Government confirms hydrogen to power business model

On 9 December 2024, the government published its response to its consultation on what market interventions are required to accelerate the deployment of hydrogen to power (“H2P”). The response confirms that market intervention will be in the form of a Hydrogen to Power Business Model (“H2P BM”) based on elements of the Dispatchable Power Agreement (“DPA”) designed for power CCUS but adapted for H2P.

This article sets out key takeaways from the consultation response and next steps.

DPA style business model for H2P 

The government’s response confirms it will proceed with a DPA style business model for H2P. The DPA, as currently designed for power CCUS is a private law commercial contract based on the CfD standard terms and conditions. It is designed to incentivise natural gas fired power plants to install and operate carbon capture equipment and then ensure these gas-fired power CCUS facilities can dispatch ahead of unabated gas generation in the merit order. 

The power CCUS DPA provides two types of payments: (i) a regular availability payment based on plant availability regardless of dispatch and (ii) a variable payment to help cover running costs and reduce short run marginal costs compared to unabated gas generation. 

The government’s assessment is that a DPA for H2P could reflect elements of the power CCUS DPA, including potentially both types of payment, but with detailed design to vary to account for the differences between the technologies. The government intends to provide more detail on proposed design in Spring 2025 and undertake further market engagement. 

Security of supply and hydrogen infrastructure

The government considers H2P as key to ensuring future security of supply alongside CCUS and LDES as a low carbon, long-duration flexible technology. According to government, ‘it can provide continuous output to manage periods of extended wind droughts when connected to large-scale hydrogen storage and transport. In doing so, H2P can act as a replacement for unabated gas for the residual and longer periods where renewable generation is not able to meet demand.’

As set out in the consultation document, the government believes that the peak rate of hydrogen consumption from medium to larger sized power plants will likely require hydrogen to be delivered via pipeline. The hydrogen economy will therefore be heavily reliant on the availability of large-scale geological storage and accordingly large volumes of stored hydrogen.

H2P in the Capacity Market 

The government acknowledges consultation feedback that the Capacity Market (“CM”) may struggle to support H2P in the short-term given its higher first-of-a-kind technology costs. For example, concerns were raised about fuel availability in a nascent hydrogen economy in the context of CM non-delivery penalties. The government will however look to allow H2P to compete in the CM as soon as practicable and expects a limited number of plants to come forward in the medium-term. 

In a separate consultation on proposals to change the CM to maintain security of supply, the government has also put forward a strategic role for H2P in the CM as a decarbonisation pathway or ‘managed exit’ for unabated gas generation. 

Hydrogen regulations and standards stocktake 

On 9 December 2024, the government also published a stocktake on the development of regulations and standards for hydrogen combustion equipment used in the industry and power sectors. The stocktake aimed to improve understanding of ongoing work across the sector, identify risks and evidence gaps in the development of regulations and standards and support knowledge sharing. The stocktake sets out roles and responsibilities for various regulations as well as the current work taking place for the use of hydrogen in the industry and power sectors. 

Next steps

The government will publish a H2P BM market engagement document in Spring 2025 outlining their approach to designing the H2P BM in more depth. Government will also be shortly establishing a H2P Expert Working Group to provide a forum to pool knowledge from industry experts to seek feedback on policy proposals and support decision making. Experts interested in joining should email hydrogenpower@energysecurity.gov.uk.