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In the run up to the United Nations Climate Change Conference (COP26), the UK has published its first ever Hydrogen Strategy. The strategy promises to deliver 9,000 jobs, GBP 4 billion in investment and new export opportunities by creating a thriving low-carbon hydrogen sector in the UK over the next 10 years and beyond. It builds on the prime minister’s determined Ten Point Plan for a Green Industrial Revolution by depicting how the UK government will work with industry to meet its ambition for 5 gigawatts of low-carbon hydrogen production capacity by 2030.

The key measures included in the strategy are as follows:

  • outlining a “twin track” approach to support key technologies, including “green” electrolytic and “blue” carbon capture-enabled hydrogen production, and committing to provide further detail in 2022 on the UK government’s production strategy
  • collaborating with national industry to develop a UK standard for low-carbon hydrogen to provide certainty to producers and users that the hydrogen the UK produces is consistent with net zero while supporting the deployment of hydrogen across the country — this will further the government’s recent report into Options for a UK Low Carbon Hydrogen Standard, which compares options for a standard that defines low-carbon hydrogen, allowing the Department for Business, Energy and Industrial Strategy to incentivise and support low-carbon hydrogen production for supply across the energy system
  • working with industry to assess the safety, technical feasibility and cost effectiveness of mixing 20% hydrogen into the existing gas supply
  • launching a hydrogen sector development action plan in 2022 outlining how the government will support companies to secure supply chain opportunities, skills and jobs in hydrogen

The UK government is collaborating with the Health and Safety Executive and Ofgem to support industry to conduct first-of-a-kind hydrogen heating trials. These trials, along with the results of a wider research and development testing programme, will inform government decisions on the role of hydrogen in decarbonising heat. If a positive case is established, by 2035, hydrogen could be playing a significant role in powering everyday life and helping to slash carbon emissions from the UK’s heating systems.

Through its Net Zero Innovation Portfolio, the government has announced a GBP 105 million funding package that will act as the foundation stone to establish the UK’s low-carbon hydrogen economy. The investment will enable industries to implement low-carbon alternatives for industrial fuels, including hydrogen, which will be key to meeting climate commitments. This funding includes the following:

  • GBP 55 million Industrial Fuel Switching Competition will support the development and trials of solutions to switch industry from high-carbon and low-carbon fuels such as natural gas to clean hydrogen.
  • GBP 40 million Red Diesel Replacement Competition will provide grant funding for the development and demonstration of low-carbon alternatives to diesel for the construction, quarrying and mining sectors, with the aim of decarbonising these industries reliant on red diesel.
  • GBP 10 million Industrial Energy Efficiency Accelerator will fund clean technology developers to work with industrial sites to install, test and prove solutions for reducing UK industry’s energy and resource consumption.

The consultation paper on a business model for low-carbon hydrogen accompanied the strategy’s release. It is recognised that there are a number of market barriers around the value chain to the wide-scale adoption of low-carbon hydrogen. While some of the funding schemes mentioned here are intended to address some of these, the high cost of low-carbon hydrogen compared to high-carbon alternatives is a fundamental barrier, and revenue support is required to overcome the cost competition barrier. The consultation discusses a number of alternatives and sets out a number of questions to elicit views on the government’s proposed approach.

The government’s intended approach focuses on support to address the significant market price and volume risks it sees as applicable — at least during the early years of a clean hydrogen market. It proposes revenue support that promotes market development and competition; that is technology agnostic; and that will support investment but will provide value for money and reduce over time as market development reduces price and volume risk.

It proposes a producer-led model, providing revenue support through a contract for differences structure, with a reference price initially based on the higher of achieved prices and the natural gas price. The strike price is based on the expected cost of production, with some level of indexation. The government recognises that some work is still needed on the most appropriate indexation mechanism. It also recognises that certain limitations will be needed in relation to price support where clean hydrogen is replacing unabated hydrogen used as a feedstock rather than as a fuel. The consultation date closes on 25 October 2021.

Alongside this, the government is also consulting on the design of the GBP 240 million Net Zero Hydrogen Fund, which aims to support the commercial deployment of new low-carbon hydrogen production plants across the UK.

The new strategy and ongoing related consultations make it very clear that the UK government sees low-carbon hydrogen as a key part of its net zero plan and is prepared to commit substantial resources to support the development of hydrogen in the UK. The successful development of a standard for low-carbon hydrogen in the UK and international taxonomy standards for clean hydrogen production are crucial to establish a clean hydrogen market in the country and to facilitate cross-border clean hydrogen trade. It will be interesting to see what the UK standard is going to be and how it will compare and/or tie in with what many other leading hydrogen economies are currently developing.

Author

Neil Donoghue is a partner in the Firms’ Energy Mining and Infrastructure Practice with over 30 years of experience throughout Europe, Middle East, Africa and Asia. Neil is Head of Baker McKenzie’s Global Nuclear Energy Practice.

Author

Philip is a Partner based in the London office who specialises in transactions in the energy and infrastructure sectors.

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