Guidance

Energy Security Bill factsheet: Hydrogen and industrial carbon capture business models

Updated 1 September 2023

The hydrogen and Industrial Carbon Capture (ICC) business models will support the Government’s ambition for up to 10GW of low carbon hydrogen production capacity (subject to affordability and value for money) and to capture and store 20-30MtCO₂, which includes 6MtCO₂ of industrial emissions, per year, by 2030.

This could support over 12,000 jobs across the hydrogen value chain and 50,000 jobs in the carbon capture, usage and storage (CCUS) sector split across industry, power, and the transport and storage network.

Why are we legislating?

In the Ten Point Plan, the Prime Minister committed to making CCUS and low carbon hydrogen feasible and attractive investments, as essential technologies to achieving our net zero commitments.

Hydrogen will be critical in reducing emissions from heavy industry, as well as in power, transport, and potentially heat. ICC will support the deep decarbonisation of industries that often have no viable alternatives, such as chemicals, refining, cement, and residual waste management processes.

The Bill will enable business models to be brought forward to provide investors with the long-term revenue certainty they need to establish and scale up deployment of these industries. The hydrogen business model will help overcome one of the key barriers to deploying low carbon hydrogen: the higher cost of low carbon hydrogen compared to high carbon counterfactual fuels. The ICC business model will help to incentivise the deployment of carbon capture technology for industries which are hard to decarbonise.

How the Bill will achieve this

Financial assistance: providing the Secretary of State with UK-wide powers to incur expenditure and provide long term financial assistance to support the establishment of CCUS and low carbon hydrogen production. This will allow revenue support to flow through a contractual mechanism.

Counterparty: The contractual nature of the ICC and hydrogen business models require a counterparty to manage the contracts and act as a conduit for funding. The Bill provides the Secretary of State with powers to designate and direct a counterparty.

Competitive Allocation: Initial projects are expected to be allocated support through a bilateral process. In the medium term, the business models are expected to move to a more competitive allocation process (e.g. auction), similar to the low carbon contracts for difference (“CFD”), to reduce costs to government and the consumer. The Bill provides the Secretary of State with powers to appoint an allocation body and set out the allocation process in regulations.

Hydrogen Production Levy: It is expected that from 2025 at the latest, all revenue support for low carbon hydrogen production will be levy funded, subject to consultation and legislation being in place. The Bill provides the Secretary of State with powers to appoint a levy administrator and to make regulations which will establish the levy.

FAQ

Why are you supporting CCUS-enabled/blue hydrogen that uses fossil fuels?

There are a variety of methods for producing low carbon hydrogen. The UK Hydrogen Strategy sets out the government’s ‘twin-track’ approach to supporting both electrolytic ‘green’ and CCUS-enabled ‘blue’ hydrogen production. We have doubled our UK ambition for hydrogen production to up to 10GW by 2030 with at least half of this coming from electrolytic hydrogen.

Why do we need a levy and what will be the impact on consumer bills?

The purpose of the levy is to provide long-term funding for the hydrogen business model, which will enable hydrogen producers to overcome the operating cost gap between low carbon hydrogen and fossil fuels.

The levy is not expected to be implemented until 2025 (subject to legislation being in place) and so we do not expect it to have impacts on consumer bills before then. Once introduced, we expect its impacts will ramp up as we look to deliver our 2030 hydrogen ambitions to improve energy security. As policy development on the levy is ongoing, with a number of key decisions still pending, there is uncertainty regarding the precise impact of the levy on consumer bills.

Background

Most hydrogen produced and used in the UK and globally is high carbon, coming from fossil fuels with no carbon capture. This is sometimes referred to as ‘grey hydrogen’. Low carbon hydrogen produced from natural gas with carbon capture, usage and storage (CCUS) is known as ‘CCUS-enabled hydrogen’, or ‘blue hydrogen’. Hydrogen produced through electrolysis, where electricity is used to split water into hydrogen and oxygen is known as ‘electrolytic hydrogen’. When the electricity comes from renewable sources, it is often referred to as ‘green hydrogen’.

The ICC and hydrogen business models are part of a range of government interventions intended to stimulate investment in projects that will be necessary to meet Carbon Budget 6 and net zero targets. These also include:

• The £1 billion CCS Infrastructure Fund (CIF) will support the capital costs of strategic CCUS infrastructure, primarily T&S networks and industrial carbon capture projects. It is part of a package of Government support to deliver the Net Zero Strategy ambition to capture and store 20-30 MtCO2 per year by 2030.
• The £240 million Net Zero Hydrogen Fund (NZHF) is aimed at kickstarting the hydrogen economy in the early 2020s by supporting hydrogen production projects with upfront costs, stimulating private sector investment, and developing the pipeline of projects needed to deliver hydrogen production at scale by 2030.
• A further £26m is being provided through the Industrial Hydrogen Accelerator, £55m through the NZIP Industrial Fuel Switching Competition and up to £60m via the Industrial Energy Transformation Fund.

Further information

The following documents are relevant to the measures and can be read at the stated locations:

• Hydrogen business model consultation and Government response (2022)
• CCUS business model updates (2020-2022)
• CCUS Investor Roadmap