RenewableUK’s Guide to UK’s Hydrogen Production Business Model

As the world grapples with the urgent need to decarbonize sectors that have stubbornly resisted green transformation, a new guide from RenewableUK titled “Demystifying the Hydrogen Business Model for Electrolysis” seeks to demystify the intricate workings of the UK Government’s Hydrogen Production Business Model.

This guide aims to provide clarity for investors, policymakers, and industry stakeholders, ensuring that the UK can swiftly deploy major green hydrogen projects essential for catalyzing cost reduction and achieving ambitious sustainability goals.

Green hydrogen, derived from the process of electrolysis, is poised to revolutionize industries that have proven challenging to decarbonize. It can be utilized for generating heat in heavy industry and serving as a clean fuel for transportation. Moreover, its capacity for storage makes it a critical asset for ensuring energy system flexibility and guaranteeing a stable energy supply.

Green hydrogen is created in advanced electrolyzers that split water into hydrogen and oxygen without emitting any carbon dioxide, offering a sustainable and eco-friendly energy solution. The UK is home to pioneering electrolyzer companies like ITM Power and Ceres, whose cutting-edge technologies have garnered international recognition.

The UK Government has set ambitious targets, aiming for 10 gigawatts (GW) of low carbon hydrogen production by 2030, with half of that generated from green hydrogen produced using renewable sources. This endeavor is projected to support over 12,000 jobs and attract approximately £11 billion in private investment. As an interim target, 2GW of low carbon hydrogen production, including 1GW of green hydrogen, is set for 2025. This is a bold vision, considering that the UK currently operates only about 5 megawatts (MW) of green hydrogen projects. The Hydrogen Production Business Model is poised to play a pivotal role in initiating and scaling up these projects by mitigating financial risks and encouraging investment.

While the Hydrogen Production Business Model is akin to the Contracts for Difference (CfD) scheme, where generators receive fixed prices for their electricity over a specified term, its complexity has been a source of criticism. Simplifying the model is essential for attracting private investment. This model provides revenue stabilization and aims to establish a market for low carbon hydrogen, particularly in the absence of multiple buyers and sellers.

So far, one allocation round (HAR1) has been completed. In this initial round, 17 projects with a total capacity of 262MW engaged in bilateral negotiations with the Department for Energy Security and Net Zero. These projects are expected to receive Low Carbon Hydrogen Agreements, and the first projects are set to reach the Financial Investment Decision stage within three months of contract award. A second allocation round (HAR2) is already in the pipeline and aims to secure 750MW of capacity.

While support has been provided through negotiations, the UK Government is contemplating a transition to competitive, price-based auctions by 2025. This shift raises challenges, particularly regarding setting reference prices that reflect the market price for each unit of hydrogen sold. A competitive transition could be problematic, given the nascent stage of the low carbon hydrogen market, with limited operational projects and market players.

RenewableUK highlights that while price-based auctions may be essential in the future to reduce costs, early adoption could hinder the development of a domestic supply chain for green hydrogen. In the guide, RenewableUK recommends that, during this infancy stage, the allocation of Hydrogen Production Business Model contracts should continue through bilateral negotiations, prioritizing deployment as the primary goal. Only after multiple operational projects are in place should the transition to competitive auctions be considered.

The 2020s represent a pivotal decade for the UK’s green hydrogen economy. These years are instrumental in laying the groundwork for large-scale operational projects, attracting private investment, and nurturing domestic supply chains. As the guide emphasizes, the focus should remain on deployment, much like the wind industry’s early lessons, where initial deployment drives down costs. Achieving this goal is essential to deliver affordable, flexible, clean power to consumers in the shortest timeframe possible.