CfD-style mechanism proposed in ‘twin track’ hydrogen strategy

The government has revealed plans for a Contracts for Difference-style mechanism to help spur the development of a hydrogen economy.

In its first Hydrogen Strategy, published today (17 August), the Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation into proposals modelled on the Contracts for Difference (CfDs) that have enabled the rapid growth of the UK’s offshore wind industry over the past decade.

The mechanism would likewise seek to close the gap between the cost of fossil fuels and low-carbon hydrogen.

BEIS said it will also consult on the design of a new £240 million Net Zero Hydrogen Fund to support the commercial deployment of new plants to produce the fuel across the UK

The strategy outlines a “twin track” approach to production, covering both “green” hydrogen produced by electrolysing water using renewable power and “blue” hydrogen produced by reforming methane and capturing the carbon dioxide emissions.

The department has committed to providing further detail next year in a hydrogen production strategy.

Other measures in the strategy include collaboration with industry to develop a UK standard for low carbon hydrogen, which is consistent with net zero, and a review to support the development of network and storage infrastructure.

BEIS said it will additionally launch a hydrogen sector development action plan in early 2022. It said, subject to trials being conducted with the Health and Safety Executive and Ofgem, hydrogen could play a “significant role” in home heating.

The government has claimed that its strategy for the hydrogen economy is set to support over 9,000 UK jobs by 2030, potentially rising to 100,000 by 2050.

The strategy is designed to drive forward the commitment in the prime minister’s Ten Point Plan for 5GW of low carbon hydrogen production capacity by 2030.

Responding to the publication, Alistair Phillips-Davies, chief executive at SSE, described the strategy as a “welcome first step to realising the potential of hydrogen”.

Emma Pinchbeck, chief executive of Energy UK, said: “Hydrogen and CCUS [carbon capture, usage and storage] are going to be incredibly valuable for sectors that will be difficult to decarbonise with electricity – and so we welcome that today’s Hydrogen Strategy takes an economy-wide approach to developing these innovative technologies.

“The UK has real potential for hydrogen and CCUS, both of which can deliver new skilled jobs, particularly in places where the UK already has a proud industrial and energy heritage.”

Antony Green, hydrogen director at National Grid, said: “The transition to a green economy will require a mix of technologies and hydrogen will play a vital role. This strategy signals the UK’s commitment to hydrogen and provides the certainty needed to boost consumer and investor confidence and support commercial solutions.

“Importantly, unlocking the potential of hydrogen as a clean energy solution requires significant pace and innovation to scale up production, and the guidance from government today will be key to triggering the investment and buy-in needed to achieve this.”

However, Dan McGrail, CEO of RenewableUK, criticised the strategy for not focusing sufficiently on the development of green hydrogen.

He said: “In the year when the UK is hosting the biggest climate change summit for years, we fear that international investors in renewable hydrogen may compare this strategy to those of other countries and vote with their feet.

“The government must use the current consultation period to amend its plans and set out a clear ambition for green hydrogen.

“The UK has the potential to generate vast quantities of renewable hydrogen using clean electricity from offshore wind which can be stored and used whenever it’s needed, providing flexibility to our energy system. Green hydrogen is a clean fuel for sectors which have proved difficult to decarbonise so far, such as shipping and heat for heavy industry.

Jess Ralston, analyst at the Energy and Climate Intelligence Unit, also raised concerns over the twin track approach to production, as well as over the prioritisation of hydrogen for different use cases.

“The fuel could be very valuable for cleaning up steel production and protecting jobs in this industry – crucial when Europe is already steaming ahead with 23 hydrogen steel plants when we have none. But some questions remain over whether the government has truly grasped which areas will be most suitable for hydrogen use and which will not.

“For example, the case for hydrogen for home heating is far from proven, particularly hydrogen derived from fossil gas rather than from renewable energy. After all, any remaining fossil gas with a hydrogen blend in the grid is just not compatible with net zero and it’s not yet clear how effective hydrogen will be, nor how much it will cost.

She continued: “The government should also be alive to the risk of gas industry lobbying causing it to commit too heavily to blue hydrogen and so keeping the country locked into fossil fuel-based technology, making reaching net zero more difficult and costly.”

Andy Prendergast, national secretary at the GMB union, said the government’s target for hydrogen production is not ambitious enough.

He said: “We have concerns that the programme is not ambitious enough and will be insufficient for hydrogen development to become a cornerstone of both our energy policy and the transition to net zero.

“5GW of low carbon hydrogen production capacity is nowhere near enough – we need to go further and need to be bolder.”

David Smith, chief executive of the Energy Networks Association, said: “This is a much needed and welcome first step for the development of the UK’s hydrogen economy. It puts in place the right pieces for Britain’s energy networks to act as the platform on which the UK’s hydrogen ambitions will be built, recognising the importance of hydrogen blending and investing in innovation.

“We need further recognition that for hydrogen to play its part in net zero, producing 5GW of hydrogen by 2030 will not be enough. We must set our sights higher, towards a figure twice that amount.”