In anticipation of our Legal and Commercial conference, we speak to John Grady of event partners Shepherd and Wedderburn about overcoming barriers to investment in the hydrogen sector.
Hydrogen represents a significant potential business opportunity. BEIS say up to 250-460TWh of hydrogen could be needed in 2050, approximately 20-35% of final energy consumption. BEIS’ target is 10GW of clean hydrogen production by 2030, with at least half from electrolytic conversion. There is, however, a lot of government work needed to achieve this.
BEIS policy development: production
BEIS have completed significant amounts of policy development on production. Key elements include the following:
· Net Zero Hydrogen Fund, (NZHF), a fund of up to £240 million, with grants to be made from 2022 to 2025. It is designed to support upfront costs of low carbon hydrogen production facilities, including from nuclear, renewables and CCUS.
· The Hydrogen Business Model, (HBM). This is a contract for difference mechanism to provide revenue support to low carbon hydrogen production facilities. The “foundation” recognises that that the price for hydrogen is higher than fossil fuel alternatives, so low carbon hydrogen producers will not be able to recover their costs under current prices.
· The UK Low Carbon Hydrogen Standard. This is an emissions standard for hydrogen production to ensure that support is targeted at projects that are consistent with net zero. For example, it addresses the issue of how hydrogen made from electricity can be determined to be low carbon.
Putting a robust legal framework in place for clean hydrogen is essential for investor confidence. The critical next step is legislation to provide a framework for these models. Provisions have been included in the Energy Security Bill. However, there are suggestions that this may be pulled, which is concerning when there is a clear need to move at pace.
The Government policy focus is on promoting the supply side. Consumers will not switch unless there is a demonstrably secure supply of hydrogen. Some critics suggest that there needs to be a greater focus on demand stimulation. However, BEIS’s “if you build it, they will come” approach is sensible. Demonstrating that low carbon hydrogen can be produced at scale is a prerequisite for a hydrogen economy.
Support for transportation
Developing support for transportation and storage is next on BEIS’ list. The BEIS Summer 2022 consultation link is a critical first step in developing the business and regulatory models and attracting investment.
BEIS’ vision for the mid 2030s is:
“A large, integrated, and resilient hydrogen network with multiple entry and exit points within and across regions and/or nationally”.
There is a potentially significant investment opportunity in networks and a significant set of barriers. These barriers will also delay the development of production. Investors will hold back if they see material risks of network unavailability or high charges (because network costs are smeared across a limited pool of users).
BEIS suggest various business models to secure investment:
· Regulated Asset Base, (RAB), based on the framework for electricity and gas networks. Adopting this model would be consistent with the BEIS model for CCUS transportation and storage.
· Cap and floor, drawing on the model used for interconnectors with a guarantee of a core revenue, (the floor), in exchange for a cap on the upside.
· Contract for difference, it is fair to say that network investment is not an obvious candidate for a CfD, which is more suited to investments in facilities that produce commodities that can be benchmarked against a reference price for a commodity traded on open markets.
· Government support, government support is sensible to ensure that costs are kept to a reasonable level at the initial stages of network development.
There is an interesting discussion about the potential to deploy different business models at the “growth” and “steady state” stages. I would express some scepticism. The scale of investment and lead times are such that it is likely to be much better to have a stable model from the outset.
Storage is essential for hydrogen to reach its full potential as a balancing fuel in the electricity and wider energy system. Options include depleted gas and oil fields, salt and rock caverns, aquifers, hydrogen carriers and metal hydrides. The two keywords in BEIS’ analysis are “potentially suited”. BEIS list the options for storage, most options are classed as “potentially suited”, very few are “suited”.
The option which is “suited” at scale is rock caverns. This shows that it is essential to support further research into hydrogen storage.
BEIS identify a wide range of barriers to investment and a range of potential business models. For many years in Britain, a common view was that investment in storage was not required due to the deep and liquid international markets in gas. That view is not so popular now. The lesson is that whatever model is adopted, a key underpinning must be a long-term and patient commitment to storage that does not fall victim to fashion.
Planning, regulatory stability and tax
BEIS’ paper discusses planning. Planning is probably the most significant barrier to the development of GB infrastructure. It is hard to think of a better place to start for the hydrogen value chain than ensuring that the planning system does not hinder swift development.
Getting on with it
BEIS has carried out a lot of good work, including on wider topics such as skills and supply chains. Investors are enthusiastic about hydrogen. There is an increasing focus on projects. My hope is that delays to the Energy Security Bill and the wider “net zero review do not hinder this progress".