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Administrative timetable

Final report

1 November 2023: The SAU has published its report providing advice to DESNZ concerning the proposed Hydrogen Production Business Model subsidy scheme. The report sets out our evaluation of DESNZs Assessment of Compliance of its proposed scheme with the requirements set out in the Subsidy Control Act 2022.

• Final report (PDF, 300KB) (1.11.23)

Request from DESNZ

21 September 2023: The SAU has accepted a request for a report from DESNZ concerning the Hydrogen Production Business Model scheme. This request relates to a Subsidy Scheme of Particular Interest (SSoPI).

The SAU will prepare a report, which will provide an evaluation of the DESNZ assessment of whether the scheme complies with the subsidy control requirements (Assessment of Compliance). The SAU will complete its report within 30 working days.

Information about the subsidy provided by DESNZ

The Hydrogen Production Business Model (HPBM) is designed to incentivise the production and use of low carbon hydrogen. It will be delivered via the Low Carbon Hydrogen Agreement, a private law contract signed between the counterparty and a low carbon hydrogen producer. The HPBM will provide support payments, over a 15 year contract term, to a low carbon hydrogen producer towards the costs of hydrogen production and a return on capital invested. This will provide investors with the certainty needed to take an investment decision on a low carbon hydrogen production project and provide lower cost hydrogen for users (for example in industry, power and transport sectors).

We published Heads of Terms for the HPBM contract in December 2022 and the full form contract in August 2023. We aim to award the first contracts to electrolytic hydrogen projects in Q4 2023 and to CCUS-enabled hydrogen projects in 2024.

Beneficiaries must be a UK registered business of any size. A business is defined as an enterprise undertaking economic activities. Academic institutions, research and technology organisations (RTOs), public sector organisations or charities cannot lead or work alone. The low carbon hydrogen projects coming forward for support in the first allocation rounds for contracts are either CCUS-enabled production, where a hydrogen production facility deploys CO2 capture technology to produce hydrogen from natural gas, or electrolytic production that uses low or zero-carbon electricity to split water to produce hydrogen and oxygen.

The eligibility criteria for HPBM supported electrolytic projects under the first Hydrogen Allocation round (HAR1) were:

• production plant located entirely in the United Kingdom and the project representatives business being registered in the UK
• commercial Operation Date (COD) by end of 2025
• technology Readiness Level (TRL) 7 or more
• new build hydrogen production facilities
• electrolytic hydrogen production facilities
• has identified at least one qualifying offtaker
• has identified an electrolyser supplier(s)
• minimum hydrogen production capacity of 5MW
• meets the requirements of the Low Carbon Hydrogen Standard (LCHS)
• demonstrated access to finance

The eligibility criteria for HPBM supported CCUS-enabled projects under the Phase 2 of cluster sequencing process were:

• be located in the UK
• have access to a CO transport solution and access to a Track 1 or reserve cluster CO2 storage site
• must be operational no later than the end of December 2027
• have commenced pre-FEED or be ready to commence pre-FEED no later than the end of December 2022
• be a new build CCUS-enabled hydrogen production plant
• have identified an offtaker or multiple offtakers

We have designed the HPBM subsidy in a way that minimises costs to the taxpayer/consumer and provides an exit route from support at an appropriate time in the future. Government announced in April 2022 that the subsidy will be delivered through a long term, private law contract between a counterparty and a hydrogen producer. We have used a similar mechanism (Contracts for Difference or CfDs) to successfully grow the offshore wind sector and we are adapting it to make the model suitable for the nascent hydrogen market. Subject to completing legislative and administrative arrangements, we have selected the same counterparty, the Low Carbon Contracts Company.

The subsidy is a variable premium that will provide i) price support (because low carbon hydrogen is more expensive than counterfactual fuels) and ii) volume support (because the market is nascent and demand is uncertain). In summary:

• price support is provided by a variable premium payment per unit of hydrogen produced and sold. This is calculated as the difference between a strike price reflecting the cost of producing hydrogen and a reference price reflecting the market value of hydrogen. This model provides the opportunity for the level of subsidy to adjust as the hydrogen market develops if the producer can sell the hydrogen at a higher price (for example as the carbon price increases and it becomes more expensive for businesses to use higher carbon fuels), the variable premium model provides a lower subsidy.

• volume support is provided by a sliding scale approach, in which the subsidy per unit of hydrogen is higher if hydrogen sales fall. However, if volume falls to zero, no subsidy will be received, and we have purposely not introduced an availability payment as this would reduce the incentive for the producer to grow its customer base and would expose taxpayers/consumers to paying a producer for not delivering a product.

CCUS-enabled producers are also eligible to receive subsidy in relation to CO2 T&S charges and CO2 T&S outage events.

Information for third parties

If you wish to comment on matters relevant to the SAUs evaluation of the Assessment of Compliance concerning the Hydrogen Production Business Model scheme, please send your comments before 5pm on the date stipulated in the timetable above. For guidance on representations relevant to the Assessment of Compliance, see the section on reporting period and transparency in the Operation of the subsidy control functions of the Subsidy Advice Unit.

Please send your submissions to us at SAU-HydrogenBusinessModel2023@cma.gov.uk, copying the public authority: hydrogen.businessmodels@energysecurity.gov.uk.

Please also provide a contact address and explain in what capacity you are making the submission (for example, as an individual or a representative of a business or organisation).

Notes to third parties wishing to make a submission

1. the SAU will only take your submission into account if it can be shared with DESNZ. The SAU will send a copy of your submission to DESNZ together with its report. This is to allow the public authority to take account of the submission in its decision as to whether to grant or modify the subsidy or its assessment. We therefore ask that you provide express consent for your full and unredacted submission to be shared. We also encourage you to share your submission directly with DESNZ using the email address provided above

2. the SAU may use the information you provide in its published report. Therefore, you should indicate in your submission whether any specified parts of it are commercially confidential. If the SAU wishes to refer in its published report to material identified as confidential, it will contact you in advance

3. for further details on confidentiality of third party submissions, see identifying confidential information in the Operation of the subsidy control functions of the Subsidy Advice Unit

Contacts

SAU project team: SAU-HydrogenBusinessModel2023@cma.gov.uk

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