BEIS report proposes CfD model for hydrogen

The Contracts for Difference (CfDs) model has been identified in a new government report as a favoured option for stimulating a UK low-carbon hydrogen industry.

A study, submitted by consultancy Frontier Economics for the Department for Business, Energy and Industrial Strategy, examines the different business models for encouraging production.

The report, published today (17 August) says that contractual support may give investors more perceived certainty than providing regulated returns because the latter offers scope for appeals to the Competition and Market Authority or the courts.

It says contracts like CfD, could either provide a premium on top of market revenue from the sale of low-carbon hydrogen or guaranteed returns to producers by top-up payments.

Under this revenue stabilisation model, producers receive a fixed payment on an ongoing basis, which gets topped up if revenues do not meet the level of an agreed strike price or pay back to bill or taxpayers if the opposite is the case.

In a new field, such as low-carbon hydrogen production, the report says investors may consider that a contract provides greater certainty.

However, Frontier cautions that a regulatory regime may be simpler to set up than a contractual model, which would require further institutional capability to assess the level of payments required to cover costs.

According to the report, contractual and regulatory approaches should not be considered mutually exclusive and hybrid approaches should also be considered.

Both contractual and regulatory models, as well as hybrid approaches, are worth investigating further, it says.

During the upcoming decade, both models could help to deliver low-carbon hydrogen production, which the report says would be “more difficult” to incentivise through end-user subsidies or obligations in the near term.

An obligation scheme guaranteeing purchases of the low-carbon fuel could expose consumers to “potentially very high payments” per unit of hydrogen produced and therefore not limit costs to bill or taxpayers.