1. Setting the Scene

The UK Government finally released its first ever Hydrogen Strategy on 17 August. The strategy aims to drive the development of a hydrogen economy in the UK by unlocking £4 billion of investment in ‘blue’ and ‘green’ hydrogen generation, storage and usage.

Business and Energy Secretary Kwasi Kwarteng says that this will create tens of thousands of jobs as well as support billions of pounds in investment and multiple new export opportunities for the UK over the next decade and beyond. However, the UK Government acknowledges that as the industry is rapidly evolving it is difficult to implement the right policies or subsidy regimes now that will be applicable to an ever-changing landscape. Consequently, certain key decisions have been delayed or are subject to public consultations.

This first report summarises the key aspects of the Hydrogen Strategy and provides commentary on its applicability and suitability for the UK hydrogen sector. This will be followed by more detailed reports looking in depth at specific sections of the Hydrogen Strategy such as storage, transport, heating and power.

2. Government Intention

The Hydrogen Strategy reiterates the UK Government’s target of 5GW of low carbon hydrogen production by 2030 that was set out in its Ten Point Plan from November 2020, and suggests that if the 5GW target is met, this could deliver total emissions savings of around 41MtCO2e between 2023 and 2032, equivalent to the carbon captured by 700 million trees over the same time period. In addition, we hear that by 2030 the UK-wide hydrogen economy could be worth £900 million, create over 9,000 high-quality jobs and attract £4 billion of private investment. This could rise to 100,000 jobs and a £13 billion market value by 2050.

By referring to “low carbon”, the UK Government is adopting a twin track approach of ‘green’ electrolytic hydrogen which the UK Government expects will be supported mostly through offshore wind; and ‘blue’ carbon capture-enabled hydrogen production which will be developed in industrial clusters, many of which are in coastal locations to take advantage of links to CO2 storage sites and disused oil and gas fields.

Green and Blue

The Hydrogen Strategy also sets out a crude roadmap for the production of ‘green’ and ‘blue’ hydrogen, suggesting that the early 2020s will likely see small scale (up to 20MW) green hydrogen projects deployed at pace, with production and end-use closely linked, e.g. at transport depots or industrial sites. By the mid-2020s, they expect to see larger (100MW) green hydrogen projects and the first CCUS-enabled hydrogen production clusters. By the end of the decade, the UK Government anticipates multiple large CCUS-enabled (500MW+) production facilities across the UK, with extensive cluster networks and integration into the wider energy system.

Storage

In terms of storage, the UK Government anticipates that over the next few years, storage vessels used at hydrogen refuelling stations coupled with electrolytic hydrogen production will be the most common form of storage due to their relatively low cost. However, as the demand for larger scale hydrogen storage solutions increases, underground storage facilities and salt caverns will become valuable assets, and storage in the form of ammonia will be key for higher fuel intensity uses such as shipping.

Heating

The Hydrogen Strategy suggest that by 2035 hydrogen could be playing a significant role in heating homes and businesses and powering cookers and boilers. The Fife neighbourhood heat trial will commence in 2023 with the aim of hydrogen heating 300 homes. This will be followed by a village heat trail in 2025 and a decision to be made in 2026 whether to commence heating towns on a wider scale with the first pilot town to be heated with hydrogen by 2030.

3. Government Commitments

In order to meet the 5GW low carbon hydrogen target, the UK Government has committed to making available a number of different grants to hydrogen projects across the supply chain. The Hydrogen Strategy helpfully sets out each funding option available and the key ones are as follows:

1. £240 million Net Zero Hydrogen Fund to be launched early 2022. This aims to support the commercial deployment of early stage low carbon hydrogen production projects across the UK through co-investment with the private sector. However, full details of this are subject to a public consultation – see below;
2. £60 million Low Carbon Hydrogen Supply 2 Competition with the aim of developing novel hydrogen supply solutions;
3. £105 million funding package through the UK Government’s £1 billion Net Zero Innovation Fund which includes
   1. £55 million for the 2nd Industrial Fuel Switching Competition to be launched later in 2021. This aims to support trials of solutions to switch industry from high to low carbon fuels such as clean hydrogen;
   2. £40 million Red Diesel Replacement Competition. This aims to support low carbon alternatives to diesel for the construction, quarrying and mining sectors; and
   3. £10 million Industrial Energy Efficiency Accelerator (IEEA). This aims to support solutions for reducing the UK industry’s energy consumption;
4. £315 million Industrial Energy Transformation Fund supporting the uptake of technologies that improve efficiencies and reduce the carbon emissions associated with industrial processes (including hydrogen);
5. £170 million UK Research and Innovation’s Industrial Decarbonisation Challenge fund – matched by £261 million from industry – to help develop industrial decarbonisation infrastructure (including low carbon hydrogen and CCUS); and
6. £1 billion Carbon Capture and Storage Infrastructure Fund launched in November 2020 with the aim of helping to implement CCUS clusters across the UK.

Nevertheless, there were a number of decisions and revenue support schemes which industry was hoping for but which have been allocated to public consultations or further Government review. For instance, in the Hydrogen Strategy the UK Government announced a:

1. Consultation on the preferred Hydrogen Business Model which is designed to overcome the cost gap between low carbon hydrogen and fossil fuels and which may be built on a similar premise to the offshore wind CfD model;
2. Consultation on the design of the £240 million Net Zero Hydrogen Fund to be launched in early 2022;
3. Consultation on a ‘UK Low Carbon Hydrogen Standard’, which seeks views on the options for setting and implementing a UK standard for low carbon hydrogen by early 2022;
4. Consultation planned for later in 2021 on the introduction of hydrogen ready boilers in homes by 2026;
5. Government review to create a production strategy for the proposed twin track approach to be launched by early 2022; and
6. Government review in place to support the development of the necessary network and storage infrastructure to underpin a thriving hydrogen sector.

In addition, the UK Government anticipates that there will be revenue support in place for the transport sector by 2024 but acknowledges that there is unlikely to be a dedicated framework for the wider low carbon hydrogen sector until 2025-2027.

4. Our view 

According to the Fuel Cells and Hydrogen Observatory 2021, less than 1% of hydrogen production capacity in the UK is from electrolysis, so the Government’s decision to adopt a dual track approach seems motivated by a concern that green hydrogen capacity alone would be insufficient for the UK to meet its low carbon hydrogen target.

The twin tracked support of both ‘blue’ and ‘green’ hydrogen may be the most controversial aspect of the Hydrogen Strategy with differing opinions on whether ‘blue’ hydrogen is a helpful enabling pathway for more widespread ‘green’ hydrogen in the future or whether it will lock in higher carbon emissions for the medium- to long-term future. Christopher Jackson, the Chair of the UK Hydrogen and Fuel Cell Association, resigned his position on the announcement of the Government Hydrogen Strategy, citing the support for ‘blue’ hydrogen as the key reason.

Without exclusive support from the UK Government for ‘green’ hydrogen production, the UK may fall behind even further in its capacity for producing zero carbon hydrogen. Hydrogen produced through methane reformation and CCUS may then continue to take precedence, especially as it is currently easier to deploy at large scale. The effect of this in the long term may be quite damaging without key technological advances as not only does a small percentage of methane leak into the atmosphere from steam reformation processes but currently the CCUS process is only able to capture between 75-90% of the CO2 produced.

In addition, many industry experts believe that the UK’s 5GW target is insufficient. David Smith, Chief Executive of the Energy Networks Association, says that

producing 5GW of hydrogen by 2030 will not be enough. We must set our sights higher, towards a figure twice that amount

In fact, GlobalData has tracked that the UK is on course to achieve 4.6GW of low carbon hydrogen production through projects that have already been proposed. The UK’s 5GW target is also far behind that other European countries such as Netherlands (15GW by 2030) and Germany (14GW by 2030), and only a fraction of the EU’s target of 40GW by 2030.

Perhaps the most frustrating aspect of the Hydrogen Strategy is that, after such a long delay, it is still lacking detail and clarity on certain policies and fiscal support offered to the low carbon hydrogen sector. As we identified above, a number of decisions (including the much anticipated subsidy regime for the hydrogen sector) have been delayed, either through the implementation of public consultations or simply by pushing deadlines down the road.

Instead the UK Government has set out principles upon which certain future policy decisions will be made. These principles commit it to developing the low carbon hydrogen sector by adopting a holistic approach to ensure that the whole economy can grow and UK companies can position themselves at the forefront of the growing global hydrogen market. This should not come at the expense, however, of long term value for taxpayers, and any increase in costs for consumers and households need to be considered.

We look forward to seeing the outcomes of these consultations and how the UK Government will approach the important issue of subsidies for the low carbon hydrogen sector. If a similar approach to offshore wind is adopted then we may see a meaningful increase in private sector investment which may help to stimulate the UK’s capacity for green hydrogen and improve our chance of meeting our Net Zero goals.

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