Hydrogen law, regulations & strategy in the United Kingdom

The UK Government has continued to develop the hydrogen sector by expanding hydrogen policies, frameworks and investment schemes, designed to deliver the five-year plan originally set out in the 2021 UK Hydrogen Strategy. One of the most significant drivers in the hydrogen sector has been the legislation for the hydrogen business models as introduced by the Energy Act 2023. This law sets out the rights by which the UK Government allocates funding to hydrogen projects. 

An example of these business models is the Hydrogen Production Business Model (“HPBM”), which provides revenue support to hydrogen production facilities through hydrogen allocation rounds (“HAR”). The first round, HAR 1, elected eleven projects to support, representing 125MW of production capacity, and provided those projects with a total of £2 billion in revenue support. The projects included a range of electrolytic projects producing hydrogen mainly for industrial sector uses. Whilst the HAR 1 process did not permit the inclusion of ‘blue’ or CCUS-enabled hydrogen projects, such projects are being developed separately as part of the UK CCUS clusters developments. Further HAR rounds are expected to be agnostic on the way hydrogen is produced as long as it meets the low carbon requirements.

Hydrogen transport and storage projects are to be supported by the UK Government primarily through the Hydrogen Storage Business Model, which looks to initially focus on geological storage, with an option to support above-ground storage in the future, and the Hydrogen Transport Business Model. The first allocation rounds for each of these are due to launch in Q3 of 2024. The storage model, which will feature allocation rounds, will look to support up to two hydrogen storage projects in the first round with the aim for them to be either in operation or construction by 2030. The transport business model will focus on a large-scale pipeline infrastructure to transport hydrogen gas and will take the form of a Regulated Asset Base (“RAB”).

There are also developments of national scale for the transportation of hydrogen. Project Union, which is led by National Gas Transmission and is not currently being supported through the transport and storage business models, aims to create a hydrogen backbone capable of transporting 100% hydrogen and connecting hydrogen production and storage with end users. By repurposing existing high-pressure gas transmission network infrastructure and building selected new pipelines, the project is expected to create a hydrogen network of up to 2,000km. Project Union is still currently in the feasibility phase.

The Energy Act 2023 (the “Act”) introduced key measures for supporting the UK’s hydrogen economy, including (amongst others) setting out the regulatory framework for revenue support contracts, authorising funds to be allocated to production, transport and storage projects through the business models, and enabling the appointment of a hydrogen levy administrator, who will be responsible for raising funds to support the hydrogen business models. The Act also extended the Gas Act 1986 to expressly cover the licensing of pipelines for the transport of hydrogen. Developers of hydrogen pipelines will require gas transporter licences for the transmission and distribution of hydrogen and those arranging the supply of hydrogen will require a gas shipper licence. In the same year, the Government published its Hydrogen Transport and Storage Networks Pathway. As part of the Pathway, the Government set out its ambition for the Future System Operator (“FSO”), a publicly owned independent organisation, to formally take over the responsibility for strategic planning for hydrogen transport and storage infrastructure by 2026. The FSO will be responsible for considering where hydrogen can add system value by overcoming electricity network constraints and also what opportunities there may be for repurposing natural gas infrastructure.

Separately, the National Wealth Fund Bill, announced on 17 July 2024, provides the UK Infrastructure Bank with £7.3 billion, £500 million of which will be channelled into green hydrogen manufacturing. The UK Government also expects that its publicly owned energy production company (GB Energy) will co-invest in research and development for green hydrogen.

To meet the demand for low carbon energy production, the UK Government set targets to develop electrolytic hydrogen production capacity, specifically to have 1 GW in construction or operation by 2025 and to deliver 10 GW of production by 2030. To facilitate this, the Government introduced different funding mechanisms, the hydrogen allocation rounds (“HARs”), which provide capex support and/or revenue opportunities for green and blue hydrogen projects through the Net Zero Hydrogen Fund (“NZHF”) and HPBM.

Under HAR1, which launched in July 2022, the UK Government awarded 11 successful projects support, including over £2 billion of revenue support under the HPBM and £90 million of capex support through the NZHF. The Government expects the first projects to be operational by 2025, contributing to the target for 1GW to be in construction or operation.

The HPBM revenue support is delivered through the Low Carbon Hydrogen Agreement (“LCHA”), which is a 15-year contract entered into by the developer and the Low Carbon Contracts Company. The LCHA is based on the Contract for Difference (“CfD”) regime in the UK, with a ‘difference amount’ payable to or by the developer. However, there are significant differences between the LCHA and CfD, including the two ‘sales caps’, which limit the overall volumes which will be supported over the lifetime of the LCHA and the volumes that can be invoiced in any fiscal year.

With the intention of providing a platform for the future rounds, HAR1 acted as an important step forward in the hydrogen sector, as it represented the largest number of commercial green hydrogen projects to be announced at once. Building on this success, the Government launched the second round for the HPBM, HAR2, on 14 December 2023, which aims to support up to 875 MW of production.

There are some key changes for HAR2, however, including no longer providing NZHF capex support at the application stage. Another key difference is the broadened scope of projects eligible for revenue support, including production using gasification/pyrolysis of biomass without carbon capture and gas splitting alongside electrolysis, which the first round was initially restricted to. This more neutral approach to hydrogen production reflects the Government’s ambition to encourage a wider range of technologies to be used, provided they meet the Low Carbon Hydrogen Standard. 1  The application deadline closed in April 2024 and, according to the Hydrogen Production Delivery Roadmap published at the same time, the contracts are set to be awarded in 2025 with project delivery expected between 2026 and 2029. 

The Government intends to run the hydrogen allocation rounds on an annual basis and the Hydrogen Production Delivery Roadmap outlined the Government’s plans to allocate up to 1.5 GW of capacity across HAR3 and HAR4. Ultimately, this development is unlikely to slow down and will be essential to the growth of the UK hydrogen market.

CCUS-enabled hydrogen is expected to play a key role in decarbonising industrial processes which are notoriously difficult to electrify, providing flexible energy to generate the power and heat required in many industrial processes. However, in order to support the development of blue hydrogen production facilities, developers will require certainty that the necessary infrastructure for the transport and storage of CO₂ will be in place.

Key to delivering this certainty is the Government’s CCUS Cluster Sequencing Process, which identifies and provides funding for CCUS and decarbonisation projects in the industrial clusters around the UK.

The CCUS cluster sequencing has been divided into two separate processes, Track-1 and Track-2, each selecting 2 clusters. Under Track-1, HyNet and the East Coast Cluster were selected for Government support and, more recently, eight projects were selected to enter into contract negotiations with respect to these two clusters, three for the East Coast Cluster and five for the HyNet Cluster.

The five HyNet projects will have access to the £20 billion funding and includes projects such as the HyNet Hydrogen Production Plant 1 (HPP1), a £2 billion production facility and carbon capture plant which will supply UK glass manufacturing facilities and will have an initial production capacity of 350 MW, and Cadent's HyNet North West Hydrogen Pipeline, which is set to be the UK's first 100% hydrogen pipeline network.

An expansion of the CCUS Track-1 was announced in December 2023, offering further CCUS projects the chance to connect to the cluster by 2030 and last year two further CCUS projects, Acorn and Viking, were granted “Track-2” status by the Government, making them eligible to receive funding from a £1 billion pot as long as they are operational by 2030. In terms of hydrogen, while the Acorn project itself plans to include a 900MW blue hydrogen production element near the St. Fergus gas terminals, Acorn's Track-2 status provides other industrial emitters in the area greater certainty that the necessary infrastructure will be in place to actually store emissions from H₂ production.

At the beginning of 2024, the Government announced a ‘call for evidence’ in respect of the Green Industries Growth Accelerator (“GIGA”), which is a £960 million fund to support the expansion of strong and sustainable clean energy supply chains across the UK, including hydrogen. This is part of a wider government package to support private sector investment in strategic sectors across the UK and will be key for developing a secure and competitive hydrogen supply chain and sustaining jobs in the hydrogen sector across the UK.

The purpose of the call for evidence is to inform the design of the fund to support hydrogen and CCUS supply chains, gather insight into the manufacturing project pipeline and the issues faced by the supply chain within the CCUS and hydrogen sectors, and inform understanding of CCUS and hydrogen market readiness for GIGA funding.

Within the scope of funding, the supply chain to the hydrogen economy includes:

• Utilities, providing either raw materials or energy to enable hydrogen production (e.g. methane);
• the supply chain required for the production of hydrogen manufacturing equipment and relevant supply chains (e.g. electrolysers);
• Hydrogen transport, distribution and storage, including pipeline and vessel/vehicle transport, underground (caverns, saline aquifers, etc.) and above ground (tank) storage and fuelling infrastructure;
• Monitoring and control;
• Manufacture of fuel cell components and fuel cells;
• Hydrogen carrier chemicals and materials;
• End user markets; and
• Decommissioning and end of life valorisation.

While the call for evidence acknowledges that projects will require significant support in respect of CAPEX, DEVEX and R&D funding, it states that CAPEX support is best situated to deliver the GIGA’s key objectives. As such, to be eligible for GIGA funding a project’s maturity will be determined through technology readiness level, which ranges from 1 (basic research) to 9 (fully mature and deployed technology). The Government has proposed using the definition of TRLs consistent with the NZHF and has stated that for a technology to be ready to scale advanced manufacturing capacity (and therefore be eligible for GIGA support), it should be in the later stages of development, demonstrating successful integration at system level, having undergone testing in relevant environments.

The funding for hydrogen value chains will be available from 2025/2026 and will be available over a five-year period. Full application guidance is set to be published ahead of the Government’s launch of the application round which is planned for the summer of 2024.