Hydrogen Strategy

First hydrogen strategy for the UK

After some delay, on 17th August 2021 the UK Government Department for Business, Energy and Industrial Strategy (“BEIS”) published its first ever Hydrogen Strategy for the UK, one of a number of strategies planned to facilitate the move to net zero.

The Hydrogen Strategy is split into five chapters being:

1. The case for low carbon hydrogen
2. Scaling up the hydrogen economy
3. Realising economic benefits for the UK
4. Demonstrating international leadership
5. Tracking our progress

The Hydrogen Strategy takes a commercial approach to the implementation of hydrogen in its many forms. At Weightmans, we have been discussing hydrogen opportunities with clients regularly and with growing intensity for the last eighteen months. In particular, we have engaged with the investment community to understand the perceived risks, blockers and opportunities of the hydrogen economy. A common theme from the investment community was technology risk (linked to scaling up primarily), regulatory uncertainty and linked to that, financial modelling. Essentially there is currently no market for hydrogen and so it is interesting to see how the Hydrogen Strategy seeks to develop a market. 

The Hydrogen Strategy builds on the Ten Point Plan for a Green Industrial Revolution released last year. Importantly it also sets out the key steps that need to be taken in the coming months and years to deliver on what hydrogen can offer. Early on in the Hydrogen Strategy it is clearly acknowledged that it must incentivise private investment and increase export opportunities. This is key to stimulate the market and get projects off the ground, with the necessary backing that they need.

In addition to the Hydrogen Strategy itself, a number of consultations are being published seeking views on the preferred Hydrogen Business Model, the design of the £240m Net Zero Hydrogen Fund and a UK Low Carbon Hydrogen Standard.

Below we take a look at some, but not all, of the elements of the Hydrogen Strategy. There are various summaries of the Hydrogen Strategy available online and it’s clear that many are playing catch-up on the importance of hydrogen in achieving net zero. Here we distil some relevant elements of the Hydrogen Strategy that we consider to be pertinent given our discussions with industry and the financing community.

The opportunity

The UK’s geography, geology, infrastructure and capabilities provide us with an opportunity for global leadership in low carbon hydrogen. The Hydrogen Strategy refers to the “twin track” approach of capitalising on the UK’s potential to produce large quantities of both electrolytic green and CCUS-enabled blue hydrogen. Industrial clusters are potential significant demand centres for low carbon hydrogen. Combine that with a strong history of natural gas power generation and favourable geology for large-scale storage of hydrogen and then add existing supply chains and it seems that the scope to maximise the economic benefits of the hydrogen economy is just too good an opportunity to miss.

The ambition

The Hydrogen Strategy refers throughout to the ambition for 5GW of low carbon hydrogen production capacity by 2030. This is seen as a sensible target to ultimately facilitate achieving net zero by 2050 and to deliver clean growth opportunities across the UK. From the discussions that we have been having with the investment community the concerns identified above can be addressed in part by a robust government support package. The Hydrogen Strategy clearly acknowledges that government investment in hydrogen to de-risk early projects could unlock over £4 billion of private sector co-investment up to 2030, but this could be higher. The Hydrogen Strategy sets out principles that will guide future policy decisions and government action. These include (i) long term value for money for taxpayers and consumers (ii) growing the economy whilst cutting emissions (iii) securing strategic advantages for the UK (iv) minimising disruption and cost for consumers and households (v) keeping options open, adapting as the market develops and (vi) taking a holistic approach.

2020 roadmap

Although we have not repeated them here, the Hydrogen Strategy includes some useful visuals clarifying the “whole-system approach” to developing the hydrogen economy. In particular, the visuals consider next steps in the context of regulatory frameworks, infrastructure, market frameworks, grant funding, research and innovation, international activity and markets, public and consumer awareness, private investment and others. Whilst demonstrating a well thought out and commercial approach, the lack of immediate regulatory certainty will be a concern as far as hydrogen projects are concerned.

Hydrogen Business Model

As referred to above, the investment community needs to ensure that the financial modelling for investments provides adequate returns versus risks. A Hydrogen Business Model Consultation has been published alongside the Hydrogen Strategy. The aim of the business model is to overcome one of the key barriers preventing the deployment of low carbon hydrogen projects, namely the cost gap between low carbon hydrogen and higher carbon counterfactual fuels. The Hydrogen Business Model Consultation acknowledges the main barriers of:

• high cost of low carbon hydrogen relative to high-carbon alternatives
• high technological and commercial risks for investment in ‘First-of-a-Kind’ projects
• demand uncertainty due to current limited use of low carbon hydrogen
• lack of market structure and long-term policy and regulatory framework
• distribution and storage barriers, reflecting the current lack of hydrogen distribution infrastructure and sufficient carbon capture and storage
• policy and regulatory uncertainty, including the lack of established standards to define low carbon hydrogen

The business model is primarily focused on making low carbon hydrogen cost competitive with higher carbon counterfactual fuels, ultimately facilitating the switch to hydrogen. The business model is intended to support multiple hydrogen production routes to support a broad range of projects. It applies across different production technologies including the main types of production (natural gas reforming with CCUS, and electrolytic hydrogen) as well as other technologies such as hydrogen from biomass gasification with CCUS.

Following the consultation, government will finalise the business model in 2022, enabling the first contracts to be allocated from Q1 2023.

Although a step in the right direction there is a lot of work to do and various moving parts that need clarification. However, it is anticipated that the business model will provide the necessary comfort and structure required to assist with the implementation of the roadmap and provide hydrogen projects and the wider hydrogen economy with the certainty required to succeed.

Industry

We work closely with manufacturers together with clients in the transport and logistics sector. The Hydrogen Strategy makes it clear that UK industrial sectors will play a vital role in developing a hydrogen economy over the next decade. Industrial users are expected to provide the most significant new demand for hydrogen by 2030. The Hydrogen Strategy confirms that within a year it will publish a call for evidence to explore with industry the further interventions needed to phase out carbon intensive hydrogen and transition to low carbon production methods and sources. Although there are some existing initiatives such as the £315 million Industrial Energy Transformation Fund, the £20 million Industrial Fuel Switching Competition and the Green Distilleries Fund, later in the year government promises to launch further funds to support industry to switch to hydrogen and other low carbon fuels. It will be interesting to see what form these further initiatives take and whether they are sufficient to incentivise change to the industrial and infrastructure markets.

Regulatory framework

The Hydrogen Strategy acknowledges that government is considering both the immediate regulatory barriers to the initial development of the hydrogen economy as well as broader regulatory framework for hydrogen, and how it will need to evolve. In particular key regulatory issues to be addressed include:

1. addressing regulatory barriers facing first-of-a-kind hydrogen projects
2. using regulation to unlock access to new markets for hydrogen
3. identifying who should regulate an evolving future market for low carbon hydrogen, and how and when
4. ensuring that the potential role for hydrogen is considered in broader reviews of regulation.

From our discussions with the investment community, lack of regulatory certainty is a key risk factor. It is positive that the government is, inevitably, seeking to address this, but the timing of this will be crucial in the race to net zero.

Commitments

Interestingly and perhaps crucially the Hydrogen Strategy sets out a full list of commitments. Although not binding, the commitments relate to production, networks and storage, end user industry (including heat in buildings and transport), creating a market (including regulatory framework), economic benefits, international leadership and the tracking of progress. These are all very positive but the government will need to be held to account in achieving these core commitments.

Concluding comments

The private sector and our world-leading financial markets will have a big role to play in the success of hydrogen in getting us to net zero. The Hydrogen Strategy is a robust starting point and provides a sensible framework to facilitate the development of the hydrogen economy. However, as it stands, the risks and barriers still remain in place. Of all of the points addressed by the Hydrogen Strategy the business model and the regulatory framework are, arguably, the most important to enable private sector investment and give industry the confidence to invest further in hydrogen. Only time will tell whether the Hydrogen Strategy has done enough to achieve the many requirements of getting us to net zero.