In brief

Following the government’s announcement of the creation of a new Future System Operator (FSO) to oversee the UK’s energy system including emerging technologies and the arrival of the UK Energy Security Strategy, on 8 April 2022, the UK government published a package of proposals in support of UK hydrogen policy, including in particular a policy paper titled “Hydrogen Investor Roadmap: leading the way to net zero”. The paper reiterates the government’s pledge made in the Strategy to double its 5GW low-carbon hydrogen target to 10GW by 2030, with the intention that at least half of this production will come from electrolytic hydrogen. The paper aligns with the approach laid out in the Strategy to utilise excess offshore wind power to drive down hydrogen production costs.

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The roadmap highlights investment opportunities across the entire hydrogen value chain and provides long awaited details in relation to the low-carbon hydrogen standard, Net Zero Hydrogen Fund (which was set up to support deployment of hydrogen) as well as hydrogen business models providing revenue support to pioneer hydrogen projects. The roadmap also provides details in relation to the Industrial Hydrogen Accelerator Programme referenced in the UK Energy Security Strategy.

We welcome this substantive development of the UK’s hydrogen policy and believe it will attract investors and serve as a catalyst for a number of pioneer hydrogen projects in the country.

In more detail

Hydrogen Investor Roadmap

The Hydrogen Investor Roadmap is essentially the UK government’s marketing campaign to attract investment into the UK’s hydrogen economy. It contains crucial information about the timings for the launch of various state support/funding mechanisms and together with the wider Hydrogen Investment Package provides much needed clarity on how and when the government expects the fledgling industry to deliver on the government’s targets.

This important part of the wider package:

• Details 59 potential hydrogen projects across the UK involving electrolytic, storage and distribution and CCUS enabled projects, with many more in development.
• Confirms that the UK government’s aim for 5 gigawatts of low-carbon hydrogen production capacity by 2030 in the UK Hydrogen Strategy has been doubled to up to 10GW (however, it notes that this ambition is “subject to affordability and value for money”);
• Appeals to foreign investors by highlighting the UK’s attractive business environment;
• Highlights extensive state support afforded to the UK hydrogen industry, including a well-developed regulatory framework, available funding and revenue support mechanisms, commitment to allocate business-model support in 2023 and 2024 and availability of a set low-carbon hydrogen standard;.
• Provides the government’s 2035 Delivery Plan, outlining critical activities and milestones on a path to developing the UK hydrogen economy; and.
• Announces the timeline, showing the key dates, for the Department for Business, Energy & Industrial Strategy (BEIS) funding rounds expected in 2022 and 2023 that will support hydrogen projects.

Hydrogen Business Model

Two papers (Government response to the consultation on a Low Carbon Hydrogen Business Model and Low Carbon Hydrogen Business Model: indicative Heads of Terms) outline the intended revenue-support mechanism for UK hydrogen projects. The Hydrogen Business Model aims to overcome the cost gap between low-carbon hydrogen and higher carbon counterfactual fuels, supporting multiple hydrogen-production routes to enable the UK to develop low-carbon hydrogen production at scale.

The papers contain a significant amount of detail in relation to the rationale behind and the operation of the revenue support mechanisms. We intend to analyse these and their implications in later articles but the key points include the following:

• The indicative Heads of Terms set out a preliminary and indicative framework for the principal terms and conditions expected to be included in the contract underpinning the business model — the Low Carbon Hydrogen Agreement (“Agreement”). These contracts are expected to commence being awarded in 2023 and will typically last between 10 and 15 years.
• The Business Model is intended to support new production, while existing producers may be eligible to apply for funding through the Industrial Carbon Capture business model.
• To qualify for support, the producers will need to meet the UK Low Carbon Hydrogen Standard (see below). Importantly, projects benefitting from Business Model support will be permitted to export hydrogen. However, the specific volumes exported will not be eligible for support payments.
• The Business Model envisages both price and volume support (the latter through a sliding scale mechanism enabling the Producer to recover a relatively greater proportion of its cost of production if offtake volumes fall).
• The Agreement will include a mechanism designed to aid price discovery and incentivise the Producer to seek higher price sales.

It should be noted that on 8 April 2022, the government launched a consultation in relation to the proposed approach to allocating Hydrogen Business Model and Net Zero Hydrogen Fund support through a joint allocation process for electrolytic-hydrogen projects. The consultation closes on 6 May 2022, with the results expected in the coming months.

The government has also committed to design new business models for hydrogen transport and storage infrastructure by 2025. These of course are critical to supporting the roll-out of supporting infrastructure as well as to stimulating a market for hydrogen.

Establishing the standard for low-carbon hydrogen

Early participants in the hydrogen market have long called for an established low-carbon hydrogen standard, something crucial for the functioning of the domestic hydrogen market. The government has now published its response to the market consultation on the hydrogen standard, which effectively sets out the low-carbon hydrogen emissions standard applying to the grant of state support (such as the Net Zero Hydrogen Fund and the Hydrogen Business Model). It covers the methodology only for UK production pathways at this stage.

The standard now has a single threshold using “absolute emissions.” The threshold, set at the point of production, is 20gCO2e/MJLHV (Lower Heating Value) of hydrogen. The UK Low Carbon Hydrogen Standard guidance document sets out in detail the methodology for calculating the emissions associated with hydrogen production and the steps producers are expected to take to prove that the hydrogen they produce is compliant with this standard.

In particular:

• Projects will be required to demonstrate that they can meet the standard requirements at the point of applying for government support.
• Depending on the government scheme in question, projects may also be required to prove ongoing compliance with the standard during operation. For example, throughout the duration of their business model contract, producers will need to demonstrate that the hydrogen produced meets the standard in order to qualify for and receive Hydrogen Business Model funding.
• Government expects offtake contracts to specify hydrogen pressure and purity, but with regard to impact on emissions, a theoretical minimum pressure of 3MPa and minimum purity of 99.9% will be applied for the purposes of comparing projects for government funding.
• For the purposes of the current standard, emissions calculations will not allow a Global Warming Potential (GWP) factor but this may well change in the future after the government collects further data and producers will be expected to report their fugitive emissions separately.
• Production will not have an additionally requirement to meet the standard (although it may be used as an assessment criteria for allocation rounds).
• Different electricity inputs can be averaged over a reasonable period, allowing for mixed inputs into production systems.
• CCU are not be given carbon reduction credits under the standard. Biomass projects are expected to comply with the requirements of the Green Gas Support Scheme and Renewable Transport Fuel Obligation.

Importantly, the government has confirmed that the Hydrogen Business Model contract will not require producers to comply with future amendments to the standard in order to continue receiving Hydrogen Business Model support after signing the contract – i.e., projects funded at one level of carbon intensity will not need to meet a later, higher standard. However, the government also clarified that there will be no leeway on the standard for existing hydrogen-production facilities.

As outlined in the UK Energy Security Strategy, the government expects to set up a separate hydrogen certification scheme by 2025 to support future international trade.

Net Zero Hydrogen Fund

This paper contains further details in relation to the previously announced Net Zero Hydrogen Fund. The Fund is worth up to GBP 240 million and will be delivered between 2022 and 2025. It is aimed at supporting the commercial deployment of low-carbon hydrogen projects during the 2020s. The Fund has been designed to support all forms of hydrogen production (including nuclear energy), provided these projects meet eligibility requirements.

The funding is allocated under the following four strands:

• Strand 1: DEVEX (development expenditure) for Front End Engineering Design (FEED) studies and post FEED costs.
• Strand 2: CAPEX (capital expenditure) for projects that do not require revenue support through the hydrogen business model.
• Strand 3: CAPEX for non-Carbon Capture, Usage and Storage (CCUS) enabled projects that also require revenue support through the hydrogen-specific business model.
• Strand 4: CAPEX for CCUS-enabled projects that require revenue support through the hydrogen business model.

The budget for strands 1 and 2 is up to GBP 90 million. The funding is to be delivered in the form of grants, co-funded with private sector funding. The government stated that it expects a significant proportion of this budget to be allocated to strand 2 projects, with the remainder of the Fund being allocated to strands 3 and 4. Projects applying to strand 1 and 2 will be able to bid up to 50% and 30% of their total eligible costs, respectively. Projects applying for strands 1 and 2 will be assessed against seven criteria (1) Deliverability. (2) Risk, (3) Project governance and stakeholder management, (4) Emissions and wider environmental impacts, (5) Commercial, (6) Economic benefits and project significance, and (7) Hydrogen market development and knowledge sharing. Projects must demonstrate financial backing relevant for the strand and at least one agreed offtaker, for strand 2, or demonstrated demand for hydrogen, for strand 1.

The competition brief documents for strands 1 and 2 have been published. The first wave of funding for strands 1 and 2 opened on 25 April 2022. The application window for strand 1 will close on 22 June and for strand 2 it will close on 6 July 2022. Applications for strands 3 and 4 are expected to open mid-2022 and mid-2022 (EOI) and 2023 (full application) respectively.

Industrial Hydrogen Accelerator Programme

While released in advance of the launch of the roadmap, the Industrial Hydrogen Accelerator Programme is an important part of the overall hydrogen policy package. The Programme will provide funding for innovation projects that can demonstrate end-to-end industrial fuel switching to hydrogen.

There are two streams – a fund going straight to demonstration of a small number of the largest projects, allocating grants of between GBP two million and 10 million and match-funding applicant costs of between 25-60% of the project total, and then a second two part stream, with around five projects to be initially funded for GBP 100k-400k 100% grant funded feasibility studies, followed by GBP 1-7 million grant allocations matched to 25%-60% of the project total.

The government aims to launch the Programme in late April 2022 and all projects must achieve demonstration by March 2025.

In addition, the government has set up the Industrial Hydrogen Accelerator Networking Platform (B2Match IHA), a virtual marketplace where hydrogen market participants can browse the expertise, products and services of potential partners and request support from others.

In conclusion

We welcome this substantive development of the UK’s hydrogen policy and we believe it will attract investors and serve as a catalyst for a number of hydrogen projects in the country. As with any new policy supporting emerging market, a lot of detail will need to be worked out during the implementation process. We expect (and the UK government acknowledges this in its response to the consultation on the business model) that certain adjustments will need to be made to the policy. Baker McKenzie is an active member of Hydrogen UK, the trade association committed to the development and deployment of hydrogen solutions. We will be happy to help you navigate the complex regulatory framework and, drawing on our experience in pioneer hydrogen projects around the globe, execute hydrogen projects.