The net zero transition will require decarbonisation of every part of the economy. Much of this will be delivered by renewable electricity, but this cannot get us the whole way there. Green hydrogen is a versatile energy vector that can take us the rest of the way. Produced by using renewable energy to power the electrolysis of water, green hydrogen can be used to decarbonise hard-to-abate sectors such as heavy transport, industry and heat. Compared to electrons, green hydrogen is much easier to store inter-seasonally and during periods of low demand it can improve the utilisation of renewable generators by reducing curtailment.
The government has recognised the importance of low carbon hydrogen in its recent Hydrogen Strategy. Alongside this, there were a number of consultations setting out its vision of the hydrogen economy. While these were welcome there is still more work to be done to ensure that green hydrogen, as well as blue hydrogen (produced with carbon capture), can play a central role in the net zero economy.
One of these consultations is on the proposed hydrogen business model which aims to provide revenue support to low-carbon hydrogen projects through a variable Contracts for Difference (CfD) scheme. The subsidy is calculated as the difference between the strike price and the reference price. Due to the absence of a mature market for low carbon hydrogen, the Department for Business, Energy and Industrial Strategy (BEIS) has proposed to set the reference price as the highest of either the achieved sales price or natural gas price.
In our response, RenewableUK welcomed the scheme as it will significantly de-risk investment in low-carbon hydrogen production and provide a viable route to market for first-of-a-kind green hydrogen projects. However, we are concerned that using the natural gas price input could result in a “missing money problem” for projects with fixed offtaker agreements if gas prices remain volatile. This occurs when there is insufficient revenue to support fixed and operational costs of a project due to, in this instance, a gap between the offtake price and gas-based reference price. There is also a risk that the scheme unnecessarily links green hydrogen projects with natural gas prices, which they would otherwise not be exposed to. This also implies that perhaps the scheme is designed to help blue hydrogen projects – which use natural gas as a primary input – remain competitive.
The strike price, on the other hand, should harness multiple index price options to reflect the inherent differences between hydrogen production technologies. If BEIS decides to use the natural gas price input, RenewableUK has recommended that it is capped against the strike price to ensure producers are protected against surging natural gas prices.
As well as the business model, BEIS will also provide support to low carbon hydrogen deployment through the Net Zero Hydrogen Fund (NZHF). The pot offers £240 million in funding for low-carbon hydrogen projects between 2022 and 2025, which our members welcome as necessary funding to stimulate a UK-based hydrogen economy.
Nonetheless, BEIS’s technology agnostic approach to the design of both the NZHF and business model may put green hydrogen projects at a disadvantage. Unlike green hydrogen projects which will be small-scale in the 2020s, blue hydrogen projects are large, more established and require millions of pounds to fund. There is a risk that green hydrogen projects will be crowded out in the NZHF by large blue hydrogen projects, and that the pot is being spread too thinly for it to be impactful. Similarly, under the business model blue hydrogen projects are likely to have more resources to competitively bid into auctions or enter bilateral negotiations for a limited number or capacity of contracts. The NZHF and business model should therefore incorporate separate schemes for green hydrogen and blue hydrogen projects.
BEIS is also developing a low-carbon hydrogen standard which will lay out what is meant by “low carbon hydrogen”. The current proposal for the standard will adopt a single “low carbon” label for hydrogen which meets its greenhouse gas threshold. RenewableUK, however, argues that a single label is reductionist and that it should differentiate between “zero carbon” and “low carbon hydrogen”, with the possible inclusion of “negative carbon”. Using a single label obscures the premium associated with being zero carbon and does not grant the same level of flexibility provided by multiple labels. Corporations are increasingly being held to account for their emissions, and so this level of differentiation will also allow users to validate their green credentials more accurately.
Green hydrogen is going to be a vital part of the UK’s energy mix. With this in mind, RenewableUK has set up a dedicated Green Hydrogen Working Group to make sure the role of green hydrogen in a net zero system is foremost in the government’s mind, and to help develop a robust policy and regulation framework to facilitate deployment.