UK hydrogen and CCUS markets get boost, but need greater direction

Out-Law News | 21 Aug 2020 | 1:37 pm | 5 min. read

Businesses developing low carbon hydrogen technologies in the UK will be encouraged by the government's recent recognition of their potential role in decarbonising the economy, with it potentially being the lead option for decarbonising industry, a specialist in energy and industrial projects has said.

Businesses developing low carbon hydrogen technologies in the UK will be encouraged by the government's recent recognition of their potential role in decarbonising the economy, with it potentially being the lead option for decarbonising industry, a specialist in energy and industrial projects has said.

Stacey Collins of Pinsent Masons, the law firm behind Out-Law, said the government has also identified the importance of CCUS to the decarbonisation of industry. However, he said those seeking to benefit from these technologies will require further clarity and direction to be comfortable that they are commercially-viable.

The UK government has, this month, reiterated its belief that low carbon hydrogen technologies can help it meet itslegally-binding 'net zero' emissions target by 2050. The government's statement came in a response it published to feedback received to an earlier consultation it had held on potential business models for carbon capture, usage and storage (CCUS)

Collins Stacey Nov_2019

Stacey Collins

Partner

There's clearly a role for hydrogen to play in the UK achieving its 'net-zero' target, particularly for the UK's industrial sector. However, in order for companies to commit to hydrogen-based options to reduce their carbon footprint, there needs to be clarity and commitment from the government on how it will support the development of the hydrogen economy into the future, both financially and politically

The Department for Business, Energy and Industrial Strategy (BEIS) said: "While it is not possible to be certain of the precise role it will play in 2050, applications and the scale of demand, BEIS analysis and that from the CCC [Committee on Climate Change] suggests a major increase in, and decarbonisation of low carbon hydrogen production methods is required. We see low carbon hydrogen as a lead option for decarbonising industry, and potentially having a role in power, transport and the way we heat our homes, including blending in the near term."

Stacey Collins, an energy and infrastructure specalist at Pinsent Masons, said the BEIS response paper shows that there is broad industry support for the development of a government-backed business model that supports the deployment of hydrogen at scale within the UK's energy system.

However, he said the feedback shows that there remains "a lack of consensus on the appropriate business model" and that the government "needs more industry engagement to assess , and decide upon, the potential options".

In a separate report published recently on behalf of BEIS, Frontier Economics set out business model options for low carbon hydrogen deployment with the aim of providing "an incentive to invest in low carbon hydrogen production, while limiting costs to consumers and taxpayers".

Frontier Economics said that a business model built on contractual payments to producers or regulated returns, as well as models based on a mix of the two, are "worth investigating further".

According to the report, the system of contractual payments to producers could work in a similar way to the existing Contracts for Differences regime that operates to incentivise investment in renewable technologies. It would see the producers receive a subsidy to cover "the incremental cost of low carbon hydrogen above the carbon-intensive alternative fuel".

A regulated returns model would see regulated payments made to producers that offer a return on their costs.

The government recently established the Hydrogen Advisory Council in a bid to facilitate wider engagement between industry and policymakers. Collins welcomed the recent developments , but called on the government and industry to work together to help bring hydrogen solutions into deployment swiftly.

Collins said: "There's clearly a role for hydrogen to play in the UK achieving its 'net-zero' target, particularly for the UK's industrial sector. However, in order for companies to commit to hydrogen-based options to reduce their carbon footprint, there needs to be clarity and commitment from the government on how it will support the development of the hydrogen economy into the future, both financially and politically. The clock is ticking and there are already 'hydrogen ready' projects in development and in the consenting process, so it is important there is a quick resolution to this issue. Industry and other stakeholders also have a role to play in making the government aware of what they, and their projects, need to make the UK's hydrogen economy a market leader."

Nick McDonald, who specialises in energy consenting at Pinsent Masons, said that many of the projects which are progressing are those which have obtained, or are seeking, government grants: "Whilst the prospects of success for consenting hydrogen and CCUS projects in the right location are good, significant applications can easily cost six figures and not many businesses will commit that kind of investment without political, regulatory and commercial certainty."

The need for industry to cut their emissions to support the government's 'net zero' ambitions is at the centre of the BEIS plans to support the growth of CCUS in the UK. According to its consultation response paper, business and industry account for 25% of UK greenhouse gas emissions, but it said CCUS is not financially workable for most companies at the moment.

"CCUS is not currently investable for most industrial sectors as the high cost of deploying CO₂ capture and transporting and storing the CO₂ cannot be passed on to consumers by businesses operating in competitive global markets," BEIS said. "Businesses are also likely to be deterred from investing by uncertainty over the future carbon price and how it will affect both their overall competitiveness and the case for deploying CCUS. Additionally, businesses may face challenges raising capital finance to invest in CCUS until costs come down as a result of higher deployment, proven results and more efficient supply chains. This is exacerbated by there being a minimal premium attached to low carbon industrial products."

To address these issues, the government said it favours the introduction of an "industrial Contract for Difference" to help fund investment in CCUS by industry, but that it intends to provide upfront capital to help fund initial projects in recognition of the lack of maturity in the market and high costs of deployment currently.

Collins said, though, that the ability to access transportation and storage solutions for captured CO₂ is a recognised risk, particularly for the industrial sector. However, he said that the approach to this issue in an industrial context has been considered in another recent report produced for BEIS by Element Energy which highlighted the need for government business models to ensure greater collaboration between industrial companies and sites in a particular locality, with more tailored solutions being required for sites which are "truly dispersed".

"Whether via use of low-carbon hydrogen or CCUS, decarbonisation should already be high on the list of board-level issues for industrial companies to address, particularly heavy energy users or significant carbon emitters," Collins said. "The government has itself appreciated the challenge for industry in this respect and is looking at ways to incentivise decarbonisation in the short to medium term. Industry needs to be aware of this, and ensure that it has an appropriate 'voice' in the current government deliberations on the appropriate way forward. Those that do not react quickly enough may face significant challenges in the future, as the future for carbon-based business models is bleak."

"There is funding from government available already for industry to start the process of decarbonisation. Businesses should seek advice on how they might access such funds and on how to structure projects so that they can ultimately align with the relevant business models that the government will ultimately support," he said.