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Linklaters
Part 2

Hy-Politics – political considerations shaping the evolution of clean hydrogen policy

In June 2019, the UK Government committed to a target of achieving net zero greenhouse gas emissions by 2050.47 The UK Government’s overarching strategy for achieving this decarbonisation target is set out in the Clean Growth Strategy48 which sits alongside its modern Industrial Strategy.49 Each year both the UK Government and the Committee on Climate Change report to Parliament on the current progress to, and next steps for, achieving these targets.50

The UK Government stated that achieving net zero will require “a fundamental and sustained transformation of our whole economy – including in our homes, transport, land, businesses and industry, and how we generate and use electricity”51 and that “the recovery [from Covid-19] is a chance for us to build back better, build back greener … placing clean growth and our target to achieve net zero greenhouse gas emissions by 2050 at the heart of our economic recovery”52. The UK Government is pursuing a wide range of policies and initiatives to achieve decarbonisation and increasingly policy papers and initiatives show that clean hydrogen could have a role to play in reaching net zero in the UK.

Summary of UK use case

The UK Government’s policy is at the earlier stages of development with the UK Government exploring the use of hydrogen alongside other potentials solutions for its decarbonisation strategy (in particular, electrification). The current policy for hydrogen is limited and is spread across a wide number of policy documents from a range of government departments. However, the UK Government is set to announce a formal hydrogen strategy in 2021, and in August 2020, it published a report (prepared by Frontier Economics) on the potential business models for incentivising clean hydrogen production. We understand that the UK Government will launch a consultation on the potential business models in early 2021.

Across these documents the UK Government has consistently indicated there could be a role for hydrogen within decarbonisation of heat, industry and transport in the UK and the UK Government has said that its hydrogen strategy will “set out the near-term actions… to ensure blue hydrogen can play a vital role in decarbonising industry, heat and heavy transport whilst also providing system value through grid balancing and integration of increasing levels of intermittent renewable energy”53. Until recently, the UK Government’s focus has been on research and development of hydrogen technologies and demonstration/feasibility projects throughout the hydrogen supply chain to explore the possibilities and cost consequences of using hydrogen for decarbonisation. Over time this has involved increasing commitments to grants and funding for innovation competitions, research and development.

In addition, the UK Government has stated any development of hydrogen would need to be alongside the development of carbon capture, usage and storage (“CCUS”) which has also seen increasing levels of commitment and attention from the UK Government in recent years and in August 2020, the UK Government published its response to a consultation on CCUS business models, which also considers the role of blue hydrogen in the UK’s future energy mix.

Whilst, on the face of it, the key motivation for the UK Government is achieving its net zero target by 2050, it should be noted that the Clean Growth Strategy sits alongside the UK Government’s modern Industrial Strategy. In the UK, decarbonisation should be accompanied by economic growth and new industrial opportunity. Any uses of hydrogen need to be economically viable and competitive when compared to alternative solutions such as electronification. For example, as electrification of cars is growing, the documents repeatedly indicate that the use case for hydrogen is strongest for heavy vehicles (such as HGVs, buses and trains) where benefits of hydrogen fuel cells are greatest in comparison to electric battery power. In addition, this appears to be driving the focus at this stage on research and development to bring down the costs of hydrogen, to innovate and develop UK expertise and to build the information required to allow the UK Government to make the far wider reaching strategic decisions needed on infrastructure (in particular for electrification, hydrogen and CCUS) to allow the UK Government to achieve its 2050 targets.

Examples of feasibility/demonstration projects in the UK

HyNet North West is a hydrogen energy and CCUS project. The aim is to create a low carbon exemplar cluster to act as a UK model for clean growth. HyNet is based on the production of hydrogen from natural gas with a new hydrogen pipeline and CCUS infrastructure. HyNet is being led by Progressive Energy and has a wide range of partners/supporting companies from across the industry.

HyDeploy, a consortium led by Cadent, is demonstrating the feasibility of blending up to 20% hydrogen with natural gas in the gas network. The aim is to provide evidence that customers do not need to change heating/cooking appliances and that customers do not notice a difference when using the hydrogen blend.

The HySecure project, conducted by INOVYN as lead partner, Storengy and Element Energy, intends to demonstrate the deployment of grid-scale storage of hydrogen in a salt cavern. The proposed location of the hydrogen storage cavern is a site owned by INOVYN known as H325 on the Stublach Site of the Holford Brinefield.

UK industry perspective on the use case

The Committee on Climate Change (the “CCC”) is an independent, statutory body established under the Climate Change Act 2008. Its purpose is to advise the UK Government on emissions targets and to report to Parliament on progress made in reducing greenhouse gas emissions and preparing for and adapting to the impacts of climate change. The CCC’s report, ‘Reducing UK emissions: 2020 Progress Report to Parliament’, released in June 2020,54 “recommends that Ministers seize the opportunity to turn the COVID-19 crisis into a defining moment in the fight against climate change”55  and states that “Climate investments will help create jobs and stimulate economic recovery, while changing the course of UK emissions and improving our resilience to climate change for the coming decade and beyond”.

The CCC views the next year as key for development of climate change policy, as the UK will host the rescheduled Conference of the Parties climate summit (“COP26”) and will hold the presidency of the G7.

The report highlights five investment priorities:

  1. low carbon retrofits and buildings that are fit for the future;
  2. tree planting, peatland restoration, and green infrastructure;
  3. energy networks must be strengthened;
  4. infrastructure to make it easy for people to walk, cycle, and work remotely; and
  5. moving towards a circular economy.

In addition, the report notes the following opportunities to support the transition and recovery by investing in the UK’s workforce, and in lower-carbon behaviours and innovation:

  1. reskilling and retraining programmes;
  2. leading a move towards positive behaviours; and
  3. targeted science and innovation funding.

In relation to hydrogen specifically, the report states that a clean hydrogen economy will be needed to service demands of industrial processes, vehicles, electricity and heating and that “by 2050, a new low-carbon industry is needed, with UK hydrogen production capacity of comparable size to the UK’s current fleet of gas-fired power stations.” The report recommends that the UK Government develops a co-ordinated strategy for clean hydrogen use across power, industry, transport, buildings, production and infrastructure, in 2021 with large scale hydrogen trials in the early 2020s.

In July 2020, the Hydrogen Advisory Council was established to inform the development of hydrogen as a strategic decarbonised energy carrier for the UK. The Council is intended to be the primary forum for ministerial engagement with representatives from the hydrogen sector and will engage with existing industry and government lead groups.

Green vs. blue

The UK Government does not explicitly state whether it has a preference from a policy perspective for blue hydrogen or green hydrogen. In its Clean Growth Strategy and Leading on Clean Growth Report, reference is made throughout to “low carbon” hydrogen and development of CCUS is stated to play a key role in the supply of hydrogen. The recent Frontier Economics report on hydrogen business models also focuses on three technology groups:

  • Methane reformation with CCUS, either via steam methane reformation (SMR) or autothermal reformation (ATR);
  • Biomass gasification with CCUS; and
  • Electrolysis using proton exchange membrane (PEM) or alkaline.

Whilst the UK Government does not view these technologies as being an exhaustive list of clean hydrogen technologies, the UK Government clearly sees both green and blue hydrogen being an important part of the UK’s future energy mix, with blue hydrogen potentially leading the way and kick-starting a future hydrogen economy.

However, through the Hydrogen Supply Programme,56 the UK Government is funding initiatives for the supply of clean hydrogen and this includes a number of green hydrogen research and development projects (in particular, those associated with the development of offshore windfarm technologies).

In addition, a number of the papers produced within industry highlight that the UK can be viewed as being uniquely well placed for green hydrogen with its focus on renewable electricity (again particularly from offshore windfarms).

 

Part 4

Hy-Achieving – creating a suitable incentive regime

The UK is set to announce a formal hydrogen strategy in 2021 but is currently working to develop sustainable business models to support a range of hydrogen production methods and drive investment through:

  • exploring the role hydrogen could play as part of a hydrogen chapter in the CCUS business models consultation; and
  • conducting extensive engagement on business model design, including through the launch of hydrogen expert groups.

Alongside its work on potential business models, the UK Government is:

  • investing in innovation, with up to £108m supporting a range of projects to explore and develop the potential of clean hydrogen across the value chain;
  • driving towards deployment through the new £100m Clean Hydrogen Fund announced in August 2019; and
  • providing new funding for hydrogen through the Hydrogen Supply Programme and Industrial Fuel Switching Competition.

Whilst an overarching strategy for the development of a larger-scale hydrogen economy has not been formally announced, the UK has significant experience in delivering cost-down in low carbon energy through the implementation of schemes such as Feed-in-Tariffs, the Renewables Obligations, Contracts for Difference, Capacity Market, Renewable Heat Incentive and the Heat Networks Investment Project. These schemes were designed to promote the deployment of low carbon generation technologies, allowing them to achieve cost down and mass market deployment, and are likely to inform the UK Government’s policy approach to clean hydrogen.

The recent business models report published by the UK Government sets out a number of potential models for incentivising clean hydrogen. This includes:

  • contractual payments to producers: this would involve the hydrogen producer receiving a subsidy which covers the incremental cost of clean hydrogen above the carbon-intensive alternative fuel;
  • regulated returns: a regulated asset base (RAB) model or a cap and floor model would allow the hydrogen producer to earn a regulated return on the cost it incurs. Regulatory models are assumed to involve providing support to two parties in the value chain:
  • owner/operators of the production facility; and
  • shippers who buy input fuel, contract for conversion services from the hydrogen producer, and sell the clean hydrogen to customers; and
  • obligations – this would see obligations placed on parties such as fuel suppliers and end users, to ensure that a certain quantity or proportion of gas or energy consumed comes from clean hydrogen (similar to the renewables obligation model). Appropriate penalties are in place if obligations are not met; and
  • end-user subsidies – this would provide an abatement subsidy to industrial emitters.

From these four categories of business models, the contractual-based and regulatory models are seen by Frontier Economics as preferable for delivering clean hydrogen production in the 2020s. Contractual models may give more certainty to producers, while regulatory models may be easier to implement, given existing institutional capabilities. These are, therefore, likely to be the focus for the UK Government in further developing the business models over the coming year.

We understand that the UK Government is due to announce a consultation in early 2021 to consider the potential business models in further detail and to decide whether to opt for:

  • a split revenue stabilisation model vs a split premium model;
  • fixed pricing or with input fuel indexation; or
  • support delivered via contractual (e.g. CfD), regulatory (e.g. RAB/cap and floor) or a hybrid model.

As the UK Government continues to consider potential business models for the incentivisation of hydrogen projects, a key consideration for government and regulators will be the appropriate means of paying for these policies. Until a formal hydrogen strategy is announced in the UK, with further certainty on the UK Government’s chosen business model, the following are noted as currently providing some financial benefits for hydrogen versus fossil fuels.

  • Fuel duty: Fuel duty is currently collected from sales of diesel and petrol. Electric and hydrogen vehicles are currently exempt from fuel duty, which provides some financial benefits compared with hydrocarbon fuels.
  • Carbon costs: Until 31 December 2020, the UK remains a full participant in the EU ETS. Some details of the UK Emissions Trading Scheme which will replace the EU ETS have been published and this will be revisited following publication of the sixth carbon budget in December 2020. The ETS will set a cost for emissions over a designated cap (which is intended to be 5% lower than the EU cap, in recognition of the UK’s net zero emission ambitions); large industries such as the power sector then have to pay for any emissions produced over this cap. Around 1,000 factories and plants will be brought under the replacement scheme. To the extent that any of these factories and plants use hydrogen to reduce its carbon emissions, they will save costs under the ETS. After 31 December 2020, it remains to be seen whether the UK will have its own UK ETS scheme or whether it will adopt a carbon tax regime.
  • Renewable Transport Fuel Obligation: In the UK, the Renewable Transport Fuel Obligation (RTFO) Order 2007 requires suppliers of liquid fossil fuel for use in road transport or non-road mobile machinery in the UK to supply a certain amount of sustainable biofuel, calculated as a proportion of the overall volume of fuel that they supply. Hydrogen was recognised in the UK as a transport fuel in 2016, and the RTFO Order 2007 was amended to include hydrogen as a specified type of renewable transport fuel. Suppliers of renewable hydrogen are eligible to apply for Renewable Transport Fuel Certificates, but fossil hydrogen is not obligated under the RTFO Order.

 

Part 5

Hy-ly Volatile? making it safe, sustainable and transportable

Production

Licensing

The Gas Act 1986 (“GA 1986”) is the primary source of legislation governing the licensing of the UK downstream gas industry, which includes the transportation, trading and sale of gas to end-users. The definition of “gas” in the GA 1986 expressly captures a substance in a gaseous state consisting wholly or mainly of hydrogen (section 48(1)). Therefore, the requirements and obligations set out in the GA 1986 would generally apply to hydrogen.

The GA 1986 does not require a licence to be held for the production of hydrogen or gas more generally, although various other legal requirements are relevant to the production of hydrogen (such as planning, permitting and environmental controls and safety legislation). See further below.

In addition, a hydrogen producer may also require one of the other licence categories set out in the GA 1986 (such as a gas shipper licence) depending on how the supply chain is structured. However, note that under section 7(3A) of the GA 1986, a licence authorising the conveyance of gas through pipes to any premises must not be granted to a gas producer, unless it is a condition of the licence that the person must not convey gas through pipes to 100,000 or more sets of premises. “Gas producer” is defined to mean a person who:

  • gets natural gas from its natural condition in strata (otherwise than as an unintended consequence of the storage of gas) and requires a licence under the Petroleum Act; or
  • produces any other gas, including in particular biomethane, which is suitable for conveyance through pipes to premises in accordance with a transportation licence.

This latter category would be expected to cover the production of hydrogen.

The restriction in section 7(3A) of the GA 1986 is one aspect of the unbundling requirements, which involve separating the ownership and operation of the transmission network from other activities, including gas production and supply.

Planning and permitting

There are various pieces of UK legislation and regulation which require certain permits and permissions to be held in order to produce hydrogen. Key points to note include the following:

  • planning permission is likely to be required under the Town and Country Planning Act 1990 (“TCPA”) for the construction of a hydrogen production facility. An Environment Impact Assessment is also likely to be required as part of the planning process under the TCPA.
  • depending on the quantity of hydrogen that is stored at a production site, the Planning (Hazardous Substances) Regulations 2015 (“PHSR”) and/or Control of Major Accident Hazards Regulations 2015 (“COMAH”) may be applicable.
  • an environmental permit from the relevant local authority would be required under the Environmental Permitting (England and Wales) Regulations 2016 (“Permitting Regulations”) for any activities or plant which fall within the scope of the Permitting Regulations. The Permitting Regulations implement the requirements of Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control) (the “EID”), which regulates the production of hydrogen by virtue of Annex 1. The Permitting Regulations require operators of “regulated facilities” to obtain a permit or to register some activities, which would otherwise require permits, as “exempt facilities”. They regulate, among other things, installations where hydrogen is produced on an industrial scale.

The fact that there is no simplified process for smaller and/or localised hydrogen production is a key challenge.

Safety and environment regulation

There are various safety and environmental regimes which apply to the production of hydrogen and which impose obligations on producers in relation to health and safety and environmental management.

Transportation: Pipelines

Persons wishing to transport hydrogen through gas pipelines in the UK require a licence. The EU unbundling requirements also apply to prevent the holder of a gas transportation licence from also holding a gas shipper’s licence, a gas supplier’s licence or an interconnector licence. Various safety regimes also currently apply to the transportation of hydrogen via pipelines.

Transportation: Road

International regulations govern the carriage of dangerous goods by road, via the European Agreement concerning the International Carriage of Dangerous Goods by Road (“ADR”). In Great Britain, the ADR is applied by the Carriage of Dangerous Goods and Use of Transportable Pressure Equipment Regulations 2009.

There are no general route restrictions on vehicles transporting hydrogen in the UK. However, the UK authorities notified the United Nations Economic Commission for Europe (UNECE) of several categories of tunnel restrictions which came into force in the UK.

Hydrogen as a Fuel and for Vehicles

Certificates of Origin

The UK currently has no system of certification of hydrogen origin at a national level, as the Renewable Energy Guarantees of Origin (REGO) scheme has no direct impact for hydrogen due to the 0.1% maximum hydrogen concentration in the gas flow.

Hydrogen fuel cells

Hydrogen fuel suppliers in the UK are required to provide hydrogen which meets specific international standards and fuelling stations must meet minimum design, installation, commissioning, operation, inspection and maintenance requirements for the safety and performance of fuelling stations that dispense gaseous hydrogen.

Refuelling stations are also subject to certain additional planning and consenting requirements, including the requirement to conduct an environmental impact assessment and may also be subject to restrictions on location.

Gas Grid Issues

Injecting hydrogen into the existing natural gas network would alter the calorific value of the gas. Consequently, regulatory changes may be required to enable the blending of hydrogen into the existing natural gas network. It also seems likely that various contractual arrangements in the industry in relation to supply and billing will need to be amended, including potentially the charging methodologies that apply under the gas licences.

Injecting gas with a higher hydrogen composition into the gas-grid may require end-user gas equipment to be adapted or replaced, as many appliances are designed for conventional natural gas with differing calorific value. In the UK, gas appliances manufactured after 1996 have been designed to operate with a hydrogen mix of up to 20%, so it may be possible to increase the current limits without having to make full design changes.77

However, there is currently no clear position for how appliance design will have to change to allow higher concentration of hydrogen.

 

Footnotes
Key Contacts
Australia  •  Belgium  •  The EU  •  France  •  Germany  •  Italy  •  Japan  •  The Netherlands  •  Portugal  •  Spain  •  The UK
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