As part of the Government’s move to launch the price support mechanism for green hydrogen (the so called “Hydrogen Business Model”) BEIS has issued a market engagement exercise on how its proposed contracts for difference will be allocated to projects. For more details on the CfD for hydrogen see my previous briefing on the Burges Salmon website The UK proposed business model for Low Carbon Hydrogen (burges-salmon.com). This market engagement exercise on allocation is very important and merits a read for all those thinking of applying for support for green hydrogen projects when the allocation round opens in July this year.
While further development of the support package is welcome and needed, there are definitely some wrinkles to be ironed out in the allocation proposals and although the Government has been at pains to say that the first rounds will not be allocated by competitive auction, it is pretty clear that projects will be evaluated against each other and scored. The costs of a project will be part of the evaluation, which is probably understandable given there is a finite amount of funding, but for those projects that will pass the evaluation tests, BEIS is also considering a “sealed bid” process to final awards.
The closing date for the response to this important document is 6 May so time is short.
Other issues to consider
- Understanding the CfD is going to be important. It will be modelled on the electricity CfD and will have similar terms, concepts, milestones and longstop dates. Those who have renewable energy CfDs already will have the advantage of knowing how it works. (For those coming to it for the first time from a hydrogen background, we are happy to discuss).
- At the moment only 5MW and above projects can apply for the Business Model support (and BEIS is considering whether that ought to be raised even further to 10MW)
- Projects have to be up and running by the end of 2025
- If you are awarded support you have to demonstrate FID within 3 months of the award which seems very challenging
- To qualify for the support you have to demonstrate you have a demand customer and that you have some form of contractual commitment with that customer – this should not be overlooked- we are already helping projects with this and even relatively loose terms take time to put in place. Remember the allocation kicks off in July. Checks are going to be made as to the robustness of any offtaker agreements
- Once you are past eligiblity you are then evaluated and that will include assessing project deliverability – this will obviously encompass a number of things but issues such as consenting and permitting, contractual strategies with suppliers and offtakers and financing strategy will all play a part
- The document is somewhat confusing on additionality- the principle that hydrogen production should be met by new renewable or low carbon electricity rather than existing generation. This is an important point for the first green hydrogen allocations and is something that has been part of the dialogue on the Low Carbon Hydrogen Standard. BEIS suggests that up to 5% of marks will relate to additionality
- The economic benefits to the UK in terms of jobs, technology, skills form a big part of the scoring so projects will need to present these clearly
Once all of the eligible projects have been evaluated and scored BEIS then says it will be free “at its absolute discretion” to limit the number of projects that can go forward and to potentially ignore the highest scoring projects in favour of making sure there is a portfolio of different types of project that are given the option of an award with locational spread around the UK. Having your project achieve a high score only to find you are discarded will, I suggest, be a bitter pill for developers, but the counter to this is that we do need to see different types of project and demand uses deployed.
Once through all of this, it still does not mean you end up with a financial support contract. The last stage is agreeing the contract and as I mention above, that is going to involve bilateral negotiations or a sealed bid process on what level of strike price your project wants.
......So important things to consider and now is the time to comment to achieve the best possible process for the first round this year.
Hydrogen Business Model and Net Zero Hydrogen Fund: market engagement on electrolytic allocation