The UK government should explore introducing a split Contract for Difference or premium payment to support the deployment of low carbon hydrogen, according to a new report.
Such models are preferable to applying a backstop or guaranteed purchase of the gas as consumers are exposed to high payments under such systems, the study by Frontier Economics concluded.
The research found that if applying the same business case for multiple technologies, the CfD-style or revenue stabilisation mechanism would be easier.
Several technologies including electrolysis with grid electricity and dedicated renewables were assessed in the report, which was commissioned by UK Energy Department BEIS.
The work focused on near term investments that will incentivise low carbon hydrogen production from project of over 100MW.
“Indexing support payments to the input fuel price should be considered further,” added the study.
“It could reduce investor cost of capital, though at the same time it would transfer additional risks to taxpayers and bill payers. Indexing may be particularly helpful if a revenue stabilisation approach is taken, to avoid placing excessive input cost risk on investors.”