The UK government has unveiled the blueprint for its low-carbon hydrogen agreement (LCHA). This contract forms the backbone of the nation’s strategy to support electrolytic and carbon capture-enabled production of low-carbon hydrogen, a vital energy carrier in the transition towards a greener future.
The essence of this business model lies in providing financial support to hydrogen producers, bridging the gap in operating costs between low-carbon and high-carbon fuels through 15-year contracts. The Department for Energy Security and Net Zero (DESNZ) has emphasized the importance of this agreement in catalyzing negotiations for the allocation of funding to the initial electrolytic hydrogen initiatives and the first two carbon capture-enabled hydrogen production projects.
The LCHA represents a decisive leap towards achieving the UK’s hydrogen production targets, including a staggering 10 GW of hydrogen capacity by 2030. Half of this capacity is projected to stem from electrolytic hydrogen, underpinning the nation’s commitment to cleaner energy sources.
The introduction of LCHA fills a crucial void in the UK’s hydrogen policy framework, closely following the unveiling of the updated hydrogen strategy in early August. It builds upon the foundation laid by the Low-Carbon Hydrogen Production Business Model Heads of Terms, released in December 2022.
In essence, the LCHA subsidy model takes inspiration from contracts for difference, a mechanism extensively employed in the realm of renewable power generation. This approach involves compensating hydrogen producers for the difference between the actual sales price of low-carbon hydrogen and a predetermined strike price, with the price of natural gas setting a lower threshold.
The strike price acts as the benchmark that low-carbon hydrogen producers must meet to cover their production expenses, including a justifiable return on investment. The specifics of this strike price and cost components are subject to project-specific negotiations, accommodating variations in production technology pathways.
Industry analysts have calculated the production costs of hydrogen using different methodologies. For instance, the cost of producing hydrogen through alkaline electrolysis in the UK, considering capital expenditure, was estimated at GBP5.54/kg ($7.06/kg). In comparison, proton exchange membrane electrolysis production accounted for GBP6.48/kg, while blue hydrogen production using auto thermal reforming was estimated at GBP3.72/kg, considering capital expenditure, carbon capture, and storage costs.
Moreover, the LCHA agreement addresses contingencies in the event of disruptions to carbon storage facilities or unforeseen CO2 emissions from production plants. In such cases, a calculated waiver is applied, accompanied by a payment obligation to the LCHA Counterparty.
The introduction of LCHA is set to invigorate the emerging hydrogen industry in the UK. However, experts from Hydrogen UK emphasize the need for additional considerations, particularly with regard to intermediary entities that play a pivotal role in developing a dynamic hydrogen market.
This milestone heralds a new era for the UK’s energy landscape, fostering cleaner energy sources and setting the stage for a thriving hydrogen economy.
