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UK gambles on domestic fossil fuels for hydrogen in energy security strategy

11 April 2022 Cristina Brooks

The UK published a plan to restrain high natural gas prices that some observers say moves the needle "closer" to net-zero, even while it expands drilling in the North Sea.

The government's advisor on mandated carbon budgets, the Climate Change Committee (CCC), said on 7 April that the UK's policy paper on energy security exceeded net-zero-aligned targets for offshore wind, nuclear, and hydrogen.

In focusing on electricity production from nuclear and wind, the Energy Security Strategy echoes the Net-Zero Strategy, the UK's rough plan to reach net-zero by 2050 released last year.

The scarcity of concrete detail in the Net-Zero Strategy caused alarm among green groups, which have launched related legal actions, and likewise, the Energy Security Strategy has been criticized as too vague by the Head of Net-Zero at the Tony Blair Institute for Global Change, Daniel Newport.

The strategy foresees power supplies in Scotland, England and Wales "could" become 95% low-carbon by 2030 by using hydrogen, offshore wind, and nuclear.

Despite low-carbon power aspirations, the UK is far from abandoning natural gas for power in the strategy.

Dutch bank ING warned that the government's plan to use natural gas-sourced blue hydrogen for gas-fired power may actually increase the UK's gas dependency in the short term.

Newport agreed, saying, "Perhaps most bizarrely of all, with all the pressure to reduce our demand for imports, the government has doubled its target for hydrogen production, intimating that up to half of it will be 'blue,' creating a significant additional demand for natural gas."

Following the Russian invasion of Ukraine and rising prices for wholesale gas in Europe, the UK banned Russian oil imports to cut dependency on Russia, but did not ban imports of Russian gas.

About 5-10% of UK gas supply comes from Russia, but the UK will phase out Russian oil and coal by the end of 2022 and Russian natural gas imports in the form of LNG as soon as possible thereafter under the strategy.

The government said the UK meets half of its own gas demand, for example through gas production in the North Sea, and that homegrown gas has a lower carbon footprint. This has motivated the government's decision in the strategy to spur North Sea oil and gas production with a licensing round, backtracking after reportedly considering a ban on such rounds. This North Sea gas is set to be a source of "low carbon" blue hydrogen used as a domestic source of fuel for gas-fired power.

While the CCC also advocated for more energy efficiency measures, it "recognized it was difficult to implement policy quickly."

The CCC was not the only observer to notice the strategy was weak on short-term solutions: Newport called the government's interventions "slow, expensive and risky."

Likewise, ING economists did not see the plan as addressing the urgent energy security problem. "A key challenge for the government is that many of these proposals-necessary though they are for achieving long-term net-zero and energy independence-contain few silver bullets to reduce the UK's reliance on gas in the short/medium-term," they said.

Hydrogen from fossil fuel production

On 14 March, after the Russian invasion of Ukraine encouraged higher European gas prices, Prime Minister Boris Johnson met with oil industry companies, including Shell, to discuss growing lucrative UK oil and gas production.

On 25 March, Shell announced its aim to invest "up to" £25 billion [$33 billion] in UK energy projects. Shell says it now produces about 10% of UK oil and gas from "50 interests in the North Sea."

The company voiced its support of the government's strategy, noting "more than 75% of [the £25 billion] is for low- and zero-carbon technology. Offshore wind, hydrogen, and CCS will all be critical but we need the right policy frameworks in place."

In the Hydrogen Strategy, the government envisioned a hydrogen production subsidy scheme that would be like the one that successfully grew investment in renewable energy. This scheme, called Contracts for Difference (CfD), allocated 15-year government contracts, giving investors stable returns.

Last year, the government launched a consultation to decide, among other things, how much subsidy should be doled out through a similar scheme encouraging hydrogen production and consumption.

Hydrogen from offshore wind

The security strategy has added to several existing decarbonization goals, much as the EU may do via the recent energy security package, REPowerEU.

The UK added "up to" 5 GW to its existing production commitments for blue and green hydrogen, but until hydrogen auctions and other plans ramp up in 2025, the continued gas dependence of the UK's power system leaves it exposed to high prices.

The UK is now proposing to tender for green hydrogen electrolyzers each year by 2025 so that up to 1 GW of capacity is under construction or operational, and set up in ways that ease network constraints created by offshore wind.

By the same year, the government also wants to have hydrogen emissions certification as well as designs for new business models, networks and storage in place.

First, though, the government will launch the £240m net-zero Hydrogen Fund that will mostly be allocated towards producing green hydrogen from offshore wind power. At least half will be for green hydrogen, as the strategy foresees using green hydrogen for power, transportation, and potentially heating fuel. This fund for producers as laid out in last year's Hydrogen Strategy.

The energy strategy has also added 10 GW to its 40 GW by 2030 target for offshore wind capacity, for a new total of 50 GW. It "would like to see up to 5 GW" of this committed to largely experimental floating offshore wind.

Globally, three prototype floating wind farms have commenced operation, and last year the UK and France became the first countries to tender for floating wind farm leases.

In a move that specifically targeted gas used for heating, the UK added £10 million to an existing £10 million fund pledged for the development and piloting of financial products to encourage home energy efficiency projects.

The government also pledged to run a £30 million Heat Pump Investment Accelerator Competition this year to spur heat pump manufacturing.

This may be an attempt to address heat pump supply chain issues that have plagued UK energy efficiency schemes, most recently cancelling the Green Homes Grant scheme, which shut down a year ago.

A renewable energy source often overlooked in the UK, solar PV may get a break as the UK is considering increasing its 5 GW solar capacity target for 2030, with promised consultations to ease development of both rooftop and ground mounted solar and a vision for "up to 70GW of solar by 2035," but firm targets remain elusive.

A new government body, Great British Nuclear, will be set up to achieve "up to" 24 GW of added capacity by 2050, possibly via a new nuclear reactor every year, although existing capacity is already at 1,198 MW.

Newport doubted the UK's nuclear plan could be put into motion for at least a decade because of the time it takes to build nuclear power plants.

Fixes for electricity prices, networks

Despite the accusations the government is acting too slowly, it will nevertheless provide a small amount of relief to British families from high energy bills in the form of a £150 tax rebate, additional funding for low income households, as well as an energy bill scheme that will spread the cost of the energy price shock over five years starting in 2023.

Heavy industry, too, will benefit from an electricity bill relief scheme, according to an 8 April statement from the Department for Business, Energy and Industrial Strategy.

But the strategy seeks to change the electricty system more broadly. A day before the energy security strategy's publication, the government announced the launch of a new public body for power sector governance, providing energy and network plans to ensure security of energy supply.

In a parallel move, one of the strategy's aims is "a blueprint for the whole system by the end of 2022" called the Holistic Network Design to find out what new wires are needed to reach the higher 2030 offshore wind goal.

Posted 11 April 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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