Can UK green hydrogen contract for difference (CfD) match the cost-saving success of renewable electricity?

Contract for difference (CfD) entered the hydrogen sector as a natural extension of their successful application in the electricity sector. In the UK, low carbon hydrogen CfDs are primarily focused on two key objectives: reducing the costs of hydrogen production and scaling up production capacity. This raises the question of whether these contracts will be as effective as their counterparts in the electricity sector. We argue that Hydrogen CfDs face significant limitations compared to the more established renewable electricity CfDs, particularly in their ability to drive cost reductions and manage risk effectively. First, while renewable electricity projects benefit significantly from fixed-price contracts by reducing capital costs, this impact is less likely for green hydrogen, where operational costs are more dominant. Second, hydrogen CfDs place greater cost risks on producers due to the variability of electricity prices and immature supply chains. Offtakers also face higher risks given the uncertainty in green hydrogen market price development and the potential emergence of alternative, cheaper solutions. In contrast, renewable electricity CfDs provide a more balanced risk allocation with established markets and more predictable cost structures. Third, the uncertain and developing market for green hydrogen poses a significant challenge for fixed-price contracts. The potential for stranded assets is higher if demand does not materialise as expected. Renewable electricity, with its established demand, presents a more secure environment for long-term contracts. Finally, investors typically use fixed price long-term contracts as a way to hedge against price volatility. However, in presence of demand uncertainty, hedging strategies that focus on price stability offer little protection. Therefore, the unique challenges of the hydrogen sector-specifically around cost structures, risk distribution and uncertain market demand-indicate that the success seen with in renewable electricity CfDs may not be easily replicated in green hydrogen.