Construction needed to promote UK hydrogen market, says expert

Stacey Collins of Pinsent Masons was commenting after trade bodies Hydrogen UK and the Energy Networks Association (ENA) said the UK had fallen six places in an index that “assesses how ready major economies are to effectively use hydrogen to help decarbonise their energy systems”.

In 2021, the UK was rated second behind only South Korea in the index. Now it sits eighth. South Korea remains first, followed by the US, Germany, Japan, Canada, the Netherlands and France, which have all moved ahead of the UK in the past two years.

The ENA’s gas members and Hydrogen UK called on industry and government “move faster and be more flexible with production support” and “identify and support strategic infrastructure investment now”. They also said clarity is needed “on the minimum roles for hydrogen in industry, power, transport and heat, with support measures to make high-carbon expensive and low-carbon low cost” and that there needs to be stimulation of “domestic supply chains” to “maximise the significant economic opportunity” the hydrogen market offers.

Collins said: “I think it is fair to say that the UK government’s original hydrogen strategy set out the UK’s stall to become a world-leader in producing, transporting, storing, and utilising low-carbon hydrogen. In that respect, it’s taken a holistic approach to looking at how to develop that market. However, the number of consultations, initiatives, and funding pots evident in the latest hydrogen strategy update perhaps suggest that its efforts to look at every aspect of the market are getting in the way of moving the initial projects into construction.”

“There is still a lot of interest and opportunity in the UK market, but inevitably developers, funders and suppliers are considering whether other jurisdictions are a better bet. It is important that the UK continues to build and accelerate momentum, or it’ll find that the market capacity needed to develop the promised projects has gone elsewhere,” he said.

Earlier this year, the government announced 20 electrolytic hydrogen projects had been shortlisted for support through the Hydrogen Production Business Model (HPBM) and Net Zero Hydrogen Fund (NZHF). Last month, alongside its latest hydrogen strategy update, the UK government confirmed that initial due diligence in relation to those shortlisted had been completed and that it had invited 17 projects to enter into contractual negotiations with it. Those awarded contracts stand to obtain government support for their projects. The 17 projects account for 262MW of low carbon hydrogen production in total.

The government further confirmed that a second allocation round is scheduled to open later this year. Its hydrogen strategy update also provided news on action the government has taken in respect of exploring hydrogen’s potential uses – in industry, in the power sector, in heat, and in transport. It reflected on legislative initiatives, such as the progress of the Energy Bill through parliament, to consultations held, and competitive funding initiatives.

One recent consultation response published by the government concerned business model designs, regulatory arrangements, strategic planning and the role of blending in the context of hydrogen transport and storage. Alongside that paper, the government set out policy positions it said it is “minded to” adopt.

Among other things, the government said it is minded to endorse a ‘regulated asset base’-based business model to support growth of the UK hydrogen market, to help meet its target of scaling up hydrogen production capacity in the UK to 10GW by 2030. Regulated asset financing is where a regulated ‘public’ asset and its associated income stream is used to secure private finance.

Germany is one of the countries that has moved ahead of the UK in the index. Düsseldorf-based Sönke Gödeke and Florian Huber of Pinsent Masons said a contracts for difference (CfD) scheme is helping to provide a catalyst for growth of the German hydrogen market amidst the stiff global competition.

Gödeke said: “A good example of a short-term approach to the chicken-and-egg dilemma for the ramp-up of the hydrogen market – production or import versus offtake – is the German climate protection contracts funding programme. This introduces the concept of so-called carbon contracts for difference (CCfD) between the government and companies in emission-intensive industries. Climate protection contracts provide companies with financial planning security in relation to price fluctuations associated with, for example, the cost of producing hydrogen and, therefore hedge against risks that currently stand in the way of investment in climate-friendly production processes.

Gödeke said the German federal cabinet also recently updated Germany’s national hydrogen strategy. Among other things, Germany is seeking to scale up its electrolysis-based hydrogen production to at least 10GW by 2030 and plans to develop a separate import strategy too. Other short-, medium-, and long-term actions are set out in the update.

Huber added: “The strategy update could provide a good starting point for the upcoming transformation process in Germany. It fits into the EU's wider hydrogen strategy, which was developed as part of the Green Deal and published in 2020.”

“Many of the actions in the update are measurable. The measurability increases the chance that the goals will be achieved and ensures there will be scrutiny and accountability at a political level during the transformation process. For Germany, a total hydrogen demand of 95-130TWh was assumed for the year 2030. Besides local production, the hydrogen import strategy shall secure the import demand for sustainable hydrogen and hydrogen derivatives. The measures set out in the NHS Update are a strong signal for the design of the hydrogen market economy in Germany,” he said.