First UK green hydrogen funding round awards just half of 250 MW capacity

The UK government has awarded funding to 11 successful electrolytic hydrogen projects under its first hydrogen allocation round (HAR1), totaling 125 MW, just half of the total capacity submitted.

The 11 successful projects were awarded at a weighted average strike price of GBP241/MWh (around GBP8.03/kg, $10.23/kg, using a lower heating value), backed by more than GBP2 billion of revenue support from the Hydrogen Production Business Model, the UK Department of Energy Security and Net Zero said in a statement Dec. 14.

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

Platts, part of S&P Global Commodity Insights, assessed the cost of producing hydrogen via alkaline electrolysis in the UK (including capex) at GBP5.36/kg ($6.79/kg) Dec. 13, based on month-ahead grid power prices. PEM electrolysis production was assessed at GBP6.28/kg.

Projects will be paid once they become operational, DESNZ said, with first projects targeting startup in 2025. An additional GBP90 million from the Net Zero Hydrogen Fund will support project construction.

"Combined with our commitments to further Hydrogen Allocation Rounds, this gives hydrogen developers, investors and supply chain companies the certainty they need to commit to the UK," DESNZ said.

The successful projects cover eight regions across England, Scotland and Wales, and are the first step towards the government's target of 1 GW of electrolysis in operation or construction by 2025, and 5 GW by 2030.

List of successful HAR1 projects

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

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.

The business model provides revenue support to hydrogen producers, making up the operating cost gap between low-carbon and higher-carbon fuels via 15-year contracts.

The private law contract will be made between a government-appointed counterparty and a hydrogen producer, with the business model designed to drive investment in low-carbon production and use.

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.

Increased HAR2 launches

DESNZ has also launched its second allocation round (HAR2), which is set to close in the second quarter of 2024.

While HAR1 fell short of the 250 MW of capacity support on offer, and the 262 MW submitted, DESNZ has increased HAR2 to 875 MW, from 750 MW previously.

The government also plans future allocation rounds in 2024 and 2026, with an ambition of supporting an additional 1.5 GW of electrolytic hydrogen production capacity.

A total of 17 projects entered final negotiations for HAR1, of which 2 projects withdrew and 15 projects totaling 243 MW submitted best and final offers, with four of these being unsuccessful.

DESNZ said unsuccessful projects should consider applying for HAR2 "with more competitive proposals."

The government intends to move to annual allocation rounds for the Hydrogen Production Business Model from 2025.

Unsuccessful HAR1 projects

A large share of the unsuccessful green hydrogen capacity under HAR1 is accounted for by BP's 80-MW HyGreen Teesside project, targeting initial production in 2026, and expanding to 500 MW by 2030.

""Though BP is disappointed that HyGreen Teesside is not included in HAR 1 we remain committed to the project," the company said in an emailed statement. "It is a project that stands out in terms of size and scale, and we look forward to continuing to work with the UK government to make progress towards commercial operations."

SSE's 35-MW Aldbrough Hydrogen Pathfinder and Gordonbush Hydrogen were also not selected, though the company said it would continue to develop the projects and would have "further opportunities to seek support."

Octopus Renewables declined to comment on its two hydrogen projects it had planned with RES that were not being taken forward under HAR1, totaling 18.75 MW, though the parties did win backing for their 10.6-MW Green Hydrogen 3 plant.

The 28-MW Cheshire Green Hydrogen project from Progressive Energy will also not go forward under HAR1. The company did not respond to a request for comment.

DESNZ put an emphasis on affordability and value for money in its awarding criteria.