The Department for Energy Security and Net Zero has released a Market Engagement document to seek views on the proposed design of the second Hydrogen Allocation Round (HAR2) which will allocate funding to low carbon hydrogen projects in a move towards enhancing the UK’s Net Zero commitments. The document also sets out a timeline for the round. A launch briefing will be held on Thursday 25 May.
Background into Hydrogen Allocation Rounds
In December 2022, the Heads of Terms for the Low Carbon Hydrogen Agreement were published. These Heads of Terms were draft terms for the agreement for the Hydrogen Production Business Model (HPBM). Following this, the Government confirmed their support for electrolytic hydrogen projects of up to 250mw through the first Hydrogen Allocation Round (HAR1) in March 2023.
Building on HAR1, the Government hopes that applications for the second Hydrogen Allocation Round (HAR2) will soon open, with the aim of supporting up to 750mw in 2025, subject to affordability and value for money (VfM).
Strategic objectives for HAR2
The Department for Energy Security and Net Zero have set numerous objectives for the second allocation round such as kickstarting the low carbon hydrogen economy, helping meet the ambition of up to 1GW of electrolytic hydrogen capacity in operation or construction by 2025, as established in the British Energy Security Strategy.
Moreover, the Government hopes to establish frameworks to put the market on a pathway to deliver cost reductions and VfM. Cost reductions are a notable change from HAR1 – the Government asserts that this positions HAR2 as a transitional round to a more price-based competitive allocation mechanism from 2025, with a longer term aim in bringing down the Levelised Cost of Hydrogen (LCOH).
Therefore, the Department for Energy Security and Net Zero is seeking views on the proposed design of HAR2 across the following areas:
- Proposed eligibility and evaluation criteria
- Project requirements
- Proposed delivery approach
- Co-locating with a government-subsidised renewable electricity source
The proposed process has also been set out. Building on HAR1 this would take the following structure:
- Eligibility check: Assessors will confirm the application meets the defined eligibility criteria
- Deliverability assessment: Applications which pass the initial eligibility check will move on to the deliverability assessment, to ensure projects meet the minimum deliverability score before going on to full assessment against a set of evaluation criteria.
- Evaluation: Applications will be assessed against the remaining criteria. These criteria will recognise the costs, and wider benefits and impacts of a hydrogen project. Projects will receive a total weighted score, including the deliverability score, with the highest scoring projects ranked first.
- Agreeing an offer: Involves value for money assessment, bidding pathways, best and final offers
- Award of contract: Successful projects will be awarded. This is subject to application of any final portfolio factors and integration checks. More information on the process will be shared in the guidance for applicants document which will be published alongside the launch of HAR2.
Three workshops will also be held. These will focus on eligibility and evaluation criteria, along with the role of capital expenditure support (CAPEX) as HAR2 will allocate revenue support via the Hydrogen Production Business Model (HPBM).
Proposals outlined in this document will take into account any Market Engagement responses, as well as ongoing policy developments within the Government. A response to the Marketing Engagement document will be released by the Department for Energy Security and Net Zero in Autumn 2023, ahead of the round launching.
In a commitment to achieve Net Zero, the Government’s Marketing Engagement document on the second Hydrogen Allocation Round sets out a detailed consultation process on an extensive plan concerning low carbon hydrogen projects.