Draft Hydrogen Production Revenue Support (Directions, Eligibility and Counterparty) Regulations 2023
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The Parliamentary Under-Secretary of State for Energy Security and Net Zero (Amanda Solloway)
I beg to move,
That the Committee has considered the draft Hydrogen Production Revenue Support (Directions, Eligibility and Counterparty) Regulations 2023.
The regulations were laid before the House on 8 November. On 26 October, the Energy Act 2023 received Royal Assent. It provides a legislative framework for hydrogen, including provisions that relate to the hydrogen production business model, which is a funding model for supporting the production and use of low-carbon hydrogen in the United Kingdom. Delivering that policy is essential to kick-starting the hydrogen economy and moving towards the Government’s ambition of up to 10 GW of low-carbon hydrogen production capacity by 2030, as set out in the British energy security strategy.
Under the business model, projects will be paid a subsidy for the hydrogen they produce through a revenue support contract, similar to the highly successful contracts for difference for low-carbon electricity generation. The business model contracts for hydrogen will be managed by a hydrogen production counterparty. Initial projects are to be selected through allocation rounds run by the Department for Energy Security and Net Zero. To receive business model support, a project must be an
“eligible low carbon hydrogen producer”.
Where such a project is allocated support, the Secretary of State will issue a direction to the hydrogen production counterparty to offer to contract with that project.
Hydrogen projects have already been shortlisted through the track-1, phase-2 cluster sequencing process and invited to negotiations for the 2022 hydrogen electrolytic allocation round.
I will now outline the detail of the regulations and their important role in all that. Fundamentally, the regulations satisfy the duty in section 66(4) of 2023 Act by determining the meaning of “eligible” in relation to a low-carbon hydrogen producer. They tell the world who can be eligible for support.
The regulations set out that only new hydrogen production facilities, or existing facilities that add new production capacity, which can demonstrate that their proposal for the production of hydrogen is capable of complying with the UK low-carbon hydrogen standard, will be considered eligible. That ensures that eligibility will keep pace with the way in which the Government define low-carbon hydrogen.
I recall that several amendments that were tabled during the passage of the 2023 Act sought to ensure that regulations on eligibility referred to the low-carbon hydrogen standard. I therefore hope that the regulations will be welcomed.
The regulations also set out the process whereby the Secretary of State may direct a counterparty to offer to contract with an eligible low-carbon hydrogen producer. That follows a similar approach to the contracts for difference, with which industry is very familiar.
Similarly, the regulations include requirements for a counterparty to publish the full contracts entered into and to establish a public register of key information. As we would expect, such publication is, of course, subject to redaction of confidential information and personal data.
The regulations set out various requirements in respect of the Secretary of State’s directions to a counterparty. They also include the circumstances in which directions cease to have effect, and enable the Secretary of State to revoke a direction before it has been accepted.
Furthermore, the regulations require a counterparty to promptly notify the Secretary of State if it is—or considers that it is likely to be—unable to carry out its functions. Committee members may think that such a provision sounds familiar, and indeed it is. It is a similar approach to that in the Nuclear Regulated Asset Base Model (Revenue Collection) Regulations 2023.
The Department has considered the content of the regulations extremely carefully. It carried out a full public consultation earlier this year, seeking views on the principles enshrined in the regulations and satisfying the statutory requirement to consult, as set out in the 2023 Act. We received 28 responses from various organisations and members of the public. We carefully considered all responses, though I am pleased to say that the majority supported our proposals.
Accordingly, in our Government response, published on 30 October, we set out plans to proceed largely as proposed, albeit with some amendments in response to the feedback received.
This secondary legislation represents an essential step towards implementing the hydrogen production business model to ensure that we can support the deployment of low-carbon hydrogen projects to achieve our 2030 ambitions, improve energy security and help achieve net zero.
I commend the draft regulations to the Committee.
Amanda Solloway
I thank right hon. and hon. Members for their valuable contributions. I will try to answer the questions succinctly and appropriately. If anything remains outstanding, I will write, as usual, with further information.
The hon. Member for Southampton, Test talked about the low-carbon hydrogen standard. Projects that seek support under the hydrogen production business model are required to show, as part of their application for revenue support, evidence that they are capable of meeting the UK low-carbon hydrogen standard.
The hon. Gentleman asked about the standard evolving over time. Regulation 2(6) makes clear that once a producer is deemed eligible under the regulations, they will not be subsequently rendered ineligible merely because of the publication of a new version of the low-carbon hydrogen standard. However, a direction issued by the Secretary of State pursuant to section 66(1) of the 2023 Act—
Amanda Solloway
Yes! The direction may require a hydrogen production revenue support contract to be offered on terms that require compliance with the later version of the standard.
To provide certainty for investors, we intend any review and updates to the standard to occur in advance of allocation rounds rather than during them. Where it is considered necessary to introduce updates during an allocation round—that is, in the period between the launch of the application window and contracts being awarded—we would aim, as part of the allocation or negotiation process, to provide projects with plenty of notice about any potential changes.
We propose that the review points for the low-carbon hydrogen standard should coincide with future contract awards through the hydrogen production business model. We would not expect any changes to be applied retrospectively to contracts that have already been awarded through these schemes. That means that the hydrogen production business model contract will not require producers to comply with any amendments made to the low-carbon hydrogen standard after the date on which the contract was signed. That will give producers confidence that the rules with which they will need to comply to receive support under the contract will not be changed retrospectively. Subject to the final contract terms and conditions, we expect that producers will be able to follow, where relevant, future changes to the LCHS, should they choose to.
Our ambition for the United Kingdom to have up to 10 GW of low-carbon hydrogen is both stretching and credible, and positions us at the front of the pack internationally. It will help us to realise a hydrogen economy that could potentially support over 12,000 jobs and result in up to £11 billion in private investment in the UK by 2030. Low-carbon hydrogen is considered to be an essential part of our future energy mix, and the hydrogen production business model seeks to address one of the key barriers to deploying low-carbon hydrogen: the higher cost of low-carbon hydrogen relative to high-carbon counterfactual fuels. We intend to launch the second hydrogen allocation round this year, following the announcement of the projects that were successful in the first hydrogen electrolytic allocation round.
The regulations are vital in enabling contracts to be awarded, so that projects can take investment decisions that will kick-start the deployment of low-carbon hydrogen production in the UK. I commend them to the Committee.
Question put and agreed to.