Hy time for hydrogen – key takeaways from the UK’s hydrogen strategy

United Kingdom

On 17 August 2021, the UK Government Department for Business, Energy and Industrial Strategy (“BEIS”) published its long-awaited and first ever Hydrogen Strategy for the UK (the “Strategy”).[1] The Strategy reinforces prior commitments made by the government to deploy hydrogen as a means to decarbonise parts of the electricity, heating, transport and industry sectors, and provides more definition as to how these commitments are intended to be achieved. It also sets forth the government’s vision for a hydrogen roadmap over the 2020s, the availability of funding packages, and, as indicated in the government’s Ten Point Plan, launches a consultation on hydrogen business models.

In this article, we provide an overview of some of the key points coming out of the Strategy and comment on how the Strategy aligns with the wider framework of hydrogen policy developments.

1. The Hydrogen Strategy – an overview

The overall ambition of the Strategy is not unexpected and confirms the government’s position in the Ten Point Plan to accelerate the UK’s path to net-zero. In particular, the prior ambition for 5GW of low carbon hydrogen production capacity by 2030 (and 1GW by 2025) has not increased. That said, it does provide clarity on the following:

a) A roadmap for the 2020s

The Strategy outlines a more detailed roadmap to developing a hydrogen economy in the UK over the next decade, taking a ‘whole-system approach’. It is divided into key archetypes and milestones that the government expects to see in terms of production, networks and use of hydrogen in the early, mid and late 2020s to reach its 5GW goal, as well as an indication of the intended direction from the mid-2030s and beyond – see Figure 2.1 from the Strategy replicated below. However, supporting policies and activities, including the development of regulatory frameworks, will need to be in place to deliver the roadmap. An initial network regulatory and legal framework is not expected to be in place until 2025 at the earliest. Until then, networks are envisaged to be delivered through existing frameworks.

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b) Hydrogen business models and a low carbon hydrogen standard

An important document accompanying the Strategy is the consultation (“Consultation”) on the proposed business models to support hydrogen production (both blue and green hydrogen are currently envisaged to use the same model and it is intended to cater for a range of possible end users). As indicated in the Ten Point Plan, the Strategy confirms the government’s ambition to finalise the hydrogen business model in 2022 so as to enable first contracts to be allocated from Q1 in 2023. Whilst many in the industry had anticipated that the preferred business model for hydrogen will be based on the offshore wind Contract for Difference (“CfD”) scheme – and the contract will now be with a government counterparty – the Consultation sets out a number of options as well as giving an indication of the government’s preferred approach (and reasons behind it).

Namely, the Consultation states that the hydrogen CfD will be a variable price support model whereby the reference price will comprise, at least initially, the highest of two proxies (methane gas price and sales price achieved by the producer). The government is also likely to follow the FIDeR approach to early contracts – eligible projects are invited to make applications in 2022 with selection to be made in 2023.

Which projects will be eligible is yet to be determined and is subject to a separate consultation. The Strategy anticipates that this standard will be developed over the course of the year and published in 2022 (presumably in time for the first hydrogen CfD allocation).

However, a number of key parameters to the business model are yet to come – they include details of the proposed contract term, what indexation will apply, how the sliding scale of support will work and details for regulating the distribution and storage of the hydrogen produced.  Some of this is likely to be published in the indicative Heads of Terms expected to be published in Q1 2022. 

c) Hydrogen blending (as part of combination with existing gas networks)

The Strategy outlines that the government is working with the Health and Safety Executive to assess the potential for 20 per cent hydrogen blending into the gas network. There are a number of projects trialling hydrogen blending (up to 100%) and supporting the development of ‘hydrogen-ready’ appliances. This includes projects like FutureGrid which aims to create a representative transmission network to trial hydrogen and will allow for real-time testing and analysis of the network in operation over the coming months. The final decision on whether the UK will permit blending of 20% hydrogen into the natural gas grid will depend on the safety case approval from the Health and Safety Executive (HSE) and economic assessments.

If permitted, this is one of a number of areas which will require changes to legislation – both a review of the market framework set out in the Gas Act 1986 and changes to the Gas Safety (Management) Regulations 1996 which currently limits hydrogen content in the gas networks to 0.1% by volume.

The government also intends to review gas quality standards, with a view to enabling the existing gas network to have access to a wider range of gases, including hydrogen, subject to successful blending trials. A Call for Evidence on the future of the gas system is to be launched later in 2021 which, amongst other things, will look at the implications for increased use of hydrogen in the existing gas system.

d) Hydrogen markets

Longer term, the Strategy envisages the development of a domestic and international hydrogen market. A combination of market developments is expected to underpin the longer-term vision of hydrogen being economically viable without subsidies. These include: revising the design of the UK Emissions Trading Scheme and sustainably increasing the price of carbon to be consistent with net zero commitments; cost reductions and scale increases in hydrogen production technologies; the development of distribution and storage infrastructure to expand the hydrogen economy; the roll-out of sector-specific decarbonisation policies that drive demand for low carbon hydrogen and establishing a regulatory and market framework that supports hydrogen deployment at scale.

e) Monitoring and reporting

The Strategy notes that tracking progress will be essential to ensuring that the key outcomes – long term value for money for taxpayers and consumers, growing the economy whilst cutting emissions, securing strategic advantages for the UK, minimising disruption and cost for consumers and households, keeping options open, adapting as the market develops and taking a holistic approach –  are achieved. The Strategy provides a set of indicative metrics (see Table 5 from the Strategy replicated below) which may be used to measure progress against these outcomes, noting that flexibility will be needed in respect of monitoring given the nascent nature of low carbon hydrogen and the fact that the exact mix of technologies comprising the hydrogen economy and how it will compare with other new low carbon technologies is unknown. BEIS also note their intention to update the Strategy every five years.

Strategy Outcome

Potential indicators and metrics

Progress towards 2030 ambition

  • Low carbon hydrogen capacity installed (GW)
  • Volume of hydrogen produced (TWh)
  • Breakdown by technology (such as electrolysis and methane reformation)

Decarbonisation of existing UK hydrogen economy

  • Remaining volume of fossil fuel hydrogen produced (TWh)

Lower cost of hydrogen production

  • Levelised cost (£/MWh)

End to end hydrogen system with diverse range of users

  • Estimated volume of hydrogen used in the UK (TWh by sector)

Increased public awareness

  • Percentage of people aware of/familiar with hydrogen

Promote UK economic growth and opportunities (including jobs)

  • We are exploring using metrics such as:
  • Number of low carbon hydrogen jobs available in different regions of UK and/or percentage of people trained or retrained into ‘green’ jobs within the sector
  • R&D spend and patents
  • Gross Value Added (GVA)

Emissions reduction under Carbon Budgets 4 and 5

  • CO2 emissions reduction from hydrogen

Evidence-based policy making

  • Quantitative and qualitative data collected
  • Engagement with stakeholders and expert advice
 

2. The Hydrogen Strategy – hydrogen applications

The Strategy cannot be considered in isolation; crucially, to reach the government’s targets, policy development and implementation must progress in transport, heating and industry applications of hydrogen.

a)Transport

The Strategy outlines that hydrogen is likely to be fundamental to achieving net zero in transport by complementing electrification or providing an alternative solution for sectors not able to otherwise decarbonise, such as shipping. BEIS identifies transport as being one of the biggest future components of the UK hydrogen economy, and by 2030, envisages that hydrogen will be used across a range of transport modes including HGVs, buses and rail.

The Strategy also makes various financial commitments towards developing hydrogen use in transport, including £120 million towards 4,000 new zero emissions buses (either hydrogen or electric), £20 million for both electric and hydrogen long haul HGVs, and £3 million to support the development of a hydrogen transport hub in Tees Valley that will focus on research and demonstrations.

However, more clarity is needed on how the Strategy will align with the Department for Transport’s (“DfT”) plans, and in particular, how hydrogen suppliers can participate in the Renewable Transport Fuels Obligation (“RTFO”). The RTFO has been in place since 2008 and is a certificates-based mechanism used to incentivise the use of renewable fuels in transport and non-road mobile machinery (“NRMM”). It requires that suppliers of at least 450,000 litres of transport or NRMM fuel during any obligation period (a calendar year) must supply a certain percentage of eligible renewable fuels – currently 12.4% by 2032, but this is to increase to 14.6%.

Hydrogen can be eligible for support under the RTFO either as a biofuel, where produced using biomass, or, since 2018, as an renewable fuel of a non-biological origin (“RFNBO”) where it is “green” hydrogen – i.e. produced using non-biological renewable power such as wind or solar. However, for reasons we have set out previously in a separate Law-Now article, in practice, the current RTFO requirements include barriers which have, at least in part, hindered the ability of hydrogen projects to participate in the RTFO scheme.

On 25 March 2021 the DfT issued a consultation on its proposed changes to the RTFO. The proposed changes not only included increasing the RTFO target to 14.6% as above, but also measures aiming to provide some clarity for hydrogen suppliers. The government has now published its response to the consultation (the “Response”) which confirms, amongst other measures, that:

  1. It will expand the RTFO to support renewable hydrogen and other RFNBOs used in maritime transport, trains with alternative propulsion systems (e.g. renewable hydrogen in fuel cell powered trains) and alternatively powered non-road vehicles such as loading and construction equipment powered by hydrogen fuel cells (at present, the definition of NRMM only includes machinery powered by an internal combustion engine). This change will support the Strategy, which identifies hydrogen as a possible solution for decarbonising maritime transport and UK rail not suitable for electrification;

  2. It will proceed with its consultation proposal to strengthen existing restrictions which prevent renewable fuels from receiving support under the RTFO if they already receive other incentives, potentially including feed-in-tariffs or premium payments. The Response notes, however, that electricity which has benefitted from support such as under the BEIS Contract for Difference or Renewables Obligation scheme will remain exempt as it is not a renewable fuel or chemical precursor. If the electricity is being used to produce renewable hydrogen and has benefited from support, the hydrogen itself would still be eligible for certificates. DfT maintains that this change aims to limit market distortions and promote a fair renewable fuels market. However, this may hinder ambitions to deploy carbon capture and low carbon hydrogen projects at scale in the UK where they might benefit from other governmental support schemes; and 

  3. It recognises industry’s need for flexibility in rewarding renewable RFNBOs (like renewable hydrogen) under the RTFO, in particular, having more freedom to locate production plants away from sources of renewable energy. However, due to the complexity of this area, the DfT will take additional time to consider industry responses on this matter, as well as on the eligibility of grid supplied renewable power for RFNBO production, additionality requirements, and on changes to the level of rewards for biohydrogen. A further response will be published “later in summer” which will hopefully shed light on these important, and rather extensive, considerations for hydrogen suppliers looking to participate in the RTFO.

While these changes offer some insight on the future applicability of the RTFO for hydrogen fuel suppliers, uncertainty remains, and in implementing the Strategy, BEIS must align with the DfT, as well as the Treasury, to ensure that hydrogen will be able to deliver the government’s transport decarbonisation goals.

b) Heating

The Strategy recognises that hydrogen is ‘one of a few key options’ for decarbonising heat in buildings, alongside electrification and heat networks. However, BEIS points out that further evidence is required in relation to safety and feasibility, and as a result expects low demand for hydrogen heating by 2030. To accelerate a positive case for hydrogen heating, and gather more evidence, the government is committing to support various hydrogen heat trials, including a neighbourhood trial by 2023 and a village scale trial by 2025. These trials are to inform its 2026 strategic decision on the future of hydrogen for heat. In terms of hydrogen appliances, the government is to consult later in 2021 on the case for enabling or requiring new natural gas boilers to be easily convertible to use hydrogen.

Progress with hydrogen heating is, however, being held back by the delayed publication of other plans, as well as, potentially, a lack of coherence with such other essential policies and legislation. The government’s Heat and Buildings Strategy, also within the remit of BEIS, was originally promised by Summer 2020 but has not yet been published. It has been flagged as a priority by the latest 2021 Progress Report to Parliament by the Committee on Climate Change, which overall is critical of the government’s lack of policy in this area.

Without sight of, and alignment with, the Heat and Buildings Strategy, the role of hydrogen for heating as outlined in the Strategy is less clear. One particular area requiring clarification is how the government’s plans to potentially end gas grid connections for new homes built after 2025, as set out in its 2020 Energy White Paper, will sit alongside plans in the Strategy to potentially use green hydrogen to heat homes. It remains to be seen whether the proposal to end new home gas grid connections will go ahead, but it calls into question whether hydrogen will only be used for any remaining boilers (blended with natural gas or otherwise), or as part of district heating systems, if at all. In any case, significant legislative changes will be required to be able to convey or blend hydrogen onto existing gas networks as there are strict limits on the amount of hydrogen that can be injected safely onto the system.  In addition to the new trials outlined in the Strategy, the outcomes from projects such as Hy4Heat, which is assessing the potential use of hydrogen to heat UK homes and businesses (and in particular addressing safety issues and the development of domestic appliances), and HyDeploy, which is testing an injection of up to 20% hydrogen into the natural gas network, are also likely to provide insight as to the long-term future and policy of using hydrogen for heating.  

c) Industry

While advocating a twin track approach, the Strategy’s approach to use of hydrogen in the industrial sector is aligned with use of hydrogen with carbon capture, utilisation and storage (“CCUS”) projects. The Strategy proposes to publish a call for evidence to explore with industry what further interventions are needed to phase out carbon intensive hydrogen and transition to low carbon production methods and sources at pace. It also commits to working with cluster projects, where CCUS facilities (that may incorporate low carbon or “blue” hydrogen production) share infrastructure, to better understand the opportunities of these clusters. As both CCUS and hydrogen technologies are still in early stages, and costs are comparatively high when measured against other established forms of energy, discussion is ongoing as to how incentivisation might work. The government is currently researching and developing business models that will support investment in CCUS and hydrogen projects and develop the market, but these are still a work in progress, with no substantive hydrogen business model having been published at the time of writing. In particular, the revenue mechanism for these kinds of projects is still under discussion. However, as above, in tandem with the publication of the Strategy, the government has launched a Consultation on the preferred hydrogen business model which is to be built on a similar premise to the offshore wind Contract for Difference scheme. As in its Ten Point Plan, the government’s target milestone is for the preferred hydrogen business model to be finalised by 2022.

Determining how a CfD mechanism will work for a gas that is (a) produced using different input fuels; (b) in need of investment to enter the market; and (c) is not yet fully commercialised (and therefore has no benchmark price) may be a challenge. The difference between blue and green hydrogen may also pose a challenge in terms of investment options; whilst there is potential to raise funding for investment by introducing a consumer levy, this may be confronted with industry backlash, particularly from green energy suppliers, as has recently been the case for investments into nuclear technology.

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Comment

The Strategy builds on the Ten Point Plan to have 5GW of low carbon hydrogen generation by 2030. The consultations about business models, what sorts of projects would be eligible to be called low carbon and how the £240m ‘Net-Zero Hydrogen Fund’ should be allocated are all key planks in building a hydrogen regulatory framework within which such projects can be situated. In particular, it will be interesting to see how regulation of the hydrogen economy will fit with the existing regulatory framework of the energy sector, which is itself currently undergoing significant reform (see our commentary on energy code reform here).

Blue hydrogen producers will no doubt want to understand how the proposed hydrogen business model Consultation proposals fit with the CO2 infrastructure and potential funding via the CCUS cluster sequencing competition (see here for our commentary), with five eligible Phase-1 clusters having been announced in July 2021.

The government expects that 20-35% of the UK’s energy consumption in 2050 can be met with hydrogen use and that it can be used in sectors ranging from heating to heavy industry, land, air and maritime transport. However, while the Strategy is much awaited and welcomed by many in the industry, it leaves plenty of work to be done both by government and their advisors. Legal analysis and the development of new laws and an industry framework is yet to come. The Strategy notes that primary as well as secondary legislation may be needed in a number of cases. This is in addition to navigating the HSE and environmental regulations, whether as part of consenting such projects or in trying to get them built.

While 5GW may not sound like a lot compared to some of the UK's neighbouring countries - for comparison, the EU is targeting 40GW by 2030 - and 2030 may sound a whole decade away, if the UK wants to build the hydrogen economy set out in the Strategy, there is plenty for all to do over the coming months. For example, there are a number of gaps to fill: the business models are acknowledged as not necessarily being suited for smaller hydrogen producers. Similarly, the Strategy's twin track approach can be said to have a bigger track for blue hydrogen projects, while with information needed for green hydrogen projects is absent.

Still, with just weeks to go before the COP26 climate change summit, it is encouraging to see that with this publication, the UK joins the 30+ other countries which already have hydrogen-specific strategies; representing an important signal of the UK’s commitment to achieving its net-zero greenhouse gas ambitions.

The authors would like to acknowledge the assistance of Kirsty Mitchell, Legal Assistant, in preparing this article.


[1] The Scottish Hydrogen Policy Statement was published in December 2020 – see our analysis of it here.