Ministers warned against hydrogen levy ‘trap’

The government should scrap plans for a hydrogen levy on domestic customers bills and instead fund efforts to kickstart the fledgling industry by axing emissions trading system (ETS) allowances, a right wing thinktank has urged.

The government included provisions in the Energy Bill, which re-entered the House of Commons last week, to introduce a levy to support investment in hydrogen production and distribution.

However reversing a Labour amendment to scrap the levy, voted for by the House of Lords last month, risks creating a “political trap” for the government because households are less likely to directly benefit from hydrogen than heavy industrial users, according to a new analysis published by the thinktank Onward.

Entitled Hydrogen: Who Pays, the report estimates that reaching the government’s 10GW hydrogen target will require around £3.5 billion of support per annum. Raising finance to pay for this support through a levy would add £118 onto typical household customers’ bills, it says.

Placing another green levy on consumers is unfair says the analysis.

“Applying a flat rate across energy consumers, regardless of their financial means, is the wrong way to raise the required capital. It risks undermining the public’s support for hydrogen and net zero more widely,” the report adds.

“Even if the economic case for the levy stacks up, the political and moral case is weak.

“The government is right to set ambitious targets for hydrogen. But they cannot put the costs on bill payers.”

Polling, carried out by Onward, found that 43% of the general public would not be willing to pay a hydrogen levy on their energy bills.

A phase out from 2026 of the free carbon pricing allowances, which are available under the ETS to disincentivise heavily emitting industries from quitting the UK, would raise more than enough to pay for 10GW of hydrogen per annum, the analysis says.

This move could be implemented in tandem with the introduction of a carbon border tax on embodied emissions of products entering the UK, which the government has recently consulted on.

The analysis also backs allowing hydrogen to be blended into the gas network.

This would enable the gas grid to act as a reserve offtaker for dumping excess hydrogen and keep production facilities running, which would otherwise have to switch off because on-site storage is too difficult at a large scale, Onward says.

For example, the report says, allowing blending into the transmission network could reduce the need to curtail intermittent renewables.

But the report says blending should be a last resort option for using hydrogen.

And it rejects a recommendation by the government’s hydrogen champion Jane Toogood for a 20% blending target because of the sheer amount of demand it would create, which would need to be met from carbon emitting blue hydrogen.

In order to disincentivise dumping, the report suggests that hydrogen producers should be mandated to show they cannot not find a suitable alternative customer to blending.

Jack Richardson, head of energy and climate at Onward, said: “The government is walking into a trap with the hydrogen levy. It would be a mistake that risks stalling the development of a British hydrogen economy. It would also be unfair to ask households that won’t benefit from hydrogen directly to pay for it. The government should think again. And the Treasury should get off the fence and back the role hydrogen can play in the economy.”

Utility Week is hosting a webinar on the challenges and opportunities of engaging the public on hydrogen’s role in net zero. Find out more and register here.