Will the UK’s “colour-blind” hydrogen strategy accelerate the transition?

Introduction

The government’s strategy proposes a twin-track of blue and green hydrogen development

On August 17, 2021 the UK Government presented its long-awaited hydrogen strategy. The strategy sets out plans and proposals to help the UK reach the Government’s ambition of 5GW of low carbon hydrogen production capacity by 2030—the equivalent to the amount of gas consumed by over 3 million UK households each year. 

This target cannot be achieved through government action alone—energy companies, technology providers, investors and innovators all have a significant role to play. But in the absence of clear guidance on business structures, funding allocation and the regulatory regime, many have been reluctant to commit to new projects. The strategy goes some way to addressing this, and also identifies three important areas which require further industry input.

The government  has published three consultations alongside the strategy, requesting industry input on: the design of the hydrogen business model; the development and application of a low carbon standard; and the allocation of the Net Zero Hydrogen Fund, which aims to distribute up to £240mn ($322mn) of government funding by 2025.

A timeline for reporting on these consultations and finalising the details has been set out (along with a broader timeline of how the industry is expected to develop to 2030), and interested parties should expect to see the first round of funding distributed in early 2023.

The strategy formalises what is referred to as the “twin track” approach of the UK government – to actively pursue both green and blue hydrogen projects with a view to reaching the necessary scale for real change in the energy system more quickly than by pursuing hydrogen sourced from renewables alone. The government sees the logic in making use of its natural gas resources and market-leading position in offshore wind. Access to domestic resources and offshore wind knowledge for integrated green projects may help to get multiple hydrogen projects up and running more quickly, and with fewer parties involved.

Accelerating decarbonisation

In contrast with the approach taken in Europe so far, the UK government is at pains to stress it will not favour one “colour” of hydrogen over another—what is critical is that it comes from a low-carbon source. Angela Wilkinson, secretary general and CEO of the World Energy Council recently pointed out, “The colours attributed to hydrogen were originally intended to indicate the feedstock source, and do not reflect carbon intensity, a far more useful measure when it comes to energy and climate.”

By focusing on the end low-carbon product rather than the precise “colour” of the hydrogen (and obviously excluding the darker colours of the spectrum which could not be classified as low carbon), the UK is seeking to accelerate the transition whilst ensuring the North Sea remains a key player – both as producer and as a location for the safe storage of carbon.

The twin track approach of the strategy will support the ongoing objective of maximising economic recovery from the UKCS whilst taking into account decarbonisation obligations (as part of the North Sea Transition Deal with the UK government, producers are obliged to support efforts to  reach net zero carbon emissions by 2050).

This is a marked difference from the approach of the EU to date, which is focusing its efforts on hydrogen produced from renewable electricity.

This may prove to be the slower (albeit more sustainable) route to decarbonisation which could have the opposite effect from that intended, and actually hamper the bloc’s transition efforts. For example, the EU might have to consider importing hydrogen derived from non-renewable feedstock  if demand has been stimulated beyond available supply from green sources.

To prevent this happening in the UK, blue projects are being developed alongside green. The policy also makes sense when considering security of supply issues, as imports of green hydrogen may be difficult to source and also costly.

Incentivising investors

There are already significant challenges which need to be overcome to both produce and consume hydrogen at sufficient scale, including the current high cost of production, the lack of sufficient infrastructure for both production and transportation, and the uncertain regulatory environment—which all mean investors are reluctant to commit.

The strategy recognises the additional hurdles posed by focusing solely on green hydrogen—such as the lack of low-carbon hydrogen currently in production in the UK and the fact that a massive new build of renewable infrastructure is already required for decarbonising electricity—and is sensibly keeping its options open. By encouraging both blue and green projects to be developed, innovation from all angles will be stimulated, allowing new technologies to emerge whilst strategically positioning the UK within the burgeoning hydrogen market and ultimately ensuring a greater chance for low-cost energy to be made widely available.

The financial support offered by the government in the form of awards from the Net Zero Fund or entering into Contracts for Difference (CfDs)—a model with which the energy markets are already familiar—may encourage investors to take the leap, and the outcomes of those consultations will be critical.

Low-carbon credentials

Whether hydrogen is in fact low-carbon or not depends on a number of variables beyond the primary energy input and disappointingly, the strategy did not put forward any definition of “low-carbon”, instead publishing a report which explores a range of factors including maximum acceptable levels of greenhouse gas (GHG) emissions and the methodology for calculating these GHG emissions.

The issue has been put into consultation and views on the options for setting and implementing a low carbon standard are sought before the methodology is finalised. It is, however, a key commitment of the strategy that this will be published by “early 2022” and will encompass a myriad of low-carbon production methods beyond those generically referred to as blue and green.

The strategy acknowledges that the exact mix by 2030 and beyond will be influenced by a range of factors both within the government’s control (carbon pricing, final form of the subsidy regime) and those outside it (investor confidence, technology and innovation, market forces). For these reasons, and at this stage, the strategy encompasses a large proportion of the hydrogen rainbow.

Demand side

In contrast to the early days of renewables, the government is grappling with stimulating not only supply but also demand. There is an existing, relatively low demand for hydrogen in the context of refining, fertiliser production and petrochemicals. And some of these purchasers may switch to low carbon sources of hydrogen as part of the general decarbonisation of their businesses.

However, the strategy makes clear it does not want the consequence of this to be prevention of new supply from reaching other industries, slowing down the transition away from fossil fuels.  To achieve the scale of demand required to rapidly transition to a low carbon economy, strong financial support will be needed in those challenging sectors such as heat, transport and heavy industry.

The government is well aware that cost rather than colour is likely to be a key factor when selecting a supplier, although carbon intensity will of course be considered as part of the decision-making process. However, the strategy also indicates that many potential users are not even aware that hydrogen could be a solution for them, and so will focus efforts toward winning “hearts and minds” as well as providing financial incentives.

Current events

At the time of writing, there is debate as to whether the current spike in global gas prices may hinder the bankability of blue hydrogen projects in comparison to green. Events in the UK are also casting an interesting light on the progress of the energy transition.

Reported shortages of CO2 have impacted the food industry, causing a number of media commentators to query where the “U” has got to in plans for CC(U)S projects. Could the gap be filled by utilising captured carbon rather than simply storing it? Does this open up discussion for future income streams in blue hydrogen projects and in fact make them more attractive than before? Or is the technology simply too complex and expensive to contemplate at this nascent stage?

Separately, fuel shortages beyond the HGV driver crisis (90pc of petrol stations were reporting low or no fuel stocks caused predominantly by panic buying by consumers) are helping the early movers to hydrogen fuel cells to feel pretty pleased with their choices, and the situation may provide an additional nudge to those in the transport industry still considering their options.