FTI Consulting Public Affairs Snapshot – The UK Hydrogen Strategy: One Year On

Putting Hydrogen on the Map

The Strategy did not arrive from nowhere. Built on the ambition set out in November 2020’s 10-Point Plan for a Green Industrial Revolution to deliver 5 gigawatts (GW) of low carbon hydrogen production capacity by 2030, it articulated with greater granularity the actions required to get there.

To deliver this, BEIS committed to putting in place three mechanisms to underpin the scale-up of the low carbon hydrogen economy: defining what counts as low carbon hydrogen, providing initial funding support, and longer-term subsidy. The Net Zero Hydrogen Fund (NZHF) will provide £240 million of funding to support capital expenditure, the Hydrogen Business Model (HBM) will provide revenue support for production, and the Low Carbon Hydrogen Standard (LCHS) will govern what counts as “low carbon” hydrogen. The design of these three mechanisms was consulted on alongside the Strategy, with BEIS promising to deliver them at pace.

To meet its target, the Government has committed to a twin track approach to both green and blue hydrogen production: the former produced via renewables-enabled electrolysis, the latter using natural gas with Carbon Capture, Usage and Storage (CCUS).

This approach courted some controversy and diverged from the UK’s continental partners, who have sought a “green only” approach. While green hydrogen produces zero carbon emissions, the imperfection of CCUS technology means that blue hydrogen does not. Further, given its dependence on natural gas, ardent elements of the green hydrogen lobby have argued that it is not consistent with net zero and is instead a lifeline for oil and gas companies to maintain production from what would otherwise be stranded fossil fuel assets.

The Government contends that blue hydrogen will enable the UK to scale production quickly and more affordably than green hydrogen would, while making best use of the UK’s existing skills and expertise in the hydrocarbon industry. The Climate Change Committee agrees; there simply isn’t enough renewable capacity currently to produce sufficient green hydrogen. Whether it will be cheaper to produce blue hydrogen at a time of exorbitant gas prices or not, the Government remains committed to this approach.

Doubling Up

Since the Hydrogen Strategy’s publication, the Government has published its Net Zero Strategy, hosted COP26, and responded to the rising cost of energy with the British Energy Security Strategy (BESS). Each added new detail to the hydrogen policy landscape.

The BESS marked the most significant development. This framework to secure the UK’s future energy supply, in response to the energy crisis, doubled the hydrogen production target to 10GW with at least half produced via electrolysis. None of it is available to address the problem today, but it gives an insight into just how important hydrogen is seen as being to the UK’s future energy mix.

The UK’s potential hydrogen production pipeline is in excess of the Government’s renewed 2030 production target – already the joint highest in Europe alongside Germany. But optimism is unavoidably tarnished by the reality that there have been no new funding commitments for delivering any of it.

Sceptics have already vocalised concerns that the Government’s focus on unlocking private sector investment to maximise the UK’s hydrogen potential is misplaced. They conclude that, without taxpayer-backed funding, the targets are already doomed to failure. It has not gone unnoticed that Germany’s strategy is backed with €8 billion in state funding. The disparity is clear.

But if necessity is the mother of invention, then tight funding allocations are inspiring policy ingenuity. The BESS was followed by confirmation of the design detail of BEIS’s three policy mechanisms.

The NZHF has already launched its first funding rounds, with the LCHS and HMB to be formalised through the Energy Bill, the legislation necessary to deliver the BESS. Both are world-leading in providing a formal definition of what constitutes low carbon hydrogen, and a subsidy support mechanism for its production. Based on the successful Contracts for Difference model which has underpinned the rollout of offshore wind, the Government plans for the HBM to shift to levy funding from 2025, providing a self-sufficient means of funding future hydrogen production.

What came first, the chicken or the egg?

Policymakers globally have grappled with the “chicken and egg” conundrum of trying to build up supply and demand for hydrogen in lock-step. The Government’s focus has so far been on supply, and in opening the NZHF and legislating for the LCHS and HBM, it has succeeded against its own measure of success. More attention now needs to be afforded to the demand side of the equation.

The Government has acted to build demand and supply concurrently via the decarbonisation of industrial clusters. Clusters in the North West of England, and on the East Coast, have both been awarded funds to support hydrogen production for use in a range of localised industrial processes. With four clusters planned by 2030, another funding competition is on the horizon. Meanwhile, Project Union, National Grid’s project to develop a hydrogen ‘backbone’ linking the industrial clusters will be fundamental to achieving a truly nationwide hydrogen economy.

Nevertheless, the sectors in which hydrogen will be deployed remains an open question. Various proposed hierarchies for its potential end-uses have emerged. While there is broad agreement that industrial processes and shipping provide the clearest cut use for hydrogen, there are significant grey areas.

For road freight, where hydrogen is set to compete with battery electric for market share, the Department for Transport has launched the Zero Emission Road Freight Demonstrator to test the technologies and their associated infrastructure requirements in the real world. Meanwhile for domestic heating, where electric heat pumps are a more developed alternative, a decision on hydrogen’s role will not be taken until 2026 – subject to a series of trials including a hydrogen village, to be followed by a hydrogen town.

As a result, there is significant and growing pressure to accelerate this decision making. The rate at which the debate has evolved underscores how rapidly the sector has moved from niche to vital enabler. Politicians and industrialists agree that UK plc is going to need a significant volume of hydrogen. The next pressing policy question is where to use it.

The next debates

Making decisions on hydrogen’s end-uses requires a change in thinking from Government. The point is approaching when decisions will need to be taken as to where the finite amount of hydrogen available could be best used. It will be time to pick some winners, uncomfortable territory for a Conservative government.

The next Prime Minister – whether it is Rishi Sunak or Liz Truss – is unlikely to be as garrulously enthusiastic about hydrogen as Boris Johnson, who took to calling it the new “super fuel”. More problematic will be tension within the Conservative Party over whether near term crises like energy price inflation should take precedence over long term ambitions such as net zero . Amid blowback over skyrocketing bills, the net zero agenda – and hydrogen with it – could fall from political favour and plans to shift to levy funding in 2025 may come a cropper.

Regardless, the politics of the hydrogen economy will remain one to watch. The sector is a new and dynamic landscape, subject to change in policy and regulation as with any nascent industry. Political advocacy will be essential to ensuring positive outcomes for interested businesses. Government knows it doesn’t have all the answers, making for the ideal opportunity for strategic partnerships between the public and private sectors.