UK: The first electrolytic hydrogen funding allocation round closes to applicants

As part of the UK’s efforts to accelerate the hydrogen economy, the UK government introduced the Net Zero Hydrogen Fund (NZHF) and the Hydrogen Production Business Model (HPBM). The NZHF will provide up to £240 million in grant funding, while the HPBM is a contractual business model for hydrogen producers which will provide ongoing revenue support. These measures are intended to accelerate the hydrogen economy by incentivising the production and use of low carbon hydrogen, and producers can apply for funding via electrolytic allocation rounds.

As the application window for the first electrolytic allocation round for the NZHF and HPBM closes (12 October 2022), we take a look at some of the key points to note.

Strategic objectives of the HPBM/NZHF

With the overarching aim of giving a much-needed boost to hydrogen production in the UK, the HPBM/NZHF electrolytic allocation round has three strategic objectives, being:

• to kickstart the low carbon hydrogen economy across the UK, with a view to meeting the goal of having 2GW of low carbon hydrogen capacity in operation or construction by 2025;
• to support projects to deploy at scale at the earliest opportunity, aiming to achieve the government’s aim of deploying up to 10GW of low carbon hydrogen capacity by 2030 (subject to affordability and value for money considerations), with at least half of that capacity being produced from electrolytic hydrogen projects;
• to deliver carbon savings, allowing the UK to remain on course to meet Carbon Budget 5, Carbon Budget 6 and the UK’s net zero commitments.

With the government hoping to support at least 250MW via this first allocation round, but with a right to allocate less if insufficient projects come forward that meet the eligibility criteria or present value for money to the government, there is still a lot of work to be done to meet the 2030 target of 10GW low carbon hydrogen production capacity.

Funding through HPBM and/or NZHF

The NZHF seeks to address the high upfront costs associated with initial electrolytic hydrogen production projects, with the intention that the projects can benefit from lower financing costs. The HPBM provides ongoing support through a contractual mechanism, based on the Contracts for Difference regime (CfD), providing price and volume support for the developer. 

The UK government recognised that certain projects may require both HPBM revenue support and capital expenditure (CAPEX) through the NZHF. With this in mind, the first electrolytic allocation round, launched in July 2022, enables applicants to apply for HPBM revenue support only, or join HPBM revenue support and NZHF CAPEX support. The guidance for the first round sets out the options (referred to as ‘strands’, of which there are four) for applicants, and applicants must choose the best option for their project.

For projects that will be operational before March 2025, HPBM funding will be available, provided by up to £100m of taxpayer funding. After 2025, the UK government intends that HPBM support will be levy funded from 2025 onwards. Projects can include small-scale hydrogen.

The maximum grant funding intensity level (CAPEX %) available from the NZHF for this first allocation round is set at 20%, so that projects can apply for up to 20% of the CAPEX that falls within the scope of the NZHF (which does not included CAPEX costs for storage and transport). 

Who can apply for funding?

Applicants to the first allocation round have had to demonstrate a number of things to be eligible to apply for funding through the HPBM / NZHF, including that:

• the project is located entirely in the UK;
• the applicant is a UK registered business;
• the project’s commercial operations date is before the end of 2025;
• the project is for new build low carbon hydrogen production facilities; and
• the volume of hydrogen to be produced by each individual project will be a minimum of 5MW (projects cannot aggregate capacity across different locations or have a phasing approach to build capacity gradually to 5MW).

Anyone wishing to submit an application had to submit an expression of interest by 7 September 2022. 

The full eligibility details are set out in the guidance to the scheme.

Next steps

Following the submission deadline, all applications will be evaluated and a shortlist of successful projects will be announced early in 2023 (a specific date has not yet been announced). 

An indicative heads of terms for the HPBM contract was published in April 2022, setting out the proposed terms and conditions for the Low Carbon Hydrogen Agreement that will underpin the HPBM. The heads of terms indicate that the term of the Low Carbon Hydrogen Agreement will be 10-15 years, and will include terms relating to conditions precedent and milestone requirements, which are likely to follow those set out in allocation round 4 of the CfD, along with a pricing mechanism based on the strike and reference prices concept in the CfD. 

The final design of the HPBM is proposed to be finalised by the end of 2022, with a view to the first contracts being allocated from July 2023. 

Future allocation rounds

A further electrolytic allocation round, similar to the 2022 allocation round, is planned for 2023, with contracts being awarded in 2024. 

The UK government is intending to run annual electrolytic allocation rounds for the HPBM, with a move to price-competitive allocations by 2025. The scope of these future rounds is yet to be determined, however may include non-carbon capture, usage and storage, and non-solely electrolytic technologies, such as biomass.

Further consultation

Although the application deadline for NHZF/HPBM is 12 October 2022, BEIS launched a further consultation at the end of August, seeking views on hydrogen transport and storage infrastructure model designs, as well as looking at strategic planning and the regulatory framework. In particular, this consultation looks at the extent to which blending might help provide market-building benefits for the hydrogen economy. This consultation closed on 22 November 2022.

How did we get here?

In 2020, the UK Department for Business, Energy and Industrial Strategy commissioned Frontier Economics to develop business models to support low carbon hydrogen production. At the end of 2020, the then Prime Minister, Boris Johnson, announced his Ten Point Plan for a Green Industrial Revolution, with the long-awaited Energy White Paper being published shortly after. In these, the UK government announced its plans for the development of 5GW of low-carbon hydrogen production capacity by 2030. 

Support for hydrogen continued to be demonstrated as the UK government published its Industrial Decarbonisation Strategy (IDS) in March 2021. Recognising the importance of developing the hydrogen economy in decarbonising industry, the IDS focused on the need to establish appropriate mechanisms to support the deployment and use of low carbon hydrogen technology and infrastructure for industry, as well as creating conditions to ensure industrial uptake of fuel switching to hydrogen.

The HPBM and NZHF were formally announced in the Hydrogen Strategy, published in August 2021. Repeating its ambition for 5GW hydrogen production by 2030, the Hydrogen Strategy set out the key points for delivering this ambition, and confirmed that the UK government would be taking a twin-track approach to hydrogen production, with both blue and green hydrogen contributing to the overall capacity. Since the publication of the Hydrogen Strategy, the volume of hydrogen to be produced by 2030 has been doubled to 10GW, announced in the Energy Security Strategy, with at least half of this being produced from electrolytic technologies. Although steps are being taken to accelerate hydrogen production, there is still more to do, particularly in terms of regulatory frameworks and the infrastructure required to deliver hydrogen to the end user.