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Net Zero Hydrogen Fund, Strands 1 and 2: Accounting officer assessment 2022 (HTML)

Updated 12 June 2023

Department for which the accounting officer who made the assessment is responsible:

Department for Business, Energy and Industrial Strategy

Project title:

Net Zero Hydrogen Fund, Strands 1 and 2

Main scheme project stage:

Full Business Case approved by BEIS Portfolio and Investment Committee: March 2022

Scheme launch date: April 2022

Introduction

It is normal practice for Accounting Officers to scrutinise significant policy proposals or plans to start or vary major projects, and then assess whether they measure up to the standards set out in Managing Public Money. From April 2017, the government has committed to make a summary of the key points from these assessments available to Parliament when an accounting officer has agreed an assessment of projects within the government’s Major Projects Portfolio.

This Accounting Officer Assessment considers the Net Zero Hydrogen Fund (NZHF) Strands 1 and 2. Following the approval of the outline business case. I have made the assessment as the Accounting Officer for the Department for Business Energy and Industrial Strategy (BEIS).

Background and context

The UK government is committed to achieving Net Zero by 2050.

Announced in November 2020 in the Prime Minister’s Ten Point Plan for a Green Industrial Revolution, the Net Zero Hydrogen Fund (NZHF) will provide up to £240 million of government co-investment to support new commercial low carbon hydrogen production out to 2025, kickstarting efforts to deliver our ambition to have 10GW of low carbon hydrogen production capacity in the UK by 2030.

Hydrogen is one of a handful of new, low carbon solutions that will be critical for the UK’s transition to net zero. Low carbon hydrogen could be a versatile replacement for high carbon fuels used today – helping to bring down emissions in vital UK industrial sectors and providing flexible energy for power, heat, and transport.

The flagship Net Zero Hydrogen Fund is part of a comprehensive package of measures set out alongside the Hydrogen Strategy, kickstarting our efforts in the 2020s to deliver our GW ambition by supporting commercial production of new low carbon CCUS-enabled and electrolytic hydrogen.

Assessment against the Accounting Officer standards

Regularity

No new financing mechanism is required to deliver Strands 1 and 2 which will rely on the Industrial Development Act 1982 (IDA). Strands 3 and 4 may be catered for under the bespoke spending power provided under the forthcoming Energy Bill, due to receive Royal Ascent in spring 2023. It would be possible to deliver Strands 3 and 4 using the IDA if there is any delay with the Energy Bill. Confirmation of spending power for Strands 3 and 4 will be provided once it is certain which route will be used.

The NZHF has completed a Delivery Model Assessment to ensure Commercial Assurance, it received a ‘Green’ rating and approval of its decision not to procure an outsourced delivery partner. The NZHF has established its delivery model for Strands 1 and 2 (UKRI and CGL). Additional procurements, such as for M&E consultancy support to develop fund evaluation plans, will be procured in line with government Commercial Function guidance.

Overall assessment: My assessment is that the regularity test is satisfied.

Propriety

The NZHF Programme has been approved at both Strategic Outline Business Case and Outline Business Case stage by the BEIS Projects and Investments Committee as well as HMT’s Treasury Approval Panel. The Programme has received all the required Cabinet Office Commercial Spend Controls.

Delivery partners for Strands 1 and 2 are both established with strong credentials in delivering public funding and as such both have robust governance and counter fraud measures in place to manage public funds in compliance with Managing Public Money guidance.

Applications will go through a robust appraisal process to reduce the risk of fraudulent or misleading applications being supported. Grants will be awarded via a detailed grant funding contract which will be agreed with BEIS Legal Services and issued by the BEIS Central Grants and Loans team for Strand 1 and 2 projects. Agreements set out circumstances where grant will be withheld or partially or fully recovered. Project delivery and monitoring includes detailed grant claims supported by independent Accountants Reports to validate expenditure and employment outputs before any grant is paid over. Monitoring officers will undertake regular site visits as part of the monitoring process to further reduce the opportunity for fraudulent claims. All grants are paid retrospectively, so applicants must defray expenditure then claim back a proportion of it in the form of grant. The NZHF team has also conducted a Fraud Risk Assessment and have completed the recommended actions.

Funding has been secured via the SR21 process for Strands 1 and 2 of the NZHF scheme which will allow delivery of the programme to meet the objectives of this key intervention to support Net Zero.

Overall assessment: My assessment is that the propriety test is satisfied.

Value for money

The Net Zero Hydrogen Fund (NZHF) forms part of a package of measures to build the low carbon hydrogen economy. The value for money assessments for NZHF Strands 1 and 2 were set out in the Full Business Case. NZHF Strands 3 and 4 will work alongside the hydrogen business model and its underlying funding mechanism, the Industrial Decarbonisation and Hydrogen Revenue Support (IDHRS) scheme. The value for money assessments for NZHF Strands 3 and 4 are therefore covered within the IDHRS AoA.

The rationale for intervention is because the UK market alone will not deploy low carbon hydrogen production at the scale or pace needed to meet our Net Zero commitments as set out in law. The NZHF aims to address barriers relating to low carbon hydrogen production. Production barriers are linked to the following market failures: nascent markets and imperfect information, first mover disadvantage, and the negative externality of the social cost of carbon.

The cost benefit analysis conducted for the NZHF Strands 1 and 2 Full Business Case quantified the key costs and benefits to society of delivering the NZHF relative to a counterfactual of no NZHF support. This counterfactual assumes other support mechanisms and funds (including IDHRS, the CCUS Programme and end-use sector policies) continue to be developed and are implemented. Therefore, the counterfactual considered potential gaps in support due to coverage, sequencing, and timing of different policies. In addition to the preferred option which provides support for both development expenditure (DEVEX) and capital expenditure (CAPEX), the following options were also appraised: CAPEX support only and DEVEX support only. Both the preferred option and the CAPEX only option had a positive Net Present Social Value (NPSV) and benefit to costs ratio (BCR) of greater than 1, whilst the DEVEX only option had a negative NPSV.

Monetised costs included DEVEX, CAPEX, OPEX, fuel costs from hydrogen production, financing costs and administration costs. Monetised benefits included air quality benefits, reduced carbon emissions, and reduced energy costs from the fuels displaced by hydrogen.

A number of non-monetised benefits were also identified relating to finance barriers and developing the market (for example, cost reductions due to learning and supply chain development). NZHF projects will also support jobs and create GVA.

The preferred option (DEVEX and CAPEX support) and CAPEX only options generated similar NSPV and BCR estimates when compared to a ‘Do Nothing’ option. However, it was identified that the preferred option will also deliver significant qualitative benefits from its DEVEX support that a CAPEX only support scheme would not provide. There was also uncertainty regarding the scale of benefits that a CAPEX only support scheme could realise. Therefore, the DEVEX and CAPEX support option was deemed to represent the best value for money and offer the greatest support to industry in order to deliver further benefits, and was therefore was selected as the preferred option.

During the assessment and shortlisting process projects will also undergo an individual value for money assessment to ensure that they meet Accounting Officer standards and the minimum requirements of public funding. This value for money assessment will be composed of quantitative cost-effectiveness and cost-benefit analysis as well as qualitative analysis. Any projects that do not pass this assessment will not receive funding.

Overall assessment: My assessment is that the value for money test is satisfied.

Feasibility

NZHF is a complex programme and as such it presents many technical, financial, and operational risks. The programme was subject to IPA standard Gateway Reviews to confirm on the programme’s readiness to move onto the next phase and provided confidence in delivery subject to the completion of recommendations.

The delivery of the NZHF programme is a combined effort between industry, BEIS and other organisations including other government departments and arm’s length bodies. BEIS officials are working closely with our delivery partners to support their readiness.

Overall assessment: My assessment is that the feasibility test is satisfied.

Conclusion

As the BEIS Accounting Officer, I have considered this assessment of Net Zero Hydrogen Fund, Strands 1 & 2 and approved it on 3 March 2022

I have prepared this summary to set out the key points which informed my decision. If any of these factors change materially during the lifetime of this project, I undertake to prepare a revised summary, setting out my assessment of them.

This summary will be published on the government’s website (GOV.UK). Copies will be deposited in the Libraries of the House and sent to the Comptroller and Auditor General and Treasury Officer of Accounts.

Sarah Munby
Permanent Secretary, BEIS
3 March 2022