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...Request free
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The Parliamentary Under-Secretary of State for Energy Security
and Net Zero ()
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.
2.34pm
(Southampton, Test)
(Lab)
It is a pleasure to serve under your chairmanship, Mr Gray. You
chaired a substantial part of the proceedings on the Energy Bill
and you will therefore be well aware of the consequences of that
labour of Hercules that we undertook between us to get the
measure on the statute book. The statutory instrument is one of
the first to follow from the 2023 Act.
As the Minister explained succinctly, the regulations cover the
process whereby the hydrogen low-carbon business plan is
implemented during the initial allocation period of contracts for
hydrogen producers in order to achieve our target of 10 GW of
hydrogen production. As the Minister also said, qualifying
schemes have already been substantially identified through
track-1, phase-2 of the cluster process. Schemes will be
identified and quality-assured by the Minister, who will then
direct the hydrogen counterparty, which is identical in structure
to the low-carbon contracts company, to provide contracts for
companies that have been deemed eligible. So far, so good. That
is absolutely the right thing to do to develop the outline in the
Act into some detailed legislation to make the whole thing work,
particularly the initial allocation process.
The explanatory notes state that the initial allocation gives way
to a competitive tender process later. The directions therefore
concern the initial allocation process in the first instance, but
they are all to be informed by the centrepiece of the SI—the
low-carbon hydrogen standard, which is generally called “the
standard” in the regulations. It refers to a detailed document,
which sets out the greenhouse gas emissions and sustainability
criteria that programmes that apply for an allocation contract
should follow.
The document is entitled, “UK Low Carbon Hydrogen Standard” and
was published in April. It is interesting to note that the
standard rightly provides for stringent qualifying criteria for a
project’s eligibility. For example, it requires a project not to
exceed a certain level of carbon emissions, and to measure
fugitive hydrogen for its duration, the process whereby hydrogen
is produced, transport and other things. It is a system-wide
standard for the low-carbon nature of the hydrogen.
For a project to get a direction from the Minister to be awarded
a contract by the hydrogen counterparty, it must comply with the
standard when it receives agreement to proceed. However, as hon.
Members will have observed, that standard is evolving. Indeed,
the standard to which the SI refers is version 2 of the “UK Low
Carbon Hydrogen Standard”. That version has evolved from the
initial standard, which was produced immediately after the Act
was passed. Version 2 has emerged from consultation and
correction of various elements of the initial standard that could
have caused difficulties, and has tightened up several matters
that were uncertain, difficult or in need of clarification.
The document and the explanatory notes say that it is intended
that the standard will evolve. That means that the Department
envisages that it will produce further iterations of the standard
in future. The low-carbon hydrogen standard as it currently
stands may therefore change. That is fair enough given that we
want the standard to progress, but a question then arises. If a
company or body wishes to get a low-carbon hydrogen contract,
what are they signing up for when they apply? Clearly, the
companies that sign up want to comply with version 2 of the
standard, but they will not necessarily comply with versions 3 or
4. Those companies will presumably want some assurance that they
will not be knocked out of their contracts if the standard
evolves.
(Hereford and South
Herefordshire) (Con)
I am grateful to the hon. Gentleman for his careful rehearsal of
the background, but surely the regulations contemplate a series
of private law contracts, the circumstances and detail of which
will be whatever is agreed under the law. Why is he pressing the
Minister on this matter now? Does he believe that the law is
defective?
Dr Whitehead
No, I do not think that the law is defective, but, as I have
tried to explain, it is evolving as the contracts are given out,
possibly into a different form. That is an inevitable consequence
of the 2023 Act being distilled into secondary legislation. As
the process has gone on, the standard has evolved. My central
question is whether the Minister is clear that companies that are
compliant with the current standard can safely put in their bids
for contracts under that standard, and will not be disadvantaged
should it change in the future. I think the regulations contain
provisions giving the Minister some discretion in that
respect.
Conversely, if the terms are relaxed in a future iteration of the
standard—I do not anticipate this happening—and compliance
becomes less onerous with regard to carbon emissions, for
example, might companies that are already contracted ask to sign
up to the new less onerous version and continue their contract?
This is evolving and it can go in two ways.
I am grateful for this clarification, although obviously the
Minister will want to speak for herself and for the Government.
It does not sound as though the hon. Gentleman opposes the
regulations— he may wish to comment on that—but is he not
flagging a difference between the evolution of the law, by
further amendment in statutory instruments considered in
Committee, and evolution of a contractual situation that operates
within that process? If it is the latter, any Government can give
an indemnity against future changes to the rules if they wish,
but it is not unknown for people to sign a contract and then,
further down the track, think, “If only I’d struck this contract
earlier. I’d’ve got a better deal,” or vice versa. Is that not a
matter of private law and negotiation between the parties, and
why is it a matter for this Committee?
Dr Whitehead
It is a matter for this Committee inasmuch as the standard is the
centrepiece of how the regulations will work, but that standard
is itself evolving. Contracts are being given as this piece of
law is evolving. Obviously, contract law applies to those
contracts, which bind the company applying for the contract to a
certain standard of operation, which may well put the company to
quite a lot of expense and planning. It is a bit like a boxer
going into training and having to reach the weight for the
upcoming fight, and having reached it, then having to keep to
that weight after the fight takes place, because that is the
continuing standard for their operation.
What methods of verification, challenge and judgment will be used
to determine whether companies are continuing to adhere to the
standard, once the standard has been set in the contract? That is
my final question for the Minister. Is she satisfied that that
will work well? As the low-carbon standard evolves, it may well
be a case that a company says, “Well, that’s my hard luck,
because I signed up for something that was a bit more onerous
than it is now, but I ought to stick to it anyway,” or is the
Minister suggesting that companies could relax their adherence to
the standard if the standard itself is relaxed? Indeed, the
regulations suggest that the Minister can or may—the famous
“may”—do that if she so desires.
If the right hon. Member for Hereford and South Herefordshire is
in any doubt, I stress that we do not oppose the SI and we want
it to succeed. There is a provision, which does not always apply
in regulations, that the SI comes into force tomorrow. I am sure
that we will all happily agree to that. As soon as we have agreed
to the regulations, they will come into force so that the
contracts can be pursued.
It is important that we are clear about how the standard works on
an evolving basis, but I do not wish to impede the issuing of the
contracts or the forward march of hydrogen production and use in
future.
2.50pm
(Inverclyde) (SNP)
I shall keep my remarks short and sharp. It does not mean that
the Minister will like them, but at least they will be brief. I
turned up for this Delegated Legislation Committee at six o’clock
last night, so I cannot be accused of being late to the show, but
I think that the UK Government can. In 2021, the UK was ranked as
the second most attractive market for hydrogen, but the UK
Government’s lack of commitment means that the UK is now ranked
eighth. It has slipped behind Germany, Japan and Canada. That is
because the UK Government continually change their attitude to
renewable energies.
The UK Government’s ambition is 10 GW by 2030. I hope that the
Minister can tell me what will kick on after that. What is the
final ambition? By when? The Scottish Government have an
ambitious hydrogen plan to produce 5 GW by 2030 and to increase
that to 25 GW by 2045. They are investing £100 million in the
development of Scotland’s hydrogen economy. If the UK invested at
the same scale, we would be looking at a bare minimum of £1
billion. Will the Minister clarify what the financial investment
will be? The Government cannot continue at a pedestrian pace.
My concern is that lack of ambition is restricting our ability to
create a net zero environment. The UK target is 2050; Scotland’s
is 2045. I hope that the Minister will allay my fears. What do we
kick on to after 10 GW? When will that happen and how much will
it cost the taxpayer?
2.52pm
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—
Dr Whitehead
I am anticipating the word “may”.
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.
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