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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.

In November 2020, Prime Minister Boris Johnson outlined the “Ten Point Plan for a Green Industrial Revolution”, which aimed to achieve 1GW of low-carbon hydrogen production capacity by 2025 and 5GW by 2030, together with a £240 million Net Zero Hydrogen Fund and an intention to allow up to 20% blending of hydrogen into the gas distribution grid for all homes on the gas grid.

The UK Government has separately developed support models for Carbon Capture Use and Storage (CCUS), which will be key to the development of “blue hydrogen” projects.

A core takeaway of the UK government’s approach to hydrogen and CCUS development is the creation of “SuperPlaces” or industrial clusters, which will become the focal point for initial low carbon hydrogen and CCUS projects.

In August 2021, the UK government released its much-awaited Hydrogen Strategy alongside consultations on: (i) a low carbon hydrogen business model; (ii) the design of the Net Zero Hydrogen Fund; and (iii) a new low carbon hydrogen standard.

On 19 October 2021 the UK Government announced its Net Zero Strategy, which included the establishment of a new Industrial Decarbonisation and Hydrogen Revenue Support (IDHRS) scheme to fund new industrial carbon capture and hydrogen business models. Simultaneously the government also confirmed that the HyNet and East Coast clusters have been confirmed as the first two industrial carbon-capture clusters to be prioritised for development.

Summary of UK use case

The Hydrogen Strategy highlights the role for hydrogen within decarbonisation of heat, industry and transport in the UK. 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 Hydrogen Strategy is the UK Government achieving its net zero target by 2050, it should be noted that the Hydrogen 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 year 2021 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.

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 has not explicitly adopted a preference from a policy perspective between blue hydrogen or green hydrogen. In its Hydrogen Strategy, 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. This thinking is consistent with the approach taken in the UK Hydrogen Strategy (see Part 4 below).

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

On 17 August 2020 the UK government released its much-awaited Hydrogen Strategy as part of its commitment to reaching net-zero carbon emissions by 2050. The Hydrogen Strategy sets out the UK Government’s use cases, the development of a full hydrogen value chain and the next steps to achieving a hydrogen economy. Alongside this, the UK Government published its proposed business model to incentivise low carbon hydrogen production, as well as consulting on the design of the Net Zero Hydrogen Fund and a new low carbon hydrogen standard.

Key takeaways of the Hydrogen Strategy are:

  • Hydrogen targets: The UK Government has maintained its existing 5GW hydrogen production target by 2030. It will launch the £240 million Net Zero Hydrogen fund in early 2022 with a series of competitions at intervals. UK Government will finalise the Hydrogen Business Model in 2022, with first contracts to be awarded in Q1 2033. 
  • Blue and Green Hydrogen: The strategy covers both “blue” hydrogen (i.e. hydrogen derived from natural gas through the process of steam methane reforming (SMR), with the associated carbon dioxide captured through CCUS technology) and “green” hydrogen (i.e. mainly produced by water electrolysis using renewable electricity, with no associated carbon emissions). Unlike the EU, which has a clear preference for “green” hydrogen, the UK sees both “green” and “blue” hydrogen being an important part of the UK’s future energy mix (i.e. a “twin-track” approach). The UK is geographically well-placed to develop CCUS projects and therefore “blue” hydrogen is likely to lead the way in the UK, allowing early hydrogen projects to be deployed quickly and more cheaply whilst, in the interim, costs of “green” hydrogen start to fall.
  • Technology neutral: The UK Government has sought to remain technology-neutral in terms of the support which will be offered. The strategy recognises that a range of technologies will play a future role in hydrogen production, noting that costs for some technologies are currently cheaper (such as CCUS technology) and will be needed to scale-up production in early years.
  • Contractual support model: As expected, the UK Government has proposed a contractual support model to incentivise hydrogen production, borrowing heavily from the UK’s CfD regime for renewables. By utilising a contractual support mechanism similar to the CfD regime for renewables, the UK Government hopes that it will see a clean hydrogen revolution, akin to the success and rapid expansion of renewable power generation in the UK. Under this model, the UK Government has sought to mitigate two key risks: (i) market price risk (the risk that production costs are high compared to the market price achieved); and (ii) volume risk (the risk that producers cannot sell enough hydrogen to cover their costs).
  • Market price risk: The UK Government has considered three methods for dealing with price risk, its preferred option appears to be the “variable premium” model. Similar to the CfD regime for renewables, the proposed “variable premium” model will aim to mitigate market price risk by topping-up producers’ revenues up to an agreed “strike price”. Where the hydrogen reference price exceeds the “strike price”, producers will be required to repay revenues down to the agreed “strike price”. The effect of this is to provide producers with a stable revenue stream.
  • Volume support: The UK Government has considered a number of volume support options, including: (i) availability-based payments (i.e. a split payment model where the production plant receives a payment covering fixed costs simply for being available and a separate variable payment based on the volume of hydrogen produced); (ii) or acting as a backstop purchaser of last resort where a producer has been unable to sell minimum quantities due to low demand. The UK Government’s preferred approach to provide volume support is through sliding scale price support. This would involve higher price support where volumes sold are low. Sliding scale support would divide production levels into tranches, with different price support levels for each tranche – the aim being to achieve a minimum economic return at lower volumes sold. 
  • Reference price: In order for the “variable premium” model to work, there needs to be a reference price for hydrogen against which the agreed “strike price” can be compared. The UK Government’s view is that the reference price should ideally reflect the market value of the product. However, until there is a market price for hydrogen, a proxy needs to be developed. The UK Government has proposed a number of alternatives, but its “minded-to” position is that:
  • in the longer-term, a market reference price will be developed, which represents the value of low carbon hydrogen in the market; and
  • in the shorter/medium-term, the reference price will be the higher of the natural gas price and the average achieved sales price at each plant. This option gives pricing power to the producer to incentivise end users to switch to hydrogen. The inclusion of the natural gas price as a floor is because it is the most common fuel from which end users would switch so are likely to be willing to pay at least that price for hydrogen. UK Government also proposes a gainshare mechanism or periodic payment linked to achieving a certain price threshold. This is to incentivise producers to increase the achieved sales price.
  • Indexation: The UK Government has considered four options for indexing of the strike price: inflation-linked, natural gas benchmark, electricity price benchmark and actual input energy cost. The UK Government’s preferred approach has not been confirmed and it plans to carry out further analysis to consider how the indexation options work across different types of projects, the impact on producers’ incentives to invest in hydrogen production and whether different approaches are appropriate for different technologies. UK Government will also consider whether to apply indexation for input fuel costs and whether there are other cost elements which also need consideration.
  • Contract length: UK Government has not proposed a contract length, but acknowledges precedents set under the CfD regime (15 years) and the industrial CCUS contract (10 years).
  • Allocation: UK Government is considering whether the proposed business model will be allocated bilaterally or through an auction process (similar to the CfD regime for renewables). Initially, contracts are likely to be awarded on a bilateral basis, with a competitive auction in place in the medium-term.
  • Funding the business model: A difficult question which has not yet been answered is how the business model will be funded. Revenue support for electricity has been funded by passing the costs onto electricity consumers; however, the issue is more complex for hydrogen, where the end-consumers of hydrogen are more varied. It is not clear therefore whether the costs will be funded by both gas and electricity consumers.
  • Demand-focussed hydrogen policies: The UK Government is considering a range of policies to create a demand for hydrogen production:
  • Carbon pricing: By strengthening the UK Emissions Trading Scheme pricing, the UK Government hopes to promote investment in low carbon technologies, including clean hydrogen;
  • Creation of a low-carbon hydrogen standard: To support the demand for low carbon hydrogen by providing confidence to end users that the hydrogen purchased is a low carbon alternative to existing fuels; and
  • Sector-specific policies: For example the Renewable Transport Fuel Obligation (RTFO) in transport, the Capacity Market (CM) in the power sector, or the Industrial Energy Transformation Fund (IETF) in industry.
  • Broader regulatory regime: Further clarity is yet to be provided on licensing requirements and roles, for example, whether hydrogen production, storage and transportation will require a licence, and whether National Grid’s role as the gas transmission operator will be extended to encompass hydrogen, or whether a new regulated entity will be created. A review of the Gas Act 1986 will also be launched to consider the future regulation of a gas industry which includes hydrogen.
  • Hydrogen storage: The strategy acknowledges the need to scale up the hydrogen network and storage infrastructure in time. An update on the economic regulation and funding of storage will be announced in 2022, with a £68 million Longer Duration Energy Storage Demonstration Competition due to be launched. 

On 19 October 2021 the UK Government announced its Net Zero Strategy, key takeaways of which included: 

  • the establishment of a new Industrial Decarbonisation and Hydrogen Revenue Support (IDHRS) scheme to fund new industrial carbon capture and hydrogen business models. The £140 million scheme will initially commit to providing up to £100 million to award contracts of up to 250 MW of electrolytic hydrogen production capacity in 2023 with further allocation in 2024. Eventually, the IDHRS will fund the allocation of the hydrogen business model contracts to both electrolytic and CCUS-enabled projects, resulting in up to 1.5 GW of low carbon hydrogen contracts awarded to projects;
  • a funding envelope to be announced in 2022 enabling the award of the first contracts to industrial carbon capture facilities and CCUS-enabled hydrogen production projects from 2023 through the Cluster Sequencing process, to deliver up to 3 MtCO2/yr of industrial carbon capture and up to 1GW of CCUS-enabled hydrogen by the mid-2020s;
  • further allocation rounds for all types of eligible low carbon hydrogen production and industrial carbon capture from 2025, so as to enable the UK to meet its 2030 deployment ambitions of 6MtCO2/year of industrial carbon capture, 5 GW hydrogen production capacity, and four CCUS clusters; and
  • from 2025 at the latest, all revenue support for hydrogen production to be levy funded, subject to consultation and legislation. 
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.

For our note on the UK Hydrogen Strategy 2021 please read our note here


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