Switching to competitive, price-based auctions for hydrogen too soon could actually render it economically unviable for developers to progress their projects, RenewableUK has warned.
It published a guide seeking to explain how the Hydrogen Production Business Model (HPBM) works to investors and policymakers, as well as the challenges facing it and reforms necessary to ensure the UK can scale up its green hydrogen industry successfully. Considering its similarities with the Contracts for Difference (CfD) scheme, RenewableUK emphasised the need to learn the right lessons from prior allocation rounds and the history of renewables.
The government has already proposed shifting to competitive auctions under the HPBM as soon as 2025, but this would be risky without a fully developed supply chain and market in place.
Under the CfD, offshore wind had benefited from “years of subsidies” beforehand which meant there was real business case certainty, an opportunity to trial technologies and take on higher risk. Around 4,000MW of operational offshore wind projects had been established before competitive auctions were introduced. Today, the UK only has around 5MW of green hydrogen projects operational in stark contrast.
Instead, with the market in its infancy, the allocation mechanism for HPBM contracts should progress through bilateral negotiations that prioritise deployment first and foremost. Moving to competitive auctions should be less of a priority and wait until multiple operational projects have been established. The government can instead review each allocation round against a clear timeline and set of criteria for when competitive auctions should be triggered, allowing them to gain information on projects and inform auction parameters.
It also warned of how a hurried transition over to competitive auctions could have an impact on creating domestic supply chains for green hydrogen too. Wind turbine manufacturers have already faced constant pressures to innovate to drive down costs because of a “race to the bottom” that has been incentivised by price-based CfDs. This has led to a shorter lifespan for certain components, while overseas purchases has made it more challenging for OEMs to achieve positive returns on capital.
Senior Policy Analyst for Emerging Technologies at RenewableUK, Laurie Heyworth, said: “We are at a critical juncture, as some elements of the current Hydrogen Production Business Model are not fit for purpose. For example, the Government’s proposal to move to competitive CfD-style auctions by 2025 should be shelved until there are enough operational projects to act as a lynchpin for supply chain companies and market entrants at scale. While we do recognise the need for price-based auctions in the future to drive down costs, the lessons learned from the wind industry show that it is ultimately deployment that catalyses initial cost reduction.”
