The UK government has ramped up its plans to support the development of electrolytic hydrogen production by tripling the capacity target for its second-round subsidy allocation and potentially broadening the scope of the scheme to include at least two additional technologies.

Round two of the subsidy allocation is scheduled to launch in the fourth quarter of this year with the ambition to award support for up to 750MW of new hydrogen production capacity, up from 250MW in the first round, the Department for Energy Security and Net Zero says in a consultation paper.

750MW – Target capacity

“This would help achieve our aim of up to 1GW of electrolytic hydrogen production projects to be in operation or construction by 2025, as set out in the British Energy Security Strategy,” the government says. It aims to have in place up to 10GW of capacity by 2030.

The raising of its capacity target for round two comes after the government faced calls from the industry to raise its ambitions or risk missing out on the growing pipeline of large projects that has built up in the UK over the last couple of years. The UK is competing for investment in hydrogen with the EU and the US, both of which are now offering developers highly competitive incentives.

Timeline

The provisional timetable for the round two allocation is for an application window to run from Q4 2023 to Q2 2024. A shortlist of projects qualifying for due diligence and initial negotiations with the government would follow in late 2024, with the award of contracts from 2025. Projects would be expected to take FID within three months of a contract award.

The government proposes to change the rules on specifying project startup dates, allowing developers applying for subsidies to nominate a “delivery year” rather than a fixed date for the start of commercial operation, as was the case with the first allocation round.

Under round two, qualifying projects would need to demonstrate that they are able to be operational within one of three delivery years, between 31 March 2026 and 31 March 2029. One business entity will be allowed to put forward up to six projects.

Technologies

The government is also proposing to broaden the range of technologies potentially qualifying for subsidies beyond the scope of electrolytic hydrogen. Two technologies under consideration are hydrogen production from advanced gasification of biomass and/or waste, and pyrolysis to hydrogen and solid carbon. Technologies requiring CCS will not be considered.

Capex and opex

The government is also consulting on the type of support needed by projects under the round two allocation. Subsidies offered to projects under round one fall into two categories: the Hydrogen Production Business Model—a contract for difference designed to support operational expenses for the lifetime of the project—and the Net Zero Hydrogen Fund (NZHF), which is a £240mn ($298mn) fund for one-off grants to cover capex. Round one projects could apply for both funding streams under a “co-funding” approach.

But the NZHF is due to expire in 2025, which means the government would need to find new funding if support for capex remains necessary for projects.

“We are working to understand the need for capex support for this round; therefore, we are inviting views from industry on whether they would require NZHF capex funding, should it be available, and the underpinning rationale,” the government says.

The government is confident the round one and two subsidy allocations will succeed in unlocking enough private investment to remove the need for capex support in subsequent subsidy rounds.

It aims to transition the whole subsidy allocation process to a competitive price-based system by 2025 to drive down the cost of hydrogen and to create a “sustainable and competitive” market. The allocation process is based on bilateral negotiations between the government and project developers.

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Author: Stuart Penson