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August 23, 2021

UK Hydrogen Strategy: Significant Commercial Opportunities Promised

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UK HYDROGEN STRATEGY: SIGNIFICANT COMMERCIAL OPPORTUNITIES PROMISED

On August 17, 2021, the U.K. government published its highly-anticipated Hydrogen Strategy. The strategy outlines the U.K.’s approach to developing a thriving low-carbon hydrogen sector, re-states its ambition for 5GW of low carbon hydrogen production capacity by 2030 and outlines how the hydrogen sector will be instrumental in achieving the U.K.’s target of net zero greenhouse gas emissions by 2050.

This article provides an overview of the U.K. Hydrogen Strategy and highlights some of the key commercial opportunities outlined thereunder.

Key Takeaways

  • Significant investment is required to reach the U.K.’s target of 5GW low carbon production by 2030, up from close-to-zero installed capacity today.
  • A twin-track approach will be pursued, with both blue and green hydrogen encouraged initially and other technologies (including nuclear-powered electrolysis and methane pyrolysis) being explored further.
  • The government is assessing the potential for blending of up to 20 percent hydrogen in the national gas grid to create an early market for hydrogen.
  • A consultation has been launched for a revenue support mechanism to incentivize low carbon hydrogen production and bridge the cost of production gap with high carbon alternatives, with a proposal expected in Q1 2022 (see Hydrogen Business Model Consultation).
  • A consultation has been launched for a £240 million Net Zero Hydrogen Fund to support the commercial deployment of new low carbon hydrogen production projects through the 2020s (see Net Zero Hydrogen Fund Design Consultation).
  • A consultation has been launched for the development of a common low carbon hydrogen standard with the aim of establishing consistent sustainability and greenhouse gas emissions criteria (see U.K. Low Carbon Hydrogen Standard Consultation).
  • Actionable funding opportunities will appear as the government makes more concrete proposals (in particular, during early 2022).

Overview of the UK Hydrogen Strategy

The government estimates that the market stimulation promised by the U.K. Hydrogen Strategy could facilitate up to £4 billion of private sector investment in the U.K. low carbon hydrogen market during the 2020s alone, representing not insignificant investment potential arising from the implementation of the measures contained in the U.K. Hydrogen Strategy.

In addition to the consultations described above, the U.K. Hydrogen Strategy proposes various mechanisms to support decarbonization across all sectors of the economy through the adoption of low carbon hydrogen. These will include exploring hydrogen’s increased use in industry and the encouragement of developments in hydrogen networks, storage, hydrogen-to-power, transportation and domestic heating applications.

Twin-track Approach: Green and Blue Hydrogen

Similar to the recently-announced U.S. strategy (see our article, DOE Launches Energy Earthshot to Spur Low Cost, Clean Hydrogen), the U.K. Hydrogen Strategy reflects a “twin-track” approach of developing both green and blue hydrogen. Today, most hydrogen is produced by reacting natural gas with steam (commonly known as Steam Methane Reforming), a highly carbon-intensive and methane-intensive process. Blue hydrogen refers to hydrogen produced in the same manner but with the addition of carbon capture, usage and storage (CCUS) which is aimed at reducing carbon emissions from the production process. Green hydrogen refers to hydrogen produced through the electrolysis of water using renewable power.

There are no established international definitions or standards for green or blue hydrogen, although there are a number of initiatives to create such standards in different jurisdictions. The U.K. Hydrogen Strategy’s launch coincides with the commencement of a consultation to establish a consistent standard for low carbon hydrogen. This is intended to aid the uptake of hydrogen by giving producers clarity with respect to the production processes that must be followed to produce low carbon hydrogen meeting a common standard and give consumers confidence in the sustainability and low carbon credentials of low carbon hydrogen. Our own view, based on experience developing hydrogen projects worldwide, is that this is an essential cornerstone of the development of the sector that should be pursued as quickly as possible.

It remains to be seen whether the government’s support for blue hydrogen will continue in the long-term. A number of other countries, as well as the EU member states as a bloc, currently view blue hydrogen (at best) as a transitional source of energy or a pathway to reduce emissions from industries that for technological reasons are reliant on gas for the long term, with green hydrogen being the preferred production pathway. It will be particularly important to see whether the low carbon standard to be developed will impose requirements on the source of electricity to be used to power the CCUS as well as taking into account methane leakage in the system boundaries when determining the carbon footprint for blue hydrogen production.

Proposed Support Mechanisms

The government has proposed the following key support mechanisms, which will be of interest to potential investors in the U.K. hydrogen sector:

  • The launch of the £240 million Net Zero Hydrogen Fund (NZHF) in early 2022 for co-investment in early hydrogen production projects. The aim of the NZHF is to support the commercial deployment of new low carbon hydrogen production projects during the 2020s and thereby help to mitigate the barriers related to the commercial risk and high production costs of hydrogen as compared to fossil fuel alternatives. The government is consulting on the design and delivery of the NZHF alongside the publication of the U.K. Hydrogen Strategy.
  • Delivery of the £60 million Low Carbon Hydrogen Supply 2 competition, which is intended to support the development and cost reduction of a wide range of world-leading technologies in the low carbon hydrogen sector.
  • Finalization of a Hydrogen Business Model during 2022 which aims to provide long-term revenue support starting early 2023 for hydrogen producers to overcome the cost barriers of producing low carbon hydrogen compared to cheaper, high-carbon alternatives. The options considered by the government are generally based on the contract for difference model successfully employed in the U.K. to procure renewable electricity generation capacity. A Hydrogen Business Model Consultation was published alongside the U.K. Hydrogen Strategy and the government intends to publish its response, together with an indicative Heads of Terms for the proposed support mechanism, in Q1 2022.
  • By early 2022, the government commits to provide further detail on its strategy for supporting low carbon hydrogen production and its twin-track approach of supporting both green and blue hydrogen.
  • Further expansion of the U.K. ETS to cover a greater share of the U.K. economy’s emissions, with the government committing to publish further aspirations on how it will continue to pioneer an ambitious carbon pricing regime ahead of COP 26 in Glasgow in November 2021.

Conclusions

The government’s Hydrogen Strategy indicates great promise for the U.K. hydrogen sector, although the implementation is of course critical. How these statements of ambition will, practically speaking, translate into viable commercial opportunities for investors and meaningful decarbonization will depend to a great extent on the outcomes of the government’s consultations published in parallel with the U.K. Hydrogen Strategy. Further clarity on this should be possible from early 2022 when the initial incentives to be offered to investors in low carbon hydrogen should be published.

As part of our work representing key stakeholders in the low carbon hydrogen sector and the energy transition more generally, we are closely following these and other developments in the policy and regulatory landscape and would be happy to speak with you if you would like further information as these matters evolve.

Special thanks to attorney Saloni Patel who contributed to this publication.

Authors and Contributors

Iain Elder

Partner

Project Development and Finance

+44 20 7655 5125

+44 20 7655 5125

+971 2 410 8100

+971 2 410 8100

London

Dan Feldman

Partner

Project Development and Finance

+971 2 410 8158

+971 2 410 8158

Abu Dhabi

Ben Shorten

Partner

Project Development and Finance

+44 20 7655 5923

+44 20 7655 5923

London

Frederick Lazell

Associate

Project Development and Finance

+44 20 7655 5968

+44 20 7655 5968

London