UK's updated hydrogen strategy confirms 750-MW allocation round

The UK government is to launch a second hydrogen allocation round (HAR2) later this year with contract awards of up to 750 MW in 2025, it confirmed in an updated hydrogen strategy document Aug. 2.

In March the government published a shortlist of 20 electrolytic projects totaling 408 MW under a first allocation round (HAR1). Awards for around 250 MW are expected in Q4 2023, with first projects 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," it said.

At the same time, the government is about to publish the Low Carbon Hydrogen Agreement (LCHA) for HAR1 projects, it said.

The LCHA is to provide support via Contracts for Difference, bridging the cost gap between low carbon hydrogen and high carbon fuels.

After HAR2, the government would transition to annual, price-based competitive allocation for LCHAs by 2025 for electrolytic projects, and potentially other specified non-carbon capture hydrogen production technologies, it said.

A call for evidence on this transition is due to close on Aug. 11.

The government is targeting up to 10 GW of low carbon hydrogen production capacity by 2030, with at least half of this from electrolytic hydrogen. It aims to have up to 1 GW of electrolytic hydrogen and up to 1 GW of CCUS-enabled hydrogen in operation or construction by 2025.

HAR2 funding would support three times the capacity of the initial allocation round, noted S&P Global Commodity Insights' analyst Matthew Hodgkinson.

The level of interest in the round "will provide an even greater indication of the desire for private funding in the UK's low-carbon hydrogen industry, and indicate whether investors have confidence in the UK's low-carbon hydrogen legislation," he said.

In October 2021, the Net Zero Strategy confirmed up to GBP100 million ($127 million) would be provided to award contracts to up to 250 MW of electrolytic projects in 2023.

This level of funding would provide a subsidy of GBP1/kgH2 to 10,000 mt/year (or 65 MW-75 MW electrolysis) of production over a 10-year period, according to S&P Global's May 2023 Future Energy Insights report on UK hydrogen.

"This is far below the UK government target of at least 5 GW of electrolysis-based capacity by 2030. The UK's scheme is one of the most advanced in terms of progress and delivering support to projects. However, if the government intends to provide a subsidy for all 1 GW of capacity that is to be either operational or under construction by 2025, then the subsidy value will be very low (circa GBP0.10/kgH2)," Hodgkinson said.

Transport and storage

In its updated strategy, meanwhile, the government said it would continue to develop policy based on recommendations in the Independent Review of Net Zero.

This included plans to publish consultations later this year on hydrogen blending, and on design options for hydrogen-to-power market intervention.

It also included development of a hydrogen production delivery roadmap, and design of transport and storage (T&S) business models.

In responses to a T&S consultation published Aug. 2, the government said it favored a regulated asset base model combined with some form of revenue support for hydrogen transport.

RAB-based models have gained ground in the UK for large, complex utility infrastructure projects and new nuclear projects.

For storage, it favored a model including a minimum revenue floor to provide investor certainty.

Centrica, which wants to invest GBP2 billion to repurpose its Rough gas storage facility to hydrogen, has said it would only proceed with "the right regulatory support framework."

Meanwhile "some form of strategic planning, potentially combined with elements of market-led development, is necessary to enable the efficient, cost-effective and timely roll-out of transport and storage infrastructure," the government said.

"We will set out a 'hydrogen networks pathway' of the next steps in our vision for the development of hydrogen T&S in the UK alongside the hydrogen production delivery roadmap by the end of 2023," it said.

A future system operator with competence across electricity and gas networks would be tasked with central strategic planning for hydrogen T&S, it said.

Platts, part of S&P Global Commodity Insights, assessed the price of UK electrolytic hydrogen (PEM electrolysis, including capex) at GBP5.47/kg Aug. 1. UK blue hydrogen (SMR with CCS, including capex and carbon) was assessed at GBP2.86/kg. UK electrolytic hydrogen prices are among the most expensive assessed by Platts.