UK: Applications open for first round of hydrogen funding

On 20 July 2022, the UK government announced the opening of the application window to the 2022 Electrolytic Allocation Round of its Hydrogen Business Model and Net Zero Hydrogen Fund (“HBM/NZHF”). The first tranche of funding will be reserved for green hydrogen production (using electrolysers to split water), with later rounds potentially targeting blue (natural gas with carbon capture) or pink (nuclear electricity-powered) hydrogen generation.

 Background

The UK government, in November 2020, announced its ambition to develop 5GW of low carbon hydrogen generation by 2030. In April 2022, this ambition was doubled to 10GW of low carbon generation by 2030, with at least half of this capacity coming from electrolytic hydrogen drawing upon the UK’s significant renewable energy sources.

The Hydrogen Business Model (“HBM”) was first announced at the publication of the UK Hydrogen Strategy in August 2021. This is a contractual business model aiming to incentivise the production and use of low carbon hydrogen through the provision of ongoing revenue support, in the form of finance from the private and public sectors. More details can be found on our dedicated blog post on the HBM here.

The Net Zero Hydrogen Fund (“NZHF”) consists of up to £240m of grant funding agreed to 2025 to support the upfront costs of developing and building low carbon hydrogen production projects.

 The 2022 HBM/ NZHF Electrolytic Allocation Round

Although the HBM and NZHF target different categories of funding, initial feedback from stakeholders indicated that a significant number of early electrolytic projects wished to apply for both revenue support via the HBM and capital support through the NZHF.

The 2022 HBM/NZHF Electrolytic Allocation Round is a response to this feedback and puts in place a joint process whereby projects can apply for HBM revenue support only, or for both HBM revenue support and capital support through the NZHF. The government hopes to support at least 250MW via the first Electrolytic Allocation Round, although it notes that it retains the right to allocate less.

Eligible projects will receive:

• Ongoing contractual revenue support via the HBM; this is expected to provide price support through a variable premium model, with volume support provided indirectly via a sliding scale approach; and/or
• Where relevant, capital grant support through the NZHF. Projects will be able to apply for a capex of up to 20% of the CAPEX that falls within the NZHF Scope.  

Application Timelines 

The application process consists of three key stages: receipt of expressions of interest, submission window engagement and deadline for final submission.

Projects wishing to apply must first submit an Expression of Interest on behalf of their project by 7 September 2022. Certain engagement sessions will then be organised by the government with a view towards engaging with stakeholders. The final submission must be made by 12 October 2022.

After the initial evaluation of applications there may, in the event of oversubscription, be a shortlisting stage, following which projects should be informed of whether they were successful or not in early 2023. Shortlisted projects will then be invited to an Agreeing an Offer stage which includes a due diligence process and value for money assessment, as well as a process to agree an offer. The award of contracts is intended to take place from July 2023.

The government has produced the following indicative timeline:

Eligibility Criteria 

For the 2022 HBM/ NZHF Electrolytic Allocation Round, a business can lead on up to four applications, which must be materially different, and can be included as a collaborator, or project partner, in a further four applications.

Only those Projects that meet the prescribed eligibility criteria will be evaluated further and be capable of being shortlisted to participate in the Agreeing an Offer stage.

The eligibility criteria are as follows:

1. UK-based: Project plant located entirely in the United Kingdom and the Project Representative’s business being registered in the UK.
2. COD by end 2025: Demonstrate that it is able to be operational (i.e. achieve commercial operations date or COD) no later than the end of December 2025.The government has clarified that COD in the context of new build hydrogen production facilities means the date when the facility is commissioned and ready to commence operations. Government has also noted that having an earlier COD could count favourably towards the project at the evaluation stage. As for the existing CfD regime, participants will need to provide a target COD, and the Target Commissioning Window and Longstop Date will be adjusted day-for-day for any delays that occur due to “Force Majeure” (and potentially other events outside the Producer’s control to be specified).
3. Technology Readiness: Using core technology that has been tested in a commercial environment, Technology Readiness Level (TRL) 7 or more. The government has indicated that both PEM and Alkaline electrolysers meet this requirement.  
4. New build hydrogen production facilities: Only new build hydrogen production facilities are eligible to apply to this Electrolytic Allocation Round. ‘New build production facilities’ are defined as newly constructed facilities built for the specific purpose of producing hydrogen. Although this comprises the entirety of the production process, government has noted that where new hydrogen production equipment shares pre-existing balance of plant, hydrogen transport and/or storage equipment, this shall be deemed permissible. There are certain exemptions for projects that have received funding through certain specified rounds.
5. Electrolytic hydrogen production facilities: The 2022 HBM/ NZHF Electrolytic Allocation Round will provide funding to low carbon electrolytic hydrogen production facilities only. For the purpose of this document, ‘electrolytic hydrogen production’ refers to water electrolysis, where water is split into hydrogen and oxygen using low carbon electricity. Government has noted that this does not preclude the inclusion of other technologies in future allocation rounds.
6. Has identified at least one qualifying offtaker: “qualifying” refers to offtakers that are eligible for HBM support under this allocation round. An offtaker is both the end user of low carbon hydrogen and, where relevant, any intermediary party who may purchase and resell hydrogen to end users. To demonstrate this, Projects should have an agreement or evidence of progress towards an agreement with potential qualifying offtakers, as well as provide the details of any agreed offtakers in the Project Application Form.
7. Has identified an electrolyser supplier(s): Projects should demonstrate their engagement with electrolyser supplier(s), for example through a budgetary quote or a completed Request for Information (RFI) response from a supplier.
8. Minimum hydrogen production capacity of 5MW: The 5MW threshold applies to individual projects and should comprise one single facility in a single location. Projects will not be able to aggregate capacity across different locations or have a phasing approach to build capacity gradually to 5MW.
9. Meets the requirements of the Low Carbon Hydrogen Standard (LCHS): This standard establishes a threshold for greenhouse gas emissions allowed in the production process for hydrogen to be considered low carbon, and a methodology for calculating these emissions
10. Demonstrate access to finance: Projects must be able to show information about their financing plan and the status of discussions with financiers (if appropriate). This could be shown, for example, by a letter from the board of equity partners which commits to financing the project, letters of support from financiers and/or confirmation of the ability to fund from existing liquidity.

In the event of an oversubscription from projects that satisfy all of the above eligibility criteria, the government may apply certain portfolio factors, including location (to ensure that all projects are not concentrated in one or very few regional areas), project size (to ensure at least some larger scale projects are taken through), and diversity of end use and electricity source/operating model.  

 Further Information

The government’s official guidelines to the HBM/NZHF scheme, the application process and the eligibility criteria can be found here. 

Please get in touch with us if you would like to discuss any of the above in more detail.