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Industrial Decarbonisation and Hydrogen Revenue Support: Accounting officer assessment 2022 (HTML)

Updated 12 June 2023

Department for which the accounting officer who made the assessment is responsible:

Department for Business, Energy and Industrial Strategy

Project title:

Industrial Decarbonisation and Hydrogen Revenue Support

Main scheme project stage:

Outline Business Case approved by BEIS Portfolio and Investment Committee: March 2022.

Introduction

It is normal practice for Accounting Officers to scrutinise significant policy proposals or plans to start or vary major projects, and then assess whether they measure up to the standards set out in Managing Public Money. From April 2017, the government has committed to make a summary of the key points from these assessments available to Parliament when an accounting officer has agreed an assessment of projects within the government’s Major Projects Portfolio.

This Accounting Officer Assessment considers the Outline Business Case for the Industrial Decarbonisation and Hydrogen Revenue Support Scheme (IDHRS.)

Background and context

The UK government is committed to achieving Net Zero by 2050.

Low carbon hydrogen and carbon capture, usage, and storage (CCUS) are essential technologies for meeting our legally binding Carbon Budgets 6 and Net Zero target. The government’s Net Zero Strategy (NZS), published in October 2021, announced 2 ambitions for these technologies to put us on the pathway to Net Zero.

To support the delivery of these technologies alongside a suite of other funds and policy mechanisms, the NZS also announced a new Industrial Decarbonisation and Hydrogen Revenue Support (IDHRS) scheme. IDHRS will fund the new hydrogen and industrial carbon capture (ICC)^{[footnote 1]} business models which are designed to provide long-term certainty on revenue support to industry, enabling final investment decisions on ICC and hydrogen production projects.

The IDHRS scheme will work alongside in conjunction with interdependent capital co-funds the CCUS Infrastructure Fund (CIF) and Net Zero Hydrogen Fund (NZHF).

Assessment against the Accounting Officer standards

Regularity

Primary legislation to deliver spending powers for the business models/IDHRS will be required. The Energy Bill, introduced into Parliament in July 2022, includes bespoke spending powers, powers to designate and direct a counterparty, powers to run a competitive allocation process and powers to raise a levy to fund the hydrogen business model. We will provide further detail on our approach to primary legislation at the Final Business Case stage. The development of the hydrogen levy policy and the progression of the legislation will be kept under review, and I will reassess the position once the legislation comes into effect.

Overall assessment: My assessment is that the regularity test is satisfied.

Propriety

The IDHRS Programme has been approved at both Strategic Outline Business Case and Outline Business Case stage by the BEIS Projects and Investments Committee as well as HMT’s Treasury Approval Panel. The Programme has received all the required Cabinet Office Commercial Spend Controls. As a result, this has had approval to proceed. The programme has also been reviewed by HMT’s Major Project Review Group where it was approved.

In line with the departmental risk appetite, at this stage, the risk of fraud is minimised and managed with adherence to BEIS’ standard procedures, including the Counter Fraud Strategy and Fraud Response Plan.

A thorough due diligence and audit process to mitigate the risk of fraud will be developed as part of subsequent business cases. As a new policy, the IDHRS and business model teams will work with delivery partners and the counterparty(s) to develop robust governance and counter-fraud plans. The risk of fraud will be assessed, and appropriate and effective controls such as due diligence and audit, will be put in place ahead of scheme launch. The IDHRS will also develop a long-term governance structure to appropriately manage long-term delivery of the project, incorporating delivery partners where applicable to monitor and control the funding envelope through the project lifecycle.

Overall assessment: My assessment is that the propriety test is satisfied.

Value for money

Value for money assessments for Industrial Decarbonisation & Hydrogen Revenue Support (IDRHS) were set out in the IDHRS Outline Business Case. This included projects that potentially also received capex support through strands 3&4 of the Net Zero Hydrogen Fund (NZHF). The analysis focused on our “mid-2020s ambition” for a combination of electrolytic hydrogen, industrial carbon capture, waste, and hydrogen production enabled by carbon capture and storage. This work is currently “illustrative” as it is based on projects that may, or may not, be awarded funding throughout negotiations taking place over the next year. Final business cases for selected projects will be developed at the end of this process.

Low carbon hydrogen and carbon capture, usage, and storage (CCUS) are essential technologies for meeting our legally binding Carbon Budget 6 and Net Zero target. The government’s Net Zero Strategy (October 2021) and British energy security strategy (April 2022) announced 2 key ambitions to put us on the pathway to Net Zero; to deliver by 2030, 4 CCUS clusters, capturing 20-30 Mt CO₂ per year across the economy, and 10 GW hydrogen production capacity. The Industrial Decarbonisation and Hydrogen Revenue Support (IDHRS) scheme will fund the new hydrogen and industrial carbon capture (ICC) business models which are designed to provide long-term certainty on revenue support to industry. The IDHRS scheme will work in conjunction with interdependent capital co-funds the CCS Infrastructure Fund (CIF) and Net Zero Hydrogen Fund (NZHF).

Without funding support, it is expected that there will be no ICC or at-scale hydrogen deployment in the 2020s. Investments in these technologies are expected to have a negative return on private investment, due to the high cost of deployment relative to high-carbon alternatives.  Therefore, the counterfactual assumed in this analysis was effectively zero deployment of these technologies. The full costs and benefits of ICC and hydrogen deployment have been attributed to the policy options. Without ICC and hydrogen deployment, industry and other potential hydrogen users will continue to emit CO₂ through fossil fuel use and industrial processes. In this scenario, it is highly likely that we will fail to meet the ambitions set out for the 2020s in the Net Zero Strategy and will likely face a higher overall cost of meeting our 2050 Net Zero target and Carbon Budget targets, due to an increased requirement for early scrappage of equipment.

As well as the monetized benefits described above, the deployment of ICC and Hydrogen is expected to bring in significant amounts of private sector capital investment into the UK and our industrial base, which could result in the creation of many thousands of new jobs. The IDHRS via the business models will support wider infrastructure deployment for CCUS and hydrogen, underpinning a growing hydrogen economy and acting as an enabling measure for wider decarbonisation in the future. The programme will further improve energy security for the future as well as reducing system costs. The deployment of ICC and hydrogen will bring in significant amounts of private sector capital investment into the UK and our industrial base.

The value for money analysis quantified the key costs and benefits to society of delivering an illustrative mix by the mid-2020s, comprising Industrial Carbon Capture (ICC), waste management with CCS, CCUS-enabled (blue) hydrogen and electrolytic (green) hydrogen production. The total discounted system costs included capex, opex and transport and storage infrastructure costs. The monetised benefits are mainly reductions in carbon emissions, either directly through carbon capture or where hydrogen has displaced the use of fossil fuels in transport, industry, and power. The difference in the costs and benefits showed a positive total Net Present Social Value. Taking into account the whole of life public costs, based on either a levy funded, or exchequer funded model, the analysis also showed that the benefit to costs ratio was greater than 1.

Overall, the analysis suggests there is a strong case for delivering our mid-2020s ambition, which is expected to result in positive benefits to society.

Following longlisting and shortlisting of suitable options for the fund, a detailed economic analytical plan has been developed to forecast the expected impact of funding and to demonstrate which options represent value for money. Each ‘option’ will comprise potentially viable combinations of a transport and storage network in each cluster, together with different shortlisted CCUS projects. The planned approach has been quality assured by senior BEIS analysts, and will be further developed at FBC.

The application stage for Phase 2 has completed, this was opened to competition between projects within clusters between November 2021 to January 2022, individual ICC and new build CCUS-enabled hydrogen projects were evaluated against key criteria. This process aimed to ensure deliverability of projects alongside bearing down on costs and maximising value for money.

During the due diligence and then negotiations phase, value for money will also be at the heart of every negotiating decision, with assessments to take into account affordability (considering CIF funding, T&S revenue support, IDHRS support to emitters, any consumer support provided) and returns on investment to developers (no over-compensation and commensurate with the risks taken), in addition to criteria set out during the evaluation phase.

Overall assessment: My assessment is that the value for money test is satisfied.

Feasibility

The Industrial Decarbonisation and Hydrogen (IDH) and CCUS Programme boards are the principal boards for IDHRS policy, and they consist of a large range of experts from related funds and technical, commercial, legal, finance, project delivery and other backgrounds. These boards have responsible for advising the IDHRS SRO on policy proposals from the team and fed into the many key design decisions undertaken including the Outline Business Case.

The IDHRS scheme has benefited from internal feedback from a range of BEIS governance structures, including the Hydrogen Policy Board (H-Pol), Hydrogen Steering Board (HSB), Industrial Decarbonisation Funding and Policy (IDPF) Board. At the working level, the Funding and Analysis Board (FAB) has also been established and coordinates the strategic approach to funding with dependent projects (CIF and NZHF) and governance feedback.

IDHRS project risks are managed in line with the BEIS Risk Management strategy and IDH Portfolio Risk Management guidance. As a GMPP project a Risk Potential Assessment has been completed to assess the strategic profile, delivery challenge, capacity, capability, and scale including the overall consequential impact of project failure.

IDHRS is not a traditional grant funding project and does not involve conventional procurement methods. While BEIS will lead on negotiations and decisions on which projects will be awarded a business model contract (and capital grant), once awarded, to disperse the revenue funding, we are proposing to empower an arm’s length body (the Low Carbon Contracts Company) to act as the counterparty to manage the business model contracts and transactional administration.

Once the role as the counterparty becomes established in law (expected Q2 2023 following Royal Assent of the Energy Bill), we will set out a formal way of working and governance arrangement, including monitoring and reporting requirements, and will consider how this could be set out in the BEIS Framework Document and regulations to help ensure successful delivery and relationship management.

Other delivery partners could include external consultancy support for the cluster sequencing and electrolytic hydrogen selection and co-ordination processes, based on a mixed delivery model, where BEIS establishes a new internal delivery team which will retain accountability for quality assurance and continuous improvement, with potential supplementary external expertise which will be sourced as necessary for example to find legal, commercial and technical support.

Overall assessment: My assessment is that the feasibility test is satisfied.

Conclusion

As the BEIS Accounting Officer, I have considered this assessment of the IDHRS programme and approved it on 31 March 2022.

I have prepared this summary to set out the key points which informed my decision. If any of these factors change materially during the lifetime of this project, I undertake to prepare a revised summary, setting out my assessment of them.

This summary will be published on the government’s website (GOV.UK). Copies will be deposited in the Libraries of the House and sent to the Comptroller and Auditor General and Treasury Officer of Accounts.

Sarah Munby
Permanent Secretary, BEIS
31 March 2022

1. This also includes the ICC/Waste business model, an adaption of the generic ICC business model, to support investment of CCUS in waste management facilities. ↩