Demystifying the Hydrogen Business Model for Electrolysis
The green hydrogen economy is early in its development, with 700MW electrolyser capacity installed globally in 2022. This is expected to grow significantly, reaching between 175-420GW by 2030.1
The UK’s government recognises the economic opportunity, aiming to produce 10GW low carbon hydrogen by 2030 – with green hydrogen making up half of this – supporting over 12,000 jobs and potentially leveraging up to £11bn in private investment.2 There is also a milestone target of up to 1GW blue hydrogen and 1GW green hydrogen in operation or construction by 2025
Green hydrogen can be used in a wide range of sectors which have proved to be difficult to decarbonise so far, including generating heat for heavy industry and providing fuel for transport. It can also be stored to be used whenever it is needed, providing essential system flexibility services and ensuring the UK can always meet its energy needs.
Green hydrogen is made in state-of-the-art electrolysers which split water into hydrogen and oxygen, with zero carbon emissions. chnology has been licensed worldwide.
The Government has set a target of 10 gigawatts (GW) of low carbon hydrogen by 2030, half of which will be green hydrogen generated from renewables. Analysis shows that this will support over 12,000 jobs and attract £11 billion in private investment. Ministers have also set an interim target of 2GW of low carbon hydrogen by 2025, including 1GW of green hydrogen. There are currently only about 5 megawatts (MW) of green hydrogen projects operational in the UK, so the Hydrogen Production Business Model will be essential to kickstart a baseline of large operational projects by de-risking and reducing finance costs.
The document aims to guide developers and key stakeholders through the business model, which has been criticised for being complex and difficult to understand for new entrants. At its most basic level, the Hydrogen Production Business Model provides support in a similar way to same way to the Contracts for Difference scheme, in which a generator receives a fixed price (a strike price) for their electricity over a fixed term. The guarantee of a fixed price for renewable generators de-risks the project sufficiently to attract private capital investment in it. As well as revenue stabilisation, the Government’s Hydrogen Production Business Model is also attempting to establish a market for low carbon hydrogen in the absence of multiple buyers and sellers.
So far, there has been one allocation round (HAR1). In this initial round, 17 projects totalling 262MW entered bilateral negotiations with the Department for Energy Security and Net Zero in August to receive Low Carbon Hydrogen Agreements. These contracts are due to be awarded this year, with the first HAR1 projects reaching Financial Investment Decision within three months of receiving contracts. This will be followed by a second allocation round (HAR2) which aims to secure 750MW of capacity.
Although support is currently awarded through negotiations between industry and Government, Ministers are now proposing a transition to a competitive, price-based CfD-style auctions as early as 2025.
There is currently no established market for low carbon hydrogen, so setting a reference price, which is intended to represent the market price for each unit of hydrogen sold, would be challenging. Implementing competitive auctions too soon without a fully developed supply chain and a significant number of market players could make it economically unviable for developers to progress their projects. A hurried transition to competitive auctions could have a negative impact on building up a domestic supply chain for green hydrogen.