[co-author: Aleksandra Dulska]
The strategy positions the UK as a global hydrogen leader, supporting over 9,000 jobs and unlocking £ 4bn of investment by 2030.
On August 17, 2021, the Department for Business, Energy and Industrial Strategy (BEIS) published the first Hydrogen Strategy (The strategy). The Strategy sets out the government’s roadmap to achieve its ambition of 5 GW of low-carbon hydrogen production capacity by 2030, as identified in the Ten point industrial revolution plan released in November 2020, with government projections indicating that 20-35% of UK energy use could be hydrogen-based by 2050.
Forecasts suggest that by 2030, hydrogen could play an important role in the decarbonization of some highly polluting and unsuitable for electrification industries, such as chemicals, industrial furnaces and long distance or heavy transport, as well. than replacing natural gas to supply the surrounding area. three million households per year. The strategy clarifies the government’s view that the development of the UK hydrogen sector will achieve the twin goals of reducing the UK’s carbon footprint in line with UK net zero commitments, while stimulating job creation and economic growth in the industrial sector.
What are the main characteristics of the strategy?
The strategy highlights key actions to increase hydrogen production in the UK:
- Develop a two-way approach to support multiple technologies, including the production of “green” and “blue” electrolytic hydrogen allowing carbon capture
- Work with industry to develop a UK standard for low carbon hydrogen, which will provide producers and users with certainty that UK produced hydrogen meets UK net zero commitments
- Review the infrastructure needed to support hydrogen energy
- Work with industry to assess the safety, technical feasibility and cost-effectiveness of blending 20% hydrogen into the existing gas supply, which could result in a 7% reduction in emissions compared to natural gas
- Hydrogen sector development action plan launched in early 2022, to describe how the government will help businesses secure hydrogen supply chain opportunities, skills and jobs
The Strategy also contains a hydrogen roadmap for the next decade, which outlines how the industry must evolve in order to meet the 2030 targets. The key to this development will be to ensure adequate funding; In this regard, the Strategy refers to the simultaneous publication of consultations on the low carbon hydrogen business models and the Net Zero Innovation Fund which are discussed below.
Along with the Strategy, BEIS has also published:
BEIS postulates that this broader set of policy documents is essential if the UK is to meet its Sixth Carbon Budget and net zero commitments.
What business models will be used to help execute the strategy?
In the consultation on the business model, the government proposes to use contracts for difference (CfD) – a funding mechanism that has proven successful in developing offshore wind capacity in the UK – to underpin the business model hydrogen and bridging the gap between the high costs of producing low-carbon hydrogen and cheaper fossil fuels.
CfD provides an income guarantee to low-carbon hydrogen producers in the event of volatile wholesale market prices. CfD would pay producers a flat rate for hydrogen over a set period of time, which would be the difference between a ‘strike price’ (reflecting the overall value of a unit of hydrogen needed to cover the costs of the producer) and a “reference price” (reflecting the market price the producer would receive per unit of hydrogen). This premium has the potential to turn negative over time (that is to say, triggering a producer payment to the government) if the market price of hydrogen increases significantly, ensuring a cap on taxpayer funding if public money is not required to support the economic viability of hydrogen projects.
The business model consultation recognizes the challenges of setting a benchmark price for hydrogen because, unlike the electricity market, this space does not have a benchmark price for hydrogen. hydrogen on the market. The government is proposing a number of mitigation options, including the use of the price of natural gas or the energy used by the hydrogen producer, as well as collaborative projects with pricing agencies to create a benchmark hydrogen price on the market. The approach suggested by the government at this point is to use the highest natural gas price and the reached selling price of hydrogen compared to the initial projects, and then develop and adopt a benchmark in time. desired. The government is also seeking advice on other design features of proposed contracts, including length of contracts, compatibility with other policies, and how the strike price will be indexed. In addition, and as part of a related policy, the Business Model Consultation seeks opinions on whether CfD premiums should be covered by general taxation or via surcharges on energy bills. Household.
The consultation ends on October 25, 2021 and final decisions on the shape of the business model and the subsidy mechanism are not expected until 2022, which means that the first contracts would not be awarded until the first quarter of 2023.
The policy package received mixed responses so far with some stakeholders welcoming the much needed clarity and others questioning whether the package is ambitious enough, especially in light of the UK’s leadership role in the upcoming COP26 conference.
Many countries see hydrogen as the key to transforming carbon-intensive sectors, but concerns remain, especially about the dependence on blue hydrogen, which is produced using natural gas and technologies. capture and storage and is often not carbon neutral. The consultation on low carbon hydrogen standards, in particular, aims to address some of these concerns.
These concerns aside, the government sees benefits in keeping all of the options outlined in the strategy viable, in an effort to transform the UK energy system more quickly.
It remains to be seen whether the government’s strategy will make hydrogen a viable option for reducing emissions and position the UK as a world leader in this space ahead of COP26. Latham & Watkins will continue to monitor developments in this area.