorinated backbone chains.. Hydrocarbon ^ based on polymers with hydrocarbon backbone chains.Per£uorinated membranes polymers are essentially functionalised PTFE and therefore generally morestable, both chemically and mechanically. They are also substantially more expensive than hydrocarbonpolymers, by a factor more than ten. The most common per£uorinated membranes are marketed by Dupontunder the name Na¢on TM and these are presently the standard within the fuel cell industry.There is currently substantial academic and industrial interest in the development of cheap hydrocarbonpolymers with a performance that equals or betters that of the per£uorinated membranes in fuel cellenvironments. Some of these materials are available on a trial basis. Important membrane properties includeelectrical resistance, chemical and dimensional stability, extent of hydration and the transport properties ofneutral molecules. The transport of oxygen or fuel through the polymer electrolyte in a fuel cell membranecan lead to a signi¢cant loss in fuel cell performance ^ a phenomenon known as ‘crossover’.We believe itm have developed a novel and proprietary family of ion conducting polymers with potentialapplications in fuel cells and water electrolysers. The polymers have been designed and synthesised byextending concepts used in the successful development of hydrophilic polymers now widely used in themedical ¢eld. They are hydrocarbon polymers, produced from readily available, cheap monomers and theyhave entirely di¡erent chemistry from all hydrocarbon and £uorocarbon membrane polymers presently onthe market. The control of polymer hydration is essential to the properties and performance of an ionconducting membrane; other membrane polymers are dependent on the bound ionic groups for theirhydrophilic properties. The inclusion of hydrophilic components into the itm polymer backbone (in additionto the bound ionic groups) o¡ers the possibility to control the water content independently of the ionicgroups. Certainly, it allows the production of membranes with a high water content while maintaining otheressential properties.Na¢on TM and other per£uorinated polymers do not operate well above 1008C because of loss of water. Onthe other hand, PEM fuel cell operation at 120^1808C would be bene¢cial to overall performance because ofthe improvement in catalyst activity. Several academic groups (eg. CASE, USA; University of Yamanashi,Japan) and companies (e.g. Fuma-Tech, Germany; Gore, USA; Ionomem, USA) are active in thedevelopment of membranes to operate at the higher temperatures. However, their approaches aresigni¢cantly di¡erent to that of itm and because of itm’s polymer’s unique abilities to independently controlhydration levels coupled with its ability to hold water, there are reasons to believe that the itm polymers mayshow favourable performance at the higher temperatures.34

Figure 2: Comparison of the structure of itm Power polymer and other commercially available hydrocarbonpolymers. Note the increased number of water molecules in the structure.Furthermore, itm have also synthesised a family of polymers with cationic groups and these have beenexamined as hydroxide conducting membranes. Such materials are exciting since they o¡er the possibility ofoperating fuel cells and electrolysers in alkaline conditions; this opens up the possibility to operate with nonpreciousmetal catalysts with very large cost reductions. In addition, a hydroxide conducting membrane is anessential component of direct borohydride fuel cells (a concentrated aqueous solution of sodium borohydrideis a possible replacement feed for hydrogen, avoiding the need to handle/store in£ammable hydrogen gas).In preliminary experiments, the itm hydroxide conducting polymers have shown high conductivity and somestability and are presently being tested in a DTI sponsored programme on alcohol fuel cells. Othercompanies market hydroxide-conducting polymers (e.g. Fuma-Tech, Germany; Tokuyama, Japan) but weare not aware of published data on their performance in fuel cells or water electrolysers. However, we wouldstress that the itm polymers are signi¢cantly di¡erent from these materials and membranes fabricated fromitm’s polymers could have signi¢cant advantages in fuel cells and water electrolysers.The precious metals employed as catalysts for fuel (hydrogen, methanol etc) oxidation and oxygen reductionare a major cost in all fuel cells, as shown in Section 2. There is also only a ¢nite supply of these metals. Theability to recycle exhausted catalyst is therefore highly bene¢cial. The use of hydrocarbon polymer basedmaterials o¡ers a solution ^ controlled incineration should allow destruction of the polymer and recovery ofthe precious metals. This is a much more di⁄cult and costly option with per£uorinated membranes asadditional equipment is required to remove hydrogen £uoride emissions.In summary, itm are developing an exciting, novel family of ion conducting polymers. Their chemistry issigni¢cantly di¡erent from existing materials and this could be bene¢cial to their properties in both fuel cellsand electrolysers.3.2 Progress to date on polymer technologyThe ionic polymers were initially developed during an EPSRC contract (GR/L59016) at the University ofSurrey led by Dr Don Highgate, now Technical Director of itm, and based on his earlier work on hydrophilicpolymers.Since itm took over the programme in 2002, the major e¡ort has been directed at changing the procedure forthe polymerisation step. Initially, the ionic polymers were produced using g-radiation to initiatepolymerisation. Although g-radiation is used in hospitals for sterilisation and also for sterilisation of somefood products, it requires specialised equipment and a protective environment. It also limits the rate ofproduction of polymer. Hence, itm have been de¢ning the conditions to initiate polymerisation using heatand a chemical initiator. Membranes and other structures (see Section 4) are now being produced by bothprocedures although the quality of some components fabricated using thermal polymerisation are not yet ashigh as those produced by g-radiation.Experiments to date have shown that itm proton conducting polymers can have conductivity higher thanNa¢on TM and other commercial membrane polymers. These measurements have, however, only been carriedout at 308Cwithamembrane thickness of approximately 700 mm.35

In summary, itm have demonstrated the fabrication of membranes and determined some key propertiesunder a limited range of conditions. Further laboratory work remains to be done in order to identify theoptimum polymer composition (choice and ratios of hydrophilic monomer, hydrophobic monomer, ionicmonomer, cross linker and water), to reduce membrane thickness and to determine critical properties overthe full range of conditions that could be exploited in the development of fuel cells and water electrolysers.Important membrane properties that must be de¢ned include electrical resistance, chemical and dimensionalstability, hydration and its resistance to oxygen and fuels transporting through the membrane (crossover).3.3 Challenges for the future polymer technologyFor the itm polymers to realise their full potential and maximise their contribution to the problems facing thefuel cell industry, much further laboratory work remains to be done:. to optimise and understand the selection of polymer composition (choice and ratios of hydrophilicmonomer, hydrophobic monomer, ionic monomer, cross linker and water) for speci¢c applications.. to determine critical properties (e.g. resistance, stability, water retention) over a wide range ofconditions, especially temperature.. to test fuel cell devices over the wide range of conditions met in fuel cell operations; for example, anindustry goal for the large transportation and energy generation markets is operation at 120^2008C inorder to overcome shortcoming in catalyst performance.. to devise a method to manufacture thinner membranes (ca. 100 mm compared to the present * 700 mm)since performance is determined by membrane resistance (a function of thickness as well asconductivity).. to develop a cost e¡ective manufacturing technology for the polymers and fabrication of themembranes.Of course, not all these challenges need to be met in order to develop products for speci¢c applications. In the¢rst year of the next phase of the development programme, appropriate milestones might be:. Reproducible fabrication of membranes with thickness less than 150 mm.. Determination of properties over a wide temperature range.. Demonstration of a MEA based on hydroxide conducting polymer and operating in conditions of ahydrogen/oxygen fuel cell.. Demonstration of the superiority of an itm membrane over other available membranes for the speci¢cconditions of one application.The cost target must be below $20/m 2 . This should be achievable since the polymers are synthesised fromlow cost, commercially available materials provided that low cost polymerisation and membrane fabricationcan be achieved. It must be noted that while the availability of low cost membrane will reduce substantiallythe cost of PEM fuel cells, truly economic PEM fuel cells also depend on reductions in catalyst cost either byexploiting non-precious metal catalysts (an opportunity for a successful itm hydroxide polymer) or furtherreduction in the catalyst loading.4. Manufacturing Technology4.1 Novelty of the itm MEA/stack manufacturing technologyA number of companies supply MEAs (e.g. Johnson Matthey in the UK; Electrochem, 3M, Cabot SuperiorMicropowders, Celanese, Gore in the USA). A larger number of companies have technology for assemblingMEAs into fuel cell stacks (including many multi-national auto manufacturers). Stack manufacture requiresthe packing and interconnection of 10 to 100 MEAs and requires solutions to problems associated with gassupply, water management, heat management and electrical output in addition to satisfactory MEAperformance.While PEM fuel cells are not presently competitive on a cost basis with alternative technologies, fullyengineered demonstration stacks for most potential applications are available from several companies.However, as far as we are aware, all MEAs are presently manufactured by taking preformed membrane(most commonly, Na¢on TM ) and then depositing the electrocatalyst layers onto its surface, for example, byscreen printing. While itm have not ruled out the manufacture of MEAs by such routes, they have alsopatented a novel alternative technology to produce MEAs and fuel cell stacks. This involves pouring asolution of the monomer mixture into the gap between the two electrocatalyst layers and carrying out the36

polymerisation in situ. This introduces additional £exibility into the design and geometry of the MEA orstack. Therefore stack designs are no longer limited to the geometry of the commercial membranes, usually a£at sheet or occasionally also in a cylindrical form.Figure 3 Comparison of the itm POWER and traditional MEA fabrication procedures.In addition, the ITM concept opens up the possibility of manufacturing a complete fuel cell stack as a singleunit rather than stacking individual MEAs. The polymer can be (and has been) formed in complex shapeswhere the polymer forms structural components of the stack as well as the MEA component therebyreducing the number of components in the fuel cell (especially seals). It also introduces the possibility of fully£exible and shock resistant fuel cells for mobile and military applications.The concepts related to the novel fabrication procedures for MEAs and fuel cell stacks are not necessarilyrestricted to the itm polymers. The per£uorinated polymers such as Na¢on TM are synthesised by radicalinitiator/heat and other hydrocarbon polymers can be produced via initiation either with radical initiator/heat or with g-radiation. We are, however, not aware of any other companies pursuing the itm concepts forthe manufacture of MEAs or fuel cell stacks.4.2 Progress to date on manufacturing technologyAt the end of the University of Surrey programme, the MEA concept had been demonstrated but theperformance achieved was minimal, an energy density of less than 2 mW/cm 2 (cf. * 500 mW/cm 2 for astate-of-the-art fuel cell) for a short period of time (20 minutes). Within itm, the performance has beenimproved signi¢cantly and it has proved possible to fabricate MEAs through the itm approach that achieve ~50 mW/cm 2 for periods in excess of 300 hours and * 100 mW/cm 2 in short timescale experiments.Two caveats are, however, essential. Firstly, itm have chosen to carry out all their experiments at 308C (witha particular application in mind) while most published data related to fuel cell operation corresponds tohigher temperatures. The use of the lower temperature will lower the energy density that can be achieved butmay increase the polymer stability. It also requires the use of higher purity hydrogen (because of problems inthe storage and transportation of hydrogen, it is often formed in situ from other feedstocks, e.g. methanol orsodium borohydride, and the resultant hydrogen can contain impurities detrimental to fuel cell catalysts ^ ahigher temperature of fuel cell operation is one proposed solution). Secondly, the performance has beenachieved with a very high platinum catalyst loading, 5 mg/cm 2 (c.f. around 0.5 mg/cm 2 in state-of-the-artPEM fuel cells and targets of below 0.2 mg/cm 2 ). The high catalyst loadings are associated with (a) theprocedures for dispersing the catalyst prior to forming the MEA and (b) the fact that the monomer solutionin¢ltrates the catalyst dispersion prior to polymerisation and this degrades the three-phase interface betweengas, catalyst and polymer. The improvement in performance of itm devices reported above results partlyfrom attempts to improve the polymer/catalyst/gas interface. It has also been found that the itm structuresperform much better as water electrolysers and a seven cell stack has been operated for an extended period ata current density of 66 mA/cm 2 with a cell voltage of around 2.5 V. A single cell has also been operated at1 A/cm 2 for a period of 2 hours without obvious degradation of the membrane.37

Recently, a number of small laboratory fuel cell stacks have been constructed using the itm approach. Theydemonstrate the concept as they have been shown to operate as fuel cells but the present performance is poor.This is to be expected at this early stage of development. Further improvements will require advances in theformation of the catalyst/polymer/gas interface and modi¢cation of other fuel cell components such as thecurrent collector.4.3 Challenges for the future on manufacturing technologyWhilst these radical changes in fabrication procedure o¡er interesting possibilities, it is still to bedemonstrated that the approach has practical advantages. Indeed, this cannot be proven until MEAs andfuel cell stacks have been designed, fabricated and tested extensively and shown to exhibit performance equalto or superior to MEAs/stacks manufactured through conventional methods. Each of these phases has itsown challenges. It will be necessary to increase the size of devices and to demonstrate reproducible andprecise manufacture of components with small dimensions. Certainly, the performance of stacks will have tobe improved substantially. The itm procedure leads to quite di¡erent interfaces between the catalyst andpolymer from traditional MEAs. This three-phase interface between gas, polymer and catalyst is critical tofuel cell performance and its structure is yet to be controlled in order to obtain performance comparable toother MEAs/stacks. Development work related to components associated with electrical contacts, gasdistribution and water management will also be necessary.We believe that, in order for the itm fabrication procedures to impact substantially on the fuel cell industry, anumber of challenges remain:. to decrease the catalyst loading to standard industry levels or below, requiring improvements incatalyst distribution at the polymer/gas interface.. to increase the energy density of stack devices requiring development of current collectors, inter-cellconnectors etc for the non-traditional geometries as well of consideration of heat dissipation and watercontrol in such con¢gurations.. to test and measure the fuel cell/water electrolyser performance (current density, voltage, energydensity, power density, reproducibility, durability) under a range of operating conditions, especiallytemperature.. to understand the relationship between polymer composition and cell performance.. to demonstrate operation and performance data with air as well as oxygen and the dependence ofperformance on hydrogen purity.. to increase the dimensions of stack devices, to demonstrate reproducible fabrication with the requiredtolerances and con¢rm performance data in enlarged devices.. to determine and minimise crossover of oxygen and fuels in operating conditions.As noted in Section 3.3, the priorities depend on the short-term goals of itm. It is not essential to solve allthese problems in order to impact small (but lucrative) sectors of the fuel cell/water electrolyser market.With regard to the novel itm fabrication technology, a key requirement is to demonstrate a clear advantage(in terms of performance and cost) at least for some speci¢c applications.Possible milestones for year 1 of the next stage in development would be:. operation of MEAs fabricated by both standard methods and the itm approach over a wide range oftemperature with energy densities approaching 200 mW/cm 2 .. reduction the catalyst loading to 0.5 mg/cm 2 while maintaining fuel cell performance.. demonstration of a stack based on the itm concept capable of delivering 20 W.5. Intellectual PropertyAs discussed in previous sections of this report, itm’s key inventions relate to a novel membrane materialwith the potential for low-cost manufacture, the use of this membrane material in electrochemical cells, andan associated novel MEA fabrication route. All of these inventions are addressed in an international PCTapplication ¢led in September 2002. The PCT application does not in itself grant patent protection but, if,patent applications derived from it are granted they will ensure that any technology covered cannot beexploited by other parties without a licence. So far, itm have been granted a UK patent covering MEA38

fabrication. Further patents are being considered and itm expects to make decisions on additionalapplications within the next month.From a review of the UK patent and discussions with itm and its patent agent, we understand that this patentcovers an MEA comprising itm’s novel polymer membrane and electrodes, and a method for producing thisMEA by introducing the monomers or a pre-polymer between the electrodes and forming the assembly insitu.Tothe best of our knowledge, this patent has been subject to all the necessary checks by the British andEuropean patent o⁄ces. However, we have no formal training in patent law and therefore are not quali¢edto say for certain whether it would stand up to future legal challenge. The UK patent does not cover the useof itm’s polymer technology in applications other than in MEAs for electrochemical cells, but this is coveredin the PCT application and therefore could be patented at a later date.When itm was established in 2002, it took over the IP previously owned by Surrey University in this area.Surrey University had not established any patents but had disclosed some information at conferences. Areport by David Giles of Strategem Intellectual Property Management Ltd dated 2 September 2002con¢rmed that disclosures made by Surrey University did not invalidate itm’s patent claims, because thedisclosures gave insu⁄cient information to allow persons skilled in the art to arrive at the inventions. TheStrategem report also con¢rmed that itm is the sole owner of the inventions, and that Dr Highgate is the soleinventor.As the itm development programme proceeds, further knowledge of materials and processing techniques willbe generated. This is likely to lead to additional patent opportunities. Some scienti¢c and engineeringknowledge, such as how to assemble a stack or what operating conditions to use, will not be patentable butwill nevertheless be very valuable to the development programme.6. ConclusionsThe potential markets for fuel cells are very large and expectations are high that they will contribute to theresolution of critical problems facing society associated with future energy supplies, global warming andother environmental issues. In particular, PEM (proton exchange membrane) fuel cells are seen as attractivefor the essential energy storage associated with power generation through renewable sources (solar, wind,wave), vehicle traction and small mobile power sources (for telephones, electronic devices etc). Indeed, in theUSA and elsewhere, politicians are recognising the positive impact that PEM fuel cells can make on theenvironment and are considering implementation with government subsidies. An illustration of politicalintervention is the recent purchase of four fuel cell powered buses for London at a cost of »1.2 million eachwhen diesel powered vehicles were available for »0.4 million each.At the present time, however, PEM fuel cells cannot be manufactured at a price that make them attractive incomparison with other technologies on a purely cost basis. The design and manufacture of economic fuelcells certainly requires substantial reduction in the cost of both the membrane and electrocatalysts. Atpresent, the industry standard proton conducting membrane for PEM fuel cells, Na¢on TM , costs more than$500/m 2 ; the manufacturers, Dupont, project prices around $100/m 2 with high volume manufacture but theUSDOE target for automobile applications is $2.5/m 2 .Asimilar reduction in the cost of electrocatalysts isalso necessary. The approach frequently followed is to seek to reduce still further the loading of preciousmetal catalysts in the electrode formulations. An alternative long-term solution is to ¢nd conditions wherenon-precious metal catalysts give the required performance; this probably requires the development ofstable, hydroxide ion conducting polymers. PEM fuel cells also fall signi¢cantly short of their predictedperformance with energy e⁄ciencies below 60 per cent. While the most intractable problems are associatedwith the electrocatalysts, the opportunities for improving their performance within the present stage ofknowledge requires proton-conducting membranes that operate e¡ectively over a more extended range ofconditions, particularly at higher temperatures.The need for cheaper and more durable MEA components (membrane and catalyst) and the reasons for theshortcomings in PEM fuel cell performance are well known. Indeed, a very large number of scientists andengineers within many companies and universities worldwide have sought to resolve the shortcomings.Despite the many man-years of R & D, these e¡orts remain largely unsuccessful. The need for new materialsand the large ¢nancial rewards for those developing them can be in no doubt.itm has developed some membrane polymer materials that are distinctly di¡erent from those commerciallyavailable. Their polymers contain hydrophilic components in the polymer backbone and this modi¢essigni¢cantly the water content within the membrane polymer (critical to all membrane properties).Potentially, their membranes are signi¢cantly cheaper than those presently used in PEM fuel cells and thepolymers have properties that suggest that they might have the properties to give an enhanced performance39

in fuel cell conditions. In addition, polymers that conduct protons or hydroxide have been synthesised andthe latter could facilitate the manufacture of alkaline fuel cells without precious metal catalysts or operatingwith borohydride feedstock instead of hydrogen gas. itm is, however, not yet in a position to marketmembranes or to exploit their membrane technology. The techniques for polymerisation need to beoptimised, thinner membranes need to be produced, the in£uence of polymer compositions on performanceneeds to be investigated and properties/performance need to be de¢ned in a much wider range of conditions.itm has also patented some interesting and novel concepts related to the fabrication of both MEAs and fuelcell stacks. These have the objective of simplifying the manufacturing process and thereby reducing the cost.MEAs have been produced and tested and show reasonable performance in hydrogen/oxygen fuel cells.Once again, further laboratory work is necessary in order to bring the performance up to industryexpectations, to reduce the thickness of the polymer electrolyte membrane in the MEA and to decrease theprecious metal catalyst loadings. The procedure for fabricating complete fuel cell stacks has beendemonstrated with some small laboratory units but the development is not yet at a stage where its potentialor cost can be assessed.Overall, we believe that itm has technology that could impact positively the development of economic fuelcells but their programmes are all at a relatively early stage and it needs to be recognised that substantiallaboratory work needs to be concluded successfully before any product can be brought to market. Inaddition, itm cannot expect to resolve all the problems associated with the conversion of their materials andconcepts into a product and they must identify appropriate partners if the development is to be fruitful on areasonable timescale. It also has to be recognised that each application will place its own requirements on theproperties of the membrane polymer and/or the fabrication procedure. In the next stage of development witha limited number of scientist/engineers, it is critical that while the programme expands fundamentalknowledge of the polymers and the MEA/stack fabrication procedures, its market goals must be carefullyselected and fully understood. Indeed, the whole programme must be selective and targeted and the annualtargets must be realistic.7. Glossary and Further Information7.1 Glossary of termsCatalyst loadingThe amount of catalyst incorporated in a fuel cell or electrolyser perunit area. Typical units are mg/cm 2 .ElectrocatalystElectrochemical cellsElectrodeFluorocarbon membrane/polymerHydrocarbon membrane/polymerg-radiationMembraneA material such as platinum used to catalyse chemical reactions at theelectrodes.Devices in which chemicals react to produce electricity or electricity isused to drive a chemical reaction. Fuel cells and water electrolysers areboth examples of electrochemical cells.An electronic conductor through which an electric current enters orleaves a medium. Chemical change occurs at the interface of theelectrode and electrolyte medium. A fuel cell contains two electrodes:an anode where oxidation of a fuel occurs and a cathode wherereduction of oxygen occurs.A membrane or polymer made from a chemical compound consistingof £uorine and carbon. Na¢on TM is a £uorocarbon membranematerial.A membrane or polymer made from a chemical compound consistingof hydrogen and carbon. The membrane materials being developed byitm Power are hydrocarbon polymers.A very high energy form of electromagnetic radiation. Gamma rays areproduced by certain nuclear decay processes, and are used, forexample, to sterilize food.The polymer layer in a fuel cell that acts as electrolyte (a medium forthe transport of an ion between the two electrodes) as well as a barrier¢lm separating the gases in the anode and cathode compartments of thefuel cell.40

Membrane Electrode Assembly(MEA)MonomerNa¢on TMPCT applicationPer£uorinated membranePolymerProton Exchange Membrane(PEM) fuel cellPTFER&DScreen printingSodium borohydrideStackWater electrolyserThe heart of the PEM fuel cell, comprising a thin ¢lm of ion conductingpolymer (the membrane) coated on each side with electrocatalyst layers(the electrodes).A small molecule that is linked with large numbers of other smallmolecules to form a chain or a network (polymer).A per£uorinated polymer manufactured by Dupont. Na¢on TM is usedin state-of-the-art PEM fuel cells.An international patent ¢led under the Patent Cooperation Treaty.A £uorocarbon membrane (see above).A large molecule made by linking smaller molecules (‘‘monomers’’)together.A type of fuel cell in which the transport of protons (H+) from theanode to the cathode is achieved through a solid, polymer electrolyte(membrane) in its acid form. The electrolyte is a called a protonexchangemembrane (PEM). The fuel cells typically run at lowtemperatures (5120‡C).Poly£uorotetraethylene (PTFE) is a £uorocarbon polymer made of acarbon backbone chain with two £uorine atoms attached to eachcarbon atom. It is better known by the trade name Te£on TM .Research and development.A manufacturing technique for fuel cell components that involvesprinting layers onto a £at surface.a salt with an anion of boron and hydrogen (BH4 - )^as a concentratedaqueous solution it is a possible fuel for an alkaline fuel cell.Individual fuel cells connected together to form a fuel cell stack.A devise that uses energy to convert water to hydrogen and oxygen.7.2 Further informationFurther information on fuel cell technologies and markets can be found in the following references.Handbook of Fuel Cells ^ Fundamentals, Technology and Applications, Volumes 1, 2 and 3, Eds.W.Vielstich et al, John Wiley and Sons, 2003.Fuel Cell Technology Handbook, Ed. G. Hoogers, CRC Press, 2002.Fuel Cell Handbook, Fifth Edition, October 2000.www.fuelcells.org/fchandbook.pdfFuel Cell Report to Congress, US Department of Energy, February 2003.www.eere.energy.gov/hydrogenandfuelcells/pdfs/fc_report_congress_few2003.pdfHydrogen Energy and Fuel Cells ^ A vision of our future. Summary Report from the EuropeanCommission’s High Level Group for Hydrogen and Fuel Cells, June 2003.http://europa.eu.int/comm/research/energy/pdf/hlg_vision_report_en.pdfFuel Cell Today web site.www.fuelcelltoday.com/index/Fuel Cells 2000 online fuel cell information centre.www.fuelcells.org41

In addition, there are a number of workshops and conferences providing up-to-date information on fuel celltechnology developments. The prominent international conferences to be held in 2004 are:European Fuel Cell Forum, 28 June ^ 2 July 2004, Lucerne, Switzerland.www.efcf.com/conferences/index.shtmlFuel Cells Science and Technology, 6-7 October 2004, Munich, Germany.www.fuelcelladvances.com2004 Fuel Cell Seminar, 1-5 November 2004, San Antonio, Texas, USA.www.fuelcellseminar.com/index42

PART III BTECHNICAL DUE DILIGENCE REPORT ON ELECTROLYSERSA REPORT ON ELECTROLYSERS,FUTURE MARKETS AND THEPROSPECTS FOR ITM POWER PLCELECTROLYSER TECHNOLOGYAreport produced by Professor Marcus NewboroughFebruary 200443

Executive SummaryThe water electrolyser is the exact reverse of a hydrogen fuel cell; it produces gaseous hydrogen and oxygenfrom water. Electrolyser technology may be implemented at a variety of scales wherever there is an electricitysupply to provide hydrogen and/or oxygen for virtually any requirement. There are two main types ofelectrolyser (alkaline and proto-exchange-membrane) and both are well proven and long-lived. Modernelectrolysers are usually of high conversion e⁄ciency (up to 90 per cent.) and yield very high purity oxygenand hydrogen. The principal drawback of electrolysers is that of unit cost; electrolysers are very expensive(41000$/kW) and so they have tended to be dedicated only to specialist applications (e.g. oxygen generationon board submarines).Electrolysers compete in an arena where H 2 is conventionally produced by large process plant, which reformscheap hydrocarbons to hydrogen (e.g. by steam reformation of methane), and O 2 is produced by airliquefaction. Their role in the existing and future markets for these gases, relative to the conventionalproduction methods, is a strong function of electrolyser cost, electricity cost and the carbon emissionsassociated with electrolyser operation. The carbon emissions implications of the generated gases areparticularly important to the future prospects of electrolyser technology, because electrolysers may userenewable and ‘low-carbon’ electricity for generating hydrogen (e.g. for use in fuel cells, hydrogen engines,combustors and other industrial applications). When compared with conventional methods of generatinghydrogen, the low-carbon implications of using such electrolytic hydrogen will be most advantageous.However, relative to today’s prices, large decreases in unit costs will be essential if electrolyser technology isto realise this potential; indeed until such cost breakthroughs are achieved the delivery of low/zero carbonhydrogen in bulk will be inhibited.ITM Fuel Cells Limited (‘‘ITM’’) has recently developed polymer electrolyte materials (ionomers) of muchlower cost than the £uorocarbon-based membranes (e.g. Na¢on) employed by conventional PEMelectrolysers, and these have enabled an entirely di¡erent manufacturing route for PEM technology. TheITM method is to introduce a liquid monomer mix to a mould, and produce an MEA or complete stack insitu by gamma-radiation polymerisation. There are three intrinsic bene¢ts of this approach, when comparedwith the conventional manufacture of PEM electrolysers: the ionomers are very much cheaper; theproduction process is less stringent and does not involve thin polymer membranes; and there are fewerindividual components per stack to assemble.ITM have developed ionomers suitable for electrolysers employing either acid-based chemistries (i.e. PEMtechnology) or alkaline-based chemistries (i.e. a solid polymer equivalent of the conventional liquid alkalineelectrolyte). Both o¡er considerable cost advantages relative to conventional electrolysers and the alkalineionomers potentially provide a route to designing out the expensive Platinum-based catalyst of the PEMelectrolyser. Unit costs of about 50$/kW have been estimated for volume production of a PEM electrolyserstack based on the ITM approach.Substantial global markets exist for hydrogen and oxygen and within these the market for electrolysers ischaracterised by applications where alternative technology options are limited or more expensive. Thecurrent market is served by about 20 electrolyser manufacturers. It tends to divide on electrolyser size and onelectrolyser type ^ alkaline electrolysers for large (MW scale) applications, PEM electrolysers for small (kWscale) applications. A recently set US DOE target for electrolysers of 300 $/kW (including all necessarybalance of plant) by 2010 is most signi¢cant in framing the opportunities and timescale for reducing the costsof electrolysers. It is di⁄cult to judge exactly how readily existing manufacturers will achieve this as presentgeneration electrolysers are essentially hand built, existing sales volumes are low and there is limitedexperience of pathways to mass production techniques within the industry. The availability by 2010 ofelectrolysers produced at a unit cost of 300$/kW depends heavily on achieving substantial increases inmarket size during the next few years. In turn realising such growth depends partly on the availability ofcheaper electrolysers.If it were to be met entirely by high-e⁄ciency electrolysers, the existing hydrogen market (i.e. 500 billion m 3 )would require an input of around 2000TWh of electricity; this amounts to about 230GW continuous ofinstalled electrolyser capacity (i.e. an electricity demand equivalent to about three times the UK’s installedcapacity of power plant). Accordingly the existing hydrogen market provides a very large target fordevelopers of low-cost electrolysers. However, the potential of future hydrogen markets is much greater.Future applications for electrolysers include supplying high volume markets in distributed applications (e.g.for refuelling fuel cell vehicles at all scales); bu¡ering intermittent renewables technologies within electricitynetworks to facilitate power system management in a ‘high renewables’ electricity sector; capturingintermittent renewable electricity supplies for dedicated hydrogen and oxygen production; and decarbonisinglarge-scale industrial processes (e.g. ammonia production and furnaces). These applications are essentially44

international with prospective electrolyser installations at various scales both within the electricity systems ofdeveloped countries and near the renewable resources of developing countries. Further, several new marketsmay emerge for low/zero-carbon oxygen including the use of electrolytic oxygen for oxygenation processesin the water industry, for oxygen-enrichment in furnaces, for oxy-hydrogen combustion processes and forvery high-e⁄ciency fuel cells. Thus, although the principal commercial purpose of an electrolyser will be toprovide hydrogen, the value of the oxygen by-product should not be overlooked.In future low-carbon economies, electrolyser technology could provide a central solution to meeting both thepower management needs of the electricity sector and the needs of the transport and industrial sectors forlow/zero carbon fuels. Electrolytic hydrogen could thereby displace large proportions of non-electricity fuelconsumption. Simplistically, assuming continuous electrolyser operation, about 15GW of high-e⁄ciencyelectrolysers are required to deliver 100TWh of hydrogen. Thus if fuel-switching to electrolytic hydrogenbecomes a primary option, a global shift to electrolytic hydrogen could lead to a total electrolyserrequirement of several hundreds of GW per annum! For example, if by 2050 only 10 per cent. of the projectedglobal energy requirement of 200,000 TWh was met by electrolytic hydrogen, the associated hydrogenrequirement would be about 6,670 billion m 3 , and the electricity requirement for electrolysis would amountto about 26,680TWh (i.e. * 3000GW continuous of installed electrolysers) Hence, the new marketpotential for electrolysers dwarfs the existing market potential and on a global scale it is truly vast!In general, it would seem the opportunities for achieving electrolysers of 5300 $/kW will be limited by theincreasing dominance of material costs, especially for PEM electrolysers. Only ITM appears to o¡er a routeto achieving electrolysers of substantially lower unit cost. The development of low-cost electrolysers appearsmost attractive, because the existing hydrogen market is very large, the future hydrogen market is potentiallyenormous and the availability of alternative routes to producing hydrogen of zero/low carbon-footprint islimited. Thus, if proved successful, the ITM approach (using acid-based or alkaline-based ionomers) couldaccess vast markets within future low-carbon economies.45

Contents1. Introduction1.1 Aims & scope1.2 About the author2. Electrolyser technology2.1 Alkaline Electrolyser2.2 Proton-exchange membrane electrolysers2.3 The Solid Oxide Electrolyser3. The ITM Approach to Electrolysers3.1 Materials and Production Costs3.2 Other Options4. Assessment of the existing Electrolyser industry and markets4.1 Electrolysers, Carbon Emissions and Future Markets4.2 Future Market Size4.3 Future Market Players5. Conclusions6. References46

1. IntroductionThis report provides an assessment of electrolyser technology, of the new electrolyser technology of ITMFuel Cells Limited (‘‘ITM’’) and of the existing market and future market potential for electrolysers.1.1 Aims & scopeThe overall aim of this report is to assess the technical claims made by ITM in relation to their Electrolysertechnology in the context of existing and future electrolyser markets.The assessment itself has drawn upon the authors’ knowledge of Electrolyser technologies and markets andincluded a review of the relevant literature, interviews with key members of itm’s management team, a tourof facilities at itm. As part of the assessment of itm’s Electrolyser technologies technical documents werereviewed and a practical test of itm’s Electrolyser technology was conducted.1.2 About the authorMarcus Newborough MSc PhD CEng MEI is Research Professor of Energy and Environmental Engineeringat Heriot-Watt University, Edinburgh. His principal research focus is on identifying pathways to alow-carbon energy system for the UK. His expertise includes micro-CHP systems, electrolysers andcombined electrolyser/fuel-cell systems, demand-side management in the electricity sector, and intelligentlow-carbon homes. He has been Principal Investigator of over 30 research contracts and has published inexcess of 60 academic papers. Marcus is a Chartered Engineer, Board Member of the IMechE PowerIndustry Division and has over 20 years engineering research experience, holding previous positions atRolls-Royce Aero, Bristol and Cran¢eld University, Bedford.2. Electrolyser TechnologyWater electrolysis to produce gaseous hydrogen and oxygen is a long-established process. The waterelectrolyser essentially takes in pure water and dc electricity and outputs H 2 and O 2 ;itisthe reverse of ahydrogen fuel cell.Electrolyser technology may be implemented at a variety of scales wherever there is an electricity supply. Itmay be located conveniently close to the points of demand (to minimise gas infrastructure costs) or at largesites feeding into gas distribution infrastructures involving ships, tankers and/or pipelines. Electrolysers canthereby provide H 2 and/or O 2 for virtually any requirement.Electrolysers are usually of high conversion e⁄ciency, with the best commercially available examplesapproaching 90 per cent. e⁄ciency. Accordingly the carbon-footprint of the generated H 2 and O 2 isprincipally a function of the input electricity. Thus it is envisaged that future low-carbon economies willexploit electrolyser technology to deliver ‘low/zero carbon hydrogen’ for fuel cells and other uses. Theimplication here is that electrolysers may well be implemented at levels very far in excess of those applyingtoday.Unfortunately the principal factor inhibiting the advance of electrolysers beyond the specialist applicationsthey serve today is cost. Large decreases in unit costs will be essential if electrolyser technology is to realise itsfuture potential within low-carbon economies. Indeed until such cost breakthroughs are achieved thedelivery of low/zero carbon hydrogen in bulk will be inhibited.There are three principal types of water electrolyser: alkaline (referring to the nature of its liquid electrolyte),proton-exchange membrane (referring to its solid polymeric electrolyte), and solid-oxide (referring to its solidceramic electrolyte). The alkaline and PEM electrolysers are well proven devices with thousands of units inoperation, while the solid-oxide electrolyser is as yet unproven. The PEM electrolyser is particularly wellsuited to highly distributed applications. The alkaline electrolyser currently dominates global production ofelectrolytic hydrogen.2.1 Alkaline ElectrolysersThe operation of an alkaline electrolyser depends on the use of a circulating electrolyte solution (usuallypotassium hydroxide) for transferring hydroxyl ions. Alkaline electrolysers operate at relatively low currentdensities of 50.4 A/cm 2 and conversion e⁄ciencies range from 60-90 per cent. Without auxiliarypuri¢cation equipment, gas purities are typically 99.8 per cent. and 99.2 per cent. for H 2 and O 2 respectively.Several large alkaline electrolysers of 4100MW have been applied (e.g. in Egypt and Congo to utilisehydropower to generate ‘renewable hydrogen’). A modern alkaline electrolyser will achieve an e⁄ciency of* 90 per cent. (consuming about 4kWh of electricity per m 3 of H 2 generated at NTP) and deliver gasat up to 30bar without auxiliary compression. However, a significant post-electrolysis electricity47

consumption is incurred for gas compression to deliver H 2 and O 2 at the pressures required by industryand for storage on-board hydrogen vehicles (350-700bar).The key factors favouring the alkaline electrolyser are that it obviates the need for expensive Platinum-basedcatalysts, it is well proven at large scale and it is usually of lower unit cost than a PEM electrolyser.2.2 Proton-exchange membrane electrolysersThe operation of a PEM electrolyser depends on the use of precious metal catalysts (Platinum,Platinum/Ruthenium) and a solid polymeric electrolyte for transferring protons. As applies for PEM fuelcells, Dupont’s £uorocarbon-based ionomer, Na¢on, dominates most designs of PEM electrolyser.PEM electrolysers have achieved * 100,000 hours continuous operation without failure in criticalenvironments (e.g. O 2 provision for nuclear submarines). They can operate at much higher currentdensities than alkaline electrolysers (1-2 A/cm 2 ), with conversion efficiencies ranging from 50-90 percent., but cannot yet achieve high efficiencies at high current densities. In this context, one of the statedresearch aims of the ambitious Japanese WE-NET hydrogen programme [1] is to achieve a PEMelectrolyser stack of 2500cm 2 operating at 41A/cm 2 and 490 per cent. efficiency. Without auxiliarypurification equipment, gas purity is typically 99.999 per cent. both for H 2 and O 2 . Operation at highpressure (including high differential pressure between the hydrogen and oxygen side at up to 200bar) isproven and the need for auxiliary gas compression is then considerably less than for the alkalineelectrolyser.The key factors favouring the PEM electrolyser are that it avoids the requirement to circulate a liquidelectrolyte, it operates at a high current density (o¡ering a small footprint), and it has the intrinsic ability tocope with transient variations in electrical power input (hence it has outstanding applications £exibility withrespect to capturing intermittent renewable electricity supplies, such as wind and solar power).2.3 The Solid Oxide ElectrolyserThe operation of a solid-oxide electrolyser depends on a solid ceramic electrolyte (zirconia/ceria), which attemperatures of 800-10008C transfers oxygen ions (O 2- ). The solid oxide electrolyser requires a source ofhigh-temperature heat. By operating at elevated temperatures, the heat input meets some of the energeticrequirement for electrolysis and so less electricity is required per m 3 of H 2 generated, compared with theother electrolyser technologies. However, to date, prototype solid-oxide electrolyser units have not achieveduseful operational lives and substantial engineering problems exist with respect to thermal cycling and gassealing. Accordingly, it is premature to make comparisons with alkaline and PEM electrolysers.3. The ITM Approach to ElectrolysersThe production of PEM electrolysers involves making discrete membrane-electrode assemblies by combiningpolymer membranes, precious metal catalysts, electrodes and gas/water manifolding. It requires a processthat accurately layers and assembles the membrane, catalyst, electrodes, gaskets etc., and then bonds themthermo-mechanically to achieve both electrical and gas-seal integrity. Each MEA needs to be accuratelylocated in the gas manifolding and sealed to form a single cell. A stack of cells is then assembled, andinterconnected for gas, water and electricity £ows, to create a planar electrolyser stack. These productionmethods are inherently expensive and the required materials are particularly costly. Thus, like theconventional PEM fuel cell, a PEM electrolyser stack is a very expensive item.ITM has recently developed polymer electrolyte materials (ionomers) of much lower cost than Na¢on, andthese have enabled an entirely di¡erent manufacturing route for PEM technology. The ITM method is tointroduce a liquid monomer mix to a mould, and produce an MEA or complete stack in situ by gammaradiation.This ‘unique’ approach has been demonstrated and experience of the technique acquired inmaking small PEM fuel cell stacks.The intrinsic bene¢ts of the ITM approach for PEM electrolysers, when compared with the conventionalapproach, are as follows.. Much cheaper ionomers. Fewer individual components. Less stringent assembly requirements48

3.1 Materials and Production CostsThe main focus of ITM has been on fuel cell development, but the company recognises the future importanceof being able to provide hydrogen by electrolysis. Recently, PEM electrolyser stacks consisting of ITMMEAs have been assembled and tested to provide some preliminary performance data. This is used here toprovide cost estimates of the magnitude of possible improvement that the ITM approach may a¡ord forPEM electrolysers.Because ITM’s materials and production approach relates to both polymer fuel cells and electrolysers, somecaution is needed to avoid inappropriate comparisons between the unit costs of fuel cells and electrolysers.By convention each technology is judged on a unit cost basis ($/kW), but for fuel cells, unit costs areexpressed in $ per kW output, while those for electrolysers (whose operation is characterised by substantiallyhigher current densities and voltages per stack) are expressed in $ per kW input. Thus ITM MEAs of givenphysical size and catalyst loading could be used to construct an electrolyser stack which has a much lowernumerical value of unit cost (in $/kW input ) than applies if it were used to construct a fuel cell stack (in$/kW output ).Fluorinated and non-£uorinated polymers are of distinctly di¡erent cost. For example, the major componentof Na¢on (a 50:50 mixture of poly-tetra£uoroethylene and per£uoro-vinylether) costs about 17 $/kg [2],while the methyl-methacrylate monomer employed by ITM costs 1.5 $/kg [3]. A 100 micron thick sheet ofNa¢on costs about 600 $/m 2 [4], which equates to around 3000 $/kg. For its existing prototypes, ITM quotesa ¢nished product cost of 20 $/kg (allowing for water, sulphonic acid and polymerisation costs).Theoretically, if ITM ionomers were to be processed into membranes of 100 micron thickness, it is estimatedthat the equivalent cost would be around 2.5 $/m 2 . Thus, the unit costs for ionomers made from the ITMhydrocarbon-based materials are less than one percent of the £uorocarbons ionomers underpinningconventional PEM technology. Although the ionomer thicknesses in ITM MEAs are currently about fourtimes greater than Na¢on membranes (which increases the quantity of polymers consumed and hence theunit cost per MEA), the polymer cost bene¢t remains extremely large.The level of radiation used in trials by ITM is typically around 2.5 MRad from a Cobalt 60 source. This is thenormal radiation level applied commercially and ITM quote approximate costs for processing a box ofaround 0.03 m 3 as about $7.5.ITM has constructed trial electrolyser stacks consisting of ITM MEAs contained within a conventional rigidmanifold system and undertaken preliminary testing for single test periods not exceeding 3 hours. Operationof a 7 cell stack (of 112cm 2 total active area and 10 mg Pt/cm 2 catalyst loading) has been demonstrated at acurrent density of 1.2 A/cm 2 and power input of 70W. The associated component cost breakdown can beestimated approximately as follows: monomers ($3), carbon cloth electrodes ($5), radiation polymerisation($7.5), catalyst ($24.6). Hence the total cost is $40.1 for a 70W electrolyser, or a unit cost of 573 $/kW.Development work at ITM is aimed at reducing catalyst loadings (e.g. to 1 mg/cm 2 to meet conventionalmanufacturing norms); maximising the use of container volume for radiation processing; buying monomersin bulk rather than laboratory quantities and reducing electrode material cost by bulk purchasing and/ormoving to uni-axial carbon ¢bres. Further reductions in units costs should be achievable by reducing the voidspace between MEAs within prototype composite stacks; using thinner layers of ionomer within the MEAs;and reducing the valueless cast material within the unit. This suggests an ultimate cost breakdown for theabove stack of: monomers ($1), electrodes ($0.5), radiation polymerisation ($0.75), catalyst ($2.46). Hencethe total cost would then amount to $4.71 for a 70W electrolyser, or a unit cost of * 67$/kW. In large scaleproduction, it is considered that electrolyser unit costs would lie below this value, probably in the regionof 50 $/kW.3.2 Other OptionsITM has manufactured and characterised several alkaline ionomers, which have been tested for electricalconductivity and shown ionic conductivities of up to three times that measured for Na¢on under the sameconditions. These enable ion transfer via OH - ions (as opposed to protons) and so o¡er a route to using muchcheaper catalysts (e.g. Rainey Nickel) rather than Platinum. The materials are expected to be compatiblewith the production route applied for ITM’s acid-based ionomers. These alkaline ionomers o¡er a potentialroute to achieving (i) independence from Platinum-based catalysts and proton-exchange chemistries, and (ii)independence from the liquid alkaline electrolytes of conventional alkaline electrolysers. Hence ITMpolymer-based electrolyser technology may emerge that is of even lower unit cost than that indicated above.Further engineering development will be required to build and test an electrolyser stack based on thesealkaline ionomers, so as to quantify the cost/performance bene¢ts.49

A further interesting possibility is that of recycling catalysts once an electrolyser unit is spent. Because thecatalyst is a high proportion of the cost of an ITM MEA while the polymer is of low cost (unlike aconventional MEA), it becomes possible to consider destroying the polymer matrix (e.g. by pyrolysis) torecover the platinum. This would mean accounting for only the recycling costs and any incurred losses,rather than the full replacement cost of the catalyst.4. Assessment of the Existing Electrolyser Industry and MarketsSubstantial global markets exist for hydrogen and oxygen. About 50 per cent. of hydrogen is used forammonia production, 37 per cent. by the petrochemicals industry, and the remainder for applicationsincluding edible fat hydrogenation, methanol production, £oat glass production, generator cooling, weatherballoons and rockets. Worldwide hydrogen demand currently exceeds 500 billion m 3 and roughly speakingits sale value is in the region of $100 billion. However, less than 5 per cent. of this hydrogen is produced byelectrolysers. The oxygen market is not quite as large; it is dedicated mainly to metals processing in furnacesand welding (about 90 per cent.), with the remainder being used for applications in the medical, military andspace sectors.Electrolysers currently supply H 2 and O 2 principally into niche applications. Both types of electrolyser arewell-proven and reliable technologies, but they are expensive (unit costs are 41000 $/kW). The market forelectrolysers is characterised by applications where alternative technology options are limited or moreexpensive, for instance:. providing H 2 and O 2 in laboratory environments to eliminate the need to purchase relatively expensivebottled gas. providing O 2 in submarines and space stations. providing H 2 for industrial application in developing countries where hydrocarbon and electricityinfrastructures are weak.Competition within these markets appears limited, although small electrolysers are sold by severalcompanies as a cheaper and more convenient alternative to buying in bottled gas. It appears that reliability,safety and convenience are the paramount sales features for electrolysers.Alkaline electrolyser technology is mature. It has been built at various scales since the ¢rst largeinstallation in Norway in 1927. Several companies currently market such electrolysers, outputting H 2 at ratesof 10^100 m 3 /h. By comparison, PEM electrolysers are a less mature technology with the ¢rst signi¢cantadoption being in the 1980s by the Royal Navy and US Navy for oxygen generation in nuclear submarines.The other principal market is for small bench top units, which are employed in numerous laboratoryenvironments for supplying hydrogen at 50.1 m 3 /h. PEM electrolysers of MW scale have not beenconstructed, although there is no intrinsic di⁄culty in ganging existing units or in building stacks of greateractive area. Commercially available units have typical H 2 outputs of 0.01^10 m 3 /h. Further scale-upknow-how may be available from the chlor-alkali industry, which in total utilises 43GW of PEM plantbased on Na¢on membranes for brine electrolysis (where membrane areas are of the order of several squaremeters, and input powers are 410MW per electrolyser).There are approximately 20 water electrolyser manufacturers worldwide. None is particularly dominant andnone currently produces both alkaline and PEM electrolysers. Important alkaline electrolyser manufacturersinclude: Norsk Hydro (Norway), Stuart Energy Systems (Canada) and Teledyne Energy Systems (USA).Important PEM electrolyser manufacturers include Hamilton Sundstrand (USA), Proton Energy Systems(USA), Shinko Pantec (Japan) and Wellman-CJB (UK). It is tentatively estimated that this business is worthapproximately $100m, with a signi¢cant proportion being associated with the very expensive highspeci¢cationPEM electrolysers for submarine applications.The current market tends to divide on electrolyser size and on electrolyser type. With respect to competitionwithin markets it should be noted that there are relatively few wholly independent electrolyser manufacturers(such as Stuart Energy), while several are small subsidiaries of larger organisations (such as Teledyne,Wellman-CJB, Norsk Hydro). Furthermore for PEM technology it appears that several commercialmanufacturers in the US are related to, or to some extent dependent upon the core technology precedents of,Hamilton Sundstrand whose applications focus is solely on military and space electrolysers of very highspeci¢cation.A recently set US DOE target for electrolysers of 300$/kW (including all necessary balance of plant) by 2010is most signi¢cant in framing the opportunities and timescale for cost reduction. It is di⁄cult to judge exactlyhow readily existing manufacturers will achieve this as present generation electrolysers are essentially hand50

uilt, existing sales volumes are low and there is limited experience of pathways to mass productiontechniques within the industry. Much depends on (i) the degree of cost/performance optimisation achievableand (ii) the initial growth rates for emerging hydrogen economy markets. For PEM electrolysers, there issigni¢cant potential for engineering development to identify cost/performance trade-o¡s, but for alkalineelectrolysers less scope remains. Ongoing research to optimise PEM fuel cells and reduce unit costs is of somerelevance to PEM electrolysers, although the intrinsic expense of £uorocarbon-based membranes andprecious-metal catalysts will ultimately limit cost reduction e¡orts. Thus the availability by 2010 ofelectrolysers produced at a unit cost of 300$/kW depends heavily on achieving substantial increases inmarket size during the next few years. In turn realising such growth depends partly on the availability ofcheaper electrolysers.It would seem appropriate to maintain a healthy scepticism regarding the electrolyser industry’s realisationof the DOE target. There appears to be no evidence that reductions below 300$/kW are achievable beyond2010. This applies especially for manufacturers of PEM electrolysers, because of their dependency upon, andlack of control over, the expensive catalysts and £uorocarbon membranes. In this context the application ofthe ITM approach to electrolysers appears most attractive.The aforementioned relative changes in unit costs (present day, the US DOE target for 2010, the ITM massproduction target) have an enormous potential impact upon the simple economic case for applyingelectrolyser technology. Consider the production of hydrogen for road transport at a sale price equivalent totoday’s UK petrol price ($1.30 per litre) and assume (conservatively) that no e⁄ciency bene¢t accrues for theuser of the hydrogen vehicle relative to the petrol vehicle, and that no value emerges from the sale of oxygen.Assuming the electrolyser costs are 1000$/kW (present generation) 300$/kW (DOE target) and 50$/kW(ITM target); the electrolyser e⁄ciencies are identical (86 per cent.); the electricity price is 0.1 $/kWh and thepetrol and hydrogen prices are identical. On this basis, and neglecting all other operational costs, the annualbene¢t (income minus cost) amounts to $29/kW of electrolyser and the respective simple payback periodsare 34 years (present generation), 10 years (DOE target) and only 1.7 years (ITM).This is an oversimpli¢ed example but, within the framework of current UK electricity and road fuel prices, itis indicative of (i) the relative advantages of low-cost ITM electrolyser technology, and (ii) the economicattractiveness of reaching a position where electrolysers can supply low/zero carbon hydrogen into thetransport sector at minimal additional cost to the input electricity.4.1 Electrolysers, Carbon Emissions and Future MarketsElectrolysers compete in an arena where H 2 is conventionally produced by large process plant, which reformscheap hydrocarbons to hydrogen (e.g. by steam reformation of methane), and O 2 is produced by airliquefaction. Their role in the existing and future markets for these gases, relative to the conventionalproduction methods, is a strong function of electrolyser cost, electricity cost and the carbon emissionsassociated with electrolyser operation. The carbon emissions implications of the generated gases areparticularly important to the future prospects of electrolyser technology.Methane reformation causes substantial CO 2 emissions and yields hydrogen of greater carbon-footprintthan the input methane. Because of this, the argument for satisfying existing and future markets forhydrogen by hydrocarbon reformation is seriously £awed. Although electrolysis yields hydrogen of highercarbon-footprint than the input electricity, electrolysers can be matched to supplies of low-carbon, renewableor nuclear electricity, and so it is possible to produce hydrogen of low/zero carbon-footprint. Indeedelectrolysers o¡er the primary route for producing low/zero-carbon hydrogen. Electrolyser technology couldthus be at the heart of future low-carbon economies where hydrogen is utilised as a transport and industrialfuel (e.g. for fuelling fuel cell vehicles).At the point of generation, on a $/kWh basis, electrolytic hydrogen is more expensive (by de¢nition) than theinput electricity to the electrolyser, which in turn is more expensive than a hydrocarbon fuel. Similarlyhydrogen reformate is more expensive than the input hydrocarbon, but it is considerably cheaper thanelectrolytic hydrogen. To compete successfully with hydrocarbon reformers (both within existing and futuremarkets), it is essential that electrolysers of lower unit-cost are developed.With this in mind, the future growth in electrolyser applications can be considered as (i) expansion within theexisting H 2 and O 2 markets, and (ii) as required by future H 2 and O 2 markets where greater emphasis isplaced on reducing carbon emissions.If it were to be met entirely by high-e⁄ciency electrolysers, the existing hydrogen market (i.e. 500 billion m 3or about 1500TWh H 2 in energy terms) would require an input of around 2000TWh of electricity; thisamounts to about 230GW continuous of installed electrolyser capacity. The majority of the electrolyser51

applications would be of large (multi-MW) scale for applications in the ammonia production andpetrochemicals industries. These electrolysers may be located at the industrial site, or close to arenewable/nuclear/low-carbon electricity source (with implicit hydrogen distribution costs). Overall this is avery large market potential for electrolysers.The potential of future hydrogen markets is much greater. Future applications for electrolysers include:. supplying high volume markets in distributed applications (e.g. for refuelling fuel cell vehicles at allscales). bu¡ering intermittent renewables technologies within electricity networks to facilitate power systemmanagement in a ‘high renewables’ electricity sector. capturing intermittent renewable electricity supplies for dedicated hydrogen and oxygen production. decarbonising large-scale industrial processes (e.g. ammonia production and furnaces).Further, several new markets may emerge for low/zero-carbon oxygen. These include applications that areseparate from hydrogen markets (e.g. the use of electrolytic oxygen for oxygenation processes in the waterindustry or for oxygen-enrichment in furnaces) and applications that are contiguous with hydrogen markets(e.g. for oxy-hydrogen combustion processes and very high-e⁄ciency fuel cells). Thus, although the principalcommercial purpose of an electrolyser will be to provide hydrogen, the value of the oxygen by-productshould not be overlooked.4.2 Future Market SizeThe potential market size for electrolysers is identi¢ed here in the context of hydrogen requirements. Thefuture global market is outlined, and the UK market is used as a speci¢c example, while it is acknowledgedthat certain other countries (e.g. Germany and Japan) have more ambitious goals regarding renewables,hydrogen and fuel cells.Global annual energy use is approaching 100,000TWh and is expected to rise to 200,000TWh by 2050. Shellhas suggested that about 20 per cent. of global energy will come from renewables by 2050. The UK CarbonTrust has reported that the total global practical resource potential of wind (onshore and o¡shore) plusmarine (wave, tidal and hydro) plus solar-photovoltaic lies between 54,000 and 114,000TWh p.a. and by2050 the global installed capacity of these technologies is expected to be about 1000GW [5]. Other renewableresources will be increasingly exploited (including energy from waste and energy crops) but theirimplementation is CO 2 -neutral rather than CO 2 -reducing.Of the above 1000GW, about 80GW is expected to exist in the UK by 2050. Recently the hydrogenproduction potential from the combined capture of wind plus marine plus solar-photovoltaic electricity hasbeen projected as follows [6]:Year 2010 2020 2030 2040 2050UK H 2 production potential fromwind+marine+solar (TWh) 9.8 103 197 289 383By 2010, 4GW of installed wind power in the UK is expected, while 8.3GW is considered possible [5]. Themagnitude of the growing renewable input should be considered in the context of our peak and minimumdaily electricity demands approaching 60GW and 20GW respectively by 2010. Thereafter while electricitydemand growth will remain modest, the renewable input will grow rapidly (e.g. with onshore and o¡shorewind projected to reach 20GW and 30GW respectively by 2050[5]). Greater certainty is a¡orded by therecent extension of the government’s commitment to 15 per cent. renewables by 2015, by the expected rapiddepletion of North Sea oil and gas reserves and by the possibility of the UK becoming the world leader ino¡shore wind implementation. The important question here is how much of this local renewable energy willbe converted to hydrogen by electrolysis?Renewable electricity supplies are currently being dedicated entirely to the electricity system to help reduceits present 850TWh p.a. dependency upon coal and gas [7]. This relatively narrow approach to harnessingintermittent renewables is entirely feasible for the next few years, but absorbing the projected inputs ofintermittent renewable energy into the power system will become increasingly problematic. Once a few GWof renewable power has been integrated (i.e. by 2010-2015), the management of the power system willbecome di⁄cult especially at times of day when (i) demand is low but the renewables input is temporarilyhigh, and (ii) demand is very high but the renewables input is temporarily low. To deal with this, electricitycompanies will need to maintain a substantial reserve of thermal plant and/or integrate large amounts of52

energy storage and re-conversion systems. This translates to having to a¡ord several GW of additionalthermal plant and several GW of batteries, £ywheels or electrolysers within the power system to helpmaximise the capture of renewable energy, while providing no added value for electricity consumers.In this context, storage in the form of hydrogen is particularly attractive, because it can be sold as a clean fuelat a premium price (especially in the transport sector where hydrocarbon fuels are already heavily taxed), orreconverted to electricity to satisfy demand at times when the renewable input is low. Thus the generation ofhydrogen by electrolysis may become a very important feature of the future power system; indeed it maybecome pivotal in permitting the continued expansion of intermittent renewables beyond a few GW. Inaddition, o¡-grid renewable power generation sites may be developed principally for hydrogen production byelectrolysis (e.g. where all the electricity generated by an o¡shore wind farm is dedicated to hydrogenproduction), and electrolysers may also be dedicated to nuclear power supplies.Clearly, in a future low-carbon economy, electrolyser technology could provide a central solution to meetingboth the power management needs of the electricity sector and the needs of the transport and industrialsectors for low/zero carbon fuels. Electrolytic hydrogen could thereby displace large proportions of nonelectricityfuel consumption, which in the UK presently amounts to about 650TWh (transport) and about300TWh (industry) [7]. Simplistically, assuming continuous electrolyser operation, about 15GW ofhigh-e⁄ciency electrolysers are required to deliver 100TWh of hydrogen. Thus, if fuel-switching toelectrolytic hydrogen becomes a primary option for decarbonising the industrial and transport sectors,demands for electrolytic hydrogen could reach say 500TWh per annum (equivalent to 76GW continuous ofinstalled electrolyser capacity). These electrolysers would be served by some combination of localrenewables, nuclear energy and imported hydrogen (e.g. solar hydrogen from Southern Europe orgeothermal hydrogen from Iceland). Clearly, irrespective of the electricity source, the key enablingtechnology is the electrolyser.Thus a substantial shift in the UK to electrolytic hydrogen implies very large demands not only forrenewable energy technology but also for electrolyser technology. A global shift to electrolytic hydrogencould lead to a total requirement of several hundreds of GW of electrolysers. For example, if by 2050 only10 per cent. of the global energy requirement of 200,000TWh was met by electrolytic hydrogen, theassociated hydrogen requirement would be about 6,670 billion m 3 , and the electricity requirement forelectrolysis would amount to about 26,680 TWh (i.e. * 3000GW continuous of installed electrolysers)Hence, the new market potential for electrolysers dwarfs the existing market potential and on a globalscale the potential appears truly vast.4.3 Future Market PlayersAlthough the electrolyser industry is alive to the possibilities of the hydrogen economy, there is a large gapbetween where things stand today and the realisation of electrolyser implementations to meet the demands offuture markets. Existing electrolyser technology is expensive, no single electrolyser manufacturer is thedominant player, and no single company or government has a large stake in the global success ofelectrolysers. A large concerted R&D e¡ort exists to develop fuel cells especially for the transport sector, butnothing of similar scale is underway for electrolysers.Switching from hydrocarbons to hydrogen has not been widely contemplated. Thus who will be the majorplayers in developing electrolysers and matching electrolytic hydrogen of low/zero carbon-footprint totransport and industrial applications? The most prominent near-term application appears to be that ofBMW, which is enthusiastic about renewable hydrogen and has announced plans to commercially roll-out itshydrogen-engine cars in 2008. The next most likely market to emerge is that associated with the introductionof fuel-cell vehicles post-2010.In general, the market players that can in£uence the development of electrolysers and the application of therelated hydrogen technologies are:(a) electrolyser manufacturers engaged in demonstration projects involving solar and wind-poweredelectrolysers;(b) companies involved in hydrogen production, and especially petroleum companies who have interests inrenewables technologies and in delivering cleaner fuels at the forecourt;(c) companies involved in hydrogen use (as exist today or as projected for example in the automotivesector);(d) electricity companies with particular concerns for integrating high levels of (i) intermittent renewablesor (ii) nuclear power;53

(e)(f)governments with commitments to high renewables targets or carbon-reduction targets; anddevelopers of new electrolysis technology that o¡ers signi¢cant cost-performance bene¢ts.5. ConclusionsGreater than 90 per cent. of the detectable matter in the universe is hydrogen, but very little exists directly forus to exploit on Earth. Hydrogen is most probably the preferred energy carrier and fuel for futurelow-carbon economies, but concerted R&D e¡ort will be needed to provide plentiful and cheap supplies ofhydrogen of low/zero carbon footprint. Water electrolysis provides the primary option where renewable andnuclear electricity supplies are readily available. As yet electrolysis is an expensive process that has madelittle impact in the provision of hydrogen and oxygen within existing markets. However, given its low-carboncredentials electrolysis o¡ers a major route forward for harnessing renewable energy.In general, it would seem the opportunities for achieving electrolysers of 5300 $/kW will be limited by theincreasing dominance of material costs, especially for PEM electrolysers. Only ITM appears to o¡er a routeto achieving electrolysers of substantially lower unit cost. Outline unit cost targets of 50$/kW formass-produced polymer electrolysers based on the ITM approach appear most attractive, especially as theexisting hydrogen market is very large and the future hydrogen market is potentially enormous. Thus, ifproved successful, the ITM approach (using acid-based or alkaline-based ionomers) could access vastmarkets within future low-carbon economies.6. References1. www.enaa.or.jp/WE-NET Phase II Task 8, 2004.2. K.V. Lovell, N.S. Page, Membrane Electrolyte Technology for Solid Polymer Fuel Cells, EnergyTechnology Support Unit (ETSU F/02/00110/REP), 1997.3. Institute of Chemical Engineering, On-line database of bulk chemicals, www.icheme.org4. DuPont Fuel Cells, Information on Na¢on membranes from www.fuelcells.dupont.com5. Carbon Trust, Building options for UK renewable energy, 2003.6. Hart, D et al, Liquid biofuels and hydrogen from renewable resources in the UK to 2050: a technicalanalysis, Department for Transport report, 2003.7. Digest of UK Energy Statistics, DTI, 2001.#Prof Marcus Newborough54

PART IVFINANCIAL INFORMATIONSet out on the following pages are the Accountants’ Reports on the Company and on ITM Fuel Cellstogether with the opinions thereon of Deloitte & Touche LLP, the Company’s reporting accountants.AAccountants’ Report on ITM Power PlcDeloitte & Touche LLPLeda HouseStation RoadCambridgeCB1 2RNThe DirectorsITM Power PlcVilla FarmJack Haws LaneBarnackStamfordLincolnshirePE9 3DYDurlacher Limited4 Chiswell StreetLondonEC1Y 4UP18 May 2004Our Ref:Dear SirsITM POWER PLC (‘‘the Company’’)We report on the ¢nancial information set out below. This ¢nancial information has been prepared forinclusion in the Admission Document dated 18 May 2004 relating to the Admission of the Company to theAlternative Investment Market (‘‘the Investment Circular’’).Basis of preparationThe Company was incorporated on 1 March 2004 under the name of Quayshelfco 1070 PLC. The name ofthe Company was changed to ITM Power Plc on 4 May 2004.The Company issued 2 ordinary shares, on incorporation, for a consideration of »2. No material contracts ortransactions have been entered into save for those detailed in Sections 2 and 11 of Part VI of the InvestmentCircular.The Company has not yet traded and no dividends have been declared or paid.The ¢nancial information set out in this report is based on the audited non-statutory accounts of theCompany for the period from incorporation on 1 March 2004 to 5 March 2004 to which no adjustments wereconsidered necessary.ResponsibilitySuch non-statutory accounts are the responsibility of the directors of the Company who approved their issue.The directors of the Company are responsible for the contents of the Investment Circular in which this reportis included.It is our responsibility to compile the ¢nancial information set out in our report from the non-statutoryaccounts to form an opinion on the ¢nancial information and to report our opinion to you.55

Basis of opinionWe conducted our work in accordance with the Statements of Investment Circular Reporting Standardsissued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidencerelevant to the amounts and disclosures in the ¢nancial information. It also included an assessment of the¢nancial statements underlying the ¢nancial information and whether the accounting policies areappropriate to the entity’s circumstances, consistently applied and adequately disclosed.We planned and performed our work so as to obtain all the information and explanations which weconsidered necessary in order to provide us with su⁄cient evidence to give reasonable assurance that the¢nancial information is free from material misstatement whether caused by fraud or other irregularity orerror.Our work has not been carried out in accordance with auditing or other standards and practices generallyaccepted in the United States or other jurisdictions outside the United Kingdom and accordingly should notbe relied upon as if it had been carried out in accordance with those standards and practices.OpinionIn our opinion, the ¢nancial information set out below gives, for the purposes of the Investment Circular, atrue and fair view of the state of a¡airs of the Company as at 5 March 2004 and the result for the period thenended.ConsentWe consent to the inclusion in the Investment Circular of this report and accept responsibility for this reportfor the purposes of paragraph 45(8)(b) of Schedule 1 to the Public O¡ers of Securities Regulations 1995.Balance sheet of the Company at 5 March 2004Note »DebtorsCalled up share capital not paid 2CapitalCalled up share capital 3 2Shareholders’ funds ^ equity 4 21. Accounting policiesBasis of accountingThe ¢nancial statements have been prepared under the historical cost convention and in accordance withapplicable United Kingdom accounting standards, applied on a consistent basis.2. Pro¢t and loss accountNo pro¢t and loss account is presented within this ¢nancial information because the Company has notreceived income, incurred expenditure or recognised any gains or losses during the period under review.3. Called up share capitalAuthorised share capital:5March2004»50,000 ordinary shares of »1 each 50,000Allotted and called-up5March2004»2 ordinary shares of »1 each 2On 1 March 2004, on incorporation, two ordinary shares were issued at par.56

4. Reconciliation of movements in shareholders’ funds»New shares issued 2Net addition to shareholders’ funds 2Opening shareholders’ fundsöClosing shareholders’ funds 25. Post balance sheet eventsOn 14 April 2004, S Massey, J F Heathcote, D J Highgate, C G A Steele and P Hargreaves were appointed asdirectors of the Company in addition to J A Lloyd and J A D Wreford who were appointed as directors onincorporation.On 29 April 2004, by ordinary resolution passed at an extraordinary general meeting; the ordinary shares of»1 each were sub-divided into »0.05 ordinary shares and the authorised share capital of the Company wasincreased to »6,250,000 by the creation of a further 124,000,000 ordinary shares.On 29 April 2004, 71,399,960 ordinary shares were issued credited as fully paid in consideration for theacquisition by the Company of the entire issued share capital of ITM Fuel Cells Limited. Following thisacquisition, the share options granted by ITM Fuel Cells Limited were replaced by new options over theshares of the Company.The Company’s name was changed to ITM Power Plc on 4 May 2004.On 7 May 2004, the Company was issued with a trading certi¢cate in accordance with Section 117 of theCompanies Act 1985.At the date of this report the directors held the following interests in the ordinary shares and share options ofthe Company:SharesNumberShareoptionsNumberS Massey (Chairman) ö 700,000P Hargreaves (Non-executive) 5,045,810 öCGASteele (Non-executive) 1,356,250 öDJHighgate 14,000,000 öJALloyd 14,000,000 öJFHeathcote 1,312,500 7,409,500JADWreford 14,000,000 öYours faithfullyDeloitte & Touche LLPChartered Accountants57

BAccountants’ Report on ITM Fuel Cells LimitedDeloitte & Touche LLPLeda HouseStation RoadCambridgeCB1 2RNThe DirectorsITM Power PlcVilla FarmJack Haws LaneBarnackStamfordLincolnshirePE9 3DYDurlacher Limited4 Chiswell StreetLondonEC1Y 4UP18 May 2004Dear SirsITM Fuel Cells Limited (‘‘ITM Fuel Cells’’)On 29 April 2004 the whole of the issued share capital of ITM Fuel Cells was acquired by ITM Power Plc(the ‘‘Company’’). We report on the ¢nancial information of ITM Fuel Cells set out below. This ¢nancialinformation has been prepared for inclusion in the Admission Document dated 18 May 2004 relating to theAdmission of the Company to the Alternative Investment Market (‘‘AIM’’) (‘‘the Investment Circular’’).Basis of preparationThe ¢nancial information set out in this report, which has been prepared in accordance with applicableUnited Kingdom generally accepted accounting principles, is based on the statutory ¢nancial statements forthe period from incorporation (17 April 2000) to 30 April 2001, the audited ¢nancial statements for the twoyears ended 30 April 2002 and 30 April 2003 and the audited non-statutory ¢nancial statements for the eightmonths ended 31 December 2003 of ITM Fuel Cells, after making such adjustments as we considerednecessary.ResponsibilitySuch ¢nancial statements are the responsibility of the directors of the Company who approved their issue.The directors of the Company are responsible for the contents of the Investment Circular in which this reportis included.It is our responsibility to compile the ¢nancial information set out in our report from the ¢nancialstatements, to form an opinion on the ¢nancial information and to report our opinion to you.Basis of opinionWe conducted our work in accordance with the Statements of Investment Circular Reporting Standardsissued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidencerelevant to the amounts and disclosures in the ¢nancial information. The evidence included that recorded bythe auditors who audited the ¢nancial statements underlying the ¢nancial information for the year ended30 April 2002, the evidence obtained by our predecessor ¢rm Deloitte & Touche relating to the audit of the¢nancial statements underlying the ¢nancial information for the year ended 30 April 2003 and the evidenceobtained by us relating to the audit of the ¢nancial statements underlying the ¢nancial information for theperiod from incorporation (17 April 2000) to 30 April 2001 and for the eight months ended 31 December2003. It also included an assessment of signi¢cant estimates and judgements made by those responsible for58

the preparation of the ¢nancial statements underlying the ¢nancial information and whether the accountingpolicies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed.We planned and performed our work so as to obtain all the information and explanations which weconsidered necessary in order to provide us with su⁄cient evidence to give reasonable assurance that the¢nancial information is free from material misstatement whether caused by fraud or other irregularity orerror.Our work has not been carried out in accordance with auditing or other standards and practices generallyaccepted in the United States or other jurisdictions and accordingly should not be relied upon as if it hadbeen carried out in accordance with those standards and practices.OpinionIn our opinion, the ¢nancial information set out below gives, for the purposes of the Investment Circular, atrue and fair view of the state of a¡airs of ITM Fuel Cells as at the dates stated and of its losses and cash£ows for the periods then ended.ConsentWe consent to the inclusion in the Investment Circular of this report and accept responsibility for this reportfor the purposes of paragraphs 45(1)(b)(iii) and 45(10)(b) of Schedule 1 to the Public O¡ers of SecuritiesRegulations 1995.59

Pro¢t and Loss AccountsNotesPeriodended30 April2001*»Yearended30 April2002»EightmonthsYear ended ended30 April 31 December2003 2003»»Administrative expenses^ Research and development ö (43,393) (448,790) (387,171)^ Other ö (52,883) (242,905) (199,141)ö (96,276) (691,695) (586,312)Other operating income ö ö 9,809 161,785Operating loss 2 ö (96,276) (681,886) (424,527)Interest receivable and similarincome 3 ö 7,426 33,238 8,834Loss on ordinary activities beforetaxation 2,4 ö (88,850) (648,648) (415,693)Tax on loss on ordinary activities 7 ö ö 82,436 33,195Loss on ordinary activities aftertaxation, being retained loss for the¢nancial period 13 ö (88,850) (566,212) (382,498)Loss per shareBasic and diluted 8 ö (0.7p) (0.8p) (0.5p)*Represents the period from incorporation (17 April 2000) to 30 April 2001. ITM Fuel Cells commencedoperations on 6 March 2002.All activities derive from continuing operations.There are no recognised gains or losses other than as stated above. Therefore no statements of totalrecognised gains and losses have been presented in this report.60

Balance Sheets30 April2001»30 April2002»30 April2003»31 December2003»NotesFixed assetsTangible assets 9 ö 13,787 103,181 85,000Current assetsDebtors 10 3 21,121 134,641 157,323Investments ^ short term deposits ö 1,403,634 675,442 300,000Cash at bank and in hand ö 60,836 1,202 103,4813 1,485,591 811,285 560,804Creditors: Amounts falling duewithin one year 11 ö (71,048) (52,348) (86,184)Net current assets 3 1,414,543 758,937 474,620Total assets less current liabilities 3 1,428,330 862,118 559,620Capital and reservesCalled-up share capital 12 3 1,000 1,000 1,000Share premium account 13 ö 1,516,180 1,516,180 1,516,180Other reserve ö shares for issue 13 ö ö ö 80,000Pro¢t and loss account 13 ö (88,850) (655,062) (1,037,560)Total shareholders’ funds ^ equity 14 3 1,428,330 862,118 559,62061

Cash Flow StatementsNotesPeriodended30 April2001»Yearended30 April2002»EightmonthsYear ended ended30 April 31 December2003 2003»»Net cash out£ow from operatingactivities 16 ö (51,709) (704,520) (365,386)Returns on investments andservicing of ¢nance 17 ö 7,426 33,238 8,834Taxation 17 ö ö ö 7,870Capital expenditure and ¢nancialinvestment 17 ö (13,492) (111,479) (4,481)Cash out£ow before management ofliquid resources and ¢nancing ö (57,775) (782,761) (353,163)Management of liquid resources 17 ö (1,403,634) 728,192 375,442Financing 17 ö 1,522,245 (5,065) 80,000Increase (decrease) in cash in theperiod 18 ö 60,836 (59,634) 102,27962

1. Accounting policiesAsummary of the principal accounting policies, all of which have been applied consistently throughout allperiods presented, is set out below:(a) Basis of accountingThe ¢nancial information has been prepared under the historical cost convention and in accordance withapplicable United Kingdom accounting standards, applied on a consistent basis.(b) Basis of preparation ^ going concernThe ¢nancial information has been prepared on a going concern basis, on the grounds that the directorsbelieve that ITM Fuel Cells will continue in operation for the foreseeable future as a result of the planned¢nancial support from its parent undertaking, ITM Power Plc. The planned ¢nancial support will beprovided out of the anticipated proceeds of the proposed £otation of ITM Power Plc (the ‘‘Company’’), theminimum subscription level for which has been set at »6.2 million (net of expenses).The directors have prepared projected cash £ow information for the Company and ITM Fuel Cells (togetherthe ‘‘Group’’) for the period ending 31 December 2005. On the basis that the minimum subscription level isachieved, the directors believe that the Group will have su⁄cient working capital for at least the next twelvemonths.On the basis that this ¢nancial information is being included in the Investment Circular for the purpose of the£otation of the Company, and taking account of the minimum subscription level, the directors believe it isappropriate for the ¢nancial information on ITM Fuel Cells to be prepared on the going concern basis.Accordingly, the ¢nancial information does not include any adjustments that would result if ITM Fuel Cellsdid not continue trading.(c) Research and developmentResearch and development expenditure is written o¡ in the period in which the expenditure is incurred.(d) Tangible ¢xed assetsTangible ¢xed assets are stated at cost, net of depreciation and any provision for impairment.Depreciation is provided at rates calculated to write o¡ the cost of ¢xed assets, less their estimated residualvalue, over their expected useful lives on the following bases:Computer equipmentLaboratory and test equipmentO⁄ce furniture and ¢ttings3 years straight line4 years straight line4 years straight line(e) Foreign currencyTransactions in foreign currencies are recorded at the rate of exchange at the date of the transaction.Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at therates of exchange prevailing at that date. Any gain or loss arising from a change in exchange rates subsequentto the date of the transaction is included as an exchange gain or loss in the pro¢t and loss account.(f) LeasesRentals under operating leases are charged on a straight-line basis over the lease term, even if the paymentsare not made on such a basis.(g) TaxationCurrent tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (orrecovered) using the tax rates and laws that have been enacted by the balance sheet date.Deferred tax is provided in full on timing di¡erences, which result in an obligation at the balance sheet dateto pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallisebased on current tax rates and law. Timing di¡erences arise from the inclusion of items of income andexpenditure in taxation computations in periods di¡erent from those in which they are included in ¢nancialstatements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not thatthey will be recovered. Deferred tax assets and liabilities are not discounted.63

(h) Pension costsThe amount charged to the pro¢t and loss account in respect of the money purchase pension scheme is thecontributions actually payable in the year. Di¡erences between contributions payable and contributionsactually paid are shown as either accruals or prepayments in the balance sheet.(i) InvestmentsCurrent asset investments are stated at the lower of cost and net realisable value.(j) GrantsGovernment grants are included in other operating income in the period to which the expenditure they relateto is incurred.2. Segmental informationThere is only one class of business, which is the research and development of scienti¢c and engineeringprojects.The analysis of operating loss, loss before taxation and the net assets of ITM Fuel Cells by geographicalsegment has not been provided due to the fact that there is only one geographical location, being the UnitedKingdom.3. Interest receivable and similar incomePeriod ended30 AprilEight monthsended31 DecemberYear ended30 AprilYear ended30 April2001 2002 2003 2003» » » »Investment incomeBank interest receivable ö 7,426 33,238 8,8344. Loss on ordinary activities before taxationLoss on ordinary activities before taxation is stated after charging (crediting):Period ended30 AprilEight monthsended31 DecemberYear ended30 AprilYear ended30 April2001 2002 2003 2003» » » »Depreciation and amounts written o¡ö owned tangible assets ö ö 21,790 22,662Rentals under operating leasesö land and buildings ö 4,187 38,441 25,152Grant income ö ö (9,809) (142,797)Auditors’ remuneration for audit services ö 2,750 5,000 öAuditors’ remuneration for non-audit services ö 6,250 2,000 öThe auditors for the eight month period ended 31 December 2003 were Deloitte & Touche LLP. The auditorsfor the year ended 30 April 2003 were Deloitte & Touche. The auditors for the year ended 30 April 2002 werePannell Kerr Foster. The statutory ¢nancial statements for the period ended 30 April 2001 were not requiredto be audited.64

5. Employee numbers and sta¡ costsThe average monthly number of employees (including executive directors) was:Period ended30 AprilEight monthsended31 DecemberYear ended30 AprilYear ended30 April2001 2002 2003 2003Number Number Number NumberFinance and administration ö 1 3 3Research and development ö 2 5 6ö 3 8 9» » » »Their aggregate remuneration comprised:Wages and salaries ö 40,415 285,433 227,318Social security costs ö 3,209 33,116 31,543Other pension costs ö 4,050 23,116 36,428ö 47,674 341,665 295,2896. Directors remuneration(a) Directors’ emolumentsThe remuneration of the directors was as follows:Period ended30 AprilYear ended30 AprilYear ended30 AprilEight monthsended31 December2001 2002 2003 2003» » » »Aggregate emoluments ö 32,018 171,515 123,900Money purchase pension contributions ö 4,050 23,116 36,428ö 36,068 194,631 160,328(b) Directors’ share optionsAggregate emoluments disclosed above do not include any amounts for the value of options to acquireordinary shares in ITM Fuel Cells granted to or held by the directors.Details of options for directors who served during the period are as follows:At 1 May2001NoGrantedNoExercisedNoAt 30 April2002NoExerciseprice»Date fromwhichexercisableExpirydateJADWreford ö ö ö ö ö ö öDJHighgate ö ö ö ö ö ö öJALloyd ö ö ö ö ö ö öJFHeathcote ö 5,850 ö 5,850 4.00 16/05/03 16/05/10CGASteele ö ö ö ö ö ö öö 5,850 ö 5,85065

At 1 May2002NoGrantedNoExercisedNoAt 30 April2003NoExerciseprice»Date fromwhichexercisableExpirydateJADWreford ö ö ö ö ö ö öDJHighgate ö ö ö ö ö ö öJALloyd ö ö ö ö ö ö öJFHeathcote 5,850 ö ö 5,850 4.00 16/05/03 16/05/10ö 10,000 ö 10,000 4.00 21/08/02 21/08/09CGASteele ö 10,000 ö 10,000 4.00 21/08/02 21/08/095,850 20,000 ö 25,850At 1 May2003NoGrantedNoAt31 DecemberExercised 2003No NoExerciseprice»Date fromwhichexercisableExpirydateJADWreford ö ö ö ö ö ö öDJHighgate ö ö ö ö ö ö öJALloyd ö ö ö ö ö ö öJFHeathcote 5,850 ö ö 5,850 4.00 16/05/03 16/05/1010,000 ö 10,000 ö 4.00 21/08/02 21/08/09ö 75,000 ö 75,000 4.00 01/12/03 (i)ö 25,000 ö 25,000 4.00 01/12/03 (i)CGASteele 10,000 ö 10,000 ö 4.00 21/08/02 21/08/0925,850 100,000 20,000 105,850(i)One third of these options become exercisable in the period from 1 December 2003 to 31 March 2004, another third becomeexercisable in the period from 1 April 2004 to 31 March 2005 and the remaining third become exercisable in the period from 1 April2005 to 31 March 2006, based on continued employment and the options shall lapse on 1 December 2013.(c) Directors’ pension contributionsThree directors are members of money purchase schemes (30 April 2003 ^ 3; 30 April 2002 ^ 3; 30 April 2001^ nil). Contributions paid by ITM Fuel Cells in respect of such directors are set out in the table below:Period ended30 AprilYear ended30 AprilYear ended30 AprilPeriod ended31 December2001 2002 2003 2003» » » »Directors’ pension contributions ö 4,050 23,116 36,428(d) Directors’ shareholdingsThe directors held bene¢cial interests in the shares of ITM Fuel Cells as follows:30 April200130 April200230 April200331 December2003Number Number Number NumberOrdinary shares of »0.001 eachExecutiveJADWreford ö 200,000 200,000 200,000DJHighgate ö 200,000 200,000 200,000JALloyd ö 200,000 200,000 200,000Non-executiveJFHeathcote ö 6,250 8,750 8,750CGASteele ö 9,375 9,375 9,375Subsequent to 31 December 2003, S Massey and P Hargreaves were appointed as non-executive directors ofITM Fuel Cells. Since 31 December 2003 a further 10,000 ordinary shares of »0.001 each were allotted toeach of F J Heathcote and C G A Steele pursuant to the exercise by them of options.66

7. TaxationPeriod ended30 AprilEight monthsended31 DecemberYear ended30 AprilYear ended30 April2001 2002 2003 2003» » » »The tax credit comprises:Current taxUK corporation tax for the period ö ö (74,591) (33,195)Adjustments in respect of prior period ö ö (7,845) öTotal tax on loss on ordinary activities ö ö (82,436) (33,195)The standard rate of tax for the period based on the UK standard small companies rate of corporation tax is19 per cent. The actual tax credit for the current and previous periods di¡ers from the standard rate for thereasons set out in the following reconciliation:Period ended30 AprilYear ended30 AprilYear ended30 AprilEight monthsended31 December2001 2002 2003 2003» » » »Loss on ordinary activities before tax ö (88,850) (648,648) (415,693)Tax at 19 per cent. thereon ö (16,882) (123,243) (78,982)Factors a¡ecting charge for the period:Expenses not deductible for tax purposes ö 16,882 224 7Capital allowances in (excess) de¢cit ofdepreciation ö ö (6,130) 316R&D tax credit ö ö (74,591) (33,195)UK losses not recognised ö ö 129,149 78,659Di¡erences in respect of prior period ö ö (7,845) öCurrent tax credit for the period ö ö (82,436) (33,195)Analysis of deferred tax balances:UnprovidedPeriod ended30 AprilEight monthsended31 DecemberYear ended30 AprilYear ended30 April2001 2002 2003 2003» » » »Tax losses available ö ö 63,968 116,663ITM Fuel Cells has tax losses available to carry forward against future taxable pro¢ts, subject to agreementwith the Inland Revenue.No deferred tax asset has been recognised in respect of timing di¡erences relating primarily to tax losses asthere is insu⁄cient evidence that the asset would be recoverable in the foreseeable future. The asset willbecome recoverable to the extent that ITM Fuel Cells generates su⁄cient taxable pro¢ts in the future.67

8. Loss per ordinary shareThe calculations of earnings per share are based on the following losses and numbers of shares.Basic and dilutedPeriodended30 AprilYear ended30 AprilYear ended30 AprilEight monthsended31 December2001 2002 2003 2003Retained loss for the ¢nancial period (») ö (88,850) (566,212) (382,498)Weighted average number of ordinary shares forbasic loss per share 100,741 12,443,699 70,000,000 70,202,857The weighted average number of shares (and the resulting loss per share) for each of the periods, as disclosed,has been calculated with reference to the number of ordinary shares of the Company in issue post its capitalreorganisation and its acquisition (by way of share for share exchange) of ITM Fuel Cells which occurredsubsequent to 31 December 2003.FRS 14 requires presentation of diluted earning per share when a company could be called upon to issueshares that would decrease net pro¢t or increase net loss per share. For a loss making company withoutstanding share options, the net loss per share would be decreased by the exercise of options, and hence noadjustment has been made to the diluted loss per share as presented.9. Tangible ¢xed assetsLaboratoryand testequipment»Computerequipment»O⁄cefurnitureand ¢ttings»Total»CostAt 17 April 2000 and 30 April 2001 ö ö ö öAdditions ö 13,787 ö 13,787At 30 April 2002 ö 13,787 ö 13,787Additions 94,997 10,222 5,965 111,184At 30 April 2003 94,997 24,009 5,965 124,971Additions 1,004 2,498 979 4,481At 31 December 2003 96,001 26,507 6,944 129,452DepreciationAt 17 April 2000, 30 April 2001 and 30 April 2002 ö ö ö öCharge for the year 14,236 6,428 1,126 21,790At 30 April 2003 14,236 6,428 1,126 21,790Charge for the period 15,895 5,656 1,111 22,662At 31 December 2003 30,131 12,084 2,237 44,452Net bookvalueAt 17 April 2000 and 30 April 2001 ö ö ö öAt 30 April 2002 ö 13,787 ö 13,787At 30 April 2003 80,761 17,581 4,839 103,181At 31 December 2003 65,870 14,423 4,707 85,00068

10. Debtors30 April2001»30 April2002»30 April2003»31 December2003»Amounts falling due within one year:Corporation tax ö ö 82,436 107,761Prepayments and accrued income ö 972 ö 3,667Called up share capital not paid 3 ö ö öOther debtors ö 20,149 23,715 17,4053 21,121 106,151 128,833Amount falling due after more than one year:Other debtors ö ö 28,490 28,4903 21,121 134,641 157,32311. Creditors: Amounts falling due within one year30 April2001»30 April2002»30 April2003»31 December2003»Trade creditors ö 11,750 19,062 33,582Other taxes and social security ö 14,913 11,759 17,344Other creditors ö 28,524 9,527 öAccruals and deferred income ö 15,861 12,000 35,258ö 71,048 52,348 86,18412. Called-up share capital30 April2001»30 April2002»30 April2003»31 December2003»Authorised share capital:100 ordinary shares of »1 each 100 ö ö ö1,170,000 ordinary shares of »0.001 each ö 1,170 1,170 1,170100 1,170 1,170 1,170Allotted, called-up and fully paid3 ordinary shares of »1 each 3 ö ö ö1,000,000 ordinary shares of »0.001 each ö 1,000 1,000 1,0003 1,000 1,000 1,000On 17 April 2000, on incorporation, one »1 ordinary share was issued at par. On 6 February 2001 twofurther »1 ordinary shares were issued at par. On 19 February 2002, following a special resolution, each»1 share was split into 1,000 »0.001 shares, and the authorised share capital was increased to »1,170.On the same day, 597,000 »0.001 shares were issued for cash at par.Between 6 March 2002 and 28 March 2002, a further 400,000 »0.001 shares were issued for »1,600,000,giving rise to a share premium of »1,599,600.The total number of share options granted under the following share schemes is as follows:Unapproved share schemeUnapproved share options granted at 30 April 2002, 30 April 2003 and 31 December 2003 are 14,625, 34,625and 91,625 respectively. The unapproved share options are exercisable at a price of »4.00 per share and theperiod of exercise is 7 years from the date of grant.69

Enterprise Management Incentive share schemeAt 31 December 2003No.Exercise price per share» Periodofexercise25,000 4.00 From 01/12/03 up to 1 Ù 3 by 31/03/04, another 1 Ù 3 upto 31/03/05 and the remainder after 31/03/06.All options lapse on 01/12/13.8,500 4.00 1 Ù 4 after 17/06/05, 1 Ù 4 after 17/06/06, 1 Ù 4 after17/06/07 and the remainder after 17/06/08.All options lapse on 01/12/10.7,500 4.00 1 Ù 4 after 08/10/05, 1 Ù 4 after 08/10/06, 1 Ù 4 after 08/10/07and the remainder after 08/10/08.All options lapse on 01/12/10.13. ReservesSharepremiumaccount»Otherreserve»Pro¢tand lossaccount»Total»At 17 April 2000 and 30 April 2001 ö ö ö öRetained loss for the year ö ö (88,850) (88,850)Premium on shares issued in the year 1,599,600 ö ö 1,599,600Expenses of share issue (83,420) ö ö (83,420)At 30 April 2002 1,516,180 ö (88,850) 1,427,330Retained loss for the year ö ö (566,212) (566,212)At 30 April 2003 1,516,180 ö (655,062) 861,118Retained loss for the period ö ö (382,498) (382,498)Shares for issue* ö 80,000 ö 80,000At 31 December 2003 1,516,180 80,000 (1,037,560) 558,620* 20,000 »0.001 share options were exercised in the period ended 31 December 2003 for a total amount of »80,000. The shares were,however, allotted in March 2004 and hence at 31 December 2003 have been included as an other reserve.14. Reconciliation of movements in shareholders’ fundsPeriodended30 April2001»Year ended30 April2002»Year ended30 April2003»8monthsended31 December2003»Loss for the period ö (88,850) (566,212) (382,498)New shares issued 3 1,517,177 ö öShares for issue ö ö ö 80,000Net addition to (reduction in) shareholders’ funds 3 1,428,327 (566,212) (302,498)Opening shareholders’ funds ö 3 1,428,330 862,118Closing shareholders’ funds 3 1,428,330 862,118 559,62015. Derivatives and other ¢nancial instrumentsITM Fuel Cells’ ¢nancial instruments comprise cash and short term deposits, debtors and creditors, whicharise in the normal course of business. It is, and has been throughout the period under review, ITM FuelCells’ policy that no speculative trading in ¢nancial instruments shall be undertaken.The main risks arising from ITM Fuel Cells’ ¢nancial instruments are interest rate risk and liquidity risk.This note deals with ¢nancial assets and ¢nancial liabilities as de¢ned in Financial Reporting Standard 13‘‘Derivatives and other ¢nancial instruments: Disclosures’’ (‘‘FRS 13’’).70

As permitted by FRS 13, short term debtors and creditors have also been excluded from the disclosures,other than the currency disclosures.Interest rate risk and liquidity riskITM Fuel Cells has no ¢nancial assets other than sterling cash deposits of »300,000 (»675,442, »1,403,634and »nil as at 30 April 2003, 30 April 2002 and 30 April 2001 respectively) which are part of the ¢nancingarrangements of ITM Fuel Cells. The sterling cash deposits comprise amounts placed on deposit for periodsof up to one month and at call. ITM Fuel Cells seeks to maximise interest receipts within these parameters.Interest receipts are earned on deposits at the prevailing rate.ITM Fuel Cells’ policy throughout the periods presented has been to minimise the risk by placing funds inlow risk cash deposits but to also maximise the return on funds placed on deposit.Interest rate pro¢leThe weighted average interest rate in respect of sterling deposits for the eight month period ended31 December 2003 was 2.85 per cent. (3.35 per cent., 3.59 per cent. for the years ended 30 April 2003 and30 April 2002 respectively). The weighted average period to maturity for which these rates were ¢xed was6.5 days (7.1 days, 7.0 days for the years ended 30 April 2003 and 30 April 2002 respectively).Currency riskITM Fuel Cells’ principal functional currency is pounds sterling. ITM Fuel Cells has limited exposure toforeign currencies.ITM Fuel Cells held the following ¢nancial assets at 31 December 2003, 30 April 2003, 30 April 2002 and30 April 2001.30 April2001»30 April2002»30 April2003»31 December2003»Assets held as part of the ¢nancing arrangementsof ITM Fuel Cellsö Sterling cash deposits ö 1,403,634 675,442 300,000ö Cash ö 60,836 1,202 103,481ö 1,464,470 676,644 403,481Fair values of ¢nancial assetsThe directors consider there to be no material di¡erence between the book value of ¢nancial instruments andtheir fair value at the balance sheet dates.Borrowing facilitiesITM Fuel Cells had no borrowing facilities throughout the period.Market price riskThe principal market price risk comprises interest rate exposure. ITM Fuel Cells’ funds are invested in cashdeposits with the objective of maintaining a balance between accessibility of funds and competitive rates ofreturn.Liquidity riskITM Fuel Cells’ policy throughout the period regarding liquidity has been to maximise the return on fundsplaced on deposit but to minimise the associated risk by placing funds in low risk cash deposits.71

16. Reconciliation of operating loss to operating cash £owsPeriodended30 April2001Year ended30 April2002Year ended30 April2003Eight monthsended31 December2003» » » »Operating loss ö (96,276) (681,886) (424,527)Depreciation charge ö ö 21,790 22,662(Increase) decrease in debtors ö (18,686) (33,519) 2,643Increase (decrease) in creditors ö 63,253 (10,905) 33,836Net cash out£ow from operating activities ö (51,709) (704,520) (365,386)17. Analysis of cash £owsPeriodended30 April2001Year ended30 April2002Year ended30 April2003Eight monthsended31 December2003» » » »Returns on investments and servicing of ¢nanceInterest received ö 7,426 33,238 8,834Net cash in£ow ö 7,426 33,238 8,834TaxationResearch & development tax credit ö ö ö 7,870Net cash in£ow ö ö ö 7,870Capital expenditure and ¢nancial investmentPurchase of tangible ¢xed assets ö (13,492) (111,479) (4,481)Net cash out£ow ö (13,492) (111,479) (4,481)Management of liquid resourcesCash (placed on) withdrawn from term deposits ö (1,403,634) 728,192 375,442FinancingIssue of ordinary share capital (net of expenses) ö 1,522,245 (5,065) 80,000Net cash in£ow (out£ow) ö 1,522,245 (5,065) 80,00072

18. Analysis and reconciliation of net funds30 April2001»Cash £ow»30 April2002»Cash at bank and in hand ö 60,836 60,836Current asset investments ö 1,403,634 1,403,634Net funds ö 1,464,470 1,464,47030 April2002»Cash £ow»30 April2003»Cash at bank and in hand 60,836 (59,634) 1,202Current asset investments 1,403,634 (728,192) 675,442Net funds 1,464,470 (787,826) 676,64430 April2003»Cash £ow»31 December2003»Cash at bank and in hand 1,202 102,279 103,481Current asset investments 675,442 (375,442) 300,000Net funds 676,644 (273,163) 403,48130 April2001»30 April2002»30 April2003»31 December2003»Increase (decrease) in cash in the period ö 60,836 (59,634) 102,279Cash out£ow (in£ow) from increase (decrease) inliquid resources ö 1,403,634 (728,192) (375,442)Change in net funds resulting from cash £ows ö 1,464,470 (787,826) (273,163)Net funds at beginning of period ö ö 1,464,470 676,644Net funds at end of period ö 1,464,470 676,644 403,48119. Financial commitmentsITM Fuel Cells had no capital commitments outstanding at 31 December 2003 (30 April 2003: nil; 30 April2002: nil; 30 April 2001: nil).20. Contingent liabilitiesDuring the period to 31 December 2003, ITM Fuel Cells received »142,797 (out of a total of »469,250) ofgrant income from the Department of Trade and Industry. This grant is for novel materials and processes foralcohol based fuel cells, and is received based on 69 per cent. of eligible costs incurred between April 2003and March 2005 and deliverable milestones during that period. However, in the event that ITM Fuel Cellsgenerates income or sale proceeds from the use of prototypes developed from the grant project, 69 per cent.of those proceeds would be used to refund the grant. The impact at 31 December 2003 would be the potentialrefund of »142,797 in the future in the event that su⁄cient revenues are generated from the prototypesdeveloped under the grant agreement.21. Related party transactionsThe following transactions took place during the reported periods at arm’s length:Included within debtors as at 31 December 2003 is a balance of »4,272 (creditor balances of »9,527, »28,524and »nil as at 30 April 2003, 30 April 2002 and 30 April 2001 respectively) with Dental Root Filling ProductsLimited, a company incorporated in the United Kingdom, and a company for which J A D Wreford andJALloyd are both directors. Costs incurred (principally rent) during the period to 31 December 2003 byDental Root Filling Products Limited on behalf of ITM Fuel Cells, for an amount of »20,616 (»40,992,73

»27,365 and »nil for the periods ended 30 April 2003, 30 April 2002 and 30 April 2001 respectively), havebeen recharged to ITM Fuel Cells at cost. During the period ended 31 December 2003 costs incurred by ITMFuel Cells on behalf of DRFP Holdings Limited, the parent company of Dental Root Filling ProductsLimited, for an amount of »18,988 have been recharged at prices considered to be arm’s length.22. Post balance sheet eventsOn 29 April 2004, the entire share capital of ITM Fuel Cells was acquired by the Company. Following theacquisition of ITM Fuel Cells, all share options granted by ITM Fuel Cells were replaced by new optionsover the shares of the Company.On 4 May 2004, the company name of ITM Fuel Cells was changed from ITM Power Limited to ITM FuelCells Limited.23. Previous auditorsThe ¢nancial statements for the period from incorporation (17 April 2000) to 30 April 2001 were notrequired to be audited. The ¢nancial statements for the year ended 30 April 2002 were audited by PannellKerr Foster, Regent House, Clinton Avenue, Nottingham NG5 1AZ. The ¢nancial statements for the yearended 30 April 2003 were audited by our predecessor ¢rm Deloitte & Touche of Leda House, Station Road,Cambridge CB1 2RN.24. Controlling partyAt 31 December 2003, the Directors as a group controlled ITM Fuel Cells and hence there was no ultimatecontrolling party. On 29 April 2004, the Company became ITM Fuel Cells’ parent undertaking and hence itscontrolling party.Yours faithfullyDeloitte & Touche LLPChartered Accountants74

PART VPRO FORMA STATEMENT OF NET ASSETS(Assuming Maximum Subscription)The unaudited pro forma statement of net assets set out below has been prepared to illustrate how the Placingwould have a¡ected the net assets of the Group had it occurred on 5 March 2004. This table has beenprepared for illustrative purposes only and, because of its nature, may not give a true picture of the ¢nancialposition of the Group at 5 March 2004.AdjustmentsITM Power Plcat5March2004 (1)»ITM Fuel CellsLimitedat31 December2003 (2)»Placing (3)Pro forma netassets»»Fixed assetsTangible assets ö 85,000 ö 85,000Current assetsDebtors 2 157,323 ö 157,325Investments ^ short term deposits ö 300,000 ö 300,000Cash at bank and in hand ö 103,481 9,000,000 9,103,4812 560,804 9,000,000 9,560,806Creditors: Amounts falling due withinone year ö (86,184) ö (86,184)Net current assets 2 474,620 ö 9,474,622Total net assets 2 559,620 9,000,000 9,559,622Notes:(1) The net assets of ITM Power Plc have been extracted from the accountants’ report on the Company as at 5 March 2004 set out inSection A of Part IV of this document.(2) This adjustment shows the e¡ect of the reorganisation whereby the Company acquired ITM Fuel Cells Limited by way of a sharefor share exchange. The net assets of ITM Fuel Cells Limited have been extracted from the accountants’ report on that company asat 31 December 2003 set out in Section B of Part IV of this document.(3) This adjustment shows the e¡ect of the proposed Placing, assuming Maximum Subscription, of 20,000,000 Placing Shares at aPlacing Price of 50 pence each, raising net proceeds of approximately »9,000,000 (gross proceeds of »10,000,000 less costs of»1,000,000).(4) No adjustment has been made for any event since 5 March 2004, save as disclosed above, and in particular the pro forma statementof net assets does not take into account any trading or working capital movements arising for ITM Power Plc or ITM Fuel CellsLimited since 5 March 2004 and 31 December 2003 respectively.75

PART VIADDITIONAL INFORMATION1. Incorporation and Status of the Company1.1 The Company was incorporated in England and Wales on 1 March 2004 as a public limited companyunder the Act with the name Quayshelfco 1070 PLC. The Company’s name was changed to ITMPower Plc by a special resolution passed on 29 April 2004. The Company’s registered number is5059407.1.2 On 7 May 2004, the Company was issued with a trading certi¢cate in accordance with Section 117 ofthe Act.1.3 The Company’s registered o⁄ce is at Villa Farm, Jack Haws Lane, Barnack, Stamford, LincolnshirePE9 3DY.1.4 The liability of the members of the Company is limited.2. Share Capital of the Company2.1 At the date of its incorporation, the Company had an authorised share capital of »50,000 divided into50,000 ordinary shares of »1 each of which two were issued and fully paid. Since that date the followingchanges to the authorised and issued share capital have taken place:. by an ordinary resolution passed at the extraordinary general meeting referred to atparagraph 2.4 of this Part VI, the existing ordinary shares of »1 each in the capital of theCompany (including the two issued ordinary shares) were sub-divided in to 1,000,000 OrdinaryShares;. by an ordinary resolution passed at the extraordinary general meeting referred to atparagraph 2.4 of this Part VI, the authorised share capital of the Company was increased to»6,250,000 by the creation of a further 124,000,000 Ordinary Shares ranking pari passu with theexisting issued and authorised but unissued Ordinary Shares; and. on 29 April 2004, 71,399,960 Ordinary Shares were issued credited as fully paid in considerationof the transfer to the Company of the entire issued share capital of ITM by way of the share forshare exchange referred to at paragraph 3.4 of this Part VI.2.2 On the date of this document, the authorised share capital of the Company was »6,250,000 divided into125,000,000 Ordinary Shares, of which 71,400,000 such shares were issued and credited as fully paid.2.3 Immediately following Admission (assuming Maximum Subscription) the authorised share capital ofthe Company will be »6,250,000 divided into 125,000,000 Ordinary Shares of which 91,400,000 suchshares will be issued and credited as fully paid.2.4 In addition to the resolutions referred to in paragraph 2.1 of this Part VI, on 29 April 2004, it wasresolved at an extraordinary general meeting of the Company that:. the Directors were generally and unconditionally authorised in accordance with Section 80 of theAct to allot any authorised but unissued share capital of the Company for a period of ¢ve yearsfrom the date of passing the resolution, unless previously revoked or varied by the Company ingeneral meeting;. the Directors were empowered for a period of 15 months after the passing of the resolution oruntil the conclusion of the annual general meeting of the Company next following the passing ofthe resolution, whichever is earlier, to allot Ordinary Shares pursuant to the authority referred toin the preceding sub-paragraph as if Section 89(1) of the Act did not apply to such allotmentprovided the allotment is con¢ned to the allotment of Ordinary Shares:öööfor the purposes of the Placing;for the purposes of the Share Options;toexisting members by way of rights, open o¡er, scrip or bonus issue; and76

öotherwise than as stated above, up to an aggregate nominal value equal to 5 per cent. of theissued share capital of the Company immediately following Admission (assuming fullsubscription of the Placing Shares under the Placing);and the Company may, prior to the expiry of the powers conferred above, make an o¡er oragreement that requires or might require Ordinary Shares to be allotted after the expiry of suchpower.Save as set out in this paragraph 2.4, the Ordinary Shares have pre-emption rights in respect ofany future issues of Ordinary Shares to the extent conferred by Section 89 of the Act.. the Company was authorised pursuant to Section 320 of the Act to acquire the shares in ITMheld by Directors pursuant to the share for share exchange referred to in paragraph 3.4 of thisPart VI;. the name of the Company was changed to ITM Power Plc; and. new articles of association were adopted as described in paragraph 4 of this Part VI.2.5 Save in respect of the Share Options described in paragraph 9 of this Part VI (which, if exercised in full,would amount in aggregate to approximately 9.85 per cent. of the issued share capital of the Companyimmediately following Admission (assuming Maximum Subscription)), no unissued share or loancapital of the Company is under option or agreed, conditionally or unconditionally, to be put underoption.2.6 The Company does not have in issue any securities not representing share capital and on Admissionthere will not be any outstanding convertible securities of the Company in issue.2.7 The existing Ordinary Shares in issue at the date of this document are in registered form.2.8 The Placing Price of 50 pence per Ordinary Share represents a premium of 45 pence over the nominalvalue of 5 pence per Ordinary Share.3. Subsidiaries3.1 The Company is the holding company of the Group.3.2 The Company’s subsidiary is ITM, which is a wholly-owned subsidiary and is the main tradingcompany of the Group.3.3 ITM was incorporated in England and Wales on 17 April 2000 with registered number 03973827 underthe Act as a private company limited by shares. The registered o⁄ce of ITM is at Villa Farm, JackHaws Lane, Barnack, Stamford, Lincolnshire PE9 3DY.3.4 On 29 April 2004 the entire issued share capital of ITM was acquired by the Company by way of ashare for share exchange.4. Memorandum and Articles of Association4.1 The memorandum of association of the Company provides that the Company’s principal object is toact as a general commercial company.4.2 The articles of association of the Company (the ‘‘Articles’’) contain, inter alia, provisions to thefollowing e¡ect:Share Capital. The authorised share capital may be increased by ordinary resolution and reduced by specialresolution.. All the issued shares are in registered form.. A shareholder may be disenfranchised where he, or a person appearing to be interested in shares,fails to comply with a notice from the Company requiring him to indicate the capacity in which heholds such shares or any interest in them.. The Board may decline to register a transfer of any share (not being a fully paid share).. Subject to the Act the Company may issue shares which are or, at the option of the Company orthe holder of such shares, are liable to be redeemed in accordance with the Articles.77

Transfer of SharesSubject to such restrictions of the Articles as may be applicable and save in the case of shares that havebecome participating securities for the purposes of the Uncerti¢cated Securities Regulations 2001, titleto which may be transferred by means of a relevant system such as CREST without a writteninstrument, the Ordinary Shares may be transferred by instrument of transfer in writing in any usualform or in any form approved by the Board. Such instrument shall be executed by or on behalf of thetransferor and (in the case of a transfer of a share which is not fully paid up) by or on behalf of thetransferee. The transferor shall be deemed to remain the holder of such share until the name of thetransferee is entered in the register of members in respect of it. The Board may, in its absolute discretionand without giving any reason, refuse to register any transfer of a certi¢cated share unless:. it is in respect of a share which is fully paid up;. it is in respect of only one class of share;. it is in favour of a single transferee or not more than four joint transferees;. it is duly stamped (if required); and. it is delivered for registration to the registered o⁄ce or such other place as the Board may fromtime to time determine, accompanied (except in the case of a transfer by a recognised personwhere a certi¢cate has not been issued or in the case of renunciation) by the certi¢cate for theshares to which it relates and such other evidence as the Board may reasonably require to provethe title of the transferor or person renouncing and the due execution of the transfer orrenunciation by him or, if the transfer or renunciation is executed by some other person on hisbehalf, the authority of that period to do so.The Board may, in its absolute discretion and without giving any reason, refuse to register the transferof an uncerti¢cated share in the circumstances set out in the CREST Regulations (subject to anyrelevant requirements of the UK Listing Authority and/or the London Stock Exchange).If the Board refuses to register a transfer it must, within two months after the date on which thetransfer was lodged with the Company, send notice of the refusal to the transferee.The registration of transfers may be suspended by the Board for any period (not exceeding 20 days) inany year.Variation of RightsSubject to the provisions of the Act and of the Articles, whenever the share capital of the Company isdivided into di¡erent classes of shares, the special rights attached to any class of shares may be variedor abrogated either with the written consent of the holders of not less than three quarters in nominalvalue of the issued shares of the class or with the sanction of an extraordinary resolution passed at aseparate general meeting of the holders of the shares of the class (but not otherwise) and may be sovaried or abrogated while the Company is a going concern or while the Company is or is about to be inliquidation. To every separate meeting the provisions of the Articles relating to general meetingsmutatis mutandis apply, but the necessary quorum is not less than two persons holding or representingby proxy one-third of the nominal amount paid up on the issued shares of the relevant class.Voting RightsSubject to any rights or restrictions as to voting attached to any class of shares, at any general meetingevery member who is present in person (including any corporation present by its duly authorisedrepresentative) shall on a show of hands have one vote, and on a poll every member present in personor by proxy shall have one vote for every share of any class of which he is the holder.General MeetingsThe Board may make arrangements to control the level of attendance at any place of the holding of ageneral meeting and, in any such case, shall direct that the meeting be held at a speci¢ed place, wherethe chairman of the meeting shall preside, and make arrangements for simultaneous attendance andparticipation by members at other locations. The chairman of the general meeting has authority toadjourn the meeting if, in his opinion, it appears impractical to hold or continue the meeting because ofweight of numbers.Borrowing PowersThe Board may exercise all the powers of the Company to borrow and to mortgage or charge itsundertaking, property and uncalled capital or any part thereof and to issue debentures and othersecurities. The Board is to ensure that the aggregate amount for the time being outstanding in respect of78

the moneys borrowed or secured by the Company and its subsidiary undertaking (exclusive of intragroupborrowings) shall not at any time, without the previous sanction of the Company in generalmeeting, exceed an amount equal to three times the amount paid up on the issued share capital of theCompany and the amounts standing to the credit of the consolidated reserves of the Company and itssubsidiaries provided that prior to the publication of an audited balance sheet of the Company suchaggregated principal amount shall be limited to »45,000,000.Directors. A Director is not required to hold any quali¢cation shares.. The Directors (other than alternative directors) shall be entitled to receive by way of fees for theirservices as directors such sums as the Board may from time to time determine. Such sums shall bedivided among the Directors in such proportions and in such manner as the Board may determineor, in default of such determination, equally. The Directors are also entitled to be repaid allreasonable travelling and hotel expenses incurred by them respectively in or about theperformance of their duties as Directors. If by arrangement with the Board any Directorperforms any special duties outside his ordinary duties as a Director, the Board may pay himadditional remuneration (in addition to any fees or ordinary remuneration) which may be by wayof salary, commission, participation in pro¢ts or otherwise.. The Board may exercise all the powers of the Company to provide and maintain pensions, otherretirement or superannuation bene¢ts, death or disability bene¢ts, gratuities or other allowancesfor persons who are or were directors of any company in its group and their relatives ordependants.. A Director may be appointed by the Board to the o⁄ce of managing director and/or any othero⁄ce or place under the Company (except that of auditor) for such period, on such terms and atsuch remuneration as the Board may determine.. No Director is disquali¢ed by his o⁄ce from contracting with the Company nor is any contractor arrangement entered into on behalf of the Company in which any Director is in anywayinterested liable to be voided, nor is any Director so contracting or being so interested liable toaccount to the Company for any pro¢t realised thereby, but the nature of his interest must bedeclared by the Director at a meeting of the Board subject to the provisions of the Act.. Save as provided below, a Director may not vote in respect of any contract or arrangement or anyother proposals whatsoever in which he has any material interest otherwise than by virtue of hisinterest in shares or debentures or other securities of or otherwise in or through the Company. ADirector will not be counted in the quorum of a meeting in relation to any resolution on which heis debarred from voting.. A Director is entitled to vote (and will be counted in the quorum) in respect of any resolutionconcerning any of the following matters:ö the giving of any guarantee, security or indemnity to him in respect of money lent orobligations incurred by him at the request of or for the bene¢t of the Company or any of itssubsidiaries;ö the giving of any guarantee, security or indemnity to a third party in respect of a debt orobligation of the Company or any of its subsidiaries for which he himself has assumedresponsibility in whole or in part under a guarantee or indemnity or by giving of security;ö any proposal concerning an o¡er of shares or debentures or other securities of or by theCompany or any of its subsidiaries for subscription or purchase in which o¡er he is to beinterested as a participant in the underwriting or sub-underwriting thereof;ö any proposal concerning any other body corporate in which he is interested directly orindirectly and whether as an o⁄cer or shareholder or otherwise howsoever, provided thathe (together with persons connected with him) does not have an interest (as the term is usedin Part VI of the Act) in one per cent. or more of the issued equity share capital of any classof such body corporate or in the voting rights available to members of the relevantcompany;ö any proposal relating to an arrangement for the bene¢t of the employees of the Company orany of its subsidiary undertakings which does not award him any privilege or bene¢t notgenerally awarded to the employees to whom such arrangement relates; and79

ö any proposal concerning insurance that the Company purports to maintain or purchase forthe bene¢t of Directors or for the bene¢t of persons who include Directors.Where proposals are under consideration concerning the appointment (including ¢xing or varying theterms of appointment) of two or more Directors to o⁄ces or employments with the Company or anycompany in which the Company is interested such proposals shall be divided and considered in relationto each Director separately. In such case each of the Directors concerned (if not debarred from votingas described above) is entitled to vote (and will be counted in the quorum) in respect of such resolutionexcept that concerning his own appointment.DividendsSubject to the provisions of the Act and of the Articles, the Company may by ordinary resolutiondeclare dividends to be paid to members according to their respective rights and interests in the pro¢tsof the Company. However, no dividend shall exceed the amount recommended by the Board.Subject to any special rights attaching to shares, all dividends shall be apportioned and paid pro rataaccording to the amounts paid up (otherwise than in advance of calls) on the shares during any portionor portions of the period in respect of which the dividend is paid. Interim dividends may be paidprovided that they appear to the Board to be justi¢ed by the pro¢ts available for distribution. Unlessotherwise provided by the rights attached to any share, no dividends in respect of a share shall bearinterest. The Board may, with the prior authority of an ordinary resolution of the Company, o¡er theholders of Ordinary Shares the right to elect to receive Ordinary Shares credited as fully paid instead ofcash in respect of all or part of any dividend. All dividends unclaimed for 12 years after having becomedue for payment (if the Board so resolves) shall be forfeited and shall revert to the Company.Untraced ShareholdersIn certain circumstances the Company will be entitled to sell the shares of a member or the shares towhich a person is entitled by transmission if, inter alia, during a period of 12 years, all warrants andcheques sent to him during that period have remained uncashed.Retirement of DirectorsThe Directors are required to retire by rotation.No Director is to retire from o⁄ce pursuant to Section 293 of the Act by reason of the fact that he hasattained the age of seventy or any other age and Section 293 of the Act does not apply to the Company.Non-United Kingdom ShareholdersThere are no limitations in the Memorandum or Articles of Association on the rights of non-UnitedKingdom shareholders to hold, or exercise voting rights attached to the shares. However, non-UnitedKingdom shareholders are not entitled to receive notices of general meetings unless they have given anaddress in the United Kingdom to the Company to which such notices may be sent.Return of Capital on Winding-upIf the Company is wound up, the balance of assets available for distribution shall, with the sanction ofa special resolution of the Company be divided among the members in such manner as shall bedetermined by the liquidator.CRESTCREST is a paperless settlement system enabling the securities to be evidenced otherwise than bycerti¢cate and transferred otherwise than by a written instrument.The Articles are consistent with CREST membership and, amongst other things, allow for the holdingand transfer of shares in uncerti¢cated form. The Company currently anticipates entering the CRESTsystem on Admission.5. Directors’ and Other Interests5.1 The Directors of the Company and their respective functions are set out in Part I of this document.5.2 Immediately following Admission, the interests of the Directors and (so far as is known to theDirectors or could, with reasonable diligence, be ascertained by them) the persons connected (withinthe meaning of Section 346 of the Act) with them (all of which are bene¢cial save where otherwisestated) in the ordinary share capital of the Company, which are required to be shown in the registermaintained under Section 325 of the Act or which are required to be noti¢ed by a Director (or, in the80

case of such a connected person, would be required to be noti¢ed by that person had he or she been adirector) to the Company pursuant to Sections 324 or 328 of the Act are as follows:ShareholdersNumber of OrdinaryShares at AdmissionPercentage of theissued Ordinary Sharecapital at Admissionassuming MaximumSubscriptionPercentage of theissued Ordinary Sharecapital at Admissionassuming MinimumSubscriptionPeter Hargreaves 5,045,180 5.52% 5.91%James Heathcote 1,312,500 1.44% 1.54%Dr Donald Highgate 14,000,000 15.32% 16.39%Dr Jonathan Lloyd 14,000,000 15.32% 16.39%Gervas Steele 1,356,250 1.48% 1.59%John Wreford 14,000,000 15.32% 16.39%The above ¢gures are exclusive of any interests of Directors under Share Options. Details of ShareOptions which have been granted to Stephen Massey and James Heathcote are set out in paragraph 9of this Part VI. No other options have been granted to Directors which remain outstanding as at thedate of this document.5.3 At the date of this document and immediately following Admission insofar as known to the Directors,the only persons who are or will be interested (within the meaning of Part VI of the Act) directly orindirectly in three per cent. or more of the capital of the Company, together with the amount, expressedas a percentage, of each such person’s interest are as follows:ShareholdersPercentage of issuedOrdinary Sharecapital at the date ofthis documentPercentage of issuedOrdinary Sharecapital immediatelyfollowing Admissionassuming MaximumSubscriptionPercentage of issuedOrdinary Sharecapital immediatelyfollowing Admissionassuming MinimumSubscriptionDr Donald Highgate* 19.61% 15.32% 16.39%Dr Jonathan Lloyd* 19.61% 15.32% 16.39%John Wreford* 19.61% 15.32% 16.39%RAB Special Situations L.P.{ 9.56% 10.75% 11.50%Peter Hargreaves* 7.07% 5.52% 5.91%*denotes Directors{the Ordinary Shares are held by a nominee company, Morstan Nominees Limited. The Directors believe that a further 3.56 percent. of the issued ordinary share capital of the Company at the date of this document is bene¢cially owned by persons who maybe connected with RAB Special Situations L.P.5.4 Save as disclosed in this paragraph 5 and paragraph 9 of this Part VI, none of the Directors or theirconnected parties has any interest in the share capital of the Company and the Company is not awareof any persons who, directly or indirectly, jointly or severally, exercise or could exercise control overthe Company.5.5 From time to time, ITM and DRFP Holdings Limited (a company in which John Wreford, JonathanLloyd and Donald Highgate are interested as shareholders and, in the cases of John Wreford andJonathan Lloyd, as directors) (and its subsidiaries) provide services to each other on an ad hoc basis.While no formal contractual arrangements are in place in respect of such services, they are carried outon an arm’s length basis. Additional information in respect of the transactions between ITM andDRFP Holdings Limited (and its subsidiaries) is set out in paragraph 21 of Part IV(B), and inparagraph 10 of this Part VI, of this document.6. Directors’ Service Agreements and Emoluments6.1 The aggregate remuneration and bene¢ts in kind of the Directors of the Group in respect of the¢nancial year ended 30 April 2004 was »242,992. The aggregate remuneration and bene¢ts in kind ofthe directors of the Group in respect of the ¢nancial year ending 30 April 2005 under the arrangementsin force at the date hereof is expected to be »448,300. None of the Directors has agreed to waive hisentitlements to future emoluments nor was there any such waiver in respect of the year ended 30 April2004.81

6.2 Conditionally upon Admission, the Company has entered into the following service agreements withthe following executive Directors, the principal terms of which are summarised below (the ‘‘ServiceAgreements’’):NameTitleDate ofagreementDate ofcommencementof continuousemploymentCurrentannualsalaryJames Heathcote Chief Executive 18 May 2004 1 May 2003 »95,000Dr Donald Highgate Research Director 18 May 2004 19 February 2002 »85,000Dr Jonathan Lloyd Engineering Director 18 May 2004 19 February 2002 »75,000John Wreford Finance Director 18 May 2004 19 February 2002 »75,000. Each of the Service Agreements will continue unless and until terminated by not less thansix months’ written notice by either party.. No bonuses are payable to the Directors.. The Directors’ salaries will be reviewed annually by the Company’s remuneration committee andany increase is at the discretion of the Board.. The Directors are entitled to 25 days’ holiday in addition to bank holidays.. The Directors are entitled to full salary for the ¢rst six months’ absence through sickness or injuryin any period of 12 months.. The Directors will work for the Company on a full time basis. The Directors will however be ableto devote a reasonable amount of time to other business interests and external activities providedthat the Directors notify the Company of such external activities/business interests, that these donot con£ict with the performance of their duties to the Company and the time spent on suchactivities/interests does not exceed four hours per week.. The Directors are entitled to a ¢ve per cent. of salary contribution per annum to be used toprovide retirement bene¢ts for the relevant director.. The Service Agreements include clauses on con¢dentiality and restrictive covenants. TheDirectors are restricted from competing with the Company for six months after termination oftheir employment and from taking orders from or soliciting customers or particular sta¡ for12 months after termination of their employment.6.3 Two non-executive Directors have been appointed, namely Peter Hargreaves and Gervas Steele. Eachof them has entered into an agreement with the Company on the following terms:(i) Working days ^ four days per month.(ii) Directors’ fee ^ »20,000 per annum.In each case the non-executive Directors’ agreements are for an initial period of 12 months and areterminable thereafter on three months’ notice. They are paid under the PAYE system.In each case the non-executive Directors are restricted from disclosing con¢dential information during,and after termination of, their appointment and from competing with the Company’s activities for sixmonths after the termination of their appointment.6.4 Stephen Massey has been appointed as non-executive Chairman. He is to work four working days permonth and will receive a fee of »45,000 per annum. The agreement is for an initial period of 12 monthsand is terminable thereafter on three months’ notice. Stephen Massey will provide his services througha service company as a self employed consultant. As such his fee is subject to VAT.Stephen Massey is restricted from disclosing con¢dential information during, and after the terminationof, his appointment and from competing with the Company’s activities for six months after thetermination of his appointment.6.5 Save as disclosed in this document, there are no service agreements, consultancy agreements or lettersof engagement existing or proposed between any Director and the Company.7. Loans and GuaranteesThere are no loans or guarantees provided by any member of the Group to or for the bene¢t of any Director.82

8. Directorships8.1 In addition to their directorships of the Group, the Directors hold or have held in the ¢ve years prior tothe publication of this document the following directorships, and are currently or have been partners inthe following ¢rms in the ¢ve years prior to the publication of this document:Director Current directorships/partnerships Past directorships/partnershipsPeter Hargreaves Hargreaves Lansdown Asset Management LtdHargreaves Lansdown Ebt Trustees LtdHargreaves Lansdown Fund Managers LtdHargreaves Lansdown Investment Management LtdHargreaves Lansdown (Nominees) LtdHargreaves Lansdown Pensions Direct LtdHargreaves Lansdown Pensions LtdHargreaves Lansdown Pensions Trustees LtdHargreaves Lansdown PlcGartmore Go Dealing LtdGartmore Growth OpportunitiesPlcHargreaves Lansdown InsuranceBrokers LtdHLH Energy Ventures LtdMumbo Trading Company LtdNoggins LtdScott I.T. LtdHargreaves Lansdown Stockbrokers LtdLibrary Information Services LimitedJames Heathcote Panther Gold Ltd Katalyst Ventures LtdDr Donald HighgateDr Jonathan LloydStephen MasseyDH Research & Rheological Services LtdJH Research Technical ServicesDental Root Filling Products LimitedDRFP Holdings LtdGrovewalk LtdStamford Memory Polymers LtdEden Group PlcHarvington Properties LtdSLM Management LtdVillage Green PlcBuymate LtdDH Research LtdDRFP Holdings LtdHLH Energy Ventures LtdNewcorn PlcCircle Nominees LtdDryden Bank SADryden Capital Management LtdDryden Financial LimitedDryden Wealth Management LtdPBIB LtdPBI Fund Managers LtdPBI Group Holdings LimitedPBI Holdings LimitedPBI LtdPBI Management LtdPrudential-Bache Forex (UK) LtdPrudential-Bache Futures AsiaPaci¢c LimitedPrudential-Bache Holdings LtdPrudential-Bache InternationalLtdPrudential-Bache InternationalBanking CorporationPrudential-Bache International(UK) LtdPrudential-Bache Nominees LtdPrudential-Bache SecuritiesAgencia de Valores S.A.Prudential-Bache Securities(Argentina) IncorporatedPrudential-Bache Securities AsiaPaci¢c LimitedPrudential-Bache Securities(Chile) Inc.Prudential-Bache Securities(Germany) Inc.Prudential-Bache Securities(Holland) Inc.Prudential-Bache Securities(Luxembourg) Inc.Prudential-Bache Securities(Monaco) Inc.Prudential-Bache Securities(Switzerland) Inc.Prudential-Bache Securities(U.K.) IncPrudential Securities Inc.Prumerica LtdSa¡ron Nominees LtdUrban Regeneration Agency83

Director Current directorships/partnerships Past directorships/partnershipsGervas Steele Camford Press LtdGoring LtdLaw Insurance Services LtdProspero Fine Food LtdProspero LtdSage Organic LtdSwiftstart LtdThemis (Law Services) LtdDatum Group LtdDatum Technology LtdFoxsight LtdStrade Developments LtdJohn WrefordDental Root Filling Products LimitedDRFP Holdings LtdGrovewalk LtdSmartwood Technology LtdStamford Memory Polymers LtdDPN Realisations LtdKeltrip LtdNewcorn PlcThe Great Taste Company LtdWBG Realisations LtdWBS Realisations LtdWilliam Barrowcli¡e Trustees Ltd8.2 Except as noted at paragraphs 8.3 to 8.5 below, at the date of this document, none of the Directorsnamed in this document:. has any unspent convictions in respect of indictable o¡ences;. has been declared bankrupt or entered into an individual voluntary arrangement with hiscreditors or had any asset which has been subject to a receivership;. was a director of any company at the time of or within 12 months preceding any receivership,compulsory liquidation, creditors voluntary liquidation, administration, company voluntaryarrangement or any composition or arrangement with its creditors generally or any class of itscreditors;. was a partner in a partnership at the time of or within 12 months preceding any compulsoryliquidation, administration or partnership voluntary arrangement of such partnership;. was a partner in any partnership at the time of or within 12 months preceding any assets thereofbeing the subject of a receivership;. has owned an asset over which a receiver has been appointed;. has ever been publicly criticised by any statutory or regulatory authority (including recognisedprofessional bodies);. has ever been disquali¢ed by a court from acting as a director of a company or from acting in themanagement or conduct of the a¡airs of any company.8.3 John Wreford was appointed as a director of Keltrip Limited and its subsidiary, WBG RealisationsLimited, on 20 December 1999 and 13 April 2000 respectively. John Wreford was appointed by3i Group Plc as part of an arrangement to replace the managing director who had previously led amanagement buy-in in 1998. John Wreford resigned as a director of Keltrip Limited and WBGRealisations Limited on 9 October 2000, being the date on which both companies went intoreceivership.8.4 Gervas Steele was appointed as a director of Datum Technology Limited (‘‘Datum’’), an engineeringcompany, on 8 June 1995. Prior to his appointment, Datum had been su¡ering serious ¢nancialdi⁄culties and Gervas Steele, together with certain others, invested in it as part of, ultimately, a failedrescue attempt. Datum was put into receivership by Gervas Steele, as the holder of a charge over itsassets, on 3 March 1997 and subsequently dissolved.8.5 Peter Hargreaves was involved in a business venture to establish wine bars trading under the name‘‘Mumbo’’. He was appointed as a director of Mumbo Trading Company Limited, but resigned on31 December 2001. Mumbo Trading Company Limited went into administration on 9 September 2002.9. Share OptionsThe following is a summary of the share option agreements which have been entered into by the Company asat the date of this document:9.1 Enterprise Management Incentive Share Option Agreements84

OptionholderNumber ofOrdinarySharesunder optionAggregateexerciseprice (»)Expiry date of OptionJames Heathcote* 7,000,000{ 400,000 1 December 2013Dr Simon Bourne 350,000 20,000 1 December 2010Dr Rachel Smith 350,000 20,000 1 December 2010Dr Matthew Bennett 350,000 20,000 1 December 2010Paula Hilton 70,000 4,000 1 December 2010*denotes Directors{only 1,750,000 of the Ordinary Shares under option are intended to be part of an Enterprise Management Incentive.9.2 Non-Enterprise Management Incentive Share Option AgreementsOptionholderNumber ofOrdinarySharesunder optionAggregateexerciseprice (»)Expiry date of OptionStephen Massey* 700,000 175,000 18 May 2014James Heathcote* 409,500 23,400 16 May 2010Katalyst Ventures Limited 474,250 27,100 16 May 2010Charles Hall 140,000 8,000 16 May 2010Keith Lovell 70,000 4,000 17 June 2010Gautam Saraogi 70,000 4,000 19 April 2011*denotes Directors9.3 Subject to paragraph 9.4 of this Part VI, the principal terms of the Enterprise Management IncentiveShare Option Agreements are as follows:. exercise of the option may occur after the expiry of various time periods from the e¡ective date ordates as set out in the option agreements, and before the expiry of seven years. Generally, optionscannot be exercised at all before the expiry of two years from the ¢rst e¡ective date (as de¢ned inthe option agreement) and then vest over the following three years. Further details of the vestingperiods of the options are set out in paragraph 12 of Part IV(B) of this Document;. the option may be exercised within six months of death in service or the option holder ceasing tobe employed as a result of redundancy. If the employee ceases to be employed for any otherreason then, provided he enters into an election to bear the employer’s national insurancecontributions, his entitlement shall crystalise as at the date of cessation and his option shallcontinue to that extent;. the option will lapse on the seventh anniversary of the date of the option agreement, expiry of theearly exercise periods, winding up of the Company (subject to a right to exercise for 40 days), orthe option holder becoming bankrupt or ceasing to have bene¢cial ownership of the option;. in the event of a change of control of the Company by virtue of a general o¡er or certainrestricted forms of reconstruction, the acquiring company may require the option holder toaccept an exchange of options within a period of six months. The Company may also agree withan acquiring company that the options have become immediately exercisable and if not exercisedwithin the appropriate period shall lapse;. exercise of the options is by written notice and the Company is under an obligation to procure theallotment or transfer of the shares within 30 days of the notice of exercise;. if there is a liability on the option holder to pay income tax and/or national insurancecontributions there is a tax indemnity in favour of the Company in respect of the tax liability,including a power for the Company to sell option shares, and a power for the Company torecover employer’s national insurance contributions from the option holder;. the number of option shares and/or the exercise price may be adjusted in the event of a variationin the share capital of the Company which has a material e¡ect on the value of the options; and85

. the Company and the option holder may by deed alter any provisions of the agreements at anytime.9.4 The Enterprise Management Incentive Share Option Agreement for James Heathcote is in di¡erentterms to the agreements summarised at paragraph 9.3 above. The relevant di¡erences are:. the option will become exercisable in full on Admission;. the option expires on the tenth (rather than the seventh) anniversary of the date of grant;. in the event of a change of control or a reorganisation, James Heathcote is not required to acceptan exchange of options (although may choose to do so within six months). In the case of a Sale (asde¢ned) of the Company for cash, or a reconstruction, the option may be exercised within 40 daysor such longer period as the Directors may permit.9.5 Subject to paragraphs 9.6 and 9.7 of this Part VI, the principal terms of the Non EnterpriseManagement Incentives Option Agreements are as follows:. the option may be exercised once only at any time from the date of grant to the expiry of sevenyears from the date of grant;. the option, if not exercised, will lapse on the expiry of early exercise periods including on ageneral o¡er, reconstruction, or winding-up of the Company;. exercise of the options is by written notice and the Company is under obligation to procure theallotment or transfer of the shares within 30 day’s notice of exercise;. in the event of an issue of shares or reorganisation (prior to the ¢rst exercise of the option) whichwill have a material e¡ect on the value of the option the number of option shares and/or theexercise price may be adjusted; and. the Company and the option holder may alter any provisions of the agreement in writing.9.6 The option agreement for Gautam Saraogi is in di¡erent terms to the agreements summarised atparagraph 9.5 above. The principal di¡erences are:. exercise of the option may occur on Admission or in the event of a takeover, reconstruction orwinding-up of the Company;. in the event of a change of control of the Company by virtue of a share for share exchangepursuant to which the only shareholders of the acquiring company will be the shareholders of theCompany, the acquiring company may require the optionholder to accept an exchange ofoptions; and. if there is a liability of the optionholder to pay income tax and/or national insurancecontributions there is a tax indemnity in favour of the Company in respect of the tax liability,including a power for the Company to sell option shares, and a power for the Company torecover employer’s national insurance contributions from the optionholder.9.7 The option agreement for Stephen Massey is in the same terms as the Enterprise ManagementIncentive Share Option Agreement for James Heathcote summarised at paragraph 9.4 above, savethat:. the option may be exercised in full from the ¢rst anniversary of the date of grant;. the option is not granted under the Enterprise Management Initiative; and. the option is only exercisable in respect of one half of the option shares on Admission, theremainder being exercisable from the ¢rst anniversary of the date of grant.9.8 Following Admission, for so long as the Company continues to be eligible to grant options under theEnterprise Management Initiative, the Company proposes to enter into individual option agreementsunder the Enterprise Management Initiative on a case by case basis with such qualifying employees anddirectors of the Group on such terms (including such performance criteria) and at such times as theBoard considers appropriate to incentivise such employees and directors.86

10. Premises10.1 Details of the properties occupied by the Group are as follows:PropertyUnits 1 and 2, part of Manor Farm,Barnack, Stamford, Lincs PE9 3DYDescriptionUnderlease dated 1 August 2003 between Henry CharlesBrassey (1) ITM (2) and John Wreford (guarantor) (3) fora term commencing 1 August 2003 and expiring 31 July2005 at a basic annual rent of »8,184 (excluding VAT).DRFP Holdings Limited (the company referred to atparagraph 5.5 of this Part VI) shares occupation of theproperty with ITM, but has no formal right to occupy theproperty. While such joint occupation is technically inbreach of the terms of the underlease, the landlordappears to be aware of it and has taken no action inrespect of it. DRFP Holdings Limited pay the rates forthe property by way of its contribution to the costs of theproperty.Suite F, She⁄eld Business Centre,She⁄eld City Airport Europa Link,She⁄eld S9 1XZLease dated 15 April 2003 between She⁄eld City AirportLimited (1) and DRFP Holdings Limited (2) for a termcommencing 9 December 2002 and expiring 9 December2004 at a basic annual rent of »38,660 (excluding VAT).ITM is in occupation, but has no formal right to occupythe property. While such joint occupation is technically inbreach of the terms of the lease, the landlord appears tobe aware of it and has taken no action in respect of it.ITM pays to DRFP Holdings Limited an amount equaltwo-thirds of the rent payable under the lease in respect ofits occupation of the property.11. Material ContractsThe following contracts, not being contracts entered into in the ordinary course of business, have beenentered into by a member of the Group within the two years immediately preceding the date of this documentand are, or may be, material:11.1 a letter dated 7 April 2004 from the Company to ITM pursuant to which the Company con¢rmed itso¡er to acquire the entire issued share capital of ITM in consideration for the allotment by theCompany of, in aggregate, 71,399,960 Ordinary Shares to the shareholders of ITM;11.2 a Placing Agreement dated 18 May 2004 between the Company (1) Durlacher (2) and the Directors (3)pursuant to which:. Durlacher has agreed, as agent for the Company and conditionally (inter alia) onAdmissionoccurring on or before 11 June 2004 (or such later date as the Company and Durlacher may agreebeing no later than 30 June 2004), to use all reasonable endeavours to procure subscribers for thePlacing Shares at the Placing Price;. the Company has agreed to pay to Durlacher a corporate ¢nance fee and commission in respectof the Placing Shares for which subscribers are found at the Placing Price;. the Directors (or, in certain cases, the executive Directors alone) give certain warranties toDurlacher jointly and severally with the Company; the Company gives certain indemnities toDurlacher in respect of liabilities which it may incur in connection with the Placing; and theexecutive Directors covenant to indemnify the Group in respect of certain liabilities to taxation ifsuch liabilities arise from transactions between such Directors and the relevant member of theGroup;. there are provisions enabling Durlacher to terminate the Placing Agreement in certaincircumstances prior to Admission; and87

. save for John Wreford in respect of Ordinary Shares which are the subject of an existing option infavour of a third party, each of the Directors has undertaken that for as long as Durlacherremains the Company’s nominated adviser and broker, without the prior consent of Durlacher,he will not and he will use all reasonable endeavours to procure so far as he is able that no personconnected with him will, subject to certain exceptions, sell transfer or otherwise dispose of anyinterest in Ordinary Shares for a period of 12 months from the date of Admission and thereafterfor a further period of 12 months other than through Durlacher, in accordance with orderlymarket principles as determined by Durlacher.11.3 a grant agreement dated 2 April 2003 between the DTI (1) and ITM (2) pursuant to which the DTI hasmade available to ITM a grant not exceeding »469,250 in respect of 69 per cent. of the net eligible costsincurred by ITM in connection with a project in respect of alcohol based fuel cells being undertaken bythe Company (the ‘‘ABFC Project’’). The grant is payable in instalments at certain key stages of theABFC Project. The DTI is not obliged to pay more than 85 per cent. of the grant until the project iscompleted to its satisfaction. Cessation and clawback of the grant is possible at the DTI’s discretion incertain circumstances. Payment to the DTI is required (by way of a refund of the grant) of 69 per cent.of sale proceeds or income generated through the sale or commercial use of any prototype the costs ofproduction of which are included in the net eligible costs funded by the DTI (subject to deduction of thecosts of any necessary refurbishment). The grant contains certain con¢dentiality obligations upon ITMand restricts the exploitation (without the prior written consent of the DTI) of the results of the ABFCProject outside of the European Economic Area for a period of ¢ve years from the date on which ¢nalpayment of the grant is made. However, this does not restrict the sale outside of the EuropeanEconomic Area of goods manufactured within it; and11.4 an agreement between ITM (1) and Cran¢eld University (2), dated 1 May 2002, pursuant to whichCran¢eld University provides ITM with, inter alia, access to certain laboratory facilities, specialistequipment and the time and services of a suitable laboratory technician. The agreement is expected tolast for a term of 30 months and the cost to ITM over this period is estimated to be »170,000 (excludingdisbursements). The agreement provides that any intellectual property created by the parties under theagreement will be owned by ITM although Cran¢eld University is granted a non-exclusive licenceoutside the ¢eld of the proposal. ITM is required not to abandon any patent applications arising out ofthe work without Cran¢eld University’s consent. Cran¢eld University has an option to take over anypatent applications so abandoned;11.5 RAB Special Situations L.P. William Philip Seymour Richards and Michael Allen Buckley haveundertaken that, for as long as Durlacher remains the Company’s nominated adviser and broker,without the prior consent of Durlacher, they will not and they will use all reasonable endeavours toprocure so far as they are able that no person connected with them will, subject to certain exceptions,sell, transfer or otherwise dispose of any interest in Ordinary Shares held prior to Admission for aperiod of 12 months from the date of Admission and thereafter for a further period of 12 months otherthan through Durlacher, in accordance with orderly market principles as determined by Durlacher;and11.6 a Nominated Adviser and Broker agreement dated 12 May 2004 between the Company and Durlacherpursuant to which the Company has appointed Durlacher to act as nominated adviser and broker tothe Company for the purposes of the AIM Rules. The Company has agreed to pay Durlacher anannual retainer under this agreement. The agreement contains certain undertakings and indemnitiesgiven by the Company in respect of, inter alia, compliance with all applicable laws and regulations.12. LitigationNo member of the Group is involved in any legal arbitration proceedings which may have or have had duringthe 12 months preceding the date of this document a signi¢cant e¡ect on the Group’s ¢nancial position and,so far as the Directors are aware, there are no such proceedings pending or threatened.13. Working CapitalThe Directors are of the opinion that taking into account the estimated net proceeds to be received by theCompany under the Placing on the basis of Minimum Subscription and having made due and carefulenquiry, the working capital available to the Company and the Group will be su⁄cient for the Company’spresent requirements, that is for at least the next 12 months from the date of Admission.88

14. United Kingdom Taxation14.1 The comments set out below are based on existing law and what is understood to be current InlandRevenue practice. They are intended as a general guide only and apply only to Shareholders who holdOrdinary Shares as investments (and not as an asset of a ¢nancial trade) and who are the absolutebene¢cial owners of those shares. Any person who is in any doubt as to their taxation position or who issubject to taxation in any jurisdiction other than the United Kingdom, should consult an appropriateprofessional adviser immediately. This summary is not exhaustive and does not generally consider taxrelief or exemptions other than in relation to the Enterprise Investment Schemes (‘‘EIS’’) and VentureCapital Trusts (‘‘VCT’s’’).Taxation of Dividends. Under current United Kingdom tax legislation, no United Kingdom tax will be withheld fromany dividend paid by the Company.. An individual shareholder resident (for tax purposes) in the United Kingdom who receives adividend from the Company will be entitled to a notional tax credit in respect of the dividendequal to 10 per cent. of the sum of the dividend plus the notional tax credit. Individualshareholders who are so resident may set o¡ this notional tax credit against their total income taxliability. Lower and basic rate tax payers would normally have no further liability to tax on thedividend. Higher rate tax payers will be liable to tax on the sum of the dividend plus the notionaltax credit at the rate of 32.5 per cent. against which liability the 10 per cent. notional tax creditcan be o¡set ^ giving an e¡ective rate of 22.5 per cent. of the gross dividend or 25 per cent. of thenet dividend.. With the exception of investors holding their shares in the Company through Individual SavingAccounts (‘‘ISAs’’), individual shareholders who are not liable to income tax or corporation taxon dividends received by them from the Company will not be entitled to claim payment of the taxcredit in respect of those dividends.. Subject to certain exceptions for some insurance companies, a corporate shareholder resident (fortax purposes) in the United Kingdom will not be liable to United Kingdom corporation tax onany dividend received.. Ashareholder who is not resident (for tax purposes) in the United Kingdom is not generallyentitled to the bene¢t of a notional tax credit in respect of any dividends received from theCompany. Persons who are not resident (for tax purposes) in the United Kingdom should consulttheir own tax advisers as to the possible applicability of double tax conventions and what relief orcredit may be claimed for such notional tax credit in the jurisdiction in which they are resident.Such persons may also be subject to foreign taxation on dividend income under local tax law.Stamp Duty/Stamp Duty Reserve TaxThe Company has been advised in relation to stamp duty and stamp duty reserve tax that:. No stamp duty will be payable on the issue of the Placing Shares; and. The conveyance or transfer on sale of Ordinary Shares will generally be subject to stamp duty onthe instrument of transfer, normally at the rate of 50 pence per »100 (or part thereof) on theamount or value of the consideration. Where an agreement to transfer such shares is notcompleted by a duly stamped instrument or transfer, a charge to stamp duty reserve tax(generally at the same rate) may arise on the agreement.Taxation on DisposalsA disposal of Ordinary Shares may, depending on individual circumstances, including the availabilityof exemptions, reliefs and allowable losses, give rise to a liability to UK tax on chargeable gains.Individual shareholders who are resident or ordinarily resident in the United Kingdom and whodispose of their shares will generally be liable to Capital Gains Tax on any gain made on that disposal.The gain may be reduced by the availability of exemptions or reliefs and the deduction of allowablelosses in certain circumstances. For such individuals the Ordinary Shares are likely to qualify asbusiness assets for taper relief purposes. On a disposal of Ordinary Shares, status as a business assetduring the period of ownership reduces the amount of any gain which is chargeable to Capital GainsTax. Assuming that the Ordinary Shares remain business assets throughout the period during which89

they are owned, then if the period of ownership is greater than one year, only half of the gain will becharged to Capital Gains Tax. Once the period of ownership exceeds two years, only one quarter of thegain will be charged to Capital Gains Tax. For higher-rate taxpayers, the e¡ect of taper relief is often(although slightly inaccurately) expressed as reducing the rate of tax from 40 per cent. to 20 per cent.after one year and to 10 per cent. after two years.Corporate shareholders which are resident in the United Kingdom and who dispose of their shares maybe liable to corporation tax on any gain made on that disposal. Certain types of company (such aspension funds) and charities are generally exempt from corporation tax on capital gains. In addition,corporate shareholders who own a substantial shareholding for more than 12 months may qualify forexemption from corporation tax under the substantial shareholding exemption. For these purposes asubstantial shareholding is (broadly) a shareholding of more than 10 per cent. of the Company’sshares.Holders of Ordinary Shares who are not resident in the United Kingdom will not generally be liable toUK tax on capital gains. However, special rules may apply where an individual returns to the UKwithin ¢ve years of leaving having made capital gains in the meantime. In this situation, the UK mayimpose a ‘‘re-entry’’ charge on any gains made during the period of non-residence. Further special rulesapply to non-UK entities such as trusts and companies which are set up by UK residents or from whichUK residents might take a bene¢t. Local taxes may also apply in the jurisdiction in which theshareholder is resident and anyone in this position should consult their own tax advisers as to thepossible application of double tax conventions and the applicability of local law.If EIS or VCT reliefs are available to a particular investor (see below) then this may in certaincircumstances give an exemption from tax on chargeable gains after Ordinary Shares have been heldfor a certain period (usually three years).Inheritance taxIndividual shareholders who are domiciled or deemed to be domiciled in any part of the UnitedKingdom may be liable to inheritance tax (‘‘IHT’’) on the value of any Ordinary Shares held by them.IHT may also apply to individual shareholders who are not domiciled in the United Kingdom althoughrelief under a double tax convention may apply to those in this position. The chief occasions on whichIHT is charged are on the death of the shareholder; on any gifts made during the seven years prior tothe death of the shareholder; and on certain lifetime transfers, notably when shares are transferred to adiscretionary (non-interest in possession) trust.However, a relief from IHT known as business property relief (‘‘BPR’’) is likely to apply to OrdinaryShares once these have been held for two years. This relief applies notwithstanding that the company’sshares are listed on AIM (although it does not apply to fully listed shares). BPR operates by reducingthe value of shares by 100 per cent. for IHT purposes.EIS and VCT reliefsFor the purposes of EIS, the Company has received advance assurance from the Inland Revenue that:i. the money raised by the issue of Placing Shares will be used for the purpose of qualifying businessactivities within s.289(1) (c) ICTA;ii. the Company will be a qualifying company under s.293 ICTA; andiii. the Placing Shares will be eligible shares under s.289(7) ICTA.For the purposes of the rules concerning qualifying holdings of VCTs, the Company has receivedadvance assurance from the Inland Revenue that the Placing Shares will be qualifying holdings for thepurposes of Schedule 28B ICTA.This advance assurance relates only to the qualifying status of the Company and its shares and does notguarantee that any particular individual or VCT will qualify for relief in respect of an acquisition ofPlacing Shares. The conditions for relief to be obtained are complex and depend not only upon thequalifying status of the Company but also upon certain factors and characteristics of the individual orVCT concerned. Individuals or VCTs who believe that they may qualify for EIS or VCT reliefs shouldconsult their own tax advisers regarding this.It should also be pointed out that EIS and VCT reliefs may be withdrawn if, during a period (usuallythree years) following the acquisition of the shares in question, any of the conditions for relief aresubsequently broken. In these circumstances a claw-back of relief may apply. While the Company has90

no present intention that it will breach any of these conditions, it gives no warranties to Shareholders inthis respect and shall not be liable to Shareholders for any loss su¡ered as a result of the subsequentwithdrawal of EIS or VCT reliefs.15. General15.1 Save as disclosed in this document, there has been no signi¢cant change in the trading or ¢nancialposition of ITM Power since 5 March 2004, the date to which the ¢rst audited non-statutory accountsof ITM Power were prepared. In addition, there has been no signi¢cant change in the trading or¢nancial position of ITM since 31 December 2003, the date to which the last audited non-statutory¢nancial statements for ITM were prepared.15.2 Durlacher, of 4 Chiswell Street, London EC1Y 4UP is a member of the London Stock Exchange and isregulated by the Financial Services Authority. Durlacher has given and not withdrawn its writtenconsent to the issue of this document with the inclusion of its name in the form and context in which itappears.15.3 Gill Jennings & Every have given and not withdrawn their written consent to the issue of this documentwith the inclusion of their name in the form and context in which it appears.15.4 Each of Future Energy Solutions and The Electrochemical Consultancy (Romsey) Limited have givenand have not withdrawn their written consent to the inclusion of their report in this document (andaccept responsibility for it) and to the inclusion of their names in the form and context in which theyappear.15.5 Professor Marcus Newborough has given and has not withdrawn his written consent to the inclusion ofhis report in this document (and accepts responsibility for it) and to the inclusion of his name in theform and context in which it appears.15.6 The expenses of or incidental to Admission payable by the Company (assuming MaximumSubscription) are estimated to amount to approximately »1,000,000 and to approximately »835,000 onthe basis of Minimum Subscription. The estimated net cash proceeds of the Placing for the Companyare accordingly »9,000,000 on the basis of Maximum Subscription and »6,165,000 on the basis ofMinimum Subscription.15.7 In the Directors’ opinion, the minimum amount to be raised for the Company pursuant to the Placingfor the purposes set out in paragraph 21(a) of Schedule 1 to the POS Regulations is »7,000,000 whichwill be applied as follows:(i) commissions and expenses payable in respect of the Placing and Admission of approximately»835,000; and(ii) working capital of approximately »6,165,000.15.8 The ¢nancial information relating to the Company and ITM contained in this document does notconstitute statutory accounts within the meaning of Section 240(5) of the Act. No statutory accountshave yet been prepared for the Company. Statutory accounts for ITM for the periods ended 30 April2001, 30 April 2002 and 30 April 2003 have been ¢led with the Registrar of Companies. The statutoryaccounts for the periods ended 30 April 2002 and 30 April 2003 contained unquali¢ed audit reports anddid not contain a statement under sub-sections 237(2) or (3) of the Act. The statutory accounts for theperiod ended 30 April 2001 were not required to be audited.15.9 Save as disclosed in this document no person (excluding professional advisers named in this document,trade suppliers and other suppliers of routine professional services) has received, directly or indirectly,from the Company within the 12 months prior to the date of this document any of the following:. fees totalling »10,000 or more;. securities in the Company with a value of »10,000 or more; or. any other bene¢t with a value of »10,000 or more at the date of this document;nor has any person entered into contractual arrangements to receive, directly or indirectly, from theCompany any of the above after the date of this document.15.10 The Directors are unaware of any exceptional factors which have in£uenced the Company’s activities.15.11 There are no signi¢cant investments in process.91

15.12 In making any investment decision in respect of the Placing, no information or representation shouldbe relied on in relation to the Placing, the Company or the Placing Shares, other than as contained inthis document. No person has been authorised to give any information or make any representationother than those contained in this document and, if given or made, such information or representationsmust not be relied upon as having been authorised. Neither the delivery of this document nor anysubscription made pursuant to it shall, under any circumstances, constitute a representation or createany implication that there has been no change in the a¡airs of the Company since the date of thisdocument or that the information in this document is correct as of any time subsequent to the date ofthis document.16. PublicationCopies of this document will be available free of charge to the public at the o⁄ces of Durlacher Ltd,4 Chiswell Street, London EC1Y 4UP during normal business hours on any weekday (weekdays and publicholidays excepted) from the date of this document until Admission.Date: 18 May 2004Printed by greenaways, amember of the ormolu group. E148786

Villa Farm, Jack Haws Lane, Barnock, Stamford PE9 3DYTelephone: 01780 740574 Facsimile: 01780 749168 Website: www.itm-power.com Email: info@itm-power.com