Unstable hydrogen strategy is shifting projects to other shores
The Inflation Reduction Act 2022 (IRA) was passed just over a year ago in the United States and has already shown how investment of government money is a fantastic way to stimulate development. The IRA allows for billions of US dollars’ worth of tax credits to be applied towards US domestic renewable energy production, including for hydrogen. Estimates are that $391bn will be spent over the decade ending in 2031 though some investment banks think this will be materially higher.
In the UK, however, estimates show investment in the energy transition fell by ten per cent in 2022 and, in relation to hydrogen, the government has not deviated from its already announced hydrogen strategy in answer to the IRA. Where the US has taken the simple approach of throwing money at the problem, the UK has so far struggled to keep apace.
The Clean Hydrogen Production Tax Credit introduced in the US allows for a ten-year incentive for a clean hydrogen tax credit up to $3.00/kilogram. Hydrogen projects can also choose to claim up to a 30 per cent investment tax credit and the Renewable Energy Production tax credit. Not only is this generous subsidy critical to driving down the price of hydrogen but, as projects must begin construction by 2033, projects are encouraged to start construction sooner rather than later.
It is estimated that the US has spent $40bn in the first 12 months of the IRA and that the private sector has invested $270bn in that time, with 50 per cent coming from companies headquartered outside the US. In this context, 115 hydrogen projects have been announced since Biden’s inauguration and 11 hydrogen projects have already reached final investment decision. In other words, the IRA has successfully incentivised the private sector to make investments, and the interest is as much international as it is domestic.
Many jurisdictions have responded by updating their own incentives. These include new pots of funding, regulations to improve efficiency and new trade strategies.
For example, in the EU the Green Deal Industrial Plan and the Green Deal Industrial Plan for the Net Zero Age have put hydrogen at the core of the EU’s strategy and allowed for new opportunities for companies to benefit from state aid and other financial support. State aid rules are being relaxed temporarily until 2025, and the EU is setting up a hydrogen bank to direct more funding into the sector.
While difficult to total the funding amounts under the different initiatives, the funding can be estimated broadly as the sum of €250bn of the Recovery and Resilience Fund for the green transition and the amount of €270bn is still available through REPowerEU (the EU plan to reduce dependence on fossil fuels and fast forward the green transition).
The UK has not been able to match the scale with which the US or EU have injected funds into the development of green energy, and especially hydrogen. Nonetheless, progress is being made with the Hydrogen Business Model Scheme, with an announced shortlist of 20 green hydrogen projects to receive the first round of revenue support from the scheme.
These projects represent 408MW of electrolytic hydrogen capacity, and the UK Government expects to award contracts in Q4 2023 totalling up to 250MW in capacity on the basis of affordability and value for money. The first such project would become operational by 2025. The amount of support for the first 250MW of projects was determined in the October 2021 Net Zero Strategy to be up to £100m. The next contract round to be launched later this year will provide contract awards of up to 750MW in 2025.
In terms of other monetary commitments, the UK Government has allocated £19.4m to five novel technologies to move them closer to commercial deployment and £21.2m to five separate projects to turn biomass into waste. Grant funding has also been increased by £185m and certain feasibility projects have been given funding to advance to phase two with £49.7m of further funds. Additional funds are specifically earmarked towards the maritime and aviation sectors.
However, this highlights that despite the smaller size of the UK, the numbers remain in the millions of pounds rather than in billions of US dollars or euros. It also shows that projects can only access public finances after wading through a large amount of bureaucratic red tape to ensure that projects are selected for funding, awarded grants and encouraged from the ground up.
Proponents of the UK approach would argue that there is a well thought through strategy that creates lots of distinct buckets in order to encourage development of hydrogen projects across the value chain. However, perhaps the US approach of throwing money at the problem and the EU approach of clearly highlighting sums available might appear more attractive to those seeking more certainty of government support for their projects.
Victoria Judd is a multispecialist financing lawyer at Pillsbury.
