The UK government has launched a consultation on tax reforms, aiming to remove the Climate Change Levy (CCL) from electricity used in hydrogen production. This move is part of a broader effort to modernise the tax system and support the shift to low-carbon energy, with a particular focus on clean hydrogen. Currently, businesses producing hydrogen through electrolysis face additional costs due to the CCL, which was introduced in 2001 to encourage energy efficiency and emission reductions. However, with hydrogen seen as crucial for decarbonising heavy industry and transport, ministers argue that these charges are outdated and counterproductive.
The government’s push to scrap CCL costs for hydrogen production aligns with its broader strategy to foster economic growth and energy transition. “Charging businesses extra for producing hydrogen, especially when powered by renewables, makes little sense when the country is trying to cut emissions,” a minister stated. Hydrogen is increasingly seen as a game-changer for industries that are difficult to electrify, such as steelmaking, chemicals, and heavy transport. When produced using renewable electricity, it is classified as ‘green hydrogen’—a fully clean energy source. Even hydrogen made with low-carbon electricity from nuclear or gas with carbon capture can significantly reduce emissions.
However, producing hydrogen through electrolysis is highly energy-intensive, and the current CCL charges add to the production costs. In 2023-24 alone, the CCL raised £1.2 billion, with energy suppliers collecting the tax from businesses and the public sector. To scale up hydrogen production, the government believes these outdated charges need to go. Removing the levy on electricity used for electrolysis would lower production costs and attract investment into the sector.
Alongside the tax review, the government has already pledged significant financial backing for hydrogen projects. At the Autumn Budget 2024, ministers confirmed £90 million in capital grants for 11 projects through the first Hydrogen Allocation Round (HAR1). These projects will also receive revenue support under the Hydrogen Production Business Model, designed to bridge the cost gap between hydrogen and fossil fuels. The HAR1 projects, spread across the UK, will drive investment into local economies and boost clean energy jobs. The first contracts under HAR1 have now been signed, marking a milestone for the sector. Removing the CCL costs on electrolysis will further strengthen the UK’s position as a leader in hydrogen technology and support long-term growth.
The consultation aims to ensure the tax system is fit for purpose as energy markets evolve. With renewables playing a much bigger role in the energy mix, policies need to be updated to reflect these shifts. The government is seeking views on how best to remove CCL costs from hydrogen production without causing unintended consequences. They are also looking at whether other parts of the levy system need updating to better support the transition to clean energy. With the UK targeting net zero by 2050, tax policy will need to adapt to ensure businesses are incentivised to invest in green technologies rather than penalised for using them.
The government is inviting industry leaders, hydrogen producers, and stakeholders to have their say on the proposals. Ministers want to make sure the reforms strike the right balance between cutting costs for clean energy producers and maintaining a fair tax system. The consultation is now open, and the outcomes could significantly shape the future of the UK’s hydrogen sector and its broader energy landscape. This move is not just about tax reform; it’s about sending a clear signal to the market that the UK is serious about its net-zero commitments and ready to back clean energy technologies with concrete actions. The debate sparked by this consultation could redefine how the UK approaches energy taxation and support for emerging technologies, setting a precedent for other countries grappling with similar challenges.
