Consultation opens on UK hydrogen levy, raising questions on future costs

The UK Government has proposed its long-term funding mechanism for clean hydrogen projects, raising questions about how the costs of decarbonisation will be shared across households, businesses and the wider energy sector.

The government today (January 16) opened a 12-week consultation for the Gas Shipper Obligation (GSO) that would be used to fund its so-called hydrogen levy.

As passed in October 2023, “gas shippers” – which are defined as a company that buys gas from producers, trades gas on wholesale markets and sells it to gas suppliers – would bear the brunt of the hydrogen levy to fund market ramp-up.

Read more:UK Energy Act passed – with hydrogen levy attached

The government plans to introduce the GSO in 2028, aligning with the first hydrogen allocation round (HAR1) contracts to provide a “robust funding stream” for hydrogen projects that minimises the cost to energy users.

Clare Jackson, CEO of trade body Hydrogen UK, said the consultation came as a “crucial moment” for the hydrogen sector.

“Shippers play a central role in the gas market and so by placing a levy on gas shippers, costs can be spread across the vast majority of gas users,” the document reads.

However, in its own estimates, the government said the GSO would need to raise around £150m ($183m) per year from 2028 to fund its HAR1 contracts for 11 small-scale green hydrogen projects alone.

Under its proposed approach, the consultation paper estimated “this could add approximately £2.60-£4.50 ($3.18-$5.50) per annum to the average dual fuel household energy bill over the 10-year period we have assessed (2028-2037).”

At £2.60–£4.50 per year, the GSO’s initial impact on household energy bills is relatively minor compared to average annual energy bills, which currently stand at approximately £1,500–£2,000 ($1,830-$2,440) for dual-fuel households.

However, the HAR1 scheme offers £2bn ($2.44bn) in revenue support over 10 years to 11 projects that will boast just 125MW of hydrogen production capacity.

While the projected cost for HAR1 appears modest, the UK Government’s wider hydrogen ambitions – including support for major blue hydrogen plants and expanded HAR rounds to produce 10GW of low-carbon hydrogen by 2030 – could significantly increase future levies.

The government has also omitted the potential impact of the levy on industrial and commercial gas users, which could face higher costs depending on usage.

The GSO stands apart from other global funding mechanisms like the EU Hydrogen Bank and the US Inflation Reduction Act (IRA) in its design and impact. While the US and EU focus on direct subsidies and tax incentives to lower production costs, the GSO is structured to spread the cost across gas users, including households.

While the GSO ensures predictable funding over a decade, its impact on household and business energy costs raises questions about public acceptance as the UK scales up its hydrogen ambitions

Consultation on the proposed mechanism will be open until April 9, 2025.