By the end of 2023, the Government should develop and implement an ambitious and pragmatic '10 year' delivery roadmap for the scaling up of hydrogen production. This roadmap should include detail on the plan for Track-2 decisions and should also include clear indication of how much capacity government hopes to procure through each future allocation round, including for electrolytic hydrogen, and how the UK will support growth of the electrolyser supply chain. |
317. A report for BEIS by Frontier Economics in 2020 concluded that a business model to provide revenue support to hydrogen producers would be more likely to achieve our objectives than alternative models of end user subsidies or obligations on fuel suppliers or end users.258 At the evidence roundtables hosted by the Review, stakeholders welcomed government's recent confirmation that it will take forward this model.
318. However, we have also heard from a range of hydrogen stakeholders, such as Hydrogen UK, that the Government is not moving quickly enough to legislate for this to avoid investment going elsewhere.259 It is crucial that deployment of this business model is not delayed.
319. Furthermore, in order to capitalise on our strong regulatory framework and continue competing for international investment, we must provide investors with long-term funding certainty.
320. The US recently introduced significant tax incentives as part of their Inflation Reduction Act to encourage hydrogen production and carbon capture technologies. This includes tax credits of up to $3.0/kg tax credit for hydrogen, and $85/ton for Carbon Capture and Storage (rising to $180/ton for Direct Air Carbon Capture).
321. Stakeholders are clear that this is part of the race to net zero, and will attract investment towards the USA and thus away from the UK. However, they have also reflected that the UK revenue focused model is equal to, or in some cases better than, the USA business model of tax credits, and that the UK regulatory environment is still more favourable than the US.260
322. However, stakeholders have told the Review that, in order to remain competitive, the UK must quickly match the long-term funding certainty that the Inflation Reduction Act has brought.
323. This Review therefore recommends that:
• Government should deliver hydrogen business models as soon as legislation allows, to provide Exchequer funding for hydrogen production and start awarding Hydrogen Business Model contracts to producers in order to rapidly scale production.
• Government must develop a long-term roadmap for hydrogen production.
324. Clear policy direction is vital for the growth of any new technology. In 2021, government published its Hydrogen Strategy, however we have heard from stakeholders that there has been a "lack of direction from Government on hydrogen strategy".261 This includes a lack of clarity on the plan for production beyond 2030, details on Track-2 allocation, and how the Hydrogen Production Business Model will be implemented.
325. The scale up of electrolytic hydrogen is dependent on electrolyser build rates and the supply of the critical raw materials required, but there is uncertainty in this area. Research shows that most of these materials are subject to a moderate to high supply risk and are concentrated in a small number of countries.262 Global competition is likely to increase for critical minerals, such as those used in Hydrogen technologies, and sustained supply constraints may lead to a slowing in down in the delivery of the UK's hydrogen ambitions. This is a concern that is being addressed through the UK's Critical Minerals Strategy.
326. This report therefore recommends that, by the end of 2023, the Government develop and implement an ambitious and pragmatic 10-year delivery roadmap for the scaling up of hydrogen production. This should be used to inform an overarching R&D roadmap, which we explore in Pillar 6.
327. This roadmap should include detail on the plan for Track-2 decisions and should also include clear indication of how much capacity government hopes to procure through each future allocation round, including for electrolytic hydrogen, and how the UK will support growth of the electrolyser supply chain.
328. This could also consider amendments to the Renewable Transport Fuel Obligation (RTFO) to encourage greater levels of electrolytic hydrogen production. For example, we have heard though the Call for Evidence that the additionality rules currently restrict hydrogen production:
"Producers should only have to prove that hydrogen is produced in the same one-month window as renewable electricity, rather than 30-minute windows as the RTFO consultation had proposed. This would maximise green hydrogen production at best value for money."263