Industrial Decarbonisation Strategy: Amplifying decarbonisation of the Industrial Sectors

United Kingdom

On 17th March 2021, the Department for Business, Energy and Industrial Strategy (“BEIS”) released its Industrial Decarbonisation Strategy (the “Strategy”), which looks at providing a blueprint to reduce industrial sector emissions by two thirds by 2035 via industrial clusters, Carbon Capture, Usage and Storage (“CCUS”), hydrogen and other commitments. Decarbonisation of industrial processes is no small feat – emissions from industrial processes such as oil refining, steel, chemicals, ceramics and glass manufacturing will need to decrease by about two thirds over the next fifteen years if the UK is to meet its net zero ambitions.

The Strategy amplifies one element of the previous Industrial Strategy, published by BEIS in November 2017, where decarbonisation was pursued largely through commitments to R&D and innovation investments and encouraging uptake of electric vehicles. In the 2017 Industrial Strategy, the government had focused on five foundations; ideas, people, infrastructure, business environment and places. It also earmarked four areas where Britain could lead technical revolution; artificial intelligence and big data, clean growth, the future of mobility and meeting the needs of an ageing society.

The Strategy is not a complete departure from the goals of its 2017 predecessor, with themes such as mitigating geographic disparities still featuring. However, the Strategy is more focussed in its aims: encouraging investors and consumers via policy and funding mechanisms to take the necessary actions to decarbonise industry.

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Industrial clusters

The Strategy sets out plans for funding industrial clusters, with around £170 million allocated to nine green tech projects across the UK as part of the Industrial Decarbonisation Challenge, to undertake engineering and design studies for the rollout of decarbonisation infrastructure like CCUS and hydrogen. (See here for our comment in the Hydrogen Expert guide about European Commission’s proposals for developing industrial  clusters for hydrogen projects.) This is in addition to the £1 billion CCUS Infrastructure Fund to support the development of CCUS clusters discussed below.

Industrial clusters have been highlighted in the Strategy as key to achieving net zero emissions. The Strategy reveals a target of at least four low carbon industrial clusters by 2030 and at least one net zero industrial cluster by 2040.

Decarbonising with carbon capture

The Strategy emphasises the importance of technologies such as CCUS in achieving net zero emissions in industrial clusters, setting out the ambition of capturing and storing 3 MtCO2 per year by 2030 and between 8 and 14 MtCO2 per year by 2050. This is in line with BEIS’ February 2021 CCUS cluster sequencing consultation, which sets out Government’s aims for low carbon clusters

Again, BEIS has reiterated in the Strategy the points it has been making in the development of CCUS business models; namely to acknowledge the key role that government must play in supporting the deployment of the first CCUS projects, where low probability, high impact risks, such as carbon storage failure, and the significant upfront capital expenditure required are likely to be too great for the private sector to take on alone.

Via the £1 billion CCUS Infrastructure Fund, announced in the Ten Point Plan, Government aims to support the deployment of CCUS in two industrial clusters by the mid-2020s, and a further two clusters by 2030. The Strategy outlines further funding available for CCUS infrastructure, including the £1 billion Net Zero Innovation Portfolio and the £250 million Clean Steel Fund. Little new information is provided on Government support for CCUS in the Strategy, however further updates on the business models and particularly a business model for hydrogen are anticipated mid-this year. (See here for the anticipated timeline of updates.)

Hydrogen production and usage

The Strategy recognises the important role that low carbon hydrogen can play in decarbonising industrial clusters. On the same day as the publication of the Strategy, the Department for Transport also announced government investment of £3 million to help launch the UK’s first ever hydrogen transport hub, located in the Tees Valley, thus signalling one possible cluster. The hub, which aims to bring together leading figures from government, industry and academia to focus research, testing and trials across all transport modes, could be fully operational as early as 2025.

In particular, the Strategy focuses on the need to establish appropriate mechanisms to support the deployment and use of low carbon hydrogen for industry and on creating favourable conditions for encouraging industrial uptake of fuel switching to hydrogen.

The details of how these areas of focus will play out are yet to come in the dedicated Hydrogen Strategy, anticipated in the new few weeks. This is expected to build on  the Energy White Paper position which has already set out the Government’s aim to develop 5GW of low carbon hydrogen production capacity by 2030 and committed £240 million of capital co-investment via the Net Zero Hydrogen Fund.

Hydrogen business models will be critical in ensuring that hydrogen infrastructure constitutes a viable investment and attracts private sector funding. The Strategy reiterates the Government’s aim to consult on business models in 2021 and finalise them by the end of 2022.

Other policies

Fuel switching policies also form part of the Strategy, with an aim for around 20 TWh per year of fossil fuel use switching to low carbon alternatives by 2030.  In addition to the uptake of hydrogen, the Strategy names electrification and bioenergy as alternatives to high carbon counterfactual fuels. The Strategy notes that Government will need to work with stakeholders including Ofgem to accommodate the additional electricity demand from the electrification of industry, which they estimate could reduce emissions by up to 12.3MtCO2e by 2050.The Strategy also confirms Government plans to publish a Bioenergy Strategy in 2022.

Since 1 January 2021, a UK emissions trading system (“ETS”) replaced the UK’s participation in EU ETS. The Strategy states that by 2023, the UK ETS will be net zero aligned, which will require a robust carbon price. At the time of writing, the government is consulting and inviting submission of evidence in a number of areas that will be part of the UK ETS scheme, including how to allocate free allowances and impacts for the aviation sector.

Currently, low carbon products attract little corresponding price premium, meaning there is a gap between the cost of producing them and the price that the market is willing to pay. This creates the risk of carbon leakage. The Strategy confirms that, like EU ETS (Phase IV), UK ETS will initially involve the granting a number of free allowances to help mitigate against carbon leakage. Going forward, however, it states that the role of free allowances will be reviewed along with the possibility of expanding UK ETS to cover more sectors.

Creating low carbon products such as steel and cement will likely require global cooperation if carbon leakage is to be avoided. The Strategy states that this type of “climate diplomacy” will be pursued in the 2030s and 2040s, along with a review of how imports are treated to mitigate competitiveness impacts in domestic and international emissions policies.

How the UK ETS regime coordinates with the CCUS and hydrogen projects and infrastructure will be key to achieving the UK’s net zero aims.

On the same day as the publication of the Strategy, BEIS also announced its intention to launch the Green Gas Support Scheme (“GGSS”) – a tariff-based scheme supporting the injection of anaerobically produced biomethane onto the gas grid, and the Green Gas Levy (“GGL”) – a new levy on licensed fossil fuel gas suppliers which will fund the GGSS. The Government’s proposal for the GGSS was set out in its consultation on the “Future of Low Carbon Heat” (see here for our commentary on the consultation). Heating currently accounts for about one third of UK emissions and the GGSS is anticipated to create about 21.6MtCO2e of carbon savings during its lifetime. Both the GGSS and the GGL are intended to be launched in Autumn 2021.

What’s next?

The Strategy provides welcome direction on the measures for decarbonising industry, even if it does not go as far as the Committee on Climate Change advises – targeting reduction of at least two thirds of emissions by 2035 as opposed to the 78% recommended in the Sixth Carbon Budget. Furthermore, the Strategy announces limited new funding schemes to support the levels of policy ambition.

The Strategy contains an array of interconnected timelines in which the various measures should be achieved, many of which are themselves subject to consultation and change. For example, while encouraging the development of hydrogen value chains and use across a number of applications, the Government has not yet ruled out introducing a Future Homes Standard which would mandate “the end of fossil-fuel heating systems in all new houses from 2025” although doing so would impact the ability for planning of hydrogen infrastructure. What’s more, with Phase 1 of the Government’s CCUS cluster sequencing plan set to launch in April 2021, the industry will need to put together cohesive low carbon cluster plans working with a number of moving parts around policy and funding opportunities. Some details may emerge in the eagerly awaited Hydrogen Strategy and meanwhile investors planning projects in these decarbonising sectors will need to retain a degree of flexibility and agility in their plans to accommodate the evolving Government thinking.