UK Hydrogen Allocation 2 | HAR2 clarification

Clarification questions (added 9 April 2024)

Q028(a): Our company is an SME. Will that be viewed positively in itself for the assessment of section 7.2.2 “New Entrants and SME”?

This element of the economic benefits and supply chain development criterion is about assessing how Projects identify and promote new entrants and SMEs into supply chains through their projects. The focus is not on whether the proposed project itself is led by a SME.

Q028(b): For section 7.1 “Economic benefits”: In the case of two different equipment suppliers (one from the UK, one from outside of the UK) being capable of supplying within the stated project delivery timelines and a final decision has not been made, which one should be chosen for the answer of this section? The application guidance makes it sound as if it would benefit the application to choose the UK supplier, although that decision might not have been taken yet. On the other hand, this might be reductive to the supply chain resilience efforts that have been underway and led to two equipment suppliers being brought forward.

It is up to the project to assess which is the most likely supplier choice and reflect that in the application. It is important to note that the selection of a supplier may also have an impact on scoring in respect of other evaluation criteria, such as Cost and other elements of the Economic Benefits and Supply Chain Development criterion. The Government has an open market policy with respect to the Second Hydrogen Allocation Round so that suppliers from other countries should not be discriminated against. It is therefore not the case that a project with a higher proportion of CAPEX coming from UK suppliers will be directly allocated a higher score for the economic benefits proportion of the Economic Benefits and Supply Chain Development criterion. Scores for this criterion instead will be based on the economic benefits estimated to be generated by the jobs supported by a project, and the economic benefits will vary based on the region of the UK where those jobs are located. We expect that all applicants should be able to demonstrate economic benefits due to projects being located in the UK, and this accounting for a significant proportion of their jobs. 

Q028(c): Expenditure incurred before the LCHA contract award is not eligible for support under the LCHA, for example potentially significant DEVEX. Will differences in the priorly incurred expenses between projects be reflected in the assumed project IRR during the strike price negotiation phase after shortlisting?

Services costs incurred prior to contract award (e.g. pre-FEED, other DEVEX) are ineligible for support under HPBM. IRR will reflect each project’s individual risk profile and will be for projects to determine however it should not include any ineligible costs. Projects that reach the negotiations stage will be required to submit a best and final offer that includes an IRR. This should be an IRR which makes the project commercially viable and which the project can stand behind. However, whilst HAR2 is a not a purely cost competitive round, projects with a higher IRR may look less competitive than other projects. DESNZ is looking for risk to be shared appropriately between the project and government, and projects which seek to pass most or all of their risk onto government are unlikely to be seen as representing value for money and therefore risk not getting an award.

Q028(d): Could you please elaborate on the classification of allowable and disallowable capital for the purpose of the strike price negotiation after shortlisting. Will equipment CAPEX essential to the functioning of an HPF, e.g., compressors or storage units, be deemed allowable capital if it is linked to the requirements of the offtaker?

CAPEX for compression equipment and storage units located at the hydrogen production facility are both allowable cost categories and eligible to be funded through the strike price. However, we would strongly recommend that projects consider whether they can pass costs linked to the requirements of their offtakers (e.g. compression required above the output of the production system, additional storage capacity) onto their offtakers, rather than load these costs onto the strike price, especially in cases where higher cost fuels are being displaced (e.g. diesel). CAPEX for compression equipment and storage units at offtaker facilities are not eligible to be funded through the strike price.

Q028(e): Do applications need to evidence that the end customer has a commercially viable and widely available technology (at TRL 7 or above) for the use of the hydrogen? If so, how does this fit alongside fuel cell HGVs and other early stage commercialisation solutions?

There are not requirements on the TRL of end-user technologies. The robustness of project’s offtaker plans will however be scrutinised, including the technical and commercial viability of offtakers being able to receive the specified hydrogen volumes. Please see section 5.3.2 of the application form and 3.6.2 of the application guidance for more information on how offtaker arrangements will be assessed.

Q028(f): Is it possible to submit 2 separate applications for the same project location and with the same offtaker if they differ materially in their production technology, e.g., one project concept deploys an electrolytic HPF whereas the other one relies on gas splitting producing solid carbon?

Projects should refrain from submitting speculative applications into the HAR2 application process. Projects should select their most deliverable and cost effective project via one chosen technology.

Q065: In order to achieve planning permission for the site before the deadline, we may need to change sites if complications arise. Can we change sites after HAR2 application submission as long as the site remains within the UK? How would we update DESNZ of this change?

Such significant project or technical changes can be permitted but will be reviewed on a case-by-case basis. As a minimum, the project must remain eligible as per the eligibility criteria listed in the application guidance. The project should also remain deliverable and value for money. If significant changes are made late in the allocation process, there is a risk this may reduce the likelihood of success during final negotiations, as negotiations are informed by the data submitted throughout the due diligence stage.

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