UK offers first green hydrogen production contracts to HAR1 projects

The UK government has offered the first contracts to green hydrogen project developers under its debut allocation round, an energy department spokesperson told S&P Global Commodity Insights Dec. 12.

The contracts under Hydrogen Allocation Round 1 have been offered to projects via the Low Carbon Contracts Company, the Department of Energy Security and Net Zero spokesperson said by email.

"Through our funding of GBP2 billion in the Budget, we are supporting 11 green hydrogen projects across England, Scotland and Wales -- among the first commercial-scale projects anywhere in the world," the DESNZ spokesperson said.

"This funding will unlock more than GBP400 million of private investment, creating over 700 jobs across the country."

DESNZ is still evaluating applications under HAR2 and "will update on the second funding round in due course."

HAR2 closed in April, offering support for up to 875 MW.

The HAR1 funding is to support 11 renewable hydrogen projects with total capacity of 125 MW, with funding confirmed in the new Labour government's first budget on Oct. 30.

The projects will provide hydrogen to at least 35 offtakers, DESNZ said at the time.

The funding, originally announced by the previous government in December 2023, will cover the cost gap over 15 years between renewable hydrogen generation and the market price, with natural gas setting a floor.

HAR1 allocated funding to just half of the total capacity submitted.

The 11 successful projects were awarded at a weighted average strike price of GBP241/MWh (around GBP9.50/kg).

"This compares well to the strike prices of other nascent technologies such as floating offshore wind and tidal stream," DESNZ said at the time.

Platts, part of Commodity Insights, assessed the cost of producing hydrogen via alkaline electrolysis in the UK (including capex) at GBP6.96/kg ($8.86/kg) Dec. 11, based on month-ahead grid power prices. PEM electrolysis production was assessed at GBP7.14/kg.

Projects will be paid once they become operational. An additional GBP90 million from the Net Zero Hydrogen Fund will support project construction.

Commodity Insights contacted the LCCC for comment.

Successful projects in UK Hydrogen Allocation Round 1

Sources: UK Department for Energy Security and Net Zero, S&P Global Commodity Insights

*Project size could be higher than awarded capacity

Strike price and floor

The weighted average strike price is weighted by the total hydrogen volumes expected over the lifetime of the contract, and will vary according to the natural gas reference price.

Modeled on contracts for difference, used in renewable power generation, the Low Carbon Hydrogen Agreement subsidy will pay the difference between an achieved low-carbon hydrogen sales price and a strike price, with the natural gas price setting a floor.

The strike price is the unit price a low-carbon hydrogen producer needs to cover its production costs, plus an "allowed return on investment."

"The level and specific components of the Strike Price and cost components will be negotiated on a project-by-project basis," and are likely to vary across different production technology pathways, DESNZ said previously.

DESNZ said Oct. 30 the funding "aims to overcome the cost gap between low-carbon hydrogen and the high carbon counterfactual fuels hydrogen will replace," such as natural gas or diesel, suggesting the offtake price could be near the lower cap of the range at the natural gas price.