UK to launch second hydrogen subsidy round this year
The UK government is set to begin its second hydrogen allocation round later this year with plans to award contracts for up to 750 MW of projects in 2025 as the nation seeks to boost production of cost-competitive green hydrogen.
The first allocation round took place in July 2022 and in March this year, the government published a shortlist of 20 electrolytic hydrogen projects totalling 408 MW. It is expected to award contracts to about 250 MW of capacity in the fourth quarter of 2023, with first projects becoming operational in 2025.
“We also intend to launch the second hydrogen allocation round (HAR2) later this year, with the aim to award contracts of up to 750 MW in 2025, subject to affordability and value for money,” the Department for Energy Security and Net Zero said in an updated hydrogen strategy document published on Aug. 2.
The government is also soon to publish the Low Carbon Hydrogen Agreement (LCHA) for the first round of projects, it said. The LCHA is the all-important mechanism through which price support is provided via Contracts for Difference (CFD).
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In October 2021, the government said that it would provide up to £100 million in CFDs for as much as 250 MW of electrolytic projects in 2023. That level of funding would provide a subsidy of £1/kg of hydrogen at a production rate of 10,000 mt/year (equivalent to 65 MW-75 MW electrolysis) over 10 years, according to calculations by S&P Global.
The second round will support three times as much hydrogen production as the first, bringing the cumulative total to 1GW.
After the second hydrogen allocation round, the government is planning to transition to annual, price-based competitive allocation by 2025 for electrolytic projects, and potentially other specified non-carbon capture hydrogen production technologies, it said.
The government has set a target of 10 GW of low carbon hydrogen production capacity by 2030, at least half of which must come from electrolytic hydrogen. In the short-term, it aims to have 1 GW of electrolytic hydrogen and 1 GW of carbon capture-enabled blue hydrogen in operation or construction by 2025.
The UK has been at the forefront of promoting hydrogen as a potential energy source, particularly for its potential role in achieving net-zero carbon emissions by 2050.
The UK was the first country in the world to launch a hydrogen support scheme but has since come under pressure to match generous subsidies elsewhere, particularly the US, where the Inflation Reduction Act offers as much as $3/kg for green hydrogen production.
The updated hydrogen strategy document included plans to publish consultations later this year on hydrogen blending, and on design options for the hydrogen-to-power market, the development of a hydrogen production delivery roadmap, and design of transport and storage business models.
The government said it favours a so-called regulated asset base model combined with some form of revenue support for hydrogen transport. For storage, it favours a model including a minimum revenue floor to provide investor certainty.
We will continue to monitor developments as the UK puts the regulatory framework into place for the hydrogen economy.
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