Show me the H2 money: the Gas Shipper Obligation for funding hydrogen production

Show me the H2 money: the Gas Shipper Obligation for funding hydrogen production

The foundations for various measures to stimulate the UK hydrogen sector, including the Hydrogen Production Business Model (“HPBM”) revenue support regime for hydrogen producers, were laid in the Energy Act 2023 (the “Act”) (see our Hydrogen Guide for background on the HPBM and the emerging hydrogen sector more broadly). An outstanding question remained on how the regime is to be funded.

On 16 January 2025, the Department for Energy, Security and Net Zero (“DESNZ”) published a consultation on the design of the Gas Shipper Obligation (“GSO”), a levy on natural gas shippers, being one of the two potential sources of funding the HPBM (the other being general taxation). The consultation seeks input on the potential scope, impact, operation and administration of the GSO. Here we consider the main characteristics of the GSO and some of the key aspects raised in the consultation.

Source of funding for LCHA liabilities

As a reminder, the HPBM is the revenue support regime similar to that offered to other generators in the UK – such as the Contracts for Difference for renewable electricity generators (the “CfD” scheme) and the Dispatchable Power Agreement for carbon-capture-enabled power generators (the “DPA” scheme). It is designed to give supported hydrogen producers revenue certainty (by “topping up” their revenues where the price at which they can sell hydrogen falls below a contractual “strike price”), in particular while their costs are greater than those of longer-established competitors. Each supported hydrogen producer will enter into a “Low Carbon Hydrogen Agreement” (“LCHA”) with a designated independent market administrator (currently envisaged to be the Low Carbon Contracts Company, “LCCC”), under which LCCC will be required to pay the relevant revenue top-up payments.

What is the GSO?

Just as the HPBM is similar to the CfD scheme, the GSO is broadly similar to the mechanism by which the CfD and DPA schemes are funded. The GSO will operate by way of a statutory obligation on natural gas shippers to pay their share of the amounts that LCCC will need to meet its payment obligations under LCHAs. However, unlike in the CfD and DPA contexts, the costs of the GSO will ultimately be borne by natural gas consumers rather than electricity consumers.

Who will bear the cost of the GSO?

In the first instance, the obligation to make payments to LCCC under the GSO will apply to gas shippers in Great Britain. These are companies, licensed under the Gas Act 1986, that buy natural gas from producers, arrange with gas transmission and distribution network operators for the conveyance of that gas over their networks and then sell gas to the retail suppliers from whom consumers ultimately purchase their gas. DESNZ assumes that the gas shippers and gas suppliers will pass through all of these costs to their customers (though it is testing that assumption with stakeholders), such that GSO will ultimately increase gas bills for consumers.

DESNZ proposes to publish an annual Signal Forecast regarding the extent of the total costs to be recovered under the GSO to help gas shippers provision for their obligations under the regime when setting prices.

The application of the GSO to equivalent entities in Northern Ireland remains under DESNZ consideration in light of the differences in the markets and regulatory regimes for natural gas between Great Britain and Northern Ireland.

What will be funded via the GSO?

The consultation confirms DESNZ’s intent for the LCHAs for at least the first Hydrogen Allocation Round (“HAR1”) to be funded via the GSO once it comes into effect, which is expected to be in 2027. Until then, LCHAs will be funded via general taxation.

DESNZ intends for all LCHAs in future HARs to be funded via the GSO. DESNZ also expects amounts raised via the GSO to cover the administrative costs of:

• LCCC in operating LCHAs; and,
• Any future body appointed to administer the award of LCHAs in future HARs.

What factors is DESNZ considering in designing the GSO?

The central purpose of the GSO is to ensure that LCCC has enough money to make all of the payments that hydrogen producers are entitled to under their LCHAs. Alongside this, DESNZ’s stated objectives for the design of the GSO include affordability for consumers, simplicity and alignment with industry precedent, avoiding unintended consequences (such as increasing fuel poverty, increasing the cost of producing blue hydrogen or destabilising energy markets) and scalability and flexibility to accommodate future change.

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Show me the H2 money: the Gas Shipper Obligation for funding hydrogen production, source

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