Britain’s hydrogen strategy | Pillsbury Winthrop Shaw Pittman LLP
The UK has pledged to achieve net zero carbon emissions by 2050. To achieve this goal, decarbonize UK ‘hard to electrify’ industrial sectors and provide flexible energy for heating, electricity and transport , the United Kingdom is focusing on the development of its hydrogen infrastructure. Hydrogen can also be used as energy storage to solve intermittency issues associated with renewables such as wind and solar on the grid. The strategy supports the UK’s decarbonization goals by setting out a series of UK government commitments that define how the UK will deliver on its vision of a low carbon hydrogen economy.
The strategy foresees that the UK will rapidly and significantly increase hydrogen production and lay the groundwork for a low-carbon hydrogen economy by 2030, and details how the UK government will support innovation and stimulate investment in the sector. The strategy is focused on the short-term achievement of specific objectives: 5 GW of low-carbon hydrogen production capacity with potential for rapid expansion after 2030; and plans to see 1 GW of generation capacity by 2025. Not only is the focus on short-term goals, but the strategy also details how the UK will develop supply chains and skills needed to achieve these goals, as well as to create jobs and export opportunities for the UK. In addition, the strategy includes infrastructure plans to support the scale-up of the UK hydrogen grid and storage infrastructure needed for a UK hydrogen economy. The Hydrogen Strategy’s “whole system” approach is unique among the country hydrogen roadmaps announced so far and is specifically aimed at promoting foreign investment.
Development of a business model for hydrogen
The strategy proposes the development of a hydrogen business model (the hydrogen business model) and provides for a revenue mechanism to provide directed funding. The aim of the business model is to revive the industry by attracting investment from the private sector. A major barrier to the hydrogen economy is that the production and sale of hydrogen is currently more expensive than most high carbon alternative fuels. In the absence of government incentives, private investors may not choose to invest in low carbon hydrogen projects due to the uncertainty of obtaining a return on their investments. The hydrogen business model, which is still under development, will provide income support for hydrogen producers to close the initial cost gap between low-carbon hydrogen and higher-content fuels. in carbon, with the aim of enabling producers to price hydrogen competitively and encourage private sector investment in hydrogen. projects.
The preferred approach to close the price gap is a “variable premium” model where the hydrogen producer receives a premium for the hydrogen produced. The premium is calculated as the difference between an exercise price and a reference price (i.e. the market price) for each unit of hydrogen sold. This mechanism is similar to the “contract for difference” approach which has been successfully deployed for low-carbon electricity production assets. The exercise price covers the production cost foreseen by the producer and below this price, the difference between the market and production costs is constituted by the revenue regime. If the market price exceeds the strike price, the producer will have to reimburse the excess to the government.
The strategy also contains provisions for volume support to ensure that adequate capacity exists, whether or not there is demand. This could take the form of capacity payments or government contracts to purchase specified amounts of hydrogen, for example. After launching a consultation on the hydrogen business model at the same time as the publication of the strategy, responses to the consultation on the hydrogen business model are expected in early 2021 and must be published along with the terms. indicative of the hydrogen economic model. This process will allow the first contracts to be awarded from the first quarter of 2023.
The open question, however, is the source of funds for the business model payments. The short answer is that end consumers can ultimately foot the bill. The current plan is for hydrogen support to mirror support for renewable electricity. Revenue support for renewable electricity has been funded by passing costs indirectly on to consumers, for example costs related to supplier obligations that suppliers pass on to energy bills. The UK government’s plans assume that a similar approach would be taken for financing hydrogen production projects, but taking into account consumer affordability. Although income support is needed in the short term, the UK government expects its dependence to decrease as the hydrogen market matures.
The strategy also provides further details regarding the Net Zero Hydrogen Fund (NZHF) which will be launched in early 2022. The Fund will support the commercial deployment of new low carbon hydrogen production projects during the 2020s and will provide up to £ 240million in co-investments to support new production of low carbon hydrogen by 2025.
Measuring the carbon impact of hydrogen production
Because there are a variety of different ways to produce hydrogen, the carbon impact varies depending on the energy source used to produce it. Current production of hydrogen in the UK is derived almost entirely from fossil fuels, using the reformation of steam methane from natural gas without capturing or storing any of the resulting carbon emissions. To tackle these emissions, the Strategy takes a controversial two-track approach to support both the production of ‘green’ electrolytic hydrogen and the production of ‘blue’ hydrogen through carbon capture, alongside other pathways. potential production.1 While Chris Jackson, the former chairman of the UK Hydrogen & Fuel Cell Association, has resigned from his post due to this two-pronged approach, the UK government believes this two-pronged strategy will allow the sector to grow rapidly while reducing costs. . Notably, the strategy is technologically neutral and it includes blue hydrogen in its discussion alongside green hydrogen produced by nuclear power and renewables.
The controversy can be settled by including a clear definition of acceptable production methods for blue and green hydrogen. In order to measure the carbon impacts of various technologies, the Strategy proposes the development of a British standard on low carbon hydrogen. The proposal is essentially an emissions standard that defines what is meant by “low carbon” hydrogen. It will define a methodology for calculating greenhouse gas emissions associated with hydrogen production and a greenhouse gas emission threshold against which different low-carbon hydrogen production pathways would be measured. This will ensure that only low carbon hydrogen reaches the market. This has usually been coined a “colorless” approach.
Concrete and achievable objectives
The strategy defines a holistic approach to hydrogen that takes into account the entire value chain and provides for the specific expected results:
- Progress towards ambition 2030: 5 GW of low-carbon hydrogen production capacity with potential for rapid expansion after 2030; hope to see a production capacity of 1 GW by 2025.
- Decarbonising the UK’s existing hydrogen supply: Supply of existing hydrogen decarbonized by CCUS and / or supplemented by injection of electrolytic hydrogen.
- Reduced cost of hydrogen production: A reduction in the cost of low-carbon hydrogen production thanks to lessons learned from first projects, more mature markets and technological innovation.
- End-to-end hydrogen system with a wide range of users: End user demand is in place in a range of industries and locations across the UK, with many more end users able and willing to change.
- Increased public awareness: The public and consumers know and accept the use of hydrogen throughout the energy system.
- Promoting economic growth and opportunities in the UK, including jobs: UK-based capabilities and supply chain that translate into economic benefits, including through exports. The UK is an international leader and an attractive place for foreign investment.
- Reduction of emissions within the framework of carbon budgets 4 and 5: Hydrogen makes an important contribution to the UK’s emission reduction targets, including putting the country on track to achieve CB6.
- Preparing for the scale-up beyond 2030 – on the road to net zero: The infrastructure and technologies required for hydrogen are in place with potential for expansion. Well established regulatory and market framework in place.
- Evidence-Based Policy Development: Modeling of hydrogen in the energy system and improved input hypotheses based on a larger literature, qualitative and quantitative evidence and real-world learning. Evidence of delivery of innovation and deployment projects collected and used to improve policy making.
The legislative process in the UK involves extensive interaction with stakeholders when developing government action plans. As a result, the Strategy was accompanied by separate requests for public comment through three separate “consultations” published alongside the Strategy. These consultations invite comments on a proposed hydrogen business model, a UK standard on low carbon hydrogen and the Net Zero Hydrogen Fund. The brief also included an appendix outlining the analysis and evidence underlying the hydrogen strategy and consultations.
The strategy is comprehensive, thoughtful and provides strong evidence that the UK government is committed to tackling climate change. We look forward to seeing further progress and developments once the various public consultations are closed for comment. There are (inevitably) criticisms of the Strategy by some stakeholders, for example claiming that 5 GW of capacity is not ambitious enough or criticizing support for blue hydrogen as a necessary bridging technology to develop it. hydrogen economy in the UK. Nonetheless, we hope other governments will follow suit soon with their own comprehensive plans.
1 “Green” hydrogen is produced using low carbon energy sources and processes, while “blue” hydrogen is produced from high carbon intensive processes, but the resulting carbon is captured before they could escape into the atmosphere.