Hydrogen Scale up: What's Priming the UK for Success?

The NZHF and HBM are well underway, with new allocation rounds coming in the summer and autumn of 2023. While they are vital to incentivising the private sector with grants that cover start-up costs, Westwood Global Energy Group recently indicated two key factors priming hydrogen for success in the UK market: cost reductions and supply and demand. 

Naturally, government support was the first key priority, with various funds offering the chance to de-risk initial investments to help meet the 10GW target set by the UK Government. 

Continued support is also essential, which is recognised through the allocation rounds, allowing for any changes to objectives and criteria to be introduced as the economy grows. The first joint allocation, ‘2022 HBM/NZHF Electrolytic Allocation Round’, ran between July and October 2022 to support 250MW of green hydrogen production to be operational by the end of 2025. The second round is planned for summer 2023, with contracts awarded in 2024. 

Bottlenecks continuing to grow in the UK

Levelised costs are one of the biggest bottlenecks to hydrogen production, and it is hoped that this government aid will be able to address these issues. The report said: “The average levelised cost of hydrogen for blue and green remaining uncompetitive versus grey until 2030.”

Until hydrogen scales and costs decline, government support will be instrumental in making low-carbon hydrogen competitive, which is essential for incentivising uptake. Developers are simultaneously attempting to strengthen their business cases for hydrogen by leveraging advantages such as feedstocks and infrastructure that could deliver further cost reductions.

Scalability is something that the UK has successful experience in doing, especially with other renewables. At the end of 2022, the Westwood Global Energy Group found that the UK installed 13.7GW of offshore wind capacity, which is second only to Mainland China at 29.4GW. 

This is set to grow significantly with the ambition to quintuple offshore wind capacity to 50GW by 2030. In contrast to wind and blue hydrogen’s large project pipeline: “Announced capacity for green hydrogen in the UK only totals 2.6GW. Green hydrogen capacity is much more fragmented, with smaller project sizes and a higher number of developers.”

Hydrogen integral in creating a secure energy system

Fragmentation is expected to linger for a while, especially as rules on additionality will require any wind and solar built for hydrogen not to be taken from pre-existing infrastructure that could be used for other energy sources.

As the UK energy mix and infrastructure evolves, the storage of hydrogen can play an important role in creating a more secure energy system: 

1. It can balance the intermittency of renewables and create value from power that would otherwise have been curtailed. Hydrogen can be stored during periods of high renewable electricity generation and used during periods of low generation, helping to smooth variability from renewables. Curtailment of the offshore wind farms as a result of grid constraints and lack of storage cost the UK over £500 million in 2021 (Lempriere, 2022). 
2. It can balance seasonal fluctuations in demand. Grid-scale hydrogen storage can meet large fluctuations in seasonal heating demand. 
3. It can be used for grid balancing. Hydrogen-fuelled combined cycle gas turbines can be a source of fast dispatchable power when required. 

The report also expanded on the need to scale up hydrogen pipelines, whether that is through the retrofit and repurposing of existing lines or through new build delivery. “Pipelines, especially repurposed, offer the cheapest method of transport in the immediate term. Repurposing existing gas pipelines for hydrogen is up to five times more cost effective than building from new. It can also significantly reduce construction time.” 

Eventually; demand will move further away from supply, resulting in the need for a more extensive pipeline distribution network.

Project Union is one such project aimed at achieving this. Project Union is the largest hydrogen pipeline project planned in the UK. Spearheaded by National Gas (formerly National Grid), the project aims to create a hydrogen backbone for the UK by repurposing 2,000 km of pipeline (25% of the UK’s natural gas transmission pipeline) to hydrogen. 

Project Union could be the backbone to link clusters 

It will be done in phases starting from 2027, with the initial backbone to be completed by the early 2030s. The backbone will initially link the industrial East Coast clusters of Teesside and Humber. The project also explores the potential to link into the natural gas transmission network and connect hydrogen production to demand beyond this area. 

Additionally, the project will aim to connect to existing interconnectors in the Bacton gas terminal in Norfolk, which could open up hydrogen trade with Europe. Elsewhere, in the northwest, 125 km of new pipeline is being planned as part of the Hynet cluster and will deliver hydrogen that is either produced by Vertex Hydrogen at the Stanlow Refinery or stored at INOVYN’s storage site to industrial customers and/or be blended into the gas network near Manchester.

The idea of clusters will be utilised for a considerable length of time, especially when building supply and demand chains. Echoing this, the report explained: “Clusters integrate supply with demand and have several efficiency and cost benefits: 

• Shares infrastructure (i.e. pipelines and storage). 
• Minimises hydrogen transport, which over long distances is very costly. 
• Quickly achieves economies of scale from large industrial demand. 
• Connects multiple revenue sources and balances stable industrial demand with variable power demand. 
• Builds in redundancies, as new technology carries a higher risk of unexpected operational issues. 
• Promotes liquidity in a burgeoning sector where there are few market participants.

Of course, these plans and goals carry risks and uncertainties around safety, deployment, and scalability. Political uncertainty is one of the initial issues, specifically in the UK, after undergoing a series of government leadership changes over the past 18 months. The disruption has resulted in fiscal instability, policy uncertainty and some delays. 

Risks remain in place, some specific to the UK, others globally 

A risk more associated with other countries as well as the UK, is the level of competition between nations. The report highlighted this: “The policies and tax incentives of other countries (i.e. the US’ Inflation Reduction Act and Europe’s Green Deal Industrial Policy) could threaten hydrogen production and investment in the UK. 

While definitions of green hydrogen are starting to form, with the EU and the US being the most recent to form more solid definitions and the UK announcing the certification scheme, there are further issues around whether the definitions will line up with one another. If not, there could be serious issues in exporting and importing hydrogen. 

Additionally, “The timing and scope of future HBM/NZHF allocation rounds and Track 2 Cluster sequencing activities have not yet been defined, and the Low Carbon Hydrogen Agreement terms for inclusion in the HBM is still in draft and not expected to be available until later this year, delayed from 2022. Business models for hydrogen in transport and storage infrastructure are being developed for 2025.