DESNZ has published “Market Engagement on the Second Hydrogen Allocation Round” which sets out details about how the Hydrogen Business Model (HBM) will be allocated to eligible low carbon hydrogen projects going forward. It is proposing some changes from the first allocation round (HAR1) and is an important document to look at if you are considering a project that will be applying. The end date for responses is the 30 June 2023.
The key points which arise from this are as follows:
-The second allocation round (HAR2) is proposing to award contracts for up to 750MW of green hydrogen projects.
-The proposed timeline for the award of contracts is early 2025 with applications closing Q2 2024. Projects will be required to reach financial investment decision within 3 months of the contract award.
-It is expected the projects able to bid will need to be in operation between March 2026 and March 2029.
-There is currently an open question about whether HAR2 will also encompass capital support through the Net Zero Hydrogen Fund but what is clear is that beyond HAR2 no capital funding will be provided.
-Developers of projects can make up to 6 applications providing each application is different and in addition, a developer can be a collaborator or partner to 6 other applications.
-Non qualifying offtakers for the purposes of the HBM will remain the same and that includes gas blending into the network. However, on that particular use Government has committed to an ongoing review based on the fact that it is already committed to taking a policy decision in 2023 on whether to allow the blending of hydrogen in the existing gas distribution network.
- An important move in HAR2 is the concept of delivery years as apposed to commercial operations date for the deadlines for buildout. To meet the eligibility criteria projects will need to demonstrate they are able to be operational within one of three delivery years between 31 March 2026 and 2029. You will need to specify which delivery year you are selecting.
-HAR2 focused on electrolytic hydrogen but Government is recognising that it may need to expand that and is considering, for example, allowing advanced gasification of biomass, waste gasification, pyrolysis to hydrogen and solid carbon to qualify.
-The evaluation criteria will be based on deliverability, cost of the project, the economic benefits, supply chain developments and wider electricity system benefits. There will be greater emphasis on the benefits a particular project brings to the low carbon hydrogen supply chain than in HAR1 and the location of projects in beneficial areas for electricity network constraints is a new criteria.
-Once again the Government keeps open the opportunity of awarding HBM contracts to those projects which do not necessarily score highest in the scoring matrix. We are yet to see the fallout of this from HAR1 but what it may mean is that some good projects that are top scoring do not necessarily get a HBM contract which does seem odd.
-Government is also putting out a call for information on co-location of hydrogen projects with the renewable energy source. It wants to understand the benefits and risks of co-location in the context of the hydrogen business model.
So some important pointers to HAR2, but it is disappointing that DESNZ is maintaining the stance that it wants to see price competitive auctions for the HBM from 2025. Remember by 2025 we will only just be seeing the start of operations of those projects that get a HAR1 award!
...and as I write this we are still waiting on the legislation to come through Parliament to facilitate the HBM.