RenewableUK published a new guide, ‘Demystifying the Hydrogen Business Model for Electrolysis’, which aims to explain to investors and policy makers how the Government’s Hydrogen Production Business Model works, the challenges which come with it and the reforms which are necessary to ensure the UK can rapidly deploy the first tranche of major green hydrogen projects needed to catalyse cost reduction.
According to RenewableUK, the Government has set a target of 10 GW of low carbon hydrogen by 2030, half of which will be green hydrogen generated from renewables. Analysis shows that this will support over 12,000 jobs and attract £11 billion in private investment. Ministers have also set an interim target of 2GW of low carbon hydrogen by 2025, including 1GW of green hydrogen. There are currently only about 5 megawatts (MW) of green hydrogen projects operational in the UK, so the Hydrogen Production Business Model will be essential to kickstart a baseline of large operational projects by de-risking and reducing finance costs.
The document aims to guide developers and key stakeholders through the business model, which has been criticised for being complex and difficult to understand for new entrants. At its most basic level, the Hydrogen Production Business Model provides support in a similar way to same way to the Contracts for Difference scheme, in which a generator receives a fixed price (a strike price) for their electricity over a fixed term. The guarantee of a fixed price for renewable generators de-risks the project sufficiently to attract private capital investment in it. As well as revenue stabilisation, the Government’s Hydrogen Production Business Model is also attempting to establish a market for low carbon hydrogen in the absence of multiple buyers and sellers.
So far, there has been one allocation round (HAR1). In this initial round, 17 projects totalling 262MW entered bilateral negotiations with the Department for Energy Security and Net Zero in August to receive Low Carbon Hydrogen Agreements. These contracts are due to be awarded this year, with the first HAR1 projects reaching Financial Investment Decision within three months of receiving contracts. This will be followed by a second allocation round (HAR2) which aims to secure 750MW of capacity.
Although support is currently awarded through negotiations between industry and Government, Ministers are now proposing a transition to a competitive, price-based CfD-style auctions as early as 2025.
There is currently no established market for low carbon hydrogen, so setting a reference price, which is intended to represent the market price for each unit of hydrogen sold, would be challenging. RenewableUK is warning that implementing competitive auctions too soon without a fully developed supply chain and a significant number of market players could make it economically unviable for developers to progress their projects. A hurried transition to competitive auctions could have a negative impact on building up a domestic supply chain for green hydrogen.
In the guide, RenewableUK recommends that while the market is in its infancy, the allocation of HPBM contracts should continue through bilateral negotiations, prioritising deployment first and foremost. Until a market with multiple operational projects has been established, the transition to competitive auctions should not be seen as a priority.
“We are at a critical juncture, as some elements of the current Hydrogen Production Business Model are not fit for purpose. For example, the Government’s proposal to move to competitive CfD-style auctions by 2025 should be shelved until there are enough operational projects to act as a lynchpin for supply chain companies and market entrants at scale. While we do recognise the need for price-based auctions in the future to drive down costs, the lessons learned from the wind industry show that it is ultimately deployment that catalyses initial cost reduction. This is vital if we are to offer consumers flexible clean power at the lowest cost as soon as possible”, said RenewableUK’s Senior Policy Analyst for Emerging Technologies Laurie Heyworth.