Trade association RenewableUK has signalled that setting competitive auctions too soon could make hydrogen “economically unviable”.
According to the organisation’s Demystifying the Hydrogen Business Model for Electrolysis guide, the implementation of competitive auctions too soon without a fully developed supply chain and significant number of market players could make it economically unviable for developers to progress their projects.
This is a cause for concern for the UK hydrogen industry, particularly with many believing that hydrogen production projects must be scaled in order to create further demand and reduce its cost.
In a stark warning, RenewableUK also stated that “a hurried transition to competitive auctions could have a negative impact on building up a domestic supply chain for green hydrogen”.
UK policy must support the scale-up of the hydrogen ecosystem
It is worth noting that the UK has a 2030 hydrogen production target of 10GW with 5GW of this expected to be green hydrogen. In order to achieve this target, industry must pull together to scale production and increase adoption.
But this should not only fall on the hands of the UK hydrogen industry. The UK government must implement legislations and policies that send the correct signals to the global hydrogen economy to boost investment and create further confidence. Failure to do so could lead to investment moving into other regions such as the EU and the US.
Several measures have been implemented by the government to support the UK hydrogen ecosystem. For instance, the introduction of the Hydrogen Production Business Model (HPBM) has been touted as “essential” in kickstarting a baseline of large operational projects by RenewableUK.
At the time of publishing there has been one allocation round (HAR1) which saw 17 projects, totalling 262MW, receive Low Carbon Hydrogen Agreements. Future rounds will be critical in establishing a market for low-carbon hydrogen in the absence of multiple buyers and sellers.
A second allocation round is expected to closely follow and secure around 750MW of capacity.
In the guide, RenewableUK recommended that, while the market is still in its infancy, the allocation of the HPBM contracts should continue through bilateral agreements with these to prioritise deployment first and foremost.
“The 2020s are the crucial formative years for the UK’s green hydrogen economy. The next couple of allocation rounds will be essential in establishing the first major wave of large-scale operational projects, attracting private investment and building up UK-based supply chains,” said Laurie Heyworth, RenewableUK’s senior policy analyst for Emerging Technologies.
“We are at a critical juncture, as some elements of the current HPBM are not fit for purpose. For example, the government’s proposal to move to competitive CfD-style auctions by 2025 should be shelved until there are enough operational projects to act as a lynchpin for supply chain companies and market entrants at scale.
“While we do recognise the need for price-based auctions in the future to drive down costs, the lessons learned from the wind industry show that it is ultimately deployment that catalyses initial cost reduction. This is vital if we are to offer consumers flexible clean power at the lowest cost as soon as possible.”