UK hydrogen sector updates: Update to Market and Blending into the GB Gas Transmission Network
In July 2025, the UK Government’s Department for Energy Security and Net Zero (“DESNZ”) published a wide array of documents, highlighting Government’s continuing support for developing the hydrogen sector in the UK. This article focuses on some of the key points to note in respect of hydrogen developments from the following publications:
- Hydrogen update to the market: July 2025
- Consultation for Hydrogen blending into the GB gas transmission network
1. Hydrogen Update to the Market: July 2025
On 23rd July 2025, DESNZ published its Hydrogen Update to the Market policy document (the “Update”) which summarises key policy progress in the first six months of 2025 to deliver the low carbon hydrogen economy and also looks forward to upcoming hydrogen policy milestones and opportunities for the sector. This follows previous updates to the market (as separately detailed at: Hy time for hydrogen - key takeaways from the UK's hydrogen strategy; Hydrogen transport and storage: Update on proposed business models and UK Hydrogen Strategy : UK hydrogen sector updates: hydrogen production - kicking off the next allocation round) and sets out the Government’s latest position. As part of this, the government intends to publish an updated UK Hydrogen Strategy in Autumn 2025 setting out its vision, objectives and approach to delivering hydrogen projects over the next decade.
Hydrogen Production
Hydrogen Production Business Model
The Hydrogen Allocation Rounds (‘HAR’) are the main mechanism for supporting low-carbon hydrogen production, with HAR1 completed, HAR2 shortlist announced (comprising 27 projects), and HAR3 and HAR4 planned for 2026 and 2028, respectively. Details of the shortlisted HAR2 projects are available here.
The Government is removing Climate Change Levy costs from electricity used in electrolysis to lower production costs for low carbon hydrogen. Consultation responses on the appropriate legislative approach to take in respect of the removal are being considered by the Government and a Government response will be provided in due course.
The Government is also due to respond later this year on its views for having the Gas Shipper Obligation (“GSO”) as the long-term funding mechanism for initial hydrogen production projects funded through the HPBM. This was subject to earlier consultation the details of which can be found here.
Low Carbon Hydrogen Standard (“LCHS”)
The Hydrogen Production Business Model incentivises investment in low-carbon hydrogen, with projects required to meet the Low Carbon Hydrogen Standard (i.e a GHG emissions intensity of 20g CO2e/MJLHV of produced hydrogen or less) and subject to strict methodology for calculating these emissions.
Updates to the Low Carbon Hydrogen Standard are expected in 2025 and the Government is exploring updates to the low carbon certification scheme as well as the LCHA in 2025. Future versions may consider updates in respect of transport and storage emissions, international alignment and the introduction of production pathways.
In summary, DESNZ’s key future milestones in respect of hydrogen production and the HAR process are as follows:
- publish the next version of the LCHS this year;
- provide an update on the low carbon hydrogen certification scheme this year.
- seek feedback on the proposed design and delivery of HAR3 through a market engagement exercise, with the aim of publishing later this year;
- publish a review of the Hydrogen Allocation Rounds beyond HAR4 later this year;
- complete HAR2 in early 2026;
- launch HAR3 in 2026;
- launch HAR4 in 2028;
Hydrogen Transport and Storage Networks:
Hydrogen Transport and Storage Business Models
The Government is also developing business models for hydrogen transport and storage, based on a Regulated Asset Base (RAB) model, alongside a government subsidy mechanism. It is aiming to launch the first allocation rounds in 2026. With respect to hydrogen storage, DESNZ’s minded to business model remains as a revenue cap and floor mechanism to be awarded via a subsidy competition. Strategic planning for hydrogen infrastructure is being integrated with the wider energy system, with the National Energy System Operator taking a leading role from 2026.
Further, the Government is assessing hydrogen’s role in heating and consulting on its potential contribution to heat decarbonisation, and ongoing consultations are evaluating the feasibility and benefits of blending hydrogen into existing gas networks.
The Update reiterated Government’s commitment of over £500 million, as set out in the Spending Review 2025, for the development of the UK’s first regional hydrogen transport and storage network, where it expects the first network will be operational from 2031.
Uses of Hydrogen
Hydrogen to Power Business Model
Hydrogen is positioned as a key technology for low-carbon, dispatchable power generation and long-duration energy storage, with a new Hydrogen to Power Business Model launching in 2026. The Dispatchable Power Agreement mechanism that was used on CCUS projects has been confirmed as the chosen business model for this. Later this year, the Government is launching a market engagement exercise which will provide additional information on the business model. This will include the Government’s minded to positions on the eligibility and assessment criteria and suggested next steps for distributing support via the business model.
Hydrogen in Transport
In terms of transport, hydrogen is expected to play a complementary role to electrification, especially in heavy goods vehicles, maritime, aviation, and off-road machinery. Several demonstration projects and regulatory changes are underway to support hydrogen adoption in these sectors.
Off-road machinery: A statutory instrument allowing hydrogen powered off-road machinery and agricultural vehicles on the road came into force on 29 April 2025. Government is expected to publish an off-road machinery decarbonisation strategy following the Non-road mobile machinery: decarbonisation options call for evidence, however the timeframe for delivery of the strategy is unclear.
Maritime: The Maritime Decarbonisation Strategy, which amongst other things, sets out a commitment to regulate greenhouse gas emission intensity of maritime fuels and energy sources, was published in April 2025. Additionally, the government expects to introduce domestic fuel regulations in respect of zero and near-zero greenhouse gas emission fuels, further to a consultation in 2026.
Aviation: The Sustainable Aviation Fuel (SAF) Mandate – the key policy encouraging the supply of sustainable aviation fuels to decarbonise aviation fuel - was launched in January 2025. Provided it meets eligibility criteria, hydrogen is eligible for support under the Mandate. The Sustainable Aviation Fuel Bill, which introduces the Sustainable Aviation Fuel Revenue Certainty Mechanism, is expected to become law by the end of 2026. The third competition window for the Advanced Fuels Fund closed at the end of March this year, with the winners announced on 22nd July 2025. The competition winners can be viewed here.
Regulatory Framework
To be able to support the first small-scale hydrogen pipeline projects and to be flexible enough to support the hydrogen economy as it matures, a consultation on the proposed economic framework for 100% hydrogen pipelines has been launched. Please see here for further commentary on this.
2. Consultation on Hydrogen Blending into the GB Gas Transmission Network
Hydrogen Blending and the Purpose of the Consultation
The Government is again consulting on hydrogen blending (i.e blending low carbon hydrogen with other gases into the existing gas network). The aim is to assess the case for hydrogen blending including the required commercial, market, technical, safety, and billing arrangements required to accommodate such blending. Please see here for the consultation.
A previous consultation in 2023 assessed the strategic and economic value of blending up to 20% hydrogen by volume into the existing GB gas distribution networks, as well as avenues for implementing blending (the “2023 Consultation”). Following this consultation, previous government published their strategic policy decision in support of blending up to 20% hydrogen by volume into the GB gas distribution networks in specific circumstances.
The Consultation also seeks to understand the impact on existing end users directly connected to the transmission network and developments across Europe in respect of the EU Hydrogen and Decarbonised Gas Market Package. It is expected that, if a positive future decision enabling transmission-level hydrogen blending is made, the earliest that blending at a commercial scale could be made would not be until 2028.
To support the Consultation, safety and feasibility tests and demonstrations of different levels of blending (up to 5%, 10%, and 20%) within the GB gas transmission network have been carried out by National Gas Transmission (NGT). DESNZ’s minded to position is to further consider whether blending of up to 2% hydrogen by volume should be supported and enabled.
Strategic role of hydrogen blending
At distribution level, blending could function as an offtaker of last resort/minority offtaker and could mitigate both the risks of hydrogen producers not being able to sell sufficient volumes of hydrogen and cross-chain volume risks in respect of hydrogen transport and storage (T&S) infrastructure development. Where large-scale hydrogen T&S infrastructure is not available, blending could assist electrolytic hydrogen producers, particularly those producers located behind electricity network constraints, with supporting the wider electricity system and allowing blending to play a role as strategic enabler.
For Carbon Capture Usage and Storage (CCUS)-enabled and other non-electrolytic hydrogen projects, their strategic value could lie in producing hydrogen at scale, such as industrial clusters. DESNZ’s position is that CCUS-enabled and other non-electrolytic who intend to use blending as a majority offtaker from the outset will not be able to benefit from hydrogen production revenue support.
At transmission level, the strategic roles for blending could be similar to those identified at distribution level, for example, offtaker of last resort and strategic enabler, as noted above.
EU Interactions
The impact of transmission-level hydrogen blending on cross-border trade with the EU via interconnectors requires separate consideration. The EU Hydrogen and Decarbonised Gas Market Package (comprising Directive (EU) 2024/1788 and Regulation (EU) 2024/1789)(the “Package”), which does not apply to the UK, was adopted in May 2024. The Regulation became applicable on 5 February 2025 and Member States are required to transpose the provisions of the Directive into national legislation by 5 August 2026. Whilst the Package sets the basis for enabling harmonisation of hydrogen blending across Member States to enable up to 2% hydrogen blends across EU gas transmission networks, it does not specifically require individual Member States to blend hydrogen into their own transmission networks. Government is undertaking engagement exercises with neighbouring Member States to better understand the impact of the Package in respect of hydrogen blending and risks concerning security of supply.
Hydrogen Deblending
Deblending hydrogen could assist NTS end users who are unable to, or are likely to have significant safety and technical issues, receive variable hydrogen blends. A limitation to hydrogen deblending is that it is considered to be a relatively unproven technology at large scale, particularly within distribution and transmission networks.
The Consultation sets out two possible future scenarios:
- Deblending at UK gas interconnector entry points – government does not currently view this as a feasible option due to costs and technical challenges of large scale blending, however further engagement with neighbouring EU Member States and the Commission is to be expected.
- Deblending at local end user level – further work is required to be undertaken by NGT to understand the feasibility of isolating blending gas within the NTS to protect sensitive end users, and what measures, if any, could assist with managing blend variability to manage those impacts to end users.
Implementation options
Government’s position is that transmission blending, if enabled, should be implemented using existing gas market arrangements where appropriate, including for example, gas billing arrangements.
Considerations in respect of the HPBM
Government envisages that, if enabled and if supported by government, the most appropriate mechanism for transmission blending would be through the HPBM. Blending is currently considered a ‘Non-Qualifying Offtaker’ under the LCHA. Designing and integrating subsidy support for both distribution and transmission blending within the HPBM, would require to be reflected in the LCHA. Further consideration will need to be given to those HAR1 projects that have already entered into a LCHA. Sales of hydrogen to RTIs is not currently permitted under the LCHA, government will need to consider how commercial arrangements for blending will work for example, the use of gas shippers (who would at present be considered an RTI) for purchasing hydrogen for blending. If blending is enabled by government, consideration will be made in respect of eligible offtaker’s for future HARs and CCUS allocation rounds of the HPBM.
Market and trading arrangements
DESNZ’s minded to position in respect of market and trading arrangements for transmission-led blending is analogous to the network-led hybrid approach that the 2023 Consultation considered. This would allow both the gas transmission system operator and gas shippers to purchase low carbon hydrogen and shippers can sell hydrogen produced for blending.
Low carbon hydrogen certificates
In respect of low carbon hydrogen certificates for transmission blending, government have confirmed that further to the 2023 Low Carbon Hydrogen Certification Scheme Government Response, they require further consideration of how certificates could work for blending.
Implications, next steps and conclusions
The Update sets out a clearer roadmap of the key milestones DESNZ are working towards and for DESNZ’s ongoing commitments to advancing the UK hydrogen industry. The forthcoming UK Hydrogen Strategy in Autumn will be welcomed by industry and is expected to provide even greater clarity and direction, reinforcing the UK’s position as a leader in the global hydrogen market.
The Consultation will close on 16 September 2025. Responses can be submitted here. The Government has confirmed that if the outcomes of the Consultation, together with the safety review, finalisation of the economic case and distribution blending policy decision support a future decision to enable blending, government would then look to start the legislative process to implement amendments, working with industry and networks to define and deliver the technical implementation activities and processes required. Given the timescales for this, the Government anticipate that blending at a commercial scale would not be expected until 2028 at the earliest.
