Hydrogen industry warns over UK ambition following PM's climate backtrack

The low-carbon hydrogen industry has warned over risks and uncertainty in the sector after UK Prime Minister Rishi Sunak watered down some key climate policies Sept. 20.

Trade group Hydrogen UK said Sept. 21 the move undermined investor confidence in the sector.

"The main asks of government from the hydrogen industry is ambition, clarity and consistency, and although many of yesterday's announcements were consumer-focused, it undermines all three from an investor perspective," Hydrogen UK CEO Clare Jackson told S&P Global Commodity Insights.

"Delays and unexpected policy changes only make it more challenging for industries to do the vital work needed to transform our economy, create jobs and build long term economic prosperity," Jackson said.

The UK Department for Energy Security and Net Zero (DESNZ) did not immediately respond to a request for comment.

Others are hesitant to invest in UK-based green hydrogen production because of limited subsidies and support mechanisms on offer compared with other jurisdictions such as elsewhere in Europe or the US.

The HydrogenOne fund, which has investments across a range of green hydrogen technologies, infrastructure and production, is backing some UK-based companies in sectors such as storage, transport and technology, but noted that the prospects for green hydrogen production in the country were not as attractive as in Germany and Norway, where it is developing projects.

"It never really was an attractive place for green hydrogen investments," managing partner Richard Hulf said in an investor call Sept. 20.

Hydrogen production costs via grid-based alkaline electrolysis were similar in the UK and continental Europe in August, averaging $6.58/kg in the UK and $6.48/kg in the Netherlands, based on month-ahead power prices, the Platts Hydrogen Price Wall showed.

Platts is part of S&P Global Commodity Insights.

HydrogenOne's investments include Gen2 Energy, which is developing 700 MW of green hydrogen projects in Norway, with production starting in 2025-27, and HH2E, developing two 100-MW projects in Germany, with final investment decisions expected in 2023-24, for startup from 2025.

Hulf also expressed concern over the direction of UK government policy.

"I think there is concern around what the UK government is thinking or not thinking," he said in response to the reported policy shift, prior to the Prime Minister's announcement. "Clearly, it is not thinking."

Gas boilers

One of Sunak's moves was to scrap proposals to ban the installation of gas boilers in new homes from 2025.

Households would not be obliged to make to heat pumps switch before 2035, and only then if an existing gas boiler were being replaced anyway, Sunak said.

HydrogenOne's other managing partner, JJ Traynor, noted that while the fund was not invested in domestic boilers, he viewed grid blending of hydrogen as a good intermediate step to decarbonizing domestic heating.

"This is a very political decision," Traynor said, noting the difficulties around policymaking in the area.

The UK has around 23 million gas boilers installed in homes. The government has a target of 600,000 heat pumps being installed annually by 2028.

It is currently consulting on blending up to 20% hydrogen in the natural gas grid, ostensibly to provide a flexible reserve offtaker for future producers of clean hydrogen.

HAR1 funding support

For those already involved in the UK government's first hydrogen allocation funding round (HAR1), it was business as usual with no indication the funding round had been affected by the government announcement.

"For us, given the positive engagement that we have with DESNZ, we continue to press ahead with our work," Carlton Power's Hydrogen Projects Director Eric Adams told S&P Global.

Carlton Power has had three of its electrolyzer projects invited for contract negotiations under HAR1, totaling 65 MW: The 35-MW Barrow Green Hydrogen, Langage Green Hydrogen (10 MW) and Trafford Green Hydrogen (20 MW).

The UK in August finalized its low-carbon hydrogen agreement (LCHA), the contract that underpins its low-carbon business model, supporting electrolytic and carbon capture-enabled production of the energy carrier.

The business model will provide revenue support to hydrogen producers, making up the operating cost gap between low-carbon and higher-carbon fuels via 15-year contracts.

Modeled on contracts for difference, used in renewable power generation, the LCHA subsidy will pay the difference between an achieved low-carbon hydrogen sales price and a strike price, with the natural gas price setting a floor.

The strike price is the unit price a low-carbon hydrogen producer needs to cover its production costs, plus an "allowed return on investment".

The EU has a similar scheme for bridging the cost gap in clean hydrogen production through its hydrogen bank, though industry sources say EU funding support is more generous.