November's Newsletter - Awaiting first signs of green hydrogen lift-off

Posted on 28 November 2023

UK awaits first signs of green hydrogen lift-off

Next month the UK’s Department for Energy Security & Net Zero (DESNZ) will award revenue support to an initial wave of green hydrogen projects as the first part of its UK hydrogen business model programme, with the outcome of the round to provide some early signs of how the new sector is evolving. Applicants shortlisted in August 2023 for the first round of support, which is designed to top up revenues of chosen hydrogen projects in order to bridge the current gap between costs and achievable sales values, include SSE (two projects), Carlton Power (three projects), Hygen, Progressive Energy, Pale Blue Dot Energy, a RES and Octopus JV (three projects), JG Pears, Marubeni Europower, BP, EDF, a H2 Energy and Trafigura JV, and Scottish Power. 

As a sign of the growing potential and the attraction around the space, Statkraft and Foresight Group have teamed up with Progressive Energy to back its project plans, while Schroders Greencoat has struck up a partnership with Carlton Power.

At first glance, the fact that DESNZ has capacity to support up to 250MW of green hydrogen capacity in the first round of the framework, while just 262MW of capacity across 17 projects has been shortlisted, it would suggest that there is limited jeopardy for participants, all of whom are able to negotiate revenue support for their projects on a bilateral basis. But success should not be taken for granted, given one of DESNZ’s key goals from the electrolytic hydrogen allocation round (HAR1) tender is that it promotes as diverse a range of green hydrogen offtakers as possible - “it’s quite an early process compared to other countries - therefore if all projects had similar characteristics it is quite possible not all would secure awards,” says Schroders Greencoat partner, James Samworth.

Nevertheless, any projects that miss out are being encouraged to bid into the following HAR2 tender in 2024, which will provide support for 750MW of capacity and will also be negotiated on a bilateral basis. But from the third UK hydrogen tender onwards in 2025 the gloves come off and the programme will be bid more as a competitive auction, in the style of the UK’s CfD allocation rounds. 

Regulatory drivers

Given the much-trumpeted costs that producing green hydrogen is expected to continue to entail over at least the near-to-mid-term, there is scepticism as to whether the UK green hydrogen sector will be truly ready for competitive bidding by this point. “I don’t know if two bilateral bidding rounds is enough to get green hydrogen to a competitive state, there are still some regulatory developments and market barriers we’ve flagged. However, they can always tweak subsequent HAR rounds in the manner that they tend to tweak CfD rounds,” says Samworth.

Indeed, there remain to be some significant regulatory decisions pending that could either create or squash substantial new revenue streams for the sector. Not least, the UK government is still to rule whether there should be a legal mandate requiring all new gas boilers from 2026 be “hydrogen-ready”. Critics argue that burning green hydrogen in boilers would require up to six times as much renewable energy as electric heat pumps to provide the same amount of heat, while advocates counter that, provided boiler conversions can meet regulatory standards, this would deliver significant benefits should hydrogen later be rolled-out in the gas grid, by reducing the costs associated with scrapping natural gas-only boilers before the end of their useful life. Green hydrogen lobbyists also argue that the power grid would struggle to cope with a full-scale transition from natural gas boilers to electric alternatives.

On a related note, industry is also still awaiting clarity on whether the government could support the blending of up to 20% hydrogen by volume into Great Britain’s gas distribution networks, with a stakeholder consultation on the topic only recently concluding at the end of October. Finally, green hydrogen proponents are also hopeful that there will ultimately be a key role for green hydrogen in long-duration energy storage. And certainly, the prevalence of long-duration storage - and the grid stability it can offer - is seen as key in a future energy network dominated by intermittent renewables sources.

Aside from regulatory drivers, what is of paramount importance for green hydrogen producers is that they have customers to sell to, and successful projects from DESNZ’s first green hydrogen tender should jointly reveal who some of these end users are likely to be. Paper mills with boilers that can be converted to hydrogen, hydrogen-ready combined heat and power (CHP) plants, whisky distilleries, hydrogen-powered mining kilns, glass manufacturing, hydrogen-powered buses and other types of heavy transport are all viewed as potential candidates, although the shipping industry, an eventual target for green hydrogen producers in other geographies, is yet to be discussed in the UK context.

Green hydrogen as renewables PPA offtaker

Another crucial factor for green hydrogen projects is, clearly, that they are able to source the power to drive their electrolysers, which essentially need to be operational at least 70%-80% of the time in order to be financially viable. Power supply for green hydrogen projects also needs to meet “stringent low carbon hydrogen standards on a half hourly basis - as such, green hydrogen producers need to sign PPAs with counterparties that are able to guarantee this low carbon criteria,” Samworth says.

Onshore wind, offshore wind, solar PV and other renewables projects come top of the bill in providing these credentials, so green hydrogen producers could become a growing part of the PPA landscape for renewables generators in the coming years. Some green hydrogen developers have taken this one step further in recent months and looked to acquire renewables projects, in doing so guaranteeing that a certain part of the green power supply they need to produce green hydrogen is secured on a long-term basis from day one.

Protium Green Solutions’ purchase of the consented 25MW Hartwood onshore wind farm in South Lanarkshire in Q2, as reported by Energy Rev at the time, is one such example, with the purchase described as a strategic play to provide a renewables generation source which will improve the economics of Protium’s green hydrogen project pipeline. Marubeni Europower’s acquisition of the 25MW Upper Ogmore onshore wind and battery storage project in Bridgend, south Wales from developer RES in July is another, as the scheme is seen as a likely candidate to provide power to a nearby green hydrogen production plant which the trading house signed a memorandum of understanding to jointly research and develop with Bridgend County Borough Council in summer 2022.

Yet given such projects are only likely to be producing, very approximately, 20%-30% of the time, green hydrogen producers will not be able to survive solely via private wire arrangements with these assets. Having a grid connection will still, therefore, remain of great importance for producers in being able to source power for the remainder of the time the electrolysers are operating.

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