UK government launches hydrogen strategy

Author: Jake Stones

2021/08/17

LONDON (ICIS)--On 17 August the UK government outlined plans for a potential 20% blend of hydrogen in the gas network by the end of the decade through a strategy paper, despite maintaining a low production target.

ICIS analysis indicated this could amount to 51TWh in 2030, based expectations from system operator National Grid that gas demand will be 72 billion cubic metres (bcm) by this point. This would displace 14.4bcm of gas.

However if all blended hydrogen were produced using autothermal reforming, gas demand in 2030 would rise to 74.6bcm due to conversion efficiencies, ICIS analysis showed.

Total hydrogen demand by 2050 was expected to reach between 250-460TWh, accounting for 20-35% of final UK energy consumption, the strategy stated.

MARKET DEVELOPMENT

A key component for the strategy is to help bring the cost of low-carbon hydrogen in line with fossil fuels.

A consultation for a hydrogen business model that aims to reduce costs was launched alongside the strategy.

It is expected that the model with be built on a similar approach to offshore wind Contracts for Difference (CfD).

The hydrogen business model aims to conclude by 2022, supporting the first contracts for hydrogen trade by early 2023.

One market participant criticised the opening of new consultations as “kicking the can down the road,” noting that the development of a hydrogen economy still requires a great deal of work from the policy side.

In addition, if market enabling policy is poorly designed it could result in a crowding of one technology over another, the source added.

On 17 August ICIS assessed the levelised cost of UK grey hydrogen for delivery in 2022 at £1.90 per kg of hydrogen (h2), while blue hydrogen via autothermal reforming was assessed at £2.18/kg of h2.

Proton Exchange Membrain (PEM)-based green hydrogen was assessed at £5.69/kg of h2.

On the whole-system approach, the government fell short of defining specific long-term demand side policies that would enable supply-side growth.

Instead the paper highlighted the need for alignment with wider energy policies, such as the capacity market and green gas support scheme.

Specific policy linkages;

Renewable transport fuel obligation (RTFO) – aims to increase use of renewable transport fuels. Biohydrogen and hydrogen produced by electrolysis via renewables are supported through the scheme, which offers subsidies on transportation costs.

Capacity market – inclusion of hydrogen-for-power plants in the capacity market, which often underpins investment cases for new generation.

Green gas support scheme – support scheme incentivising replacement of gas with biomethane. A potential linkage could be through green hydrogen.

EU/UK emissions trading schemes (ETS) – carbon pricing.

PRODUCTION CAPACITY

The government stressed it did not wish to rely on imports and noted that a liquid market was unlikely to develop ahead of 2030.

Prime minister Boris Johnson announced in November 2020, as part of the UK’s green industrial revolution, that by 2030 5GW of low-carbon hydrogen production would be online, an ambition the government maintained in the strategy.

If all 5GW was produced via electrolysis running at 5,000 load hours/year, total output would be 17.5TWh at a 70% system efficiency.

According to ICIS data blue hydrogen capacity could amount to 9.7GW by 2030 based on just six projects.

The government also added a 1GW target by 2025 and noted that production may need to rise to 7-20GW by 2035.

There was no preference between blue hydrogen derived from gas with carbon capture and storage, and green hydrogen produced via electrolysis powered by renewables.

The decision to favour both blue and green has met criticism from some industry participants and is in contrast to the majority of mainland European strategies.

A further issue is that low-carbon standards for production are yet to be defined.

One market participant told ICIS the strategy was “marred by the lack of clarity on what ‘clean’ hydrogen is.”

A consultation on low-carbon standards was also launched on 17 August and will conclude by 2022.

The strategy mentioned nine blue hydrogen projects over 100MW, 10 green plants under 5MW with another 12 green sites over 5MW under development, but noted the list was not exhaustive.