Last week, the UK government published its long-awaited new Hydrogen Strategy plus consultations on:
- The business model for low carbon hydrogen (LCH)
- The Net Zero Hydrogen Fund (for capital support of new LCH projects)
- A UK standard for LCH.
Additionally, a Hydrogen Production Costs Report and associated analysis were published.
Many industry comments were made immediately upon publication. Some expressed disappointment - e.g. doubts about the inclusion of blue hydrogen in a twin track strategy, regret that there was not more consideration of offshore wind's production in hydrogen production and suggestions that the new hydrogen strategy is not ambitious enough. Others praised the new strategy – e.g. the strategy is a good first step, it is a realistic approach to getting the UK hydrogen market off the ground and it sets out future deliverables against timescales.
Overall, the published documents encompassed around 350 pages of reading. What are some of the key points?
The strategy confirms the Prime Minister's 10 Point Plan target of 5 GW of LCH production capacity by 2030. Some industry commentators have criticised that as insufficiently ambitious
There will be a twin track approach of focussing on both blue hydrogen and green hydrogen. Some have criticised the inclusion of blue hydrogen (hydrogen produced using natural gas but with the emissions captured and stored). The UK government stresses though that blue hydrogen must be included (a) to meet net zero targets quickly (it would take too long to build out much more expensive electrolytic – green – hydrogen in sufficient scale) and (b) because blue hydrogen can be expanded quickly with carbon capture utilisation and storage (CCUS) attached and this will help to grow swiftly the hydrogen market to 'drag up' green hydrogen whilst lowering green hydrogen's cost.
A recent academic study claiming that blue hydrogen is more emissions-intensive than grey hydrogen (i.e. hydrogen produced from natural gas without carbon capture) is the subject of debate amongst scientists.
An update will be issued in early 2022 on the production strategy and the twin track approach.
In terms of a business model to help to accelerate the development of hydrogen production, the UK government is minded to introduce:
- A Contract for Difference (CFD) style revenue support mechanism, akin to that already used for other renewable technologies such as offshore wind, to support LCH production. The reference price will be set at the achieved sales price with a floor natural gas reference price The strike price will be indexed to production costs. The price support will be limited in cases where LCH is used as a feedstock
- Volume support on a sliding scale basis to give early stage support, tapering down as production volumes increase
- No Feed in Tariff (FiT) style mechanism for small scale projects despite its success in encouraging smaller projects in other renewable technologies
- Allocation based on tie-in with the parallel CCUS clusters sequencing process and bilateral negotiation but looking to move to auctions at a later stage.
The UK government is also considering the appropriate duration of support contracts, how to deal with the scaling up of contracted capacity, the appropriate risk allocation and compatibility with other existing subsidy regimes.
More detail on the revenue funding underpinning the business model will be issued later in 2021 and the hydrogen business model is to be finalised in 2022. The first contracts are to be allocated from Q1 2023.
The £240m Net Zero Hydrogen Fund (NZHF) is to be launched in early 2022. It is envisaged that this Fund will be used to support the commercial deployment of new LCH production projects during the 2020s. It would be aimed at capital co-funding and at development costs for FEED work and possibly some post-FEED work, probably by way of capital grants.
Hydrogen producers seeking government support (via the NZHF or the business model) would need to comply with the UK LCH standard. The UK government is minded to:
- Have one standard across all production methods
- Apply the standard at the point of production and exclude construction and decommissioning emissions
- Take account of energy inputs
- Consider whether emissions captured as part of a CCS/CCUS scheme could be taken into account.
The UK government is also assessing the appropriate body to administer the scheme and the reporting requirements under the scheme.
By the end of 2021, a call for evidence will be launched on hydrogen-ready industrial equipment. By August 2022, a call for evidence will be issued on the phasing out of carbon intensive hydrogen production in industry. Phase 2 of the £315m Industrial Energy Transformation Fund will be delivered (encouraging the use of technologies which reduce emissions). A £55m Industrial Fuel Switching 2 competition will be launched in 2021 – stimulating early investment in fuel switching technologies.
Gas system review
Later in 2021, a call for evidence will be issued on the future of the gas system (note that this could entail a fundamental review of the existing Gas Act regime) to accommodate hydrogen. Closely connected to that review, by early 2022 an update will be provided following a review of hydrogen network and storage requirements.
The £68m Longer Duration Energy Storage Demonstration competition will be delivered – aimed at the commercialisation of innovative storage projects at different technology readiness levels.
Further 'hydrogen for heat' trials will be progressed – a hydrogen neighbourhood by 2023, hydrogen village by 2025 and potential pilot hydrogen town by 2030. A consultation will be issued in 2021 on introducing ‘hydrogen-ready’ boilers by 2026. An indicative assessment of the value for money case for blending up to 20% hydrogen into the existing gas network will be completed by late 2022 with a final policy decision intended for late 2023.
Amongst other measures, a Hydrogen Sector Development Action Plan will be prepared by early 2022. The UK government is keen to avoid the experience of offshore wind work and jobs being lost to overseas.
Overall then, there is much to digest in the UK government's hydrogen strategy and consultation documents and the overview set out above is by no means exhaustive.
One thing is for sure – with the CCUS cluster sequencing process already under way and a number of hydrogen projects already under development across the UK, the establishment of the new UK hydrogen regime needs to continue at breakneck speed.