The UK's approach to development of green energy sources: why the renewed interest in hydrogen?

Introduction: looking beyond renewable electricity sources

Until recently, global efforts to reduce carbon emissions have focused on reducing emissions from electricity generation. Indeed, renewable energy technologies have been deployed so successfully in a large number of countries over the last two decades that many of these technologies, such as onshore and offshore wind and solar PV, have become an established part of the electricity generation mix. But there is increasing recognition of an acute problem: it is not sufficient to aim to just reduce our carbon emissions, but rather aim for net carbon zero. If this objective is to be realised, then it is clear that there needs to be a reach beyond the power sector, and decarbonise transport, heating and industry – areas which, to a large extent, have to date lingered in the "too hard basket" with little decarbonisation investment compared to the power sector. One key challenge in these sectors is that it's not always practical to substitute renewable electricity for fossil fuels, such as natural gas. It is here that clean hydrogen can play a key role.

The current "energy transition", driven by public demand, scientific evidence and government policy, is also being backed up by binding targets in a growing number of countries (to align domestic law with commitments made under the 2016 Paris Agreement). In June 2019 the UK Government amended the Climate Change Act 2008 to include a net zero target by 2050¹, making decarbonisation a legal requirement. This has spurred an interest in decarbonisation technologies, including a renewed interest in hydrogen, due to its potential to decarbonise sectors that are difficult to abate. Hydrogen can be utilised in power, heat, industry and transport applications. It can be burnt in a similar way to natural gas or used to generate power and heat in a fuel cell but importantly has zero carbon emissions at use.

The basics of hydrogen

Hydrogen is the most abundant element on earth. At present, hydrogen is predominantly produced as a by-product in the chemical industry, during processes that emit carbon dioxide. Alternatively, there are two methods to produce clean hydrogen (also known as low carbon hydrogen):

• Green hydrogen: created by splitting hydrogen and oxygen in water using electrolysers powered by renewable electricity generation; and
• Blue hydrogen: produced through methane (natural gas) using steam reforming or autothermal reforming coupled with carbon capture usage and storage (to capture the waste carbon).

The Hydrogen Council² expects the cost of clean hydrogen to fall by up to 60% by 2030 due to the falling costs of renewable electricity generation, scaling up of electrolyser manufacturing, and development of lower-cost carbon storage facilities. The UK's domestic renewable resources (in particular, wind) means it could be in an advantageous position for the production of green hydrogen (with Australia, abundant in solar PV, being in a similar position).

Similarly to natural gas, hydrogen can be liquefied, transported via pipelines, or converted to other carriers such as ammonia or fuel cells.

While the potential applications for hydrogen are wide and varied, there has been significant focus on its use in heating and transport:

• Heating: hydrogen has many of the same properties as natural gas which means it is ideally suited for heating. The gas network offers an opportunity to decarbonise heat (domestic and industrial) while providing an early market for hydrogen. Studies³ indicated that hydrogen could be distributed by repurposing the existing gas network; and

• Transport: where batteries are unviable (e.g. lack of suitability to longer-range applications), hydrogen offers a rapid refuelling long range solution. In particular, hydrogen transport technologies are increasingly seen as being well suited to commercial fleets, as they do not have long periods of downtime in their duty cycle (e.g. forklifts operating in a 24 hour warehouse).

Early stages and uncertainty

While there is growing enthusiasm about the potential offered by hydrogen, there are a number of challenges to overcome before developers are comfortable making large-scale investments in this nascent technology. Key among these challenges are the following:

• Uncertain demand and revenues: uncertainty about sources of revenue streams and high production costs is common to almost all early stage energy technologies – battery storage has, for instance, faced similar challenges. Hydrogen technologies are still in early stages of deployment and therefore attract high operational costs, particularly in comparison with natural gas, or more developed low carbon alternatives. Early demonstrator projects are likely to need revenue support and long-term hydrogen offtake arrangements (e.g. with a heavy industry user or energy supplier). This is important as investors need business models that give a level of predictability of returns;

• Uncertain regulation: the regulatory frameworks in most jurisdictions do not contemplate the large-scale production of hydrogen or its use as a substitute for other conventional fuels, and therefore there is a regulatory gap. This regulatory uncertainty is a barrier to investment. In particular, the right safety management regulations will need to be implemented to manage hydrogen. Standards and rules provide stakeholders with the information needed to safely build, maintain and operate facilities; and

• Uncertain infrastructure: a major barrier, which, will likely need clear government policy and backing to overcome, is the infrastructure needed to allow hydrogen to be used in the heating and transport sectors. In the case of heating, in most jurisdictions (including the UK) the challenge is that the existing infrastructure may need to be retrofitted. Further studies are required to determine whether blending hydrogen into the natural gas network can be achieved without the need for major modification to pipes or household appliances (see HyDeploy below), and further evidence gathered required to support the case for 100% hydrogen conversion of the grid. In the context of transport, a nationwide network of refuelling infrastructure is required to roll-out hydrogen transport technologies. A "chicken and egg" scenario arises in this instance, as there is no incentive to build the infrastructure without the demand and there is no demand because there is no infrastructure/supply. As in the case of electric vehicle charging deployment, the vehicle capex and opex gap between conventional internal combustion engine and hydrogen transport technologies will need to be addressed. This is why government support is key.

The UK position – current and future policy developments

Strategy

Currently there is no UK hydrogen strategy for clean hydrogen production and no regulatory framework in place. It is worth noting that other nations including Japan, Germany, the Netherlands, Australia, China and, most recently, the European Union, have developed a hydrogen strategy. A UK industry consortium, the Hydrogen Taskforce, has been calling on the UK Government to provide a clear policy direction, to facilitate the scale of investment that will be required to implement the roll-out of clean hydrogen⁴. Other industry groups, such Oil & Gas UK (representing the upstream oil and gas industry) have also called on the UK Government to provide some clarity. There is a high expectation that a hydrogen strategy, or at least plans for one, will feature in the UK Government's delayed Energy White Paper, due to be published in 2020. It is worth noting that the other lower carbon thermal technology, carbon capture, utilisation and storage (CCUS), is more developed from a UK policy perspective, with the responses to an earlier consultation on the business models for CCUS expected to be published by the end of 2020, possibly alongside the Energy White Paper. In order for hydrogen not to lag behind CCUS, it is suggested that a consultation paper relating to the business models for hydrogen should also be published by the UK Government. A key question in this context is where in the value chain the revenue support is provided.

The Netherlands – aiming high

The Government of the Netherlands wants the country to become a world leader in the production of clean hydrogen, with plans for the port of Rotterdam to become a hydrogen hub. In April 2020 the Government of the Netherlands launched a hydrogen strategy, which outlines the steps towards hydrogen becoming a key part of the country's future energy mix, alongside renewable electricity and green gas. As noted in the strategy, the Netherlands is well positioned to develop a clean hydrogen industry, as after Germany, the Netherlands is currently the second-largest producer in Europe of so-called "grey" hydrogen (that is, hydrogen produced from natural gas where the carbon is released into the atmosphere). Moreover, the Netherlands has extensive existing gas pipeline infrastructure which could be adapted to transport hydrogen. Nonetheless, the strategy does not underestimate the scale of the challenge and notes that the first step must be to establish a "clean hydrogen supply chain" and that "demand, supply, storage and infrastructure will all have to develop and there are major dependencies between them". What is key, perhaps, is that the Government of the Netherlands has stated that it will play a key role in in the development of the infrastructure necessary to develop a clean hydrogen industry. While it is early days, a number of companies are already becoming involved in taking forward clean hydrogen in the Netherlands. While the UK does not have the benefit of an existing hydrogen industry, it does share many other characteristics with the Netherlands, which are conducive to clean hydrogen production, such as offshore wind in the North Sea and existing gas pipeline infrastructure. As such, it is to be hoped that the UK Government will follow with its own strategy.

Funding

Notwithstanding the current lack of a clear strategy, the UK Government has taken some tentative steps towards supporting the development of low cost bulk hydrogen production, storage and distribution through a number of funding programmes. These programmes comprised the Low Carbon Hydrogen Supply Competition, the Industry Fuel Switching Competition and the commitment to a new £100 million Low-Carbon Hydrogen Production Fund. However, the Hydrogen Taskforce's view is that this funding level is insufficient to develop the technology at the scale and speed that is required, and recommends that the UK Government commits £1 billion of capex funding to:

• hydrogen industrial cluster competition;

• development of HyDeploy (detailed below), which is a pilot project to demonstrate the technical and safety case for hydrogen blending;
• public trials of hydrogen heating in occupied buildings;
• power to gas competition; and
• hydrogen mobility infrastructure. 

It is envisaged that the UK Government could follow these initial funding programmes with similar long-term policy support mechanisms (and regulatory timetables) to those that have been adopted in the past to support emerging technologies. For example, the small-scale Feed-in Tariff scheme was instrumental in the deployment of solar PV in the UK. Moreover, the current Contracts for Difference regime, which has followed the Renewables Obligation green certificate scheme, demonstrates how consistent and longer term policy support has aided the dramatic reduction in the cost of renewables. The development of an appropriate financial support scheme for hydrogen production would enable high volume investment across the supply chain, resulting, in the longer term, in hydrogen technologies achieving cost reduction and mass market deployment.

Regulation

As mentioned above, the right safety management regulations will need to be implemented to manage hydrogen. For example, once hydrogen heating is developed there will need to be cooperation between stakeholders in the supply chain (appliance manufacturers, network operators and hydrogen producers) to ensure consistency in standards and specifications. We note that the Health and Safety Executive and the HyDeploy consortium (led by Cadent Gas) are in the process of determining the health and safety case for hydrogen and the ability of the existing gas network and appliances to tolerate a hydrogen blend. Once the HyDeploy project is completed (i.e. once it is determined whether the gas grid can be used) and the safety case has been determined, an amendment of the Gas Safety (Management) Regulations 1996 will be required to enable hydrogen blending in the UK gas grid.

Conclusion

While hydrogen is a nascent technology, interest in it is gaining momentum. As noted in our May 2020 report, Powering Change: Energy in Transition, there may only be moderate amounts of investment in hydrogen across the globe currently, compared to other energy transition technologies, but that investment is set to accelerate.

Hydrogen has the potential to replace natural gas in a number of sectors but for this to be realised, the clear policy direction which industry has called for will be required to support investment to accelerate its scale-up. While some progress has been made, with some governments including hydrogen in their energy mix strategies and investment in numerous new projects being announced. However, to bring hydrogen technologies to parity with natural gas, greater investment, policy alignment and market creation is required.

Authors: Thomas Penton, Solicitor and Justyna Bremen, Senior Expertise Lawyer

1. The Climate Change Act 2008 (2050 Target Amendment) Order 2019
2. Hydrogen Council, 20 January 2020, "Path to hydrogen competitiveness: A cost perspective"
3. The Hydrogen Taskforce, February 2020, "The Role of Hydrogen in Delivering Net Zero"
4. The Hydrogen Taskforce, February 2020, "The Role of Hydrogen in Delivering Net Zero"