UK – Referral of hydrogen production business model scheme by the department for energy security and net zero.
Request from DESNZ
21 September 2023: The SAU has accepted a request for a report from DESNZ concerning the Hydrogen Production Business Model scheme. This request relates to a Subsidy Scheme of Particular Interest (SSoPI).
The SAU will prepare a report, which will provide an evaluation of the DESNZ assessment of whether the scheme complies with the subsidy control requirements (Assessment of Compliance). The SAU will complete its report within 30 working days.
Information about the subsidy provided by DESNZ
The Hydrogen Production Business Model (HPBM) is designed to incentivise the production and use of low carbon hydrogen. It will be delivered via the Low Carbon Hydrogen Agreement, a private law contract signed between the counterparty and a low carbon hydrogen producer. The HPBM will provide support payments, over a 15 year contract term, to a low carbon hydrogen producer towards the costs of hydrogen production and a return on capital invested.
This will provide investors with the certainty needed to take an investment decision on a low carbon hydrogen production project and provide lower cost hydrogen for users (for example in industry, power and transport sectors).
We published Heads of Terms for the HPBM contract in December 2022 and the full form contract in August 2023. We aim to award the first contracts to electrolytic hydrogen projects in Q4 2023 and to CCUS-enabled hydrogen projects in 2024.
Beneficiaries must be a UK registered business of any size. A business is defined as an enterprise undertaking economic activities. Academic institutions, research and technology organisations (RTOs), public sector organisations or charities cannot lead or work alone.
The low carbon hydrogen projects coming forward for support in the first allocation rounds for contracts are either CCUS-enabled production, where a hydrogen production facility deploys CO2 capture technology to produce hydrogen from natural gas, or electrolytic production that uses low or zero-carbon electricity to split water to produce hydrogen and oxygen.
The eligibility criteria for HPBM supported electrolytic projects under the first Hydrogen Allocation round (HAR1) were:
Production plant located entirely in the United Kingdom and the project representative’s business being registered in the UK.
- commercial Operation Date (COD) by end of 2025
- technology Readiness Level (TRL) 7 or more
- new build hydrogen production facilities
- electrolytic hydrogen production facilities
- has identified at least one qualifying offtaker
- has identified an electrolyser supplier(s)
- minimum hydrogen production capacity of 5MW
- meets the requirements of the Low Carbon Hydrogen Standard (LCHS)
- demonstrated access to finance
The eligibility criteria for HPBM supported CCUS-enabled projects under the Phase 2 of cluster sequencing process were:
- be located in the UK
- have access to a CO transport solution and access to a Track 1 or reserve cluster CO2 storage site
- must be operational no later than the end of December 2027
- have commenced pre-FEED or be ready to commence pre-FEED no later than the end of December 2022
- be a new build CCUS-enabled hydrogen production plant
- have identified an offtaker or multiple offtakers
We have designed the HPBM subsidy in a way that minimises costs to the taxpayer/consumer and provides an exit route from support at an appropriate time in the future. Government announced in April 2022 that the subsidy will be delivered through a long term, private law contract between a counterparty and a hydrogen producer.
We have used a similar mechanism (Contracts for Difference or CfDs) to successfully grow the offshore wind sector and we are adapting it to make the model suitable for the nascent hydrogen market. Subject to completing legislative and administrative arrangements, we have selected the same counterparty, the Low Carbon Contracts Company.
The subsidy is a variable premium that will provide i) price support (because low carbon hydrogen is more expensive than counterfactual fuels) and ii) volume support (because the market is nascent and demand is uncertain). In summary:
- price support is provided by a variable premium payment per unit of hydrogen produced and sold. This is calculated as the difference between a strike price reflecting the cost of producing hydrogen and a reference price reflecting the market value of hydrogen. This model provides the opportunity for the level of subsidy to adjust as the hydrogen market develops – if the producer can sell the hydrogen at a higher price (for example as the carbon price increases and it becomes more expensive for businesses to use higher carbon fuels), the variable premium model provides a lower subsidy.
- volume support is provided by a sliding scale approach, in which the subsidy per unit of hydrogen is higher if hydrogen sales fall. However, if volume falls to zero, no subsidy will be received, and we have purposely not introduced an availability payment as this would reduce the incentive for the producer to grow its customer base and would expose taxpayers/consumers to paying a producer for not delivering a product.
CCUS-enabled producers are also eligible to receive subsidy in relation to CO2 T&S charges and CO2 T&S outage events.
READ the latest news shaping the hydrogen market at Hydrogen Central
Referral of Hydrogen Production Business Model Scheme by the Department for Energy Security and Net Zero., September 21, 2023
