UK Government Releases Its First Hydrogen Strategy
On 17 April 2021, the UK Government released its first hydrogen strategy (the “Strategy”) that aims to meet its goal of 5 gigawatts (GW) of low carbon hydrogen production by 2030, matching the targets previously set by Scotland, Germany and Italy. The Strategy can be accessed here.
The Government expects to make around £900 million in funding available by 2030, expected to rise to £13 billion by 2050. The Government expects that its investment in de-risking early hydrogen projects could unlock over £4 billion of private sector co-investment by 2030.
Although the Strategy was highly anticipated and long-awaited (after several delays), the next steps for hydrogen in the UK economy will not be clear until future consultations have taken place and further detail has been provided. All assumptions in the Strategy are based on a forecast of 20-35% of the UK’s energy and consumption being met with hydrogen by 2050.
The Strategy sets out a “twin-track” approach to hydrogen production, with the Government supporting production of both green and blue hydrogen. Green hydrogen is produced through electrolysis powered by renewable energy to split water into hydrogen and oxygen and has zero carbon emissions, whereas blue hydrogen is produced from natural gas and steam, with the carbon emissions captured and stored or used in other applications.
To this end, the Government is consulting on the design and delivery of a net zero hydrogen fund which will provide up to £240 million of government co-investment to support the commercial development of new low carbon hydrogen production plants across the UK.
Simultaneously, the Government is collaborating with industry to consult on the development of a new UK standard for low carbon hydrogen, which aims to give certainty to producers and end users that the hydrogen the UK produces is consistent with the net-zero policy.
The Government will develop further detail on its production strategy and the twin-track approach by early 2022.
Networks and Storage
The UK currently has limited hydrogen distribution networks and storage facilities, with most hydrogen produced being used to supply industrial users located in industrial clusters near the production point.
The Government is using the Hydrogen Business Model Consultation (published alongside the Strategy) to seek views on whether and how to fund hydrogen networks, including between hydrogen producers and industrial end users around the UK and by including hydrogen into the gas grid.
The Government is working with industry to assess the safety, technical feasibility and cost effectiveness of mixing 20% hydrogen into the existing gas supply network, which would require major investments in equipment and infrastructure. This could deliver up to 7% emissions reductions on natural gas. The Government will launch a Call for Evidence on the future of the gas system later this year.
The Government further views hydrogen’s ability to store energy for long periods of time and in large quantities as an important aspect of hydrogen’s role in the decarbonised energy system. It also expects that hydrogen energy storage will be important in scaling up the hydrogen economy, when production will need to be steady but demand may need time to build. The Hydrogen Business Model Consultation includes specific questions on the need for government intervention to facilitate investment in future larger scale storage.
Further information on status and outputs of this review will be provided in early 2022 to facilitate further discussion with stakeholders.
Use of Hydrogen
The Strategy emphasises:
- use of low-carbon hydrogen as a fuel to decarbonise pollution-heavy industries such as chemicals and oil refineries;
- use of electrolytic production, hydrogen storage and use of hydrogen as a fuel to decarbonise the power sector;
- use of hydrogen, alongside electrification, as a low carbon alternative to the UK’s largely natural-gas powered domestic heating; and
- use of hydrogen to decarbonise transport in areas of heavy transport that batteries cannot reach.
To this end, the Government is conducting a consultation on a preferred hydrogen business model which, built similarly to the Contracts for Difference (CfD) scheme, is designed to overcome the cost gap between low-carbon hydrogen and fossil fuels by guaranteeing a minimum price, enabling producers to price hydrogen competitively and helping to bring through private sector investment in hydrogen projects.
A hydrogen sector development action plan will be launched in early 2022 setting out how the government will support companies to secure supply chain opportunities, skills and jobs in hydrogen.
Criticism and Ongoing Challenges
While the Strategy sets out a number of next steps being taken by the Government, almost all aspects require further consultation or state that the Government will be providing further detail in the next year or two. This is problematic given the extent of the goals and the need to act quickly.
One key criticism of the Strategy has been the Government’s emphasis on blue hydrogen, which keeps the country locked into using fossil fuels. However, blue hydrogen is currently much cheaper than green hydrogen to produce, and the Government’s view is that deploying blue hydrogen capacity will achieve cost-effective near-term low carbon hydrogen production at scale, drive investment across the value chain and pull newer hydrogen technologies through to commercialisation.
Others have emphasised how the UK’s offshore wind industry largely uses turbines and jackets made overseas, detracting from UK manufacturing of investment and skill and have stressed the importance of ensuring the Strategy ensures that maximum jobs and investment in the growing hydrogen industry are kept within the UK.
As is recognized in the Strategy, the hydrogen industry needs to overcome the “chicken and egg” problem of needing to develop new production and use in tandem with balancing supply and demand, including potentially storage over time. Industry players are looking to the Government to provide capital and revenue support, regulatory levers and incentives, assurance on quality and safety and direction on supply chains. The Strategy aims to address these concerns, but its success will not be seen until the multitude of consultations, calls for evidence and action plans are acted upon.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.