UK: The Launch of Har2

The 14th of December 2023 yielded two important announcements for the hydrogen industry

a) the UK government concluded the first Hydrogen Allocation Round (“HAR1”) by selecting 11 projects to receive over £2 billion in revenue support, with the successful projects totalling 125MW of capacity; and

b) the government also launched the second Hydrogen Allocation Round (“HAR2”).

(For our comments on the results of HAR1, follow this link for a post by Jubilee Easo, International Head of Hydrogen.) 

The aim of HAR2 is to support up to 875MW of low carbon hydrogen production capacity by the end of 2025. Along with the 125MW of capacity supported under HAR1, HAR2 will help the government achieve its aim of up to 1GW of electrolytic hydrogen production projects in operation or construction by 2025. The government reiterated this ambition in its “Hydrogen Production Delivery Roadmap”, which was released alongside the launch of HAR2. 

Like HAR1, revenue support under HAR2 will be awarded through a bilateral negotiation process between industry and government. Project proponents can submit an expression of interest by February 5, 2024. The application submission window will then open on February 6, 2024, and applications, with all the required supporting evidence, will be accepted up to April 19, 2024.

There are some of key differences between HAR1 and HAR2, some of which were implemented as a result of a market engagement and consultation exercise undertaken by the government. We will briefly discuss a couple of differences in this briefing. 

The door is ajar to other technologies

The Roadmap confirms the government’s ambition to have up to 10GW of low carbon hydrogen production capacity by 2030, with 6GW to come from electrolytic hydrogen. However, it is unlikely that the 6GW capacity will be made up of electrolytic hydrogen alone. The Roadmap states that it is expected to be mostly made up of electrolytic technologies with some alternative technologies to also contribute. 

HAR2 makes the funding of alternative technologies a possibility. 

For HAR1, only electrolytic production projects – that is, the production of hydrogen via water electrolysis using low carbon electricity – were eligible. HAR2, however, broadened the eligibility criteria to consider applications for revenue support for projects utilising other production technologies. Specifically, in addition to electrolysis projects, the following technologies will also be eligible: (i) biomass or waste gasification and pyrolysis to hydrogen; and (ii) gas splitting producing solid carbon.

This is the application of the government’s approach to its hydrogen ambition: a technology neutral approach to hydrogen production, encouraging a range of hydrogen production technologies provided they are able to meet the Low Carbon Hydrogen Standard (“LCHS”).

The LCHS was first published in 2022, setting a clear definition of low carbon hydrogen in the UK. The methodology detailed within this did not just apply to water electrolysis and fossil gas pathways, but pathways with both biomass and waste feedstocks. Since its initial publication, the LCHS has been updated, including as recently as December 2023 to introduce a new eligible production pathway: gas splitting with solid carbon (which, as mentioned above, will be accepted under HAR2).

A flexible approach to commissioning 

Another key change from HAR1 to HAR2 is the move away from a Commercial Operation Date (“COD”) to the concept of ‘delivery years’.

Under HAR1, applicants were required to specify a COD – a particular date before the end of 2025 – when the project is commissioned and hydrogen production is to begin in order to be eligible. In contrast, in order to meet HAR2 eligibility criteria, projects will need to demonstrate that they are able to be operational within one of three delivery years, between 31 March 2026 and 31 March 2029.

In the government’s view, the ‘delivery years’ approach provides project proponents under HAR2 with more flexibility given it takes into account supply chain issues and grid connection delays, as well as encouraging larger more ambitious projects to apply. The government advised that this feature was well received by industry in its market consultation and engagement, with many expressing support for the approach given it recognises the longer lead-times for larger projects.

Under this approach, successful applicants will agree, in bilateral negotiation with the government during the ‘Agreeing an Offer’ stage, a ‘Target Commissioning Date’ and ‘Target Commissioning Window’ within which the project proponent is expecting to commission the facility (which includes satisfying the Low Carbon Hydrogen Agreement’s (“LCHA”) ‘Operational Conditions Precedent’). If the project proponent has not satisfied the Operational Conditions Precedent by the end of the Target Commissioning Window, the 15-year term of the LCHA will start to erode (and, of course, payments will not commence unless the Conditions are satisfied). 

The Longstop Date for the Operational Conditions Precedent is the last day of a 12-month period following the final day of the Target Commissioning Window. If the project proponent fails to satisfy the Operational Conditions Precedent by the Longstop Date, the government counterparty has a right to terminate the LCHA.

Future HARs 

As a final point, it is also worth noting that the government intends to move to annual allocation rounds for electrolytic and potentially other alternative technologies from 2025 to 2029.

The Hydrogen Production Delivery Roadmap states that the government understands, through lessons learned in the ‘Contracts for Difference’ regime and industry engagement, that it is essential to establish a predictable schedule of allocation rounds that will provide industry with the certainty necessary to bring forward long-term investment in low carbon hydrogen.

Accordingly, the government has signalled its intention to allocate up to 1.5GW of low carbon hydrogen capacity across HAR3 and HAR4, which are slated to be launched in 2025 and 2026, respectively. Capacity targets for HARs 5-7 (slated for 2027 to 2029) have not yet been communicated, with the government to be informed by evidence on demand, affordability and experiences in the preceding allocation rounds.