The UK Government published its overdue Hydrogen Strategy last month (17 August 2021), setting out more detail on how it intends to achieve the goal of 5GW of low carbon hydrogen production capacity by 2030, as set out in The Ten Point Plan for a Green Industrial Revolution (November 2020), and establish the UK as a global leader in hydrogen.
In this article, we provide a summary of the strategy, as well as discuss the key points to note and next steps.
The Strategy takes a holistic approach and sets out a strategy for the whole UK hydrogen supply chain, and attempts to stimulate both the supply and demand side markets. Unlike many European hydrogen strategies (including the EU's own hydrogen strategy) the UK is supporting a "twin track" approach by backing both 'blue' hydrogen (produced from natural gas using carbon capture and storage) and 'green' hydrogen (produced from renewable sources of energy).
The Government's roadmap to 2030 expects most projects in the early 2020s to be small (up to 20MW) electrolytic projects with a closely-linked, local end use i.e. a transport or industrial hub. It expects larger (up to 100MW) electrolytic projects, and the first blue hydrogen production facilities, to be supporting a broader range of hydrogen uses by the mid-2020s (including hydrogen heat trials and the use of a hydrogen blend in the gas grid). It then expects to scale up to (500MW+) blue hydrogen production facilities by the end of the decade.
The Hydrogen Strategy estimates that the 5GW hydrogen target could support over 9,000 jobs by 2030 and the scaling-up of the UK's hydrogen economy could support as many as 100,000 jobs by 2050. This scaling-up will require significant private sector investment, and the Government expects the early investments in hydrogen projects detailed in the Strategy to unlock over £4 billion of private investment.
Business model consultation
In support of this private investment, the Government has launched a consultation for the design of a hydrogen business model, which will include a revenue support mechanism to subsidise hydrogen production facilities. The Government plans to finalise the model in early 2022, with the first subsidy contracts being awarded from Q1 2023. According to the consultation document, the business model will attempt to manage the market price risk (i.e. costs outweigh the price achieved) and the volume risk (i.e. inability to produce enough to cover costs).
Business model – pricing risk
The consultation sets out three options for dealing with market price risk: fixed price, fixed premium, and variable premium, with the premium being the difference between the strike price and reference price. The Government's "minded to" position is currently a variable premium as it enables the level of subsidy to reduce over the contract term as the hydrogen market evolves. This is consistent with other comparable Government support mechanisms – for example, the contracts for difference support mechanism for low carbon electricity generation. In the absence of an established market benchmark, the Government sets out seven options for a reference price, with the Government's "minded to position" being an 'achieved sales' reference price, but to use the natural gas price as a floor.
Business model – volume risk
The consultation outlines five options for dealing with volume risk: availability payments, partial government offtake, government offtake backstop, government offtake frontstop and a sliding scale providing volume support indirectly through price variation. The Government's "minded to" position for volume risk is to apply a sliding scale. This provides higher support rates for the initial production volumes (to help cover fixed costs etc), with declining rates of support as offtake volumes increase.
The Strategy has also launched the consultation for a UK standard for low carbon hydrogen to standardise the production of low carbon hydrogen. This will be supported by a broader review of the regulatory regime. The final standard is also due in early 2022.
The consultations close on 25 October 2021.
Going forwards, the Government intends to work closely with key stakeholders (including the oil and gas sectors) to develop a Hydrogen Sector Development Action Plan for release in early 2022. The expectation is that the Government will not intervene too firmly to avoid stifling cost-competitive growth and help the hydrogen sector "follow in the footsteps" of offshore wind and oil & gas. More information is expected across a raft of hydrogen measures throughout 2022 and 2023.
You can read more about the state of the UK hydrogen market in our analysis.
Comment from Gowling WLG partner Gus Wood
Commenting on the strategy, Gus Wood said "this is a significant and positive step in the UK's transition to a carbon neutral economy. This transition will require a mixture of different technologies across the energy sectors, and hydrogen has the potential to play a significant role. This strategy lays the foundations for hydrogen to establish itself as part of this energy mix, and signals the UK Government's commitment to hydrogen. It will hopefully unlock investment and trigger innovation, as new hydrogen-based business models and products become possible - ensuring that the UK energy sector continues to present attractive investment opportunities."
Gowling WLG's Hydrogen Group
Gowling WLG launched a cross-firm Hydrogen Group in May 2021 to bring together our global colleagues to help clients in the hydrogen sector. The Hydrogen Group has experience assisting international clients in all phases of project development, including agreement negotiations, construction, financing, claims management, dispute resolution and regulatory matters.
Recently, the firm served as counsel to US-based Cummins Inc. on its cross-border acquisition of Hydrogenics Corporation, a fuel cell and hydrogen production technologies provider. We also advised Canadian company NEXT Hydrogen on patents related to hydrogen electrolysers used in renewable wind technology. In the UK, we advised HydrogenOne Capital on the fundraise and listing of a £107m clean hydrogen investment fund on the London Stock Exchange.
Keen to understand how the team can help to deliver your hydrogen projects or understand more about the Hydrogen Strategy? Speak to Gareth Baker or Gus Wood for more on how the Energy team can support your success in renewables and beyond.