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LCP Delta welcome ‘major milestone’ announcements on Hydrogen but warn more emphasis needed on storage

Summary

LCP Delta believe today’s announcements around Hydrogen mark a major milestone in the development of the sector in the UK, with a greater emphasis on clean, green hydrogen.

Brendan Murphy, Head of Hydrogen at LCP Delta, commented:

“We’ve seen some big decisions taken in a range of areas, such as blending, which ought to send stronger signals to investors and developers that the UK is serious about investing in clean hydrogen.

“It’s great to see this and marks a major milestone, but there remains a big concern that hydrogen storage is not valued as much as it ought to be, which is reflected in the detail on the hydrogen storage business model plans published today. It is crucial that government engage with industry as early as possible on the design of the storage business model, reflecting the timeframe and capital-intensive nature of these projects.”

LCP Delta have highlighted several important elements of today’s announcements and consultations. Key takeaways are:

  • More attractive subsidies
    The announced contracts for HAR1 projects represent a big milestone for the UK hydrogen sector. The average strike price of £241/MWh (~£9.5/kg, ~€11/kg) is generous and could lead to more attractive subsidies on a unit produced basis compared to European support schemes such as the EU Hydrogen Bank which is offering €4/kg subsidies. On current natural gas prices, HAR1 projects could receive subsidies of up to ~€8-9/kg. The government has taken some sale price risk away from producers, reflecting the offtaker risk for early projects. Equally, it will be important to pull policy levers on the demand side to encourage offtakers to pay a green premium for hydrogen.

 

  • Greater recognition for Green Hydrogen
    Government has placed a greater emphasis on green hydrogen, with a new split of 6GW of the 10GW 2030 target. This more accurately reflects the current ambition from electrolytic hydrogen project developers in the UK. According to our analysis, in 2030 nearly 50% of all hours we will be producing too much clean power, and this pivot towards more green hydrogen is a good use of that curtailed renewable power.

 

  • Hydrogen storage capacity still not where it needs to be
    However, on the hydrogen storage side of things, some might see today’s announcement as a disappointing level ambition for such a critical enabler of the broader hydrogen sector. The government has said it wants to see a minimum of two projects, with a minimum size of 50 GWh by 2030. Two projects at this scale would represent a tiny 0.1 TWh minimum capacity to be contracted. As reported last month, LCP Delta analysis shows that our system will require closer to 1.6 TWh to cover the imbalance between hydrogen production and demand. It will be critical that the storage business model adequately reflects and re-risks the liquidity requirements of developing and operating such capital-intensive assets, driven by the spikiness of the clean energy driving production of green hydrogen, and flatter demand profile of the offtakers consuming it (until demand for power generation picks up).

 

  • Blending
    On blending, the big update here is that blending will a permitted offtaker for producers, including for HAR1 projects, who could be allowed to amend their agreements. HAR1 projected production timeframes of 2025/26 align with this expected commercial readiness of blending in the same timeframe.

 

The decision to support blending could also signal a more important role for hydrogen for heat. The eagle-eyed may have spotted the assumed demand numbers indicate this as well:

Dec 23 Update

Original UK H2 Strategy

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