Out-Law News 4 min. read
19 Aug 2021, 10:30 am
The UK hydrogen strategy sets out ambitious plans to grow the sector through a ‘whole-systems approach’, and sets out a roadmap for what government and industry need to do during the 2020s and beyond 2030 to establish a low-carbon hydrogen economy. That includes commitments to establish a UK ‘standard’ for low carbon hydrogen, and to build a sustainable financial and business model for the fledgling industry.
The strategy also considers the development of the network and storage infrastructure necessary to underpin a thriving hydrogen sector, as well as how to stimulate the end user demand. It proposes a ‘twin track’ approach supporting multiple technologies, including ‘green’ electrolytic and ‘blue’ carbon capture-enabled hydrogen production, as well as looking at the practicalities of mixing hydrogen into the existing natural gas supply.
It’s great that the huge potential of the low carbon hydrogen industry is being recognised
The strategy is accompanied by three consultations: on developing an emissions standard and methodology for low carbon hydrogen; on the design of a £240 million fund to support at-scale deployment of low carbon hydrogen production; and on a preferred business model to incentivise future investment. The proposed business model is based on the contracts for difference (CfDs) approach that the government used to establish the UK’s offshore wind market. The primary intention is to overcome the cost gap between low carbon hydrogen and that derived from fossil fuels, and to provide a more stable funding stream so that the projects become more easily investable.
The government is targeting 5GW of low carbon hydrogen production capacity by 2030 and with this then continuing to ramp up further through to 2050, as part of its plans to achieve ‘net zero’ emissions by that date. The 2030 target is the equivalent of the amount of gas consumed by over three million UK households each year.
Energy projects and decarbonisation expert Stacey Collins of Pinsent Masons, the law firm behind Out-Law, said that the strategy document was “the start of a journey” for the industry.
“The strategy is impressive in that it covers many aspects of the low carbon hydrogen value chain, as well as the challenges to be overcome to grow the market,” he said. “However, that theory needs to be turned into practice at pace if the government’s hydrogen aspirations and commitments are to be realised.”
“There is a clear intent for the UK to be a world leader on low carbon hydrogen, and to develop the market, jobs and expertise for potential export opportunities in the future. The figures in the strategy in terms of jobs and the potential scale of the UK hydrogen economy are significant. We’ve a long way to go before we are anywhere near the 100,000 jobs and £13bn market the government is aiming for by 2050, but it’s great that the huge potential of the low carbon hydrogen industry is being recognised,” he said.
“Although it’ll be disappointing to some that there is not much in the strategy that can immediately be acted upon, the three consultations launched alongside it show an immediate intent to move things forward and will provide project promoters with confidence on where government policy is headed. The consultation on a potential business model is particularly key, given that funding support will be needed to bring forward the major low carbon hydrogen projects already in development. However, we’re unlikely to see that business model finalised until later in 2022. That’s consistent with a number of decisions that are being scheduled to be made over the next two years. It would seem that we’ll have to wait until 2022-23 until there will be greater clarity on the direction of travel for the UK market, whilst the 2030 interim target edges closer,” he said.
Hydrogen could potentially be worth £900m to the UK economy and create over 9,000 jobs by 2030, rising to 100,000 jobs, £13 billion and 20-35% of the UK’s energy consumption by 2050, according to the strategy. As well as heating homes, low carbon hydrogen is seen as particularly important to the decarbonisation of energy intensive sectors that are dependent on fossil fuels such as chemicals, power and heavy transport like shipping, HGV lorries and trains.
It would seem that we’ll have to wait until 2022-23 until there will be greater clarity on the direction of travel for the UK market
Current UK and global hydrogen production centres on the use of steam methane reformation technology, where natural gas is reacted with steam to form hydrogen, producing carbon dioxide as a by-product. The strategy proposes supporting the production of ‘blue’ hydrogen, combining this process with carbon capture, usage and storage (CCUS) whilst also supporting the growth of green hydrogen production, where hydrogen is produced through electrolysis using electricity from renewables. A low carbon hydrogen standard will be developed in collaboration with industry to ensure that there is clarity on what constitutes ‘low carbon hydrogen’ which is important for availability of government support and more widely for achieving the UK’s net zero target.
The strategy also considers the potential benefits of low carbon hydrogen in decarbonising UK industrial sectors. It recognises that industrial users can create the most significant new demand for low carbon hydrogen by 2030 through industrial fuel switching, in alignment with the UK Industrial Decarbonisation Strategy. Recognising that low carbon hydrogen is a good option for processes reliant on high temperature heat or that are more expensive or harder to electrify, the government has announced further funds to support industry in switching to low carbon hydrogen or other low carbon fuels.
Developing low carbon hydrogen production at scale will require significant private sector investment, and the strategy considers how to create an attractive UK investment environment backed by demand-side incentives. Its proposed business model would offer a ‘variable premium’ price support mechanism based on ‘strike price’, as in the CfD model, and a reference price intended to represent the market value of hydrogen in the absence of an observable market benchmark. The government’s consultation sets out seven options for calculating the reference price. The proposed business model is technology neutral, and the government sets out its reasoning for this in the consultation. The government intends to announce its response to the consultation on the business model in the first quarter of 2022, and then aims to finalise the business model, enabling the first contracts to be allocated in the first quarter of 2023.
The government also intends to explore the potential for natural gas blending with hydrogen, working in conjunction with industry. This will involve assessment of the safety, technical feasibility and cost effectiveness of mixing 20% hydrogen into the existing gas supply, reducing emissions on natural gas by an estimated 7%. Further information on the government’s approach to reducing emissions in the built environment is expected soon in the delayed Heat and Buildings Strategy.
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