Ronan Lambé of Pinsent Masons, the law firm behind Out-Law, urged potential hydrogen producers in England to respond to a government consultation on its proposed business model, published alongside Britain’s first hydrogen strategy. The consultation, which offers a technologically neutral grant based on a contracts for difference (CfD) model, ends on October 25.
“The consultation is proof that the government is reaching out to industry to help them create a robust, efficient and most importantly attractive business model that will result in the stimulation of large-scale, low-emission hydrogen production. carbon in the UK, ”he said. “In the UK hydrogen strategy, the government explains that due to the nascent nature of the market, it will need to work closely with the private sector to encourage the production of low carbon hydrogen.
“While one can understand the desire to use some form of business model to support different methods of producing low-carbon hydrogen, it remains to be seen whether a ‘one-size-fits-all’ approach, with limited ability to adapting support to different methods of producing low-carbon hydrogen and without specific support for small-scale projects will stimulate the market as required. Perhaps the complexity to create a unique model to support the production of a product subject to a wide range of trade barriers, ”he said.
The UK hydrogen strategy targets 5 GW of low-carbon hydrogen production capacity by 2030, equivalent to the amount of gas consumed by more than three million UK homes each year. Hydrogen could potentially be worth £ 900million to the UK economy and create over 9,000 jobs by 2030, reaching 100,000 jobs, £ 13bn and 20-35% of the world’s energy use. United Kingdom as production increases until 2050.
The strategy recognizes the need for a “rapid and significant increase” in the production and use of hydrogen if these ambitions are to be met. An attractive UK investment environment supported by incentives on the demand side will be needed to encourage the significant private sector investment required. Its proposed business model is based on the CfDs available to eligible renewable energy producers, which offer developers a guaranteed price for their electricity while protecting consumers from increased support costs when prices are high.
Lambe said elements of the proposed model would be familiar to many in the electricity industry, although the proposal is “more complex” than the existing system.
“The government has benefited from lessons learned from several rounds of CfD allocations in the renewable energy sector, which is seen as a major contributor to decarbonizing the power generation sector and reducing the discounted cost of energy. from renewable sources, ”he said.
“The use of a two-way CfD, modeled on the low carbon / renewable CfD, allows the government to ensure that any support given to low carbon hydrogen is not excessive. If the support is no longer needed because the value of hydrogen reflects production costs, CfD no longer pays the producer. The government has an eye on competitive bidding for support for low carbon hydrogen production in the future and choosing a CfD model means it can use the application architecture and successful auction that exists with the low carbon / renewable CfD, ”he said.
In the absence of a reliable market benchmark price for hydrogen that can be used to calculate the premium, the government offers seven different options for calculating a benchmark price. Its “aware of” position implies a benchmark price that is the higher of two prices: the “made sales” price to the plant and the price of natural gas. Other levers intended to reflect the “volume risk” – the risk that the producer will not be able to sell sufficient quantities of hydrogen to cover its costs – would also fuel the formula.
Lambe said the government’s benchmark price proposal “may represent the best of a bad lot among benchmark price options in the absence of a liquid market price.”
“The fact that the ‘profit sharing mechanisms’ and the ‘periodic payments linked to the achievement or exceeding of a threshold or a defined price benchmark’ are mentioned in the consultation without further details may raise concerns that an already relatively complex reference price mechanism does not become even more complicated to administer and distribute over time, ”he said. “All of this before considering the impact that BEIS wanted to position on volume risk – a ‘sliding scale’ of support, which decreases as the volume of hydrogen sales increases – will have on the calculation.”
At the same time, Lambe said that a fully functioning UK low-carbon hydrogen market would require a range of policy and regulatory interventions beyond the subsidy mechanism.
“The eventual business model for low-carbon hydrogen production will need to be accompanied by government support to encourage storage and transport markets and demand for hydrogen,” he said. .
The government intends to announce its response to the consultation on the economic model in the first quarter of 2022 and then aims to finalize the economic model, allowing the award of the first contracts in the first quarter of 2023, according to the consultation.