H2 offtakers, project design key for UK’s Carlton Power

UK-based Carlton Power is developing a portfolio of renewable hydrogen production plants in the UK for a variety of offtakers, including in the consumer product, mining and mineral sectors. Three of its projects were among 11 winners of subsidy contracts in the UK's first hydrogen allocation round (HAR1). Argus spoke to projects director Eric Adams to discuss the state of play in the UK hydrogen market and the key to success in the subsidy competitions. Edited highlights follow:

What are the priorities for Carlton Power in 2024?

We were really successful in HAR1, with three projects representing about 30pc of the share, so we are focused on bringing those to financial close and starting construction so we can provide hydrogen to offtakers from 2026. Those three are derisked, having secured planning permission, which was a big thing. Now we need to pull together all the bits and pieces we've been working on for the past 2-3 years, such as equipment supply, construction and design, and power purchase agreements (PPAs). We also need to sign the financing agreements in our joint venture with infrastructure investor Schroders Greencoat as the Green Hydrogen Energy Company — we announced the joint venture last year. Through their funds, they own about 10pc of all UK renewable energy assets so they can feed low-carbon electricity to the electrolysers. In parallel with that, we're participating in the government's second hydrogen allocation round (HAR2), which is running this year. We've announced two projects that we are looking to submit, one in Stirling and one with Kraft Heinz in Wigan, and we've got some other projects too. And as with everyone, we are keeping an eye on the future market for hydrogen — we would like to have a significant share of the UK market by 2030.

What is your approach to finding offtakers?

We've got a number of different sectors, but we want to work with forward-thinking organisations with clear goals for decarbonisation. They have processes that are particularly reliant on high temperatures, meaning hydrogen works for them rather than other options for decarbonisation. Kraft Heinz [at Kitt Green, Wigan], Kimberly-Clark [at Barrow-in-Furness] and Superglass [at Stirling] are such companies. We don't want to persuade someone that they need to use hydrogen; often they've already identified hydrogen as the only option or a primary option for decarbonisation. These companies are focused on making products, not on energy generation or making hydrogen. So we provide that low-carbon energy to enable them to continue their operations and have that risk taken away from them. And there's probably a benefit for their products with greener credentials, but there's still some uncertainty in how to monetise that — whether they can attract a higher price might depend on what markets they operate in. Sometimes offtake deals come down to physical constraints — we can have a committed offtaker, but then face challenges getting grid connections and land near their site. And sometimes we can get grid connections, but find there are no offtakers.

What challenges are H2 developers facing in the UK?

With all hydrogen projects, the primary challenge is finding a committed offtaker. It is relatively easy to get renewable energy, put it through an electrolyser and produce hydrogen. We do not have a hydrogen transportation network in the UK, so you have to build the pipeline yourself, and depending on where you are geographically, that can be a challenge. Or it could be tankers, but that adds to the cost because of compression. There is a general consensus that one of the biggest single challenges in the UK for decarbonisation is grid connection — to access power and also to enable more renewables to enter the system. There are areas where it is relatively easy to find grid connections, but they often don't have the industry to take hydrogen. Scotland is a good example, as it has a lot of curtailed wind power, but no large demand for hydrogen. Repurposing some of the existing gas network would help carry that energy to the point of use.

Has the UK done enough to help developers?

The government published a hydrogen roadmap and it has concluded HAR1, which is a real positive. It helps provide certainty for all the investments required in general for supply chain, workforce, skills, etc. The volume of projects from HAR1 and HAR2 will hopefully drive multiple investment decisions, so that in 10-15 years' time, the UK has a large fleet of equipment for hydrogen production and consumption and the infrastructure to maintain it. Having the defined process of the hydrogen allocation rounds will help to unlock that.

How did you set up projects to win three of the 11 contracts for difference?

We have been mindful all along about what makes a project investible — strong offtakers, land, planning permission, engagement with local stakeholders. The government's criteria focused on value for money and deliverability, so we focused on those two points when we structured PPAs, alongside sourcing the equipment, sizing the project correctly and getting offtakers. It is all those things together — there is no silver bullet. One big thing for us was getting the flexibility of operation on the electrolysers to allow us to respond to the availability of renewable energy in the market. There is a balance to be struck because operating an electrolyser 100pc of the time through the evening peaks will be expensive and there might not always be the availability of low-carbon electricity. But with a purely dedicated renewable energy facility — unless you oversize it — you are not producing hydrogen often enough to satisfy an offtaker. And remember, offtakers have to make a calculated decision about capital expenditure versus the benefit they get from avoided carbon costs, so you need to give them enough hydrogen or that impairs their investment decision. We are looking at running electrolysers probably two-thirds of the time and using hydrogen storage onsite to balance intermittent production with steady demand from the offtaker. We have a fleet PPA structure that ensures we get the electricity when we need it. We will draw on a pool of upstream renewable generation assets rather than drawing on a single asset somewhere. There is an element of trying to efficiently align how we use the electrolyser with how electricity markets work.