July highlights - Mint Selection Newsletter

Posted on 17 July 2023

States’ hydrogen subsidies race

Ever since green hydrogen came to the fore in conversations on how to decarbonise some of the most hard-to-abate sources of emissions, questions over how to encourage investment into the sector, and its potential vast pipeline of projects, have persisted. 

While perhaps hundreds of framework agreements, MoUs and heads of terms have been signed across Europe and globally, for projects ranging in size from just a few megawatts up to 1GW-plus behemoths, only a smattering of these have to date progressed to a final investment decision. As such, there is a general understanding within the industry that achieving commercial viability will require intervention of both the carrot and stick varieties.

Legislators and regulators in most markets have sought to rise to the challenge, recognising that for processes that cannot be electrified – particularly in heavy industry and heavy transport – green hydrogen is perhaps the best bet for significantly reducing emissions. 

The US Government’s passing of the Inflation Reduction Act (IRA) in August 2022 has generated huge excitement among some corners of the industry with its vast subsidies for clean energy generation. For low carbon hydrogen production specifically, the IRA will offer producers USD 3/kg for the first 10 years of production, which could in some cases represent more than half of typical current end-user costs and bring the technology into price competition with grey hydrogen. That generosity has turned attention towards what the government responses will be in the EU and the UK as western world economies seemingly enter a new period of state largesse and intervention, as well as increased international barriers to trade. 

While a British Conservative government led by Rishi Sunak would instinctively not be keen to pursue a like-for-like policy, there was just a dose of realpolitik in the prime minister’s “Atlantic declaration” with President Biden in early June which is expected to allow UK businesses to receive US subsidies such as those created by the IRA. If you can’t beat them, join them, perhaps. 

Nevertheless, the UK’s current focus for supporting green hydrogen is through the catchily named Hydrogen Business Model and Net Zero Hydrogen Fund, which is a legacy of Sunak’s predecessor-but-one Boris Johnson’s government’s more free-spending and interventionist brand of conservatism. 

Under the initiative, a series of yearly allocation rounds will be run with the goal of awarding long-term contracts for difference (CfD) style payments for green hydrogen production according to a negotiated strike price, as well as potentially also the doling out of grant funding for a portion of capex. 

The framework is designed to top up revenues of chosen hydrogen projects in order to bridge the current gap between costs and achievable sales values.

The EU earlier this year introduced European Hydrogen Bank (EHB) to increase investments in the hydrogen sector. With the ambition of producing 10mn tonnes of renewable hydrogen by 2030, EHB will aim to provide financial support for domestic hydrogen projects. Through an auction system, producers will benefit from a fixed price payment per kg for a maximum 10 years of operation. EHB is expected to be launched in autumn 2023.

Infra investors place UK green hydrogen bets

A shortlist of hydrogen projects that remain in the running to receive revenue support under the first hydrogen allocation round (HAR) was published earlier this year and this has seemingly already spurred investors into action as they seek to back developments that will potentially receive a viable route to market from the process. 

Gloucestershire-based developer Progressive Energy is one such group to have at the end of May signed a deal after making the shortlist for HAR1 with its 30MW Cheshire Green Hydrogen scheme. 

The company is establishing a joint venture, called Grenian Hydrogen, with Foresight Group and Statkraft which will develop, finance, construct and own the Cheshire project and Progressive’s wider pipeline of assets.

Grenian’s projects are ultimately being driven by the government HAR process. No one will build without a CfD,” Adam Baddeley, head of industrial hydrogen at Progressive Energy and the new CEO of Grenian, told Energy Rev recently. Other traditional energy infrastructure investors have pounced on other shortlisted projects too, with Schroders Greencoat recently entering a JV with Carlton Power which has three projects in the running for a HAR1 contract. 

Meanwhile, Octopus Renewables and RES have a long-standing partnership which has also produced three projects making the shortlist, while the rest of the list features projects promoted by various strategics and currently independent developers. 

Further corporate deals or JVs are understood to be in the offing as appetite ramps up for the UK’s clearest route-to-market for green hydrogen projects to date. However, not all of the shortlisted developments will ultimately be successful in HAR1, with only up to 250MW of capacity in line for contracts out of a total of 408MW shortlisted.  

It might at face value therefore seem premature for investors to be buying into these projects, but the framework is flexible enough to allow unsuccessful entrants to bid again next time in a second contest expected to be held in mid-2024. 

And, with the total capacity eligible for support trebling to 750MW next time, there is apparent confidence that these projects will more likely than not be able to secure an incentive at some stage in the near future. 

Those chosen for contracts during the first two rounds will receive 15-year tariffs with effectively bilaterally negotiated tariffs, although the government has stipulated criteria around value for money. 

However, from HAR3 onwards, the government is keen to move towards a new model. 

“HAR3 is going to be a competitive auction process like the current CfD [for other renewables generation technologies], so there will be lower bid costs but also likely lower strike prices than under HAR 1 and 2,” says Baddeley. This more price-based competitive approach will accordingly likely leave the first two rounds as particularly valuable for investors, which can further explain why groups such as Foresight and Schroders Greencoat are starting to move right now. One of the purposes for the introduction of renewables CfDs in the UK around a decade ago, aside from simply creating the conditions for equity investment, was naturally to allow developers to debt finance their projects. 

That is predicted to also be one of the results of the hydrogen business model, although neither Greencoat nor Grenian are understood to be seeking to project finance their first batch of projects. Nevertheless, debt funders are known to be watching the situation closely with a view to taking part in a burgeoning green hydrogen project finance market in the UK, although the precise nature of this will ultimately depend on negotiations between shortlisted developers and the government which are now underway. 

Results for HAR1 are due to be published in Q4 2023. 

The UK government’s green hydrogen push has seemingly already begun to mobilise private sector investment, although how attractive the space currently is to investors more generally remains an open question. It will therefore be interesting to see how successful capital raising processes such as that recently launched by London-based Protium Green Solutions are in enticing investors. 

Protium - which is mooted to be looking to raise GBP 200m-GBP 300m in fresh capital over the coming months - supports industrial clients with their decarbonisation efforts in harder to abate sectors, mainly through the use of green hydrogen but also by utilising heat pumps and other renewable technologies.

Its current pipeline includes a pair of transport and heating decarbonisation projects at the Magor and Samlesbury breweries run by AB InBev, the up to 70MW Tees Valley Net Zero industrial decarbonisation project, and a whisky distillery heating and electricity scheme in Scotland, as well as several others.

In France meanwhile, Samfi Invest earlier in H1 2023 launched the sale of a stake in green hydrogen project developer H2V with a target of raising up to EUR 100m in equity. The group is developing a pipeline of large-scale, 100MW-plus green hydrogen production plants across France and is targeting bringing a 3GW, 405,000 tonne capacity portfolio into operation by 2030.

It is mooted to have taken a handful of parties through to a second round of bidding in late May, with at least one European infrastructure fund manager among them.

The highlights were created in partnership with Energy Rev.

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