Understanding the Barriers to Final Investment Decisions in Hydrogen and eFuel Developments
The UK’s decarbonisation agenda has prompted a surge in hydrogen and eFuel projects. However, despite numerous announcements, only a few have progressed to the Final Investment Decision (FID) stage. The challenge lies in demand uncertainty, not supply potential, as the market for green hydrogen struggles to materialise at scale.
Haush explores why many hydrogen projects stall before reaching Final Investment Decision “FID”, with the regulatory and infrastructure challenges hindering progress, and how to secure more off-take agreements. We also highlight three regulatory burdens facing the UK’s hydrogen sector and examine whether current government incentives are sufficient to support a power-to-X transition by 2030.
The Demand Problem: Why Hydrogen Projects Stall Pre-FID
Although the UK is well-positioned to scale up green hydrogen production, the demand-side challenges remain a major bottleneck. The lack of off-take agreements for long-term hydrogen purchases, coupled with regulatory uncertainty, hampers investor confidence.
Some of the key issues include:
- Low demand signals across industries, particularly road transport.
- High production costs of green hydrogen, are made worse by strict regulations on renewable energy sources.
- Infrastructure limitations due to the difficulty of accessing the national grid for green energy and hydrogen producers.
The result is a first-mover disadvantage, where early investors face higher risks in an immature market without guaranteed long-term demand.
Key Regulatory Barriers in the UK Hydrogen Market
The UK hydrogen industry faces three significant regulatory and market barriers that are preventing a rapid scale-up:
1. Low Quotas for Hydrogen and eFuels
The UK government has set a target of 10 GW of low-carbon hydrogen production by 2030 as part of its Hydrogen Strategy, but there are no sector-specific mandates or quotas to drive hydrogen demand in key sectors. In a previous article Haush have examined, Low Emission Zones (LEZ) and Ultra Low Emission Zones (ULEZ) in cities like London impose stricter emission standards for vehicles, yet these measures have primarily encouraged electric vehicle (EV) adoption, rather than hydrogen-powered alternatives.
While these zones could become a demand driver for hydrogen-powered buses and heavy goods vehicles (HGVs), the government has not yet leveraged these tools to create substantial hydrogen demand. The transport sector, particularly road transport, represents a significant opportunity for hydrogen adoption, but the current policy framework lacks the necessary incentives to accelerate this transition.
Solution: The UK should introduce higher national quotas for hydrogen in sectors like road transport and industry. The road sector, especially HGVs and buses, is an untapped market where hydrogen could play a crucial role in decarbonisation. Additionally, LEZ and ULEZ should include specific hydrogen-related incentives, such as carbon credits and purchase subsidies, to encourage the adoption of hydrogen-powered vehicles.
2. High Green Hydrogen Production Costs and Grid Access Issues
The production of green hydrogen in the UK remains costly, primarily due to the reliance on electrolysis powered by green energy (wind, solar). Current estimates place the cost of producing green hydrogen as high as £5.00 to £7.00 per kg, depending on the scale of production and access to renewable energy and economical electrolysers.
A key issue driving up costs is the restrictive criteria for renewable energy sourcing. Hydrogen producers face additional challenges in ensuring that their electricity comes from time-matched, 100% renewable sources, adding complexity and cost. Moreover, the limited capacity of the UK’s national grid to accommodate large-scale green hydrogen projects further exacerbates the issue. currently over 1,100 renewable energy projects, including wind and solar, that are delayed in the grid connection queue, many facing wait times extending well beyond 2030. This delay affects around £200 billion worth of green energy projects, threatening the country’s ability to meet its net-zero targets. For example, roughly 40% of these projects are waiting at least one year for a grid connection, while others may have to wait until the mid-2030s. Delays in grid connections and the need for significant infrastructure investment prevent hydrogen producers from scaling up quickly.
Solution: The UK government should consider significant investment in expanding the national grid capacity, ensuring that green hydrogen projects can access renewable electricity more easily and at lower costs.
3. Limited Focus on Niche Markets
The focus on aviation and maritime as key markets for hydrogen overlooks the largest potential market: the road transport sector. While hydrogen has been touted as a solution for long-haul transportation and shipping, these are niche markets with slower demand growth. In contrast, the road sector, especially HGVs, buses, and even public transport fleets offers a much larger and more immediate market for hydrogen.
However, hydrogen infrastructure for road transport, particularly refuelling stations, remains underdeveloped. The Hydrogen for Transport Programme, which allocated £23 million to refuelling infrastructure and £20 million to hydrogen fuel cell trucks, is far too small to create the necessary infrastructure to support a large-scale transition to hydrogen. This insufficient funding undermines the broader effort to create energy security and a hydrogen-ready transport system.
Solution: The UK should expand its investment in hydrogen refuelling infrastructure, increasing the funding significantly to match the scale of demand required to decarbonise the road transport sector. By prioritising the road sector and offering better incentives for hydrogen-powered vehicles, the UK can stimulate hydrogen demand and attract investment in production capacity.
Updated UK Hydrogen Strategy and Support Mechanisms
The UK government has developed several mechanisms to support hydrogen production, including the Hydrogen Strategy, Net Zero Hydrogen Fund (NZHF), and the Hydrogen Allocation Rounds (HAR). However, there are still questions about whether this support will be sufficient to drive the hydrogen market forward.
Hydrogen Strategy Updates
The UK’s Hydrogen Strategy, launched in 2021, initially set ambitious targets for 5 GW of low-carbon hydrogen production by 2030, but this is seen as a starting point. In 2024, the UK government is expected to update the strategy with higher targets and clearer pathways for hydrogen use in various sectors, including transport, industry, and heating. However, without binding quotas or stronger incentives, demand growth may remain sluggish.
Net Zero Hydrogen Fund (NZHF): Will it Continue Beyond 2025?
The NZHF provides £240 million in funding from 2022 to 2025 to support green hydrogen projects. While this fund is crucial for early-stage project development, industry experts have raised concerns about whether this level of funding is enough to scale up production to meet 2030 targets. There are calls for an extension of the fund beyond 2025, as well as increased funding to ensure larger hydrogen projects can access capital.
Hydrogen Allocation Rounds (HAR): Pricing and Future Expectations
The Hydrogen Allocation Round 1 (HAR1) was launched in 2023, providing long-term revenue support to low-carbon hydrogen projects under the Hydrogen Business Model. The 11 projects have been agreed at a weighted average strike price of £241/MWh (£175/MWh in 2012 prices), providing hydrogen producers with certainty in the early stages of market development having attracted £413 million of private capital invested between 2024-2026
HAR2 and HAR3, expected to take place in 2024 and 2025, will likely see higher prices due to increased demand for renewable hydrogen and rising production costs, where HAR3 will be up to 750 MW, (370,000 kg/d on average) which is too low given that projects need to be at least 100 MW per producer to benefit from economies of scale and purchasing power. We need at least 2GW by 2030 just to meet the demand for HGV if 10% transition to Hydrogen in the UK.
RTFO and RTFC: Current and Future Prices
The Renewable Transport Fuel Obligation (RTFO) requires fuel suppliers to incorporate renewable fuels, including green hydrogen, into their fuel mix. Hydrogen producers can generate Renewable Transport Fuel Certificates (RTFCs), which fuel suppliers must purchase to comply with their obligations.
- The current price of RTFCs is around £0.25 per kg of green hydrogen.
- Prices are expected to increase to £0.40-0.50, and potentially more per kg by 2030 as demand for renewable fuels rises under stricter decarbonisation mandates.
Carbon Credits and UK Emissions Trading Scheme (UK ETS)
Green hydrogen producers in the UK can also benefit from carbon credits under the UK Emissions Trading Scheme (UK ETS). Current carbon credit prices fluctuate between £45-60 per tonne of CO₂, but as carbon reduction targets tighten, prices are expected to rise to £80-100 per tonne by 2030.
For hydrogen producers, this translates to an additional revenue stream, particularly for those whose hydrogen displaces high-emission fuels in industrial processes.
Current and Future Off-Take Agreements: Demand Potential
Off-take agreements are crucial for securing investment in hydrogen projects. The road transport sector and industrial processes are likely to be the primary off-takers of green hydrogen:
Transport Sector:
Hydrogen-powered HGVs and buses could consume over 100,000 kg/day of hydrogen by 2030, particularly if refuelling infrastructure expands and carbon credits make hydrogen more cost-competitive. If 10% of HGV’s transition to Hydrogen in the UK by 2030, this can be as much as 1m kg/d.
Industrial Off-Takes:
Large industrial players, such as British Steel, Tees Green Hydrogen project led by EDF Renewables UK and Hynamics along with other chemical manufacturers, are expected to demand 200,000 kg/day of hydrogen by 2030 as they transition away from fossil fuels.
In the UK, several hydrogen off-takers have been announced across a variety of sectors, including transportation, industry, and energy. These off-takers are key to stimulating demand for hydrogen and driving the development of the hydrogen economy. Haush has looked at some of the currently announced hydrogen off-takers in the UK:
Transportation Sector
The transportation sector is expected to be a significant off-taker for hydrogen, particularly for heavy-duty vehicles such as buses, trucks, and trains.
First Bus (Aberdeen and Glasgow)
Off-take potential: First Bus has incorporated hydrogen fuel cell buses into its fleet as part of its commitment to decarbonisation. Aberdeen, known for its “Hydrogen Hub,” has deployed several hydrogen buses, and Glasgow is following suit. These buses can consume several tonnes of hydrogen per day.
Alstom & East Midlands Railway
Off-take potential: Alstom, a leading rail manufacturer, is developing hydrogen-powered trains for the UK. Alstom’s Coradia iLint trains are being trialed, with East Midlands Railway planning to use hydrogen trains by the late 2020s. Hydrogen trains could consume several tonnes of hydrogen per day, depending on the scale of the rollout.
JCB and Wrightbus
Off-take potential: Both JCB and Wrightbus are developing hydrogen-powered heavy vehicles, with Wrightbus deploying hydrogen buses in UK cities. Recently announced, around 10% of buses in Wrightbus’ mammoth deal for 1,200 vehicles with the UK’s Go-Ahead Group could be its hydrogen-powered offerings, This could drive daily hydrogen demand, especially as these buses scale up in major urban areas like London, Birmingham, and Manchester.
ZeroAvia (Aviation)
Off-take potential: ZeroAvia is developing hydrogen-electric engines for aviation and plans to introduce hydrogen-powered commercial flights by the late 2020s. Initial off-take for hydrogen in the aviation sector could range from hundreds of kilograms to several tonnes per day as small and regional aircraft begin adopting hydrogen.
UK Local Authorities
By 2025, 13 of the 317 Local authorities, that are transitioning to hydrogen, their demand for hydrogen forrefuse collection vehicles alone is estimated to be around 2,324 kg/day. By 2030, with full fleet deployment, the demand is expected to grow to approximately 4,648 kg/day, this does not include back-to-base vehicles.
Industrial Sector
The industrial sector, particularly energy-intensive industries, is expected to be a major hydrogen off-taker as it seeks to decarbonise.
British Steel (Scunthorpe)
Off-take potential: British Steel has announced plans to use hydrogen in its steelmaking process to reduce carbon emissions. Hydrogen could replace coke and coal as a reducing agent, potentially consuming thousands of tonnes of hydrogen per day once fully integrated.
Tata Steel (Port Talbot)
Off-take potential: Tata Steel is also exploring hydrogen as a way to decarbonise its steelmaking operations in Port Talbot. Like British Steel, Tata’s hydrogen demand could be in the range of several tonnes per day in the medium term, scaling up significantly in the long term. However, the recent closure announcements by Tata have made this very unlikely.
CF Fertilisers (Teesside)
Off-take potential: CF Fertilisers is working on incorporating green hydrogen into its ammonia production process at its Teesside plant, which would require significant amounts of hydrogen, potentially hundreds of tonnes per day.
Glass Manufacturing (Pilkington)
Off-take potential: Pilkington, a major glass manufacturer, has trialled hydrogen-fired furnaces at its St Helens plant. If hydrogen is adopted more widely in glass production, daily hydrogen demand could reach hundreds of kilograms to tonnes.
Energy Sector
Hydrogen is also being used as part of the energy sector’s efforts to decarbonise and ensure energy security.
Equinor & SSE (Keadby Hydrogen Power Station)
Off-take potential: The planned Keadby Hydrogen Power Station in Lincolnshire, developed by Equinor and SSE, will be the UK’s first hydrogen-fueled power station. When operational, it could consume 1,800 tonnes of hydrogen per day to produce 1.8 GW of electricity.
ScottishPower (Whitelee Windfarm)
Off-take potential: ScottishPower is developing a green hydrogen project at Whitelee Windfarm, the UK’s largest onshore windfarm. The hydrogen produced will be used for a variety of applications, including transport and industrial uses, with an off-take potential of several tonnes of hydrogen per day.
BP (Teesside Net Zero Hydrogen Project)
Off-take potential: BP’s Net Zero Teesside Hydrogen Project aims to produce blue hydrogen (using carbon capture) to supply industrial clusters in Teesside. The off-take potential here is significant, with industries expected to consume several tonnes of hydrogen per day.
Maritime Sector
The maritime sector is also exploring hydrogen as a cleaner fuel option for ships and ferries.
Cory Group (Hydrogen-Powered River Transport in London)
Off-take potential: Cory Group, which operates a fleet of barges along the River Thames, has announced plans to use hydrogen to power its fleet as part of its decarbonisation strategy. This could require several hundred kilograms of hydrogen per day initially, with the potential to scale up.
Hydrogen Hubs and Clusters
Aberdeen Hydrogen Hub
Off-take potential: Aberdeen is a pioneer in the UK’s hydrogen economy, with its Hydrogen Hubsupporting buses, HGVs, and public fleets. Daily demand could grow to several tonnes as the hub expands.
Tees Valley Hydrogen Transport Hub
Off-take potential: The UK government has designated Tees Valley as a Hydrogen Transport Hub, where heavy vehicles, industrial applications, and public transport could become significant hydrogen off-takers, consuming multiple tonnes of hydrogen daily.
Growing Demand for Hydrogen Off-Takers
While off-take agreements and demand signals are still emerging, these announced off-takers across the transport, industrial, and energy sectors represent the initial wave of hydrogen adoption in the UK. As these projects scale up and hydrogen becomes more competitive, demand could surge to thousands of tonnes per day across the UK by 2030, offering hope for the development of a robust hydrogen economy.
Is Government Support Sufficient for the Power-to-X Transition by 2030?
While the UK government’s initiatives such as the NZHF, RTFO, and HAR provide a solid foundation for green hydrogen production, they may not be enough to drive the necessary scale of investment by 2030. Without stronger demand signals and more aggressive infrastructure investment, the market for green hydrogen could remain underdeveloped.
Solving the Demand Problem
To unlock the full potential of green hydrogen in the UK and accelerate the power-to-X transition by 2030, the UK must:
- Set higher national quotas for hydrogen in key sectors such as transport and industry.
- Increase funding for hydrogen refuelling infrastructure to ensure energy security and facilitate the transition to hydrogen-powered transport.
- Relax restrictive production criteria to lower the cost of green hydrogen and make it more competitive with fossil fuels, particularly by upgrading the National Grid which will bring forward permitted supply that is only able to access the grid way beyond 2030.
By addressing these regulatory and infrastructure challenges, Haush believes that the UK can stimulate demand for green hydrogen, attract more investment, the Final Investment Decision “FID”, securing more off-take agreements and its position as a leader in the global hydrogen economy.
The post We Have a Green Hydrogen Demand Problem – Not a Supply Problem first appeared on Haush.