UK's proposed support mechanism 'sends wrong signal' on green hydrogen: RenewableUK

Trade association RenewableUK has questioned the UK government's planned hydrogen business model, saying its proposed natural gas reference price "sends the wrong signal" to the market by favoring fossil fuel-based hydrogen production pathways and exposing renewable producers to gas price risk.

The UK government closed its consultation on a hydrogen business model Oct. 25, setting out details on its preferred market support mechanism of a producer-focused variable premium subsidy, with natural gas setting a floor price.

The proposed support mechanism "sends the wrong signal, as it implies that the scheme has been designed for blue hydrogen using the gas system and exposes green hydrogen producers to the risk of gas price volatility," RenewableUK said in a statement Nov. 26.

The UK should instead implement a separate funding mechanism for renewable hydrogen, RenewableUK Director of Future Electricity Systems Barnaby Wharton said.

"We all know how volatile international gas prices can be, so basing the reference price of hydrogen on the cost of natural gas is inappropriate as a business model; that must change," Wharton said in the statement.

"Separate pots of funding are vital to ensure that green hydrogen is given every opportunity to flourish," he said, adding that a low-carbon hydrogen certification scheme should be implemented to provide clarity to developers of the carbon intensity of hydrogen.

RenewableUK reiterated its call for the UK to set a 5 GW of renewable hydrogen capacity by 2030, in addition to its existing 5-GW target for low-carbon hydrogen, which includes production from fossil fuels combined with carbon capture and storage.

"To support this, the UK should establish an ambitious certification scheme which clearly distinguishes between green hydrogen generated from clean sources and blue hydrogen produced using fossil fuels with carbon capture," RenewableUK said.

"This would ensure that the significant premium of green hydrogen being emissions-free is not lost, as well as helping project owners and their customers show their commitment to clean energy, a key consideration for many, especially post-COP26."

Responding to the consultation, RenewableUK proposed the awarding of hydrogen contracts through one-to-one negotiations, particularly for smaller projects of around 20 MW, as these could lack the resources and experience compared with larger projects that have multiple funding options.

"Maintaining separate pots of funding for emerging technologies has worked well for other parts of the energy sector, and it would be appropriate here too," it said.

Contracts should be for 20 years, rather than 15 years proposed by the Department for Business, Energy and Industrial Strategy, it said, to cover the lifetime of electrolyzers.

"By addressing green hydrogen in a coherent manner, the government can advance decarbonization across the energy system and create new jobs in the renewables and manufacturing sectors," ITM Power CEO and RenewableUK board member Graham Cooley said.

"This requires considering the production and use of green hydrogen and implementing policies to incentivize its adoption."

Basis risk

Renewable energy companies Octopus Energy and RES, who have partnered to invest GBP3 billion ($4 billion) in renewable hydrogen projects across the UK by 2030, also questioned the natural gas reference price.

"We have some concerns with using gas prices in the reference price," a spokesperson for the companies told Platts. "We believe that the majority of low carbon hydrogen production in future will be from green hydrogen projects."

"A pricing structure that involves natural gas will increase the risk for these projects as their revenue will vary independently of the cost base," the spokesperson said.

The companies supported the idea of an achieved sales price as the reference.

Octopus Renewables and RES plan to develop, own and operate renewable hydrogen plants powered by renewable energy, with first production expected in 2023.

Variable premium

The proposed subsidy is similar to Contracts for Difference, but in the absence of an established hydrogen market in the initial phases of support, an alternative price reference point would be needed, BEIS said.

Under the proposed model, the government would pay producers the difference between a strike price for hydrogen and the higher of natural gas or achieved sales prices.

Natural gas would set a price floor as "it is the most common fuel from which end users would switch so are likely to be willing to pay at least that price for hydrogen," BEIS said.

The inclusion of an achieved sales price as a reference gave hydrogen producers pricing power to encourage customers to switch, BEIS said.

"When sales occur above the natural gas price, the sales price would prevail" as the reference, BEIS said.

Longer term, a market benchmark price would best represent the value of low-carbon hydrogen in the market, BEIS said.

S&P Global Platts assessed the cost of producing hydrogen via alkaline electrolysis in the UK (including capex) at GBP14.48/kg ($1930/kg) Nov. 25. PEM electrolysis production was assessed at GBP17.13/kg, while blue hydrogen production by autothermal reforming was GBP5.18/kg (including capex, CCS and carbon).