Ripe for reform: proposed RTFO developments to facilitate hydrogen uptake

United Kingdom

The Renewable Transport Fuels Obligation (“RTFO”) was established in 2008 with the aim of reducing greenhouse gas (“GHG”) emissions of the transport sector, which currently accounts for the greatest share of UK GHG emissions.

The RTFO requires that suppliers of at least 450,000 litres of transport or non-road mobile machinery fuel during any obligation period (a calendar year) must supply a certain percentage of eligible renewable fuels – currently 12.4% between now and 2032.

Suppliers satisfy their obligation by surrendering the appropriate number of “renewable transport fuel certificates” (“RTFC”), which are issued to suppliers of renewable fuels. They can meet this obligation in one of two ways:

  1. supplying renewable fuel and receiving RTFCs in return; or

  2. purchasing RTFCs from other suppliers (or paying the current “buy-out price” for every RTFC or litre they are short of their obligation) .

Initially aimed at incentivising the use of biofuels, the RTFO has undergone various amendments during its lifetime aimed at maximising GHG emission savings and increasing sustainability. In 2019, a “development fuel” obligation was introduced to provide additional incentive for the supply of fuels of strategic importance which are currently more costly to produce, such as renewable hydrogen. Suppliers must now provide a percentage of development fuels – currently 0.5% – in addition to the main obligation to provide renewable fuels. Fuels qualifying as “development fuels” receive double RTFCs. However, the uptake of renewable hydrogen on the back of the RTFO did not materialise. Critics have attributed this to the lack of clarity over how hydrogen projects could participate in the RTFO and lack of administrative practice to genuinely support and guide supply and demand side through the RTFO requirements which would qualify for double RTFCs.

On 25 March 2021 the Government issued a consultation on its proposed changes to the RTFO, with the stated aim of accelerating transport decarbonisation through increasing the GHG emissions savings that the scheme achieves. Here, we provide an overview of the proposed changes and then look in further detail at the implications for hydrogen and carbon capture, usage and storage (“CCS”) which would be involved in blue hydrogen production.

Overview of proposals

  1. Increase RTFO main obligation to supply renewable fuel by 2.5% - a 1.5% increase will be required in 2022, with an additional 1% spread over 2023 to 2032.

  2. Recycled carbon fuels (“RCFs”) to be eligible for RTFO support – RCFs are fuels produced from fossil wastes that cannot be avoided, reused or recycled e.g. industrial waste gases and non-recyclable plastic. The consultation suggests that the ability to reduce GHG emissions by supporting RCFs via the RTFO is twofold:

    1. providing a route to recover the most energy from problematic residual waste, which would otherwise end up in landfill; and

    2. supporting increased use of biomass waste since RCFs are often mixed with biogenic material e.g. food contaminated packaging and sanitary waste.

  3. Expand the scope of eligibility of renewable fuels of a non-biological origin (“RFNBOs”) – RTFO support may be extended to RFNBO fuels used in maritime, rail and non-road vehicles.

  4. Amend support for biohydrogen – biohydrogen produced using steam methane reformation (“SMR”)  and autothermal reformation (“ATR”) will no longer be eligible for RTFO support.

  5. Update sustainability criteria – proposed measures to further improve the sustainability profile of RTFO supported fuels include:

    1. increasing the quantity of GHG emissions that newer biofuels production installations must avoid in order to be eligible; and

    2. protecting additional land types that store large amounts of carbon by making biofuels grown on that land ineligible for RTFO support in some cases.

  6. Updating civil penalties – to reflect recent changes to the buy-out prices (currently £0.50 per litre for the main obligation and £0.80 per litre for the development fuel obligation).

  7. Changes to ensure that renewable fuels and chemical precursors do not receive multiple incentives – further restricting the situations where a fuel can receive RTFO support so that any fuel which:

    1. counts towards another renewable energy obligation in the UK or elsewhere in the world; or

    2. receives another form of support including FiT or premium payments, is not eligible for support under the RTFO, with an exception for financial incentives to develop fuels and technologies.

Implications for hydrogen projects

Application of the RTFO

Depending on how it is produced, hydrogen can be eligible for support under the RTFO – either as a biofuel, where produced using biomass, or, since 2018, as an RFNBO where it is ‘green hydrogen’ – i.e. produced using non-biological renewable power such as wind or solar.

Currently, all hydrogen produced in compliance with the RTFO’s sustainability requirements is classed as a development fuel and thus should be eligible to receive twice as many RTFCs as crop-based biofuel. However, for reasons including those set out below, in practice the current RTFO requirements have included barriers which have, at least in part, hindered the ability of hydrogen projects to participate in the RTFO scheme.

Meeting the GHG emissions saving threshold

Current treatment of hydrogen

Under the present RFTO rules, a UK RFNBO production plant, such as a hydrogen electrolyser, which is not directly connected to a renewable energy source, such as a wind farm, may not meet the RTFO GHG emissions saving requirements necessary in order to be eligible for support. This is because where the plant sources power from the national grid, such power is likely to be derived from a combination of renewable and non-renewable sources and it is difficult to evidence the meeting of the GHG emissions saving threshold required – currently 60% for RFNBO, proposed to be increased to 65%.  In addition, RFNBO suppliers must demonstrate that the renewable power they use is “additional”, meaning that it does not detract renewable energy from other sources where that power would have been used. This means that RFNBO suppliers which source power through the grid are required to account for the GHG emissions caused by the resulting renewable energy displacement i.e. the fact that they have taken renewable energy away from other grid reliant sources, which will now require replacement power.

Demonstrating renewable energy source via a power purchase agreement (“PPA”)

The consultation recognises that this treatment can be a barrier to the deployment of hydrogen, which will be essential in particular in decarbonising hard to electrify means of transport. It is therefore proposed to allow RFNBO’s to demonstrate the renewable nature of their power source via PPAs.

This has the potential to support the building of RFNBO plants like hydrogen electrolysers in places of maximum demand e.g. at transport hubs, where co-location with a renewable power source  is not possible. The consultation clarifies that suppliers seeking to rely on a PPA must also satisfy the requirements around additionality and must show time correlations between the production of renewable energy and RFNBO.

Enabling the use of PPAs has an additional benefit of avoiding curtailment in regions where grid constraints mean renewable energy is lost at times of peak generation, where RFNBOs enter into PPAs with these generators. While this is a welcome direction of travel, the consultation does not offer sufficient linking up with the changes seen in the electricity market. For example, it would merit considering how hydrogen projects can be incentivised to produce during periods of negative wholesale electricity prices. Nor does it address the issue of needing to track the RTFCs through the hydrogen value chain (from production to consumption of the fuel).

Adopting GHG emission factors from regional or local electricity grids

The consultation notes than in certain parts of the world, electricity grids are not national in scale and that the use of a national grid average for GHG emissions is therefore inappropriate. It is suggested that in these circumstances, a regional or local GHG emission factor may be used where it can be demonstrated that the regional or local grid is “highly renewable and sufficiently separate” from the national grid. This will be consulted on separately.

The consultation uses Canada and the US as examples of non-national electricity grids. It is not clear whether or how this would apply to the UK, to which the RTFO applies, which has a national grid. Pursuant to the proposed consultation changes, the regional GHG emissions saving threshold would need to be at least 65% in order to satisfy the RFNBO eligibility requirements.

Fuel use eligible for RTFO support

Fuel uses currently eligible

The RTFO currently supports renewable fuels used in road vehicles and non-road mobile machinery. The consultation proposes expanding support to cover renewable fuels used in maritime, fuel cell powered trains and non-road vehicles.

Hydrogen has been identified as a possible solution for decarbonising maritime transport, the large fuel demand of which is unlikely to be satisfied by 100% biofuel. 95% of the UK’s trade is handled by the UK’s 51 major ports, which together contribute about £14.5 billion gross value added to the UK’s economy annually. Decarbonising the maritime sector will therefore be crucial in achieving the UK’s net zero ambitions, and, assuming hydrogen rather than ammonia is the fuel of choice, support via the RTFO is one means of encouraging this.

Hydrogen fuel cells are also being considered as a means of decarbonising those elements of the UK rail network which are not suitable for electrification, as well as non-road vehicles such as farming and construction equipment which are not currently supported under the RTFO. Under the proposed changes, fuel cell powered trains and non-road vehicles would be eligible for support.

Treatment of biohydrogen

Steam Methane Reformation and Autothermal Reformation

The consultation states that SMR and ATR of biomethane to produce biohydrogen are now established technologies and should therefore no longer be classed as development fuels, receiving corresponding double RTFCs. Going forward, it is proposed that hydrogen produced in this way should instead be eligible for RTFCs but not at double-levels.

Other novel biohydrogen production methods

The consultation also highlights direct biomass gasification, direct hydrogen biological processes such as fermentation and RFNBO hydrogen produced from a renewable energy-powered electrolyser as being development fuels, thus eligible to receive double RTFCs.

Hydrogen with CCS

The consultation highlights that biohydrogen produced using a combination of gas reformation and carbon capture and storage would be classified as a development fuel, This will be welcome news to the producers of “blue hydrogen” and is further evidence of the Government’s view of the strategic importance of CCS and its ambitions to develop the technology in the UK. This also follows other recent announcements by Government around the technologies, including the CCUS business models consultation and recent consultation on CCUS cluster sequencing, which envisages hydrogen production combined with carbon capture, as well as statements in the recent Energy White Paper that the RTFO and other mechanisms would be used to aid the deployment of 5GW of low-carbon hydrogen production capacity by 2030.

Blue hydrogen – subsidy choice required?

One notable proposed amendment is that renewable fuels “in receipt of support which benefits the end supply of fuel” will not be eligible for RTFO support. The consultation names feed-in tariffs and premium payments as schemes which may constitute this type of “support”. Given the Government’s ambition of deploying carbon capture and low carbon hydrogen at scale in the UK, it will be necessary to ensure that the technologies aren’t precluded from RTFO eligibility by virtue of other support schemes that the Government might offer. The hydrogen strategy and CCUS hydrogen business model consultation, expected in Q2 of this year, along with the Transport Decarbonisation Plan anticipated in Spring 2021 are likely to provide further important information for industry on proposed Government support. Industry will no doubt be watching closely for signs of this potential subsidy arbitrage.