The UK's destination? Net Zero. Its arrival time? 2050. The Climate Change Act 2008 (as amended in 2019) set this target, but will, Lucinda Robinson asks, the UK achieve it? The government's Ten Point Plan for a Green Industrial Revolution, published in November 2020, set out a commitment to channelling £12 billion of public money, and three times that amount of private investment, to generate a green recovery. The second of the Ten Points is "Driving the Growth of Low Carbon Hydrogen", cementing hydrogen's place as a key part of the UK's journey to Net Zero.
The UK Hydrogen Strategy (released in August 2021) is the self-proclaimed roadmap, directing the UK towards unlocking the potential of hydrogen as a major sustainable energy source this decade. It is certainly ambitious. Currently, there is almost no production of, or demand for, hydrogen. The vision for 2050 is a "booming" hydrogen market, supporting over 100,000 jobs and providing around 35% of the UK's energy supply. The interim target is the production of 5GW of low carbon hydrogen capacity by 2030, supporting 9,000 jobs. The Hydrogen Strategy boldly asserts that the UK will be at the forefront of hydrogen technology use and demand. It sees the UK as an international leader in this field as it is with windfarms. Fuelling all of this is the imperative of this generation, the quest for Net Zero to (putting it bluntly), save the planet.
There is huge scope for innovators and investors to participate in this drive towards a hydrogen economy because there is a lot to do in a short space of time; 2030 is less than a decade away. The key features of the UK Hydrogen Strategy are summarised here.
Creating a Market - Supply
Innovation and investment in the design and construction of the technology and plant needed to produce hydrogen is essential. These are some of the principal ways the government is seeking to encourage private investment in the development of a hydrogen market.
Hydrogen Business Model
Investors need to be assured of a decent return on their investment, so to attract private investment, the government will provide some level of revenue support, particularly at the outset when costs of production are high, but demand and revenue generation are low. Exactly how the business model will work is subject to a consultation, the paper for which was published at the same time as the Hydrogen Strategy. The intention is that hydrogen production facilities will benefit from some form of subsidy to manage the risk. Five alternatives are suggested, with the government's current preference for a sliding scale mechanism similar to the contracts for difference model. The expectation is that this would help to cover upfront and fixed costs until volumes supplied and purchased increase and revenue is sufficient to enable to the amount of support to reduce.
Net Zero Hydrogen Fund
A further investment incentive is the £24 million Net Zero Hydrogen Fund announced in the Ten Point Plan. The number of new low carbon hydrogen projects will have to escalate in the early 2020s if the UK is to reach its 5GW production target for 2030 and that will require private sector investment. This fund aims to combine public and private funding to support the anticipated new CCUS-enabled and electrolytic hydrogen projects and related FEED studies, focusing on those that could realistically result in hydrogen production this decade.
A consultation on the Net Zero Hydrogen Fund was launched at the same time as the Hydrogen Strategy, seeking views on the scope of the fund, eligibility criteria, technologies capable of meeting it, and the effectiveness of capital grant funding.
"Twin Track" Approach
Whilst all of this demonstrates that the government is keen to support the supply of hydrogen, it falls short of specifying exactly how hydrogen should be supplied. The actual technologies and how they can be scaled up from the current pattern of small-scale hydrogen technology is unclear. What is clear is that, unlike the EU, the government intends to support both "blue" and "green" hydrogen. It calls this the "twin track" approach.
"Blue" hydrogen production is where hydrogen is produced using fossil fuel methods, but the carbon that would otherwise be released is captured and stored. The process is often referred to as "CCUS", standing for carbon capture, utilisation and storage. Investment in blue hydrogen causes some controversy because it continues to support the non-renewable sector. The government's retort is that blue hydrogen production is essential if the UK is to hit its target by 2030 because the technologies are more advanced so more readily deployed in the early 2020s.
"Green" hydrogen is made from the electrolysis of water, ideally using renewable energy sources such as windturbines to power the process. It is considered to be the most sustainable form of hydrogen production and favoured by many on this basis. The UK government is concerned that it will take too long to develop green hydrogen technologies at scale and that blue hydrogen options will have to assist with reaching the target in the interim.
The UK Hydrogen Strategy demonstrates a clear commitment to supporting investors and innovators in the hydrogen production space, whether blue or green. Initially, early adopters are expected to set up small electrolysers linked to the end use for that power supply. For example, small facilities could be developed close to industrial sites they power, with larger hydrogen projects supporting larger industrial clusters as the decade progresses.
Creating a Market - Demand
The Hydrogen Strategy identifies the creation of a demand as another obstacle to be navigated. It refers to hydrogen's "chicken and egg" problem of needing to generate demand and supply simultaneously, as one cannot succeed without the other.
It is anticipated that demand may be driven by the evolution of the hydrogen networks and the storage infrastructure, which will provide alternative power supplies for industry in the first instance and then businesses and consumers over time as hydrogen becomes more available and familiar. The strongest demand up to 2030 is expected to come from industrial users, as manufacturing plants and then industrial centres consider using onsite or local hydrogen facilities as their energy source.
Looking ahead outside of industry, plans are afoot, for instance, to assess the safety, technical and cost implications of introducing hydrogen into the gas system and for a street, then a village and eventually a town to be powered exclusively by a hydrogen distribution network.
In terms of incentives to switch to or adopt hydrogen energy sources, the Hydrogen Strategy focuses on industry first as the expected early adopter. Its initiatives to help foster demand include (i) carbon pricing which increases energy costs to industry for supplies of unsustainable sources and thereby encourages the businesses to adopt low carbon energy sources; (ii) financial incentives including the £315m Industrial Energy Transformation Fund schemes; (iii) a Low Carbon Hydrogen Standard to reassure users that the hydrogen they are purchasing is indeed low carbon and (4) sector specific policies to encourage the adoption of low carbon hydrogen.
At present, numerous regulatory regimes impact on hydrogen projects, from (for example) planning, safety, environment and sector specific spheres. It is not easy for trailblazers in emerging markets to navigate the various regulatory regimes set up for other markets. Furthermore, regulatory barriers to the development of new hydrogen projects and uncertainty around the regime going forwards may detract investors. The government intends to review and assess the regulation of hydrogen and will need to provide clarity on what the framework will be as early as possible to encourage investment.
Full Speed Ahead
Underpinning the UK Hydrogen Strategy is the government's acceptance that it needs to generate a hydrogen economy fast if it is to cut carbon emissions significantly by 2030 and then 2050.
The intent and the ambition are there. The Hydrogen Strategy takes a holistic approach, looking at the full ambit of a hydrogen economy from technology design, investment, production, infrastructure and end user. It makes significant financial commitments to supporting the innovation and investment. There will be a regulatory framework. However, given the number of unknowns pending the consultations, and inability to see the future, the government has not been overly prescriptive as to how the new hydrogen economy will work. Instead, it has retained some flexibility by identifying the principles that will guide future policy, including value for money for taxpayers and cutting emissions whilst growing the economy.
The government has provided a roadmap, but now it must build the road. It must progress the consultations, ensure the resulting decisions are attractive to investors and can be implemented swiftly. Then the private sector will need to step up and put their cars on the road. The opportunity is there, in the planned consultations, for investors to influence how the business model and finance for future hydrogen projects will work and there are (and will be) significant incentives to invest.
Will the roadmap take us to destination Net Zero? It is going in the right direction - let's hope it stays on track.
This article is taken from Fenwick Elliott's 2021/2022 Annual Review. To read further articles go to Fenwick Elliott Annual Review 2021/2022
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