Madano Policy Brief – Hydrogen Announcements
Today, the Government has published a series of documents that taken together are designed to provide the clarity, funding, and regulatory models that businesses will need to invest in order meet the new 10GW target for hydrogen production in the UK. This package of announcements follows yesterday’s formal launch of the UK’s Energy Security Strategy.
The documents include:
- A response to the government’s consultation on the Low Carbon Hydrogen Standard, which will set out the UK’s greenhouse gas intensity threshold for hydrogen, alongside research and analysis on fugitive hydrogen emissions.
- Publication of the Heads of Terms for the Hydrogen Business Models, with £100m to enable projects to bridge the gap between the cost of offering hydrogen at a competitive price and the true cost of production, reflecting similar interventions for offshore wind in the last decade.
- A consultation seeking further views on market engagement for electrolytic projects combining both Hydrogen Business Models (revenue support) and the Net Zero Hydrogen Fund (capex support) to provide a comprehensive package to applicants.
- A £26m Industrial Hydrogen Accelerator fund, which is designed to support demonstration of hydrogen as a fuel for industries, like steel, cement, and glass.
- A Hydrogen Investor Roadmap, which highlights a series of UK investment opportunities across the emerging hydrogen value chain.
While each document covers a defined brief, collectively these documents aim to create something greater than the sum of their individual parts by providing confidence to hydrogen sector businesses to invest in projects. Where previously there had been uncertainty as to how hydrogen would be funded at scale, and what the government would take into account when assessing projects, the documents published today mean that applicants can rely on a complete (if still theoretical) framework, regardless of production technology.
However, given the timescales, the government’s expectation is that production-at-scale will be deliverable from the mid-point of this decade, rather than immediately. Additionally, and perhaps more concerning for business, there is limited new funding attached to today’s announcements.
What is apparent in these documents is the government’s intention to diversify the supply of low-carbon hydrogen, rather than focus solely on one production method. For example, the new “Low Carbon Hydrogen Agreement” subsidy system (largely a replication of the highly successful Contracts for Difference model) will provide producers with a premium, calculated as the difference between the Strike Price and the Reference Price for each unit of hydrogen sold. This proposal has been specifically designed to support both electrolytic and CCUS-enabled hydrogen projects to be brought forward.
Rather than sources of hydrogen per se, the documents reinforce that carbon intensity of hydrogen production will be key. The proposed limit on acceptable carbon intensity to 20gCO2e/MJLHV is designed to allow a wide variety of production technologies to contribute to scaled up hydrogen production, while excluding existing carbon intensive hydrogen from support.
Overall, the announcements are good news for hydrogen producers, demonstrating the increased focus on this policy (and business) area but, as ever, the devil is in the detail and much will depend on how the government implements the package of announcements, and how it works with industry to do so.
Detailed Overview of Announcements
Low Carbon Hydrogen Standard – consultation response
- This standard enables projects to be defined as ‘low carbon hydrogen’, and guidance for compliance has been published alongside it.
- Projects funded by Government will be required to comply with the standard, and potentially prove compliance during operation, but will not be subject to later amendment – meaning projects funded at one level of carbon intensity will not need to later meet a higher standard.
- However, leeway will not be given to existing production facilities, so they too must meet this new standard to be eligible for funding.
- With the aim of striking a balance between growth of the market and emissions reductions, Government intends to set the carbon intensity threshold at 20gCO2e/MJLHV (Lower Heating Value), measured at the point of production. It will account for and report on negative emissions, where they can be proven.
- The Government will review ‘fugitive emissions’ with global warming potential from hydrogen production, and has provided guidance on best practice for reducing fugitive emissions and taking this into account in funded project applications. Successful projects will be expected to report on fugitive emissions.
- Government expects pressure and purity to be agreed between producers and off-takers, but with regard to impact on emissions, a theoretical minimum pressure of 3MPa and minimum purity of 99.9% for the purposes of comparing projects for funding. If a project will not comply, it is expected to use guidance produced by Government to account for the impact on emissions within the application.
- Carbon capture and utilisation (CCU) will not be given carbon reduction credits under the standard, meaning that carbon captured and utilised rather than permanently stored in geologic structures will be considered as being emitted to the atmosphere. This will be reviewed in the future.
- Regarding electricity inputs, the key will be for producers to demonstrate clear evidence of meeting technical requirements for achieving low carbon electricity input, so different electricity inputs can be averaged, if necessary, over a reasonable period, such as monthly. The standard allows for mixed inputs into production systems.
- Biomass projects are expected to comply with the requirements of the Green Gas Support Scheme and Renewable Transport Fuel Obligation.
- To avoid constraining uptake of electrolysis, ‘additionality’ (e.g., wider benefit around biomethane) will not be factored into the standard.
Hydrogen Investor Roadmap
- The Hydrogen Investor Roadmap details nearly 60 potential hydrogen production projects located across the UK, covering electrolysis, CCUS and storage and distribution infrastructure.
- It also sets out a roadmap of Government’s current commitments through to 2030, and a breakdown of actions to support a hydrogen economy across demand stimulation, enabling infrastructure, funding support, supply chains and the regulatory environment.
- A roadmap of BEIS Hydrogen funding rounds expected in 2022 and 2023 has been published alongside this.
Joint market engagement for electrolytic allocations within the Net Zero Hydrogen Fund and Hydrogen Business Models
- A joint market engagement document has been published that sets out a joint approach for electrolytic hydrogen projects seeking BEIS funded support in 2022.
- Hydrogen Business Models funding will provide revenue support to producers to bridge the gap between the true costs of production and the competitive pricing needed to sell hydrogen.
- The Net Zero Hydrogen Fund is designed to provide CAPEX support.
- A single application form will ask applicants to indicate whether they wish to receive CAPEX support in addition to revenue support, so BEIS can consider the optimal package of funding for projects. Government is encouraging projects to consider both to achieve the maximum value for money.
- For electrolytic projects seeking funding in this round of support from Hydrogen Business Models and the NZHF, funds will open for applications in early July 2022, close in September 2022, with shortlisted projects to be announced in early 2023. At this stage, BEIS will begin negotiations, and will aim to achieve signed contracts with successful projects no later than December 2023.
- From the award of funding, Government then expects projects to make a final go/no-go decision within three months and be in operation by the end of 2025.
- All projects must be UK based, and core production technology used should be at TRL Level 7 (‘Integrated Pilot System Demonstrated’). The NHZF will only fund new build projects, with the potential exemption of those within the existing Net Zero Innovation Portfolio pipeline. Projects must produce 5MW as a minimum, with at least one identified offtaker to provide assurance that there is demand, and an electrolyser supplier identified.
- Evaluation criteria have been published to outline how projects will be assessed.
Hydrogen Business Models – Government response and Heads of Terms
- A full response to the consultation on Hydrogen Business Models has been published, alongside Heads of Terms.
- BEIS proposes to offer a “Low Carbon Hydrogen Agreement” to hydrogen producers which meet the requirements of the low carbon hydrogen standard. These contracts will typically last between 10 and 15 years.
- Projects seeking revenue support through this process will need to demonstrate significant commitment to the project by spending a minimum percentage of “Total Project Commissioning Costs”; or fulfilling a specified set of “Project Commitments” to be eligible
- The hydrogen counterparty (the body assigning the Contracts for Difference) will be able to terminate agreements if project milestones agreed in advance are missed, and for a range of other contract violations.
- BEIS is also considering allowing termination if the hydrogen produced does not meet low carbon hydrogen standards and this is not rectified within a reasonable period.
- BEIS is also considering replicating the practice of other CfD rounds by not allowing the prospective producer to terminate the contract.
- Hydrogen producers will be paid a premium, calculated as the difference between the Strike Price and the Reference Price (discussed immediately below) for each unit of hydrogen sold. Payments will be made on a £ per MWh (higher heating value (HHV) basis.
- In determining the Strike Price, which will be negotiated on a project-by-project basis, BEIS is considering the potential elements to include, which are likely to include:
- capex and opex associated with the construction and operation of the Facility (excluding capex funded by the NZHF GFA)
- an allowed return on investment.
- capex, but not opex, associated with small-scale hydrogen transport infrastructure (negotiated on a project-by-project basis by taking several factors into account including necessity, affordability, and value for money for Government).
- capex and/or opex associated with a small-scale hydrogen storage infrastructure (negotiated on a project-by-project basis by taking several factors into account including necessity, affordability, and value for money for Government).
- The Reference Price will be whichever is higher – the Producer’s Achieved Sales Price or the Price Floor (which will be the lower of the Natural Gas Price and the Strike Price).
- The “Achieved Sales Price” will be equal to the volume-weighted average price for low carbon hydrogen for the relevant Billing Period to reduce the reporting burden for the Producer.
- The “Natural Gas Price” will be the arithmetic average of the daily value of the UK NBP Month Ahead Natural Gas Price published on every business day of the calendar month preceding the relevant Billing Period.
- The “Price Floor” will be the lower of the Natural Gas Price and the Strike Price.
- The Low Carbon Hydrogen Agreement will include a mechanism that will be designed to aid price discovery. This will operate so that the Producer receives an amount linked to the increment by which the Reference Price exceeds the Price Floor for each unit of hydrogen sold. The intention is to promote price discovery and to also incentivise the Producer to seek higher price sales.
- Volume support will be provided to Hydrogen producer through a sliding scale mechanism. Under this mechanism, if the Producer is producing low carbon hydrogen and its offtake/sales volumes fall, the Producer will receive an additional amount for each unit of hydrogen sold. This will be equivalent to paying the Producer a higher level of Strike Price for the low volumes of hydrogen. If the Producer’s offtake/sales volumes fall to zero, no volume support will be provided. This mechanism will enable the Producer to recover a relatively greater proportion of its cost of production if offtake/sales volumes fall, while incentivising the Producer to produce and sell higher volumes of low carbon hydrogen to increase its revenue.
- If production volume increases above any defined level through a new Facility or a new module, it will not be covered under the terms of the original Low Carbon Hydrogen Agreement.
- Strike Prices will be indexed to CPI inflation for electrolytic hydrogen production, while for CCUS-enabled hydrogen production, the natural gas cost component will be indexed to the market price of natural gas, while all other components will be indexed to CPI.
Industrial Hydrogen Accelerator Programme
- As part of the Net Zero Innovation Portfolio, in April 2022, Government will open a new fund designed to deliver demonstration of low carbon hydrogen as a fuel for industry.
- This aims to enable industries to switch to low carbon hydrogen to reduce their emissions. It is targeting 5 feasibility reports by 2023, and demonstration of end-to-end systems.
- It will be split into two streams – a fund going straight to demonstration of a small number of the largest projects, allocating grants of between £2m and 10m and match-funding applicant costs of between 25-60% of the project total, and then a second two part stream, with around 5 projects to be initially funded for £100k-400k 100% grant funded feasibility studies, followed by £1m-7m grant allocations matched to 25%-60% of the project total.
- All projects must achieve demonstration by March 2025, as Government is keen to create a pathway for consumption of low carbon hydrogen it is funding.