Trade bodies Hydrogen UK and RenewableUK are urging the government to overhaul its green hydrogen plans to reduce the cost of hydrogen by almost 60%.
In a new report, the associations made 11 recommendations that could slash electrolytic hydrogen prices by lowering electricity costs, which account for around 70% of the final cost of green hydrogen.
If implemented, the bodies say electrolytic hydrogen costs – currently £241/MWh (£8.02/kg) under its first hydrogen allocation round (HAR1) – could fall below £100/MWh (£3.33/kg).
Read more: UK Government selects 11 green hydrogen projects for £2bn of revenue support
“This report, a combined effort from the trade associations, marks pivotal steps towards achieving our national goals in energy security and clean energy transition by making hydrogen an economically viable option,” said Hydrogen UK CEO, Clare Jackson.
The report calls for the government to reform its key hydrogen subsidy scheme, the hydrogen production business model (HPBM). This scheme provides producers with a fixed revenue stream to cover the gap between production costs and an agreed-upon strike price.
In HAR1, 11 projects secured a strike price of £241/MWh for 125MW of electrolysis capacity, representing £2bn of revenue support over 10 years.
However, the bodies argue that “realistic strike prices” are essential to attract new market entrants.
The report also calls for incentives for electrolysis “at the time and place when electricity is cheapest,” such as periods of high renewable generation when electricity demand is low.
The UK’s expensive renewable electricity is a major barrier to reducing green hydrogen costs, with the country’s power prices consistently higher than those in mainland Europe.
A combination of grid congestion, network charges and an auction system that locks in older, higher-cost renewable contracts has kept prices elevated, despite a growing share of renewables capacity.
The report also stresses the need to remove barriers to allow hydrogen producers to co-locate projects with renewable energy generators that already have planning consent.
Furthermore, it outlines the need for a strategy to develop hydrogen pipeline networks linking renewables-rich Scotland to England and Wales to “optimise the availability of green hydrogen.”
Additionally, it calls for grid connection charges to be reduced.
Dan McGrail, Chief Executive of RenewableUK, said that enacting the report’s key measures would allow the UK’s hydrogen industry to reduce costs and deliver long-term economic benefits to the country.
“This report shows that to realise this strong potential, the government will need to work with RenewableUK and Hydrogen UK to establish innovative business models to attract private investment, including strike prices which reflect the fact that this technology is still at an early stage, and incentives for developers to build electrolysers alongside wind and solar farms to cut costs,” he said.
The report comes after the UK Government opened a consultation on its proposed long-term hydrogen funding mechanism, which raised questions about how the costs of decarbonisation will be shared across society.
Under government plans, the Gas Shipper Obligation (GSO), which will be used to fund the hydrogen levy, would need to raise around £150m per year from 2028 to fund the 125MW of HAR1 contracts alone.
Read more:Consultation opens on UK hydrogen levy, raising questions on future costs
This in turn could add up to £4.50 per annum to the average dual-fuel household energy bill, the government said.
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.
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