RenewableUK has unveiled a comprehensive guide aimed at providing clarity to investors and policymakers regarding the intricacies of the UK government's Hydrogen Production Business Model. Titled “Demystifying the Hydrogen Business Model for Electrolysis,” the guide not only elucidates the workings of the model but also addresses the challenges it presents and suggests reforms needed to expedite the deployment of major green hydrogen projects in the UK.
The UK government has set an ambitious target of achieving 10GW of low carbon hydrogen production by 2030, with half of this coming from green hydrogen generated through renewable sources. According to RenewableUK, meeting this target has the potential to create over 12,000 jobs and attract £11 billion in private investment.
As part of its strategy, the government has established an interim goal of 2GW of low carbon hydrogen production by 2025, including 1GW of green hydrogen. However, the current operational capacity for green hydrogen in the UK is limited to just about 5MW. To scale up and realize these objectives, the Hydrogen Production Business Model plays a pivotal role in mitigating risks and reducing financing costs.
The guide aims to provide developers and key stakeholders with a comprehensive understanding of the model, which has previously been criticized for its complexity, hindering new entrants' comprehension. At its core, the Hydrogen Production Business Model offers support similar to the Contracts for Difference scheme. Under this model, generators receive a fixed price (strike price) for their electricity over a predetermined period. This fixed pricing mechanism is designed to de-risk renewable projects, making them more attractive to private capital investment.
Beyond revenue stability, the government's model also seeks to create a market for low carbon hydrogen, especially in cases where there are limited buyers and sellers. To date, the Hydrogen Allocation Round 1 (HAR1) has seen 17 projects with a combined capacity of 262MW enter negotiations with the Department for Energy Security and Net Zero. They are set to receive Low Carbon Hydrogen Agreements, with contracts scheduled to be awarded this year. The first HAR1 projects are expected to reach Financial Investment Decision within three months of securing contracts.
The second allocation round (HAR2) is on the horizon, with a goal to secure 750MW of capacity. While support is currently awarded through negotiations between the industry and the government, there is a proposal to transition to a competitive, price-based Contract for Difference (CfD)-style auction system, possibly as early as 2025.
Laurie Heyworth, RenewableUK's senior policy analyst for emerging technologies, emphasized the pivotal role of the 2020s in shaping the UK's green hydrogen economy. She suggested that it is crucial to wait until there are enough operational projects to support a move to competitive CfD-style auctions, citing the wind industry's experience as a relevant example. Heyworth stressed that deployment is the catalyst for initial cost reduction, essential for offering consumers affordable clean power.