The UK’s Hydrogen Energy Association (HEA) has said that using multi-decade contracts to attract investment in the green hydrogen market ultimately stifles investment opportunities.
According to the HEA’s ‘Build Hydrogen Demand: An Action Plan’ report, measures including carbon pricing, mandates, and a delayed introduction of pipeline networks have all been barriers to private investment in the UK’s infant green hydrogen sector. The report aims to present opportunities to “smooth the path” for the hydrogen market moving forward.
Attracting this initial investment is critical to ensuring the hydrogen market in the UK can continue to scale and approach cost-competitiveness, HEA said. Hydrogen has been touted as a vital resource in the nation’s decarbonisation, with a legislated target to secure 5GW of green hydrogen production and 10GW of low-carbon hydrogen (also known as blue hydrogen) by 2030.
With the UK’s hydrogen sector still emerging, initial producers and users must collaborate effectively while managing risks. Currently, uncertainties surrounding long-term contracts make it difficult for both parties to agree on terms with acceptable risk levels.
The HEA states there is a mismatch between the long-term contractual commitments developers need from end users to finance hydrogen projects and the typically shorter procurement timelines that end users operate under, especially in the transport sector.
One way to address this risk is by adjusting the boundaries of the contractual framework. Specifically, the organisation believes that controlling the eligibility of risk-taking intermediaries (RTIs) within the Low Carbon Hydrogen Agreement (LCHA) – a standard contract used in the UK to provide revenue support for low-carbon hydrogen production projects – would enhance the financial security for both producers and users to ensure a viable project.
The HEA believes that an RTI could connect several users and producers at different scales, thereby improving the security of the entire supply chain. Additionally, it would encourage the formation of joint ventures between various parts of the supply chain, fostering better connectivity and collaboration, which the organisation said could be crucial in determining the speed at which hydrogen ecosystems develop.
Taking inspiration from the EU
The HEA report argued that the UK should look to Europe for inspiration and support for its budding hydrogen sector.
The European Union (EU) has set lofty targets for hydrogen production. For instance, the EU aims to produce10 million tonnes of hydrogen domestically, and import a further 10 million tonnes, by 2030.
The EU has introduced several support mechanisms and frameworks to incentivise investment within the economic bloc.
Under the Renewable Energy Directive II (REDII), the EU has established targets to increase the use of green hydrogen in industry and transport. By 2030, up to 42% of all hydrogen used in industry must come from Renewable Fuels of Biological Origin (RFNBOs), with this requirement increasing to 60% by 2035.
The HEA believes a similar approach should be adopted in the UK, claiming the scheme has sent a “clear incentive to increase the share of green hydrogen in heavy industry to avoid penalties” and has triggered a surge in hydrogen demand.
It said a credit-based system for low-carbon hydrogen uptake could allow the sector to achieve targets on an equitable basis. End users located close to production facilities could use a larger share of hydrogen and sell credits to stakeholders, which will take longer to transition.
The report indicates that, in Europe, renewable fuels of non-biological origin (RFNBOs) used in refineries to produce industrial products can be counted towards the industry’s sustainability targets.
The HEA suggests that this concept should be considered a policy driver for the UK’s Renewable Transport Fuel Obligation (RTFO). Implementing this could incentivise greater refinery participation in clean hydrogen initiatives.
For those interested in the UK hydrogen market, our publisher, Solar Media, will host the Green Hydrogen Summit UK on 1-2 July in London. You can book your tickets here.
