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Draft Hydrogen Production Revenue Support (Directions, Eligibility and Counterparty) Regulations 2023

Debated on Tuesday 12 December 2023

The Committee consisted of the following Members:

Chair: James Gray

† Britcliffe, Sara (Hyndburn) (Con)

† Cairns, Alun (Vale of Glamorgan) (Con)

† Cowan, Ronnie (Inverclyde) (SNP)

† Fletcher, Mark (Bolsover) (Con)

† Gibson, Peter (Darlington) (Con)

Greenwood, Margaret (Wirral West) (Lab)

† Hart, Sally-Ann (Hastings and Rye) (Con)

Hodgson, Mrs Sharon (Washington and Sunderland West) (Lab)

† Howell, Paul (Sedgefield) (Con)

† Kniveton, Kate (Burton) (Con)

† Mishra, Navendu (Stockport) (Lab)

† Norman, Jesse (Hereford and South Herefordshire) (Con)

Sobel, Alex (Leeds North West) (Lab/Co-op)

† Solloway, Amanda (Parliamentary Under-Secretary of State for Energy Security and Net Zero)

† Tracey, Craig (North Warwickshire) (Con)

† Wakeford, Christian (Bury South) (Lab)

† Whitehead, Dr Alan (Southampton, Test) (Lab)

Kevin Maddison, Committee Clerk

† attended the Committee

Fourth Delegated Legislation Committee

Tuesday 12 December 2023

[James Gray in the Chair]

Draft Hydrogen Production Revenue Support (Directions, Eligibility and Counterparty) Regulations 2023

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.

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.

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?

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?

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.

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?

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—

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.

Committee rose.