Bids due in, as UK considers hydrogen hopes

Hydrogen was once touted as the silver bullet to deliver the energy transition. Now, though, the role of this resource seems much less clear – raising significant questions around the UK, and the world’s, energy balance.

The UK closes its second round of hydrogen bids this week, seeking to secure another 875 MW of capacity.

One of the cheerleaders, speaking today in Abu Dhabi, is former prime minister Boris Johnson. The former premier spoke of the need to deliver energy security and of a “golden age of co-operation and partnership” between the UK and the United Arab Emirates.

Johnson was speaking at Masdar’s Green Hydrogen Summit. He celebrated the company’s investment in the UK. This includes Masdar’s 49% stake in Dogger Bank South, an offshore wind project with 3 GW of capacity.  

Flexible power

The former prime minister went on to note the problem of curtailment, where facilities are paid to reduce output. “It’s obviously bonkers and a total waste of money. The wind that you have … obviously you electrolyse the extra electricity and use it to make green hydrogen.”

Policy Exchange put out a paper early this year on the opportunity losses of renewable energy – and its potential for green hydrogen. Capturing curtailed wind in 2022 could have produced more than 118,000 tonnes of hydrogen, it said. It predicted this would rise to 455,000 tonnes by 2029.

The Policy Exchange paper based its projections on Proton Exchange Membrane (PEM) electrolysis. However, alkaline electrolysers are cheaper and better known.

Dr Michael Whiteley, global head of clean hydrogen at HSBC, speaking in Abu Dhabi, noted that alkaline was a more conventional choice.

“Alkaline technology has been around a long time and a lot of the movement we see is based on projects with alkaline, but we might start to see different hybridisations. Alkaline doesn’t like intermittent loads, so you either have to have solar in the day and wind in the night and overspec that, so if you do get any dips you still have a 100% or a high load factor.”

As such, an alkaline-based facility would need dedicated and dependable supply – possibly delivered by the grid. “But does that then not qualify as a green project? Do we add batteries to systems, but that adds capex? All these factor into decisions on projects,” Whiteley said.

Carbon competition

The flipside of curtailment is additionality. There may come a point where electrolysers compete for power from the grid, increasing demand and bringing on higher emitting carbon sources.

The US is often seen as a particularly attractive location for decarbonised technology, owing to its Inflation Reduction Act (IRA). In December, it published regulations calling for hourly matching, as of 2028. This would require hydrogen producers to link power on an hourly basis to renewable generation or lose tax credits.

Fitch Ratings issued a warning in March that green hydrogen plans face higher costs and lower efficiency as a result of the regulations.

“It can’t be that our product costs go up 20% to satisfy this,” said Renato Pereira, CEO of HIF USA. The company is working on a 300,000 tonne per year hydrogen facility in Texas.

In the UK, new hydrogen facilities seeking government support must show additionality. This can be accomplished either through a private connection or a power purchase agreement (PPA). That this is clear up front, rather than coming as a surprise, must be considered a plus for the UK.

The hydrogen demand case

Johnson said potential uses were steel or chemical manufacturing, in addition to heavy transport.  

Energy Systems Catapult issued its Innovating to Net Zero 2024 report this week. The report agreed with Johnson’s two areas he cited, while also including a replacement for fossil fuels in shipping.

And hydrogen in shipping is an important role. Absent innovation in hydrogen-based fuels for shipping, Energy Systems Catapult said, the price tag for reaching net zero rises by £100 billion.

One area Energy Systems Catapult saw little future for hydrogen is in heating buildings, where it is unlikely to have “any significant role”.

The report set out four different scenarios, covering the various paths that the UK may take. In the lowest case, the country may see supply of 133 TWh (4 million tonnes) per year. In the highest case, supply may reach 220 TWh (6.6mn tonnes).

Demand would be higher, Energy Systems Catapult said, where there is less co-ordinated planning. Planning is required to roll out carbon capture and storage (CCS) infrastructure. Industries seeking to decarbonise must make choices, either capturing emissions or moving to an emission-free feedstock. CCS provides the lowest cost option to reach net zero, it said.

Hydrogen consumption will evolve, the report said. The initial use will be on decarbonising industry, shifting into transport and heat demands in the 2040s. From the mid-2040s, Energy Systems Catapult forecast it would ramp up rapidly “as the last emissions are squeezed from the energy system”.

Setting targets

The UK government has set clear sights to roll out hydrogen production. In April 2022, the government doubled its target to 10 GW of low carbon hydrogen, around 64 TWh, by 2030. It aims to allocate 6 GW to green hydrogen – produced by electrolysers.

In order to achieve this, the UK has focused on Hydrogen Allocation Rounds (HARs). It launched the first of these, HAR1, in July 2022 and picked 11 projects to move forward. These have 125 MW of green hydrogen capacity. The government said they had an average strike price of £241 per MWh, equivalent to £175 per MWh in 2012.

The deadline for the next hydrogen round, HAR2, is April 19. This aims to secure 875 MW of capacity. The two rounds combined should provide 1 GW of hydrogen capacity in operation, or under construction, by 2025. The process requires that HAR2 projects be operational by April 2029.

This second round of hydrogen casts a wider net for production technologies. These include the splitting of solid carbon and biomass.

The plan is to launch HAR3 in 2025, seeking 750 MW of hydrogen capacity, and a similarly sized HAR4 in 2026. A decision has not yet been taken on the size of the next three hydrogen rounds, but the plan is to launch one per year to 2029.

Market making

The Hydrogen Production Business Model (HPBM) takes a similar tack to the contracts for difference (CfDs) scheme for renewable power. Under the HPBM, the government backed Low Carbon Contracts Company (LCCC) will pay a subsidy for each unit of low carbon hydrogen sold. The LCCC will pay the difference between the strike price – the cost of production – and the reference price, what it can be sold for.

Exports, blending and sales to traders have all been cited as ways to help create a market for hydrogen. However, these three will be ineligible to act as offtakers under the HPBM.

The UK is starting to make progress in its hydrogen aspirations, with the HPBM track running in parallel to the CCS-focused hydrogen projects in clusters. It seems likely the country will miss its 2030 target, but broadening the offering for new technologies and developing contractual framework are certainly steps in the right direction.

Energy Systems Catapult highlighted there is a wide range of options around how much hydrogen the country will need. The government is due to make an official decision on hydrogen in homes in 2026, even though enthusiasm has clearly ebbed. Faster decision making would be a boon for all involved, particularly at this critical juncture.