The UK government has proposed loosening requirements for its second round of its subsidised green-hydrogen auction scheme, which is due to be held in the last quarter of this year.

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The tender round — capped at 750MW — will award so-called Contracts for Difference (see panel below) to projects in early 2025 as part of a push to meet the government’s target of 1GW of installed capacity by that year.

The 20 shortlisted projects in the first 250MW Hydrogen Business Model (HBM) funding round were announced in March, with winning bids due to be selected in the final quarter of 2023.

But while the first round required projects to reach their commercial operation date by the end of 2025, the government suggests that the second will allow developers to choose a “delivery” year between 2026 and 2029 for when their project would become operational. This could particularly benefit large-scale projects struggling with supply chains and offtake agreements.

The UK's Department for Energy Security and Net Zero is also mulling extra financial support.

The first round allowed HBM bidders to also finance up to 20% of their projects by applying for capital-expenditure (capex) funding from the government’s £240m ($300m) Net Zero Hydrogen Fund (NZHF).

However, “a significant number of electrolytic projects wished to apply” for both capital and revenue support in future rounds, the government said, noting that this would require even more funding beyond the NZHF, which only runs to 2025.

While the first round supported only electrolytic hydrogen projects (ie, those using electrolysers to split water molecules into hydrogen and oxygen), the government is considering extending the second to include methane pyrolysis and biomass or waste gasification without CCUS (carbon capture, utilisation and storage), as long as the resulting H2 meets the same standard emissions intensity below 20g of CO2-equivalent per MJ (2.4kgCO2e/kgH2).

However, the proposal also raises the prospect that the government may decide not to fund biomass or waste projects due to limited feedstocks.

The government has also taken gas blending off the list of ineligible H2 offtake uses as it prepares to make its decision this year on whether to allow hydrogen into existing gas networks.

Its wider heating decarbonisation strategy — which will include a decision on hydrogen’s role versus electrification — is due in 2026.

Meanwhile, the UK is preparing to run hydrogen heating trials in domestic homes, with backlash from residents and local government in the areas proposed.

Hydrogen Contracts for Difference explained

The UK's Hydrogen Business Model fund offers winning bidders so-called Contracts for Difference (CfD) — a “variable premium price support model” that provides a subsidy representing “the difference between a ‘strike price’ reflecting the cost of producing hydrogen and a ‘reference price’ reflecting the market value of [grey] hydrogen [made from unabated fossil gas]”.

So if the price of grey hydrogen (which is related to the natural gas price) goes down, the subsidy would fall accordingly, with the opposite being true if the price rises.

The CfD also includes a “contractual mechanism to incentivise the producer to increase the sales price and thereby reduce the subsidy” and would provide “volume support via a sliding scale in which the strike price (and therefore subsidy) is higher on a per-unit basis if hydrogen offtake falls”.