Thanks! I played a little bit more with this trying to get hildon-desktop to run in Xephyr without success. I managed though to get applications to run in Xephyr, and I also managed to start most of the Maemo services, so maybe more applications can work now (although mypaint which previously segfaulted now does not find it's python dependencies, which is not a good sign)

I managed to start services using a script from scratchbox modified a little for use on-device, but it stops halfway, with some dbus errors about com.nokia.clockd

I am attaching the script for reference

EDIT: I forgot to document how I ran Xephyr.

I followed qole's instructions to run harmchom (debian chroot) and after chrooting to debian I ran
This launches an empty Xephyr window. Then on fremantle chroot