Oxford Institute for Energy Studies – Can UK Green Hydrogen Contract for Difference Match the Cost-S

Contract for difference (CfD) has been successfully utilized in the electricity sector and has now extended into the hydrogen sector in the UK. The main goals of low carbon hydrogen CfDs are to reduce production costs and increase production capacity. However, there are significant limitations compared to renewable electricity CfDs. Green hydrogen faces challenges in driving cost reductions and managing risks effectively due to the dominance of operational costs, variability in electricity prices, immature supply chains, uncertain market prices, and potential emergence of cheaper alternatives. Additionally, the uncertain and developing market for green hydrogen poses challenges for fixed-price contracts, potentially leading to stranded assets if demand does not meet expectations. In contrast, renewable electricity provides a more secure environment for long-term contracts with established demand and predictable cost structures. The unique challenges faced by the hydrogen sector suggest that replicating the success seen in renewable electricity CfDs may be more difficult.