What were the key success factors for HAR1

The Department for Energy Security and Net Zero (DESNZ) has committed to producing 10GW of hydrogen by 2030 (half of which should be electrolytic). The Hydrogen Production Business Model (HPBM) offers revenue support to stimulate hydrogen production in the UK through a contract for a difference mechanism.

In December 2023, the Hydrogen Allocation Round 1 (HAR1) announced eleven successful applicants. They had a combined electrolytic production capacity of 125MW and a weighted average strike price of £241/MWh (£175/MWh in 2012 prices). Initially when these applications launched in July 2022, there were a total of 17 projects that had entered the final negotiations, of which two projects withdrew and four were not successful. These projects covered a variety of different use cases and applications, all with the hope of proving out their hydrogen application across hard to abate sectors.

GHD conducted a preliminary review of all the successful and unsuccessful projects that were shortlisted for HAR1 funding. From the projects that were chosen, there were notable clear strengths that bolstered their ability to deliver on the DESNZ success criteria. This is part of a comprehensive analysis on the drivers of success behind green hydrogen projects globally. This is vital to understand as investors look to deploy capital in bankable projects.

DESNZ assessed applications against a set of eligibility criterion:

• Deliverability: one qualifying off-taker, electrolyser supplier, operational by 2025 (extended to 2026).

• Cost: The ability to deliver cost-effective hydrogen (access to finance).

• Economic Benefits: The value contribution the project will offer to the economy.

• Additionality of Electricity Security: Not diverting low carbon electricity sources from other uses.

• Market Development and Learning: Ensuring the project offers growth and learning opportunities.

• Carbon Emissions & Environmental Factors: To meet the low carbon hydrogen standard.

As expected, affordability proved to be the predominant success factor. This led to the selection of projects operating within a low budget. Other notable trends in a project’s success include:

1. Small scale electrolysers: With the average electrolyser size at 11:38 MW

2. Joint venture or partners: Funding raised through either joint ventures or partners, with private financing (investors / portfolio managers), or as a consortium linked to government actors, local councils, or other parties.

3. Co-located with renewables (private wire), and/or the off-taker: Co-located next to renewables where private wire could be possible (that has surplus resources, or establishment of new renewable power generation sites near the hydrogen site) or next to the off-taker.

4. Existing infrastructure access: Existing access to infrastructure including the grid, transmission networks, gas pipelines, and ports.

5. Anchor off-take: Including initial use cases of HGV transport, feedstock, and process heat in industry.

There were several barriers that deterred potential applicants from participating in the HAR1 initiative. These obstacles involved a deficiency in public investment and challenging timelines with the original COD set for the end of 2025, this was subsequently extended by the government to 2026 due to constraints such as a limited number of electrolyser producers that could meet the government's scale requirements. Further to this, the lack of demand certainty and stability also played a significant role, as well as concerns around perceived lack of consistency and regulation in defining green hydrogen (including within existing policies). Moreover, the nascency of transport and storage (T&S) business models, coupled with the associated high costs, deterred applicants.

Out of the shortlisted projects, there were key patterns that emerged within the HAR1 projects that did not receive funding or withdrew from the process (this information is from our preliminary findings, not DESNZ published justifications). These patterns include:

Scale: Large projects (e.g. <320 GWh capacity) with a 'hub style' of co-locating a hydrogen ecosystem, with longer operational lead times (early 2028). One project withdrew to secure alternative funding for a phased larger multi-unit development.
Local opposition: Strong local opposition to the site development.
Deliverability: Further project maturation and supply chain development needed. The (perceived) lack of off-taker demand for the hydrogen produced.

DESNZ has now opened applications for the next allocation round (HAR2), which is due to close in Q2 of 2024, with the aim of supporting a capacity of 875MW. Between HAR1&2, the UK Government aims to deliver up to 1GW of electrolytic hydrogen production capacity by 2025, this is subject to its affordability and value for money. The HAR2 assessment criteria will have a greater emphasis on cost than HAR1, and will be assessed against necessity, affordability, and value for money.