UK Hydrogen Strategy 2021

The UK government has released its much-awaited Hydrogen Strategy as part of its commitment to reaching net-zero carbon emissions by 2050.

The strategy, which has been anticipated as key to unlocking significant private-sector investment in the hydrogen sector, sets out the government’s detailed plans to achieve a goal of 5GW of clean hydrogen production by 2050. This will also involve kick-starting the creation of highly skilled employment in hydrogen and similar green sectors.

The release of the Hydrogen Strategy also now places the UK alongside other countries such as Australia, Japan, South Korea, Canada, and China, and a number of European countries (Portugal, Spain, France, Germany, Netherlands and Norway), which have previously announced national hydrogen strategies, as well at the EU’s hydrogen strategy which was published last year. All of this goes towards the emerging global "arms race" to establish an early lead in a future US$2.5tr hydrogen economy, as countries seek to develop the resources necessary to create green jobs, attract private sector investment, unlock export opportunities and increase their national energy security.

The Hydrogen Strategy sets out the UK Government’s use cases, the development of a full hydrogen value chain and the steps to achieving a clean hydrogen economy. Alongside this, the UK Government has published its proposed business model to incentivise low carbon hydrogen production, as well as consulting on the design of the Net Zero Hydrogen Fund and a new low carbon hydrogen standard.

The proposed business model will likely see the UK Government provide a contract, similar to the CfD for renewables. These contracts will initially be awarded bilaterally, with the intention of moving towards a competitive allocation.

The contract will provide:

• Price support through a “variable premium” model. This aims to mitigate market price risk by topping-up producers’ revenues up to an agreed “strike price”. Where the hydrogen reference price exceeds the “strike price”, producers will be required to repay revenues down to the agreed “strike price”. The effect of this is to provide producers with a stable revenue stream.
• Volume support, through a sliding scale price support. This would involve higher price support where volumes sold are low. Sliding scale support would divide production levels into tranches, with different price support levels for each tranche – the aim being to achieve a minimum economic return at lower volumes sold.

The UK Government has also proposed that the “reference price” for hydrogen (against which the "strike price" will be compared) will initially be the higher of the natural gas price and the average achieved sales price at each plant. The UK Government also proposes a gainshare mechanism or periodic payment linked to achieving a certain price threshold. This is to incentivise producers to increase the achieved sales price. In the longer-term, a market reference price will be developed, which represents the value of low carbon hydrogen in the market.

For more detail on the proposals, read our note here.

Read our Getting HY? publication on global hydrogen strategies here.