UK hydrogen production – LCHA terms for HAR2 projects
With the majority of the HAR1 projects having signed their LCHAs, attention has turned to the terms that will be on offer to successful HAR2 applicants. As part of this, on 30th July 2025, the Department for Energy Security & Net Zero (“DESNZ”) shared its latest terms of the Low Carbon Hydrogen Agreement (“LCHA”) that would be offered to projects participating in the Hydrogen Allocation Round 2 (“HAR2”).
Although the LCHA is largely unchanged (see our previous commentary on the terms: UK hydrogen production – January 2024 updates to LCHA terms), there are notable changes that hydrogen producers, investors and financiers should bear in mind. We summarise the key changes in this article.
Key changes to the LCHA Standard Terms and Conditions
Given that the 27 shortlisted HAR2 projects are electrolytic and that HAR2 does not support CCUS enabled hydrogen production (CCUS-enabled facilities were instead encouraged to use the Cluster Sequencing process), the most significant change to the LCHA is that terms relevant only to CCUS-specific facilities have been removed. Details of the shortlisted HAR2 projects are available here.
Certain terms have been streamlined and slightly simplified. This includes:
- Adding new standards by stipulating that if required by law, the electricity and water meter measurement systems must be compliant with the UKEX Regulations (if any part is sourced from the UK) or the ATEX 114 "equipment" Directive 2014/34/EU and ATEX 153 "workplace" Directive 1999/92/EC (if any part is sourced from the EU).
- Adding new technical standards (ASME B31.8, IGEM/TD/1, and IGEM/TD/13) to the list of the performance standard tests which the Producer must pass as part of demonstrating that the facility is fit for commercial operation.
- Updating the definition of “Non-Qualifying Offtaker” to include export and imports of liquid hydrogen for use outside the UK, as well as those Offtakers who export any Hydrogen Carrier (which refers to any product capable of being reconverted to hydrogen, including ammonia, methanol, toluene, and methylcyclohexane) outside the UK which is reconverted to hydrogen, meaning sales to these entities are permitted but are not covered by LCHA payments.
- Updating the definition of “Derived Data” to include the following:
- Gas Reference Price;
- The Floor Price;
- The Reference Price for Qualifying Volumes;
- The Price Discovery Incentive;
- The Price Discovery Incentive Amount; and
- The UKLCH Net Payable Amount.
In the HAR1 LCHA, this definition was limited to the Gas Reference Price, the Natural Gas Strike Price, the Floor Price, and all underlying data relating to the calculation of the Gas Reference Price and the Natural Gas Strike Price. The provisions related to Derived Data have also been amended and the Producer now must take all reasonable steps and use reasonable endeavours to enter into a Derived Data Agreement which is to be maintained for the duration of the Term (i.e 15 years). If the Producer does not comply, it will not be able to issue a Billing Statement Dispute Notice where such dispute relates to any amount in the relevant Billing Statement that is calculated using Derived Data. Additionally, where the Producer has not entered into a Derived Data Agreement (or if a Derived Data Agreement is terminated or ceases to have effect) then any Derived Data that would otherwise have been set out in any UKLCH Billing Statement, will be redacted.
- Adding a definition for Data, this has been defined as the “Gas Settlement Price”. The Producer is not entitled to receive all or any part of the Data from the LCHA Counterparty. If the Producer requires such Data, it will need to enter into a Data License Agreement (or alternative arrangement) with ICE Futures Europe to obtain the Data directly.
- Introducing the concept of “Injected Outage Volume” to permit the injection of hydrogen into hydrogen storage and/or transport infrastructure downstream of any hydrogen meter measurement system. The intention here is for Offtakers to be able to safely switch to other hydrogen sources if the main hydrogen facility experiences any outage.
Amendments to Payment Provisions
More interestingly, the updated LCHA terms amend a number of provisions relating to payments. This includes expressly permitting Producers being able to claim subsidy for hydrogen used as a fuel through the SAF Mandate (where eligible) as long as there is no double counting/double subsidisation. These require to be included as part of the Total Invoices Volumes in the relevant billing period.
The impact of the above is significant when considered together with the removal of the Excess Sales Volume Adjustment Amount (which was a mechanism for non-qualifying volumes and reduced the payments due to a Producer under the LCHA by setting off the excess revenue against the amount paid under the LCHA ) as these amounts no longer feature in the calculation of the Total Accrued Volume and therefore, no longer count towards the LCHA Sales Cap.
Further, whilst the concepts of “Permitted Annual Sales Cap” and “Permitted Annual Sales Cap Obligation” (i.e the obligation on the Producer to undertake that for each fiscal year, the aggregate of the total invoiced volumes and any QCIL Adjusted Revenues Volumes will not exceed the Permitted Annual Sales Cap) remain in place, repeatedly exceeding the Permitted Annual Sales Cap is no longer a termination right for the LCCC which allows more operational flexibility for Producers. Previously under HAR1, if a Producer breached the sales cap in three consecutive (or non-consecutive) fiscal years, this would trigger a termination right for the LCCC.
The Sliding Scale Top Up mechanism allows Producers to receive an additional ‘top-up’ amount where the total volume of hydrogen sold in a billing period falls below 50% of the forecast reference volume, and a Qualifying Event has occurred. A Qualifying Event specifically excludes events where the reduction in sales caused by events which are not demand-related, for example where the Producer is operating the facility in order to claim or maximise any Sliding Scale Top Up Amount. To better reflect the Non-Qualifying Event and Qualifying Event definitions and to clarify that the Sliding Scale Top Up only offers protection for offtake-related risk, the scope of the “HPP Outage Event” definition has been limited. The updated draft now captures events where the hydrogen production plant is unavailable, curtailed or derated, and has removed the express exclusion for Qualifying Events.
DESNZ has also proposed amending the existing confirmation that a Producer has not decreased the achieved sales price in a way that is intended to maximise the difference amount to ensure that Producers do not increase a Strike Price Exclusion Amount such that the aggregate amount invoiced to one or more Offtaker in relation to the relevant Strike Price Exclusion is greater than the relevant costs incurred by the Producer plus a reasonable margin. Further, Producers must account for any take-or-pay payment or reservation fees which are either applied to volumes produced by the facility and then subsequently sold to a Relevant Offtaker or used to compensate the Producer for producing and selling the relevant volumes in its total invoiced amount. This has been introduced to ensure that such payments and fees are only applied to genuine ‘pay’ arrangements and not the scenarios detailed above.
Key Change to the LCHA Front End Agreement
Condition 4.4 of the Front-End Agreement, relating to Applicable Connection Documents (and the corresponding section in the Key Project Documents table in Annex 7) has been deleted which removes the separate requirements for electricity and water connection documents (although Producers are still required to obtain these connections in order to commission successfully). Instead, an additional ‘interim planning’ Initial Condition Precedent will be introduced at Condition 4.5, requiring the Producer to provide evidence to the LCHA Counterparty that they have submitted such applications to the relevant competent authorities required to secure the Applicable Planning Consents (i.e a development consent order, planning permission, a Section.36 consent and/or a marine licence (where applicable)).
Next steps
Whilst DESNZ have indicated that the draft LCHA builds upon the LCHA Heads of Terms (HoTs) published on 16 December 2022 and the full form LCHA applicable to HAR1 dated December 2024 (and published February 2025), they have clarified that the draft will be further developed before HAR2 contracts are awarded.
As set out in one of our recent publications (found here), Government is expected to complete HAR2 in early 2026, and HAR3 and HAR4 are expected to launch in 2026 and 2028 respectively.
More broadly, Government intends to publish an updated UK Hydrogen Strategy in Autumn 2025. It therefore remains to be seen whether this may require the terms of the LCHA to be further updated.
