Scottish and Southern Energy said yesterday it has agreed to invest up to £15m in cash for a 20% stake in Coventry-based Geothermal International.
A spokesman for Geothermal said the investment will help the firm, which is the UK's leading supplier of ground-source heating and cooling systems, develop growth.
Ground-source heat pump systems can be used to transfer energy between buildings and the surface crust of the planet, or surrounding air, providing a renewable energy-efficient means of heating and cooling buildings.
These systems are a cost-effective and energy-efficient way of achieving the high targets being set in British cities for renewable energy penetration in new developments. Heating and cooling costs are dramatically reduced with ground-source technology, up to 70% annually.
SSE said it will benefit from having a commercial offering in geothermal energy and a significant stake in a business that is dominating a rapidly growing sector of the European market.
The investment will be made on a phased basis over the next six months.
Brian Davidson, chief executive of Geothermal International, said: "The investment and strategic partnership with SSE is a vote of confidence for the technology by one of the UK's leading utility companies.
"This partnership will provide numerous commercial and strategic opportunities for GI, and help to grow the business to the next stage of development."
Ian Marchant, chief executive of SSE, said: "Geothermal International is a well-established business with a proven capability and will play a major role in supporting our growing energy services business.
"It provides SSE with access to renewable heat technologies that compliment the renewable electricity technologies we have already invested in."
Shares in SSE fell sharply in yesterday's dealing, closing 47p, or 3%, lower at 1357p.
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