Over a third of the UK’s carbon emissions are generated by the 80% of domestic homes currently using natural gas for heating and cooking. The UK is committed to reaching net zero emissions target by 2050, therefore, the gas we use needs to change whilst ensuring the UK can secure an uninterrupted, cost effective energy supply.
The Government stated in its 2021 Hydrogen Strategy that part of the solution is the importance hydrogen has in supporting the decarbonisation of the UK economy, particularly in ‘hard to electrify’ UK industrial sectors, and can provide greener, flexible energy across power, heat and transport.
The UK has significant experience in the production, transportation, storage and use of natural gas and has extensive knowledge in the manufacture of hydrogen which is produced from natural gas and used as a feedstock in chemicals and refineries. In addition, hydrogen is currently used as a fuel, in small volumes for cars, trucks, buses and marine vessels. A notable project being Aberdeen’s hydrogen refuelling stations and investment in a varied fleet of hydrogen buses, cars, vans, road sweepers and waste trucks.
This makes the country well positioned to take advantage of its existing infrastructure and expertise to establish a competitive advantage and become a leader in the production of sustainable, low carbon hydrogen.
With the current Russian and Ukraine conflict forcing the issue of energy security and the high profile increase in cost of natural gas, the importance and economic viability of sustainable low carbon hydrogen projects has certainly risen up the energy agenda.
A key factor in the basket of energy sources is the UK committing to build on its expertise and pilot programmes to produce up to 10GW of low carbon hydrogen production capacity by 2030. To facilitate meeting this target, in 2021, two UK Hydrogen and Carbon Capture (CCUS) clusters were identified, the East Coast cluster spread across Teeside and Humber and HyNet North West England and North Wales cluster. The Scottish Cluster based at St Fergus, Project Acorn, being placed on the reserve list.
The Department for Business, Energy and Industrial Strategy has awarded significant amounts from the £240m Net Zero Hydrogen Fund to the three clusters to fund the front-end engineering and design (FEED) studies. The remainder of the funds being made available to fund capital and development expenditure for the deployment of the projects.
As seen with the development of offshore wind industry, the UK can be an attractive proposition for investors. Together with Government support, a key to unlocking future investment is the continued investment from multinational energy companies, as they continue to pivot away from fossil fuels. bp, Shell, Equinor and Total have formed a partnership for the East Coast Cluster with Shell and Harbour Energy providing funding for Project Acorn with more expected to follow suit as the Clusters continue to progress.
In terms of funding technology advancements, the announcement in June 2021 of the new UK Infrastructure Bank, with initial capital of £12billion, to provide leadership development of new technologies including hydrogen, particularly in scaling early-stage technologies that have moved through the R&D phase appears interesting.
Like most large-scale projects, the cost of construction will have been impacted by rising labour and material costs, therefore, visibility of the quantum and timing of project investment and the expectation of having all the required elements of the supply chain in place at the right time are challenging. Only when certainty can once more be provided on projects will investors be able to seriously consider the opportunities.
If you have any questions or would like any further information on the energy sector or energy transition, please don’t hesitate to contact Corporate Finance Director, Callum Gray, or any member of our Energy team.