The UK government opened the application window for the 2022 Electrolytic Allocation Round of its Hydrogen Business Model and Net Zero Hydrogen Fund (“HBM/NZHF”) on 20 July 2022.
The initial investment round will be earmarked for green hydrogen production (using electrolyzers to split water), with subsequent rounds possibly focusing on blue (natural gas with carbon capture) or pink (nuclear electricity-powered) hydrogen production.
Background
In November 2020, the UK government declared its intent to create 5GW of low-carbon hydrogen generating by 2030. This target was increased to 10GW of low-carbon generation by 2030 in April 2022, with at least half of this capacity coming from electrolytic hydrogen utilizing the UK’s large renewable energy sources.
The Hydrogen Business Model (“HBM”) was introduced for the first time in August 2021, when the UK Hydrogen Strategy was published. This is a contractual business model with the objective of incentivizing the production and use of low-carbon hydrogen through the provision of ongoing private and public sector financial support. Our HBM-specific blog post contains additional information.
The Net Zero Hydrogen Fund (“NZHF”) is comprised of up to £240 million in grant funds committed until 2025 to help the initial expenses of developing and constructing low carbon hydrogen generating plants.
Electrolytic Allocation Round for HBM and NZHF in 2022
Despite the fact that the HBM and NZHF target distinct categories of funding, initial response from stakeholders suggested that a considerable number of early stage initiatives wished to apply for both income assistance via the HBM and capital support via the NZHF.
The 2022 HBM/NZHF Electrolytic Allocation Round is a response to this feedback and establishes a collaborative mechanism via which projects can apply for either HBM revenue support or both HBM revenue support and capital support through the NZHF. The government hopes to support at least 250MW during the first Electrolytic Allocation Round, however it has the right to support less.
Projects that qualify will receive:
Continuous contractual revenue support via the HBM; this is anticipated to provide pricing support via a variable premium model, with volume support delivered indirectly via a sliding scale approach; and/or Where applicable, capital grant support via the NZHF. Up to twenty percent of the CAPEX that falls under the NZHF Scope may be requested by projects.
Application Periodicals
The application process consists of three stages: the reception of expressions of interest, the opening of the submission window, and the submission deadline.
Before submitting an application, projects must submit an Expression of Interest by September 7, 2020. The government will then organize certain engagement sessions in order to engage with stakeholders. The final application deadline is October 12, 2022.
In the event of an oversubscription, there may be a shortlisting stage following the initial examination of submissions, and projects should be notified of their success or failure in early 2023. The shortlisted projects will then be invited to the Agreeing an Offer stage, which comprises a due diligence process, a cost-benefit analysis, and an agreement process. The awarding of contracts is anticipated to begin in July 2023.
Eligibility Standards
For the 2022 HBM/ NZHF Electrolytic Allocation Round, a business may lead up to four applications, each of which must be materially distinct, and may be a collaborator or project partner in up to four additional applications.
Only those Projects that meet the stipulated eligibility criteria will be reviewed further and be eligible to be shortlisted for the Agreeing an Offer phase.
The following factors determine eligibility:
- UK-based: All project equipment is located in the United Kingdom, and the Project Representative’s business is registered in the United Kingdom.
- COD by the end of 2025: Demonstrate that it can be operational (i.e., attain commercial operations date or COD) by the end of 2025.
- In the context of newly constructed hydrogen production plants, the government has stated that COD refers to the date when the facility is commissioned and ready to begin operations. The government has also emphasized that an early COD could be advantageous for the project during the appraisal phase. As with the current CfD regime, participants will be required to offer a target COD, and the Target Commissioning Window and Longstop Date will be amended day-by-day for any delays caused by “Force Majeure” (and maybe other situations beyond the Producer’s control to be stated).
- Using core technology that has been tested in a commercial context, with a Technology Readiness Level (TRL) of seven or above. According to the authorities, both PEM and Alkaline electrolysers meet this standard.
- Only newly constructed hydrogen producing facilities are eligible to submit an application for this Electrolytic Allocation Round. The term ‘new build production facilities’ refers to facilities created specifically for the production of hydrogen. Although this is the totality of the production process, the government has highlighted that it is permissible for new hydrogen production equipment to share preexisting balance of plant, hydrogen transport, and/or hydrogen storage equipment. There are exclusions for projects that have received funds through particular funding rounds.
- Production of electrolytic hydrogen: The 2022 HBM/NZHF Electrolytic Allocation Round will only give money for production of electrolytic hydrogen with minimal carbon emissions. Electrolytic hydrogen production refers, for the purposes of this article, to water electrolysis, in which water is split into hydrogen and oxygen using low-carbon energy. This does not prohibit the introduction of other technologies in future allocation rounds, according to the government.
- Has discovered at least one qualifying offtaker. An offtaker is both the final consumer of low carbon hydrogen and, where applicable, any intermediary who may purchase and resell hydrogen to final consumers. To establish this, Projects must have an agreement or proof of work toward an agreement with possible qualifying offtakers, and give the details of any agreed offtakers on the Project Application Form.
- Has identified a supplier(s) of electrolysers: Projects should provide evidence of their involvement with electrolyser supplier(s), such as a budgeted quote or a Request for Information (RFI) answer from a supplier.
- Minimum hydrogen production capacity of 5MW: The 5MW barrier applies to individual projects, each of which should consist of a single facility at a single location. Projects will not be permitted to aggregate capacity across many locations or use a phasing strategy to gradually increase capacity to 5MW.
- Conforms to the Low Carbon Hydrogen Standard (LCHS) requirements: This standard defines a limit for greenhouse gas emissions permitted in the generation of low-carbon hydrogen, as well as a method for estimating these emissions.
- Projects must be able to provide information about their funding plan and the state of conversations with bankers to demonstrate their availability to financing (if appropriate). This may be demonstrated, for instance, by a letter from the board of equity partners committing to finance the project, letters of support from financiers, and/or evidence of the capacity to fund from existing liquidity.
In the event of an oversubscription of projects that meet all of the above eligibility requirements, the government may apply certain portfolio factors, such as location (to ensure that all projects are not concentrated in one or a small number of regional areas), project size (to ensure that at least some larger scale projects are approved), and diversity of end use and electricity source/operating model.
