The Department for Energy Security and Net Zero (DESNZ) has launched a call for evidence to aid in the UK’s transition to price-based competitive allocation for low carbon hydrogen.
The consultation recognises that low carbon hydrogen energy is expected to play a key role in the UK’s transition to net zero by 2050 by playing an important part in assisting industries transition away from fossil fuels.
Scope of the consultation
In the British Energy Security Strategy, the DESNZ initially aimed to run annual allocation rounds for electrolytic hydrogen before moving to price-based competition by 2025.
Currently, the low carbon hydrogen production business model/funding mechanism (or Low Carbon Hydrogen Agreement) is planned to be a 15-year private law contract between low carbon hydrogen producers and a government counterparty (expected to be the Low Carbon Contracts Company), similar to the Contracts for Difference contract. These initial contracts are planned to be awarded through the first Hydrogen Allocation Round (HAR1) and the Track-1 Cluster Sequencing process.
However, whilst the consultation recognises that the Contracts for Difference contracts have been successful in driving down low carbon electricity generation costs, the government now wants to “understand more about the implications of such downward pressure on the development of the low carbon hydrogen economy” and believes LCHA to only be suitable for a low carbon hydrogen market in its nascency.
It is hoped that the consultation will assist in designing a mechanism that works alongside other policies to support broader outcomes beyond just cost reduction, which may include benefits to the electricity system, security of supply of hydrogen and supply chain development.
The call for evidence seeks to gather insights from industry experts, stakeholders and the general public on various aspects:
- Market conditions - it seeks information on the condition of the market conditions required for the shift to price-based competitive allocation
- Ability to support broader outcomes - the extent to which the price-based competitive allocation is able to support the broader outcomes mentioned above
- Design - the consultation also seeks evidence as to how the system should be designed.
The call for evidence is a step in the right direction to fostering a long-term policy to assist in achieving the broader goal of delivering net zero by 2050. The consultation is open to anyone and runs until 2 August 2023.
Bevan Brittan have a dedicated Energy Team with over 30 years’ experience in the UK Energy Market. If you have any questions in relation to the low carbon hydrogen production business model, please contact Rupert Lugg.