U.K. Plans Subsidy-Driven Hydrogen Boost on Path to Net Zero

(Bloomberg) -- Hydrogen could be vital to U.K. efforts to eliminate greenhouse gases by changing the way vehicles are fueled, factories are powered and homes are heated, Business Secretary Kwasi Kwarteng said.

Kwarteng on Tuesday unveiled a strategy that aims to unlock 4 billion pounds ($5.5 billion) of investment in hydrogen production by 2030, supporting 9,000 jobs. Ministers are planning to use similar incentives to those that helped boost offshore wind production.

Prime Minister Boris Johnson is under pressure to show how his government will cut emissions to net zero by 2050 after announcing a series of ambitious goals to slash greenhouse gases, without outlining policies to get there. Government analysis suggests hydrogen could help provide as much as 35% of U.K. energy consumption by 2050, meaning it could be pivotal.

“Hydrogen is potentially crucially important,” Kwarteng said in an interview. “It can solve a lot of our decarbonization problems.”

Kwarteng said its use in transport could help decarbonize trains, trucks and bus fleets. Hydrogen could also generate the power for refineries and steel plants, he said, and longer term it could play a big part in heating the nation’s homes.

Carbon Capture

The U.K. is due to host a major round of United Nations climate talks in Glasgow in November, where Johnson will need to demonstrate leadership if he hopes to persuade other polluters to reduce their emissions.

While the published strategy makes no advance on the government’s existing target of producing 5 gigawatts of low-carbon hydrogen by 2030, it does begin to flesh out how ministers want to get there.

The plan includes both “green hydrogen” -- produced using water and renewable power -- and cheaper “blue hydrogen,” which has carbon dioxide as a byproduct that needs to be stored permanently underground. Amid concerns about the environmental integrity of the latter, Kwarteng’s department is consulting on an industry standard to ensure minimal carbon leakage.

The minister said pursuing both production methods is vital to help stimulate a new market, which would be much harder to do relying solely on green hydrogen at about twice the cost.

Criticism

The government will make sure blue hydrogen that’s subsidized “is as pure as we can, as decarbonized as we can,” he said.

But environmental groups criticized the dual approach. Greenpeace called it a “bad idea both environmentally and economically,” while E3G said it could be a “twin track to nowhere, leaving the climate behind.”

The government wants to use so-called contracts-for-difference to incentivize hydrogen production. Since they were introduced for offshore wind in 2015, annual power generation has tripled while costs have come down by two-thirds.

For hydrogen, the government aims initially to negotiate contracts directly with hydrogen producers, at a level that covers their costs and allows them to make a profit. Then, it aims to move on to a system of competitive auctions, as happened with renewable energy in the past decade. Ministers haven’t decided whether it will be paid for from general taxation or consumer levies.

The U.K. plans to finalize the low-carbon hydrogen business model next year with an aim to allocate the first contracts in the first quarter of 2023.

The plan doesn’t model costs for hydrogen production from nuclear power plants, but does envision a role for existing reactors to power electrolyzers this decade. The role for nuclear power to produce hydrogen could be expanded after 2030.

Heating Homes

The strategy sees industrial processes forming the bulk of hydrogen demand over the next decade. The government expects smaller take-up in the power sector and for transportation.

It also plans domestic heating trials at the scale of neighborhoods, villages and towns this decade to lay the foundations for wider post-2030 usage.

“If you consider that 85% of U.K. homes essentially use gas, we could decarbonize this essentially through use of hydrogen,” Kwarteng said. “That’s very exciting.”

Hydrogen is seen as the main alternative to heat pumps when replacing the gas-fired boilers that warm the majority of U.K. homes.

The industry sees the potential to blend hydrogen with natural gas to a proportion of 20% without the need to modify pipes or home appliances -- an option the government said it’s looking at. That could give ministers an easy way to quickly reduce emissions from home heating and cooking, opening the way for the hydrogen industry to increase that blend over time.

Tricky Politics

But domestic heating is a politically thorny issue for Johnson. Many members of his ruling Conservative Party are concerned about the extra costs associated with replacing gas boilers.

Heating an average U.K. home in 2030 using hydrogen is expected to be about 43% more expensive than using a heat pump, according to BloombergNEF. And heat pumps cost about 10,000 pounds to buy and install -- about five times the cost of a gas boiler.

Kwarteng’s department is devising a heat and buildings strategy that’s due as soon as next month, to look at how to decarbonize the country’s housing stock.

The response from British business to the hydrogen strategy was broadly positive. Antony Green, hydrogen director at National Grid Plc, said it will be key to “triggering the investment and buy-in” needed to scale up production of the gas.

Confederation of British Industry Policy Director Matthew Fell said the U.K. stands “perfectly positioned to capitalize on the opportunities provided by hydrogen,” while calling on the government to devise more detailed policy.

(Updates with nuclear plants and hydrogen production in 15th paragraph)

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