Introduction
Hydrogen represents a significant potential business opportunity. BEIS believe that up to 250-460TWh of hydrogen could be required by 2050, approximately 20-35% of final energy consumption. This compares to production of, at most, 27TWh a year at present. The current BEIS target is 10GW of clean hydrogen production by 2030, with at least half coming from electrolytic conversion.
If we are to have a “hydrogen economy”, transportation and storage are critical. Storage is essential for hydrogen to reach its full potential as a balancing fuel in the electricity and wider energy system. The electricity system is currently balanced predominantly by gas. Hydrogen is, potentially, a credible low carbon replacement.
The BEIS consultation, Hydrogen transport and storage infrastructure A consultation on business model designs, regulatory arrangements, strategic planning and the role of blending, Link, is a critical first step in developing the business and regulatory models for transportation and storage.
The closing date for responses is 22 November 2022.
This work forms part of BEIS’ wider activity on hydrogen. Our briefing on this is available here. Our wider briefing on the Energy Security Bill is available here.
Some points from the consultation: transportation
BEIS’ vision for hydrogen transport from the mid-2030s: “is for a large, integrated, and resilient hydrogen network with multiple entry and exit points within and across regions and/or nationally”.
BEIS note that a strong network reduces the need for storage which is important given that storage still needs technological development.
Importantly, the need for a national integrated network is not contingent on the use of hydrogen for heating homes. Indeed, it is worth noting that hydrogen for heating is by no means an inevitability.
Options
BEIS envisage a range of options for transportation, including repurposing the existing national gas transmission and distribution system. BEIS also envisage non-pipeline transportation (e.g., road, rail or ship) playing a role.
It is clear that BEIS favour pipelines. BEIS say that pipelines will eventually be the most efficient option. BEIS also note evidence that the transportation of hydrogen is cheaper than transporting power. This suggests that BEIS will favour production close to offshore and onshore wind followed by pipeline transmission. There is one clear attraction to this. Obtaining consents for underground pipelines is likely to be easier than consenting for overhead transmission lines.
There is no final decision on repurposing the gas transmission and distribution networks for hydrogen rather, it is noted that the network companies are assessing this.
Business models
BEIS note a range of barriers to attracting investment to hydrogen networks. These include demand and supply uncertainty, the limited current customer base to cover costs, and the high cost of developing the infrastructure.
These barriers could significantly hold back network development. They could also hold back development of production facilities. Investors may hold back if they see a risk of network unavailability. They will also assess the risk that they will bear significant charges, (because the network costs are smeared across a limited pool of users).
Various business models are suggested to overcome these barriers and secure investment. These include:
- Regulated Asset Base, (RAB), based on the current framework for electricity and gas networks. Adopting this model would be consistent with the BEIS model for CCUS transportation and storage.
- A cap and floor model, drawing on the model used for interconnectors for electricity and gas with a guarantee of core revenue, (floor), in exchange for a cap on the upside.
- A contract for difference. A number of downsides are noted to deploying. It is fair to say that network investment is not an obvious candidate for CfD support, which is much more suited to investments in facilities that produce commodities that can be benchmarked against a reference price for a commodity traded on open markets.
- Government support. There is also the option of some form of Government support. This is sensible, to ensure that costs, especially for initial users, are kept to a reasonable level at the initial stages of network development.
There is an interesting discussion about the potential to deploy different models at the “growth” and “steady state” stages. I would express some scepticism about this. The lead times for investment are such that it is likely to be much better to make provision for a stable model from the outset.
The RAB model clearly has its attractions. The regulatory regime is tried and tested, and there are well understood mechanisms for regulating RAB regulated network providers. Investors will likely take comfort from a familiar landscape.
Offshore and onshore pipelines
An interesting discussion focusses on offshore pipelines. The history of the electricity sector suggests to me that caution is required in introducing distinctions between onshore and offshore transmission. These can create complexity and, eventually, hold back investment and development. This is something BEIS will need to consider very carefully, given the obvious potential for the production and storage of hydrogen offshore at scale.
Some points from the consultation: storage
For storage, the options include depleted gas or oil fields, salt or rock caverns, aquifers, containers for compressed or liquefied hydrogen and hydrogen carriers and metal hydrides.
The two keywords in BEIS’ analysis of storage are “potentially suited”. BEIS list the options for storage at pages 48 to 49. Most options are classed as “potentially suited”. Very few are “suited”.
The option which is “suited” at scale is limited to rock caverns.
The critical point that follows is the need to support further research into hydrogen storage. This will be critical if hydrogen is to play a full role in the energy system.
Barriers
BEIS identify a wide range of barriers to investment in storage. BEIS note that barriers include demand uncertainty, high costs, commercial and regulatory uncertainty.
Potential business models
BEIS suggest a range of potential business models, including a RAB model, contracts for difference and government support. It is worth bearing in mind the history of gas storage regulation, which moved away from a merchant system to a regulated system.
A common British policymaker view has been that investment in storage is not required due to the deep and liquid international markets in gas. That view is not so popular now. There is a clear need for long-term and patient commitment to storage that does not fall victim to fashion. Hydrogen storage is likely to become a key element of energy system resilience.
Some points from the consultation: strategic planning and the wider context
BEIS also note the need to identify an appropriate system for co-ordination/ strategic planning and seek views on this. In this regard, it is notable that the Energy Security Bill contemplates a wide role for the “Future System Operator”. Some involvement of the Future System Operator must be sensible, given e.g. the potential significant importance of hydrogen to the electricity sector and the trade-offs between the two energy vectors.
BEIS also discuss health and safety and planning and environmental consenting matters.
Planning is probably the most significant barrier to the development of GB infrastructure. It is hard to think of a better place to start than ensuring that the planning system does not deter developers. Great Britain needs unprecedented levels of investment to achieve net zero and a secure energy system. There are three ways in which the governments of the British Isles can help. One is by reforming planning law, and another is promoting investor confidence in a stable regulatory regime. The third is stable and predictable taxation frameworks. The third is not discussed in the paper, but is critical.
The wider context
I see a great deal of investor enthusiasm about hydrogen. BEIS has carried out a lot of good work, including on wider topics such as skills and supply chains. The Energy Security Bill However, delays are suggested to the Energy Security Bill and the government is carrying out a “net zero review”. It would be disappointing if this held up progress, when we need to move at pace to achieve net zero.