Guidance

Energy Security Bill factsheet: Hydrogen transport and storage business models (added 9 May 2023)

Updated 1 September 2023

The hydrogen transport and storage business models will support the government’s ambition for up to 10GW low carbon hydrogen production capacity by 2030 (subject to affordability and value for money). Our 2030 hydrogen production ambition could generate enough electricity to power all of London for a year.^{[footnote 1]}

Hydrogen has the potential to unlock up to 12,000 jobs and £9 billion of private investment by 2030 and could play a critical role in the UK’s commitment to Net Zero by 2050.

Why are we legislating?

Low carbon hydrogen could form a key part of our future energy system. The UK’s vision, resources and know-how are ideally suited to developing a thriving hydrogen economy. As well as supporting energy security in the UK, it is a leading option to decarbonise (reduce or eliminate carbon dioxide emissions) industrial processes that are harder or more expensive to electrify, and can provide greener energy for power, transport and potentially home heating. ^{[footnote 2]}

Government is taking steps towards delivering its low carbon hydrogen production ambition, through its £240 million Net Zero Hydrogen Fund (NZHF) and its Hydrogen Production Business Model – which will help to close cost gaps, addressing the key barrier to deployment and making low carbon hydrogen an attractive alternative to fossil fuels across multiple sectors. In March 2023, we announced the successful applicants of the first competition window for Strands 1 and 2 of the NZHF (development and capital co-funding).

The development of hydrogen transport and storage infrastructure (for eample, pipelines for transport and salt caverns for storage) represents the critical next step in the growth of the hydrogen economy to meet this up to 10GW ambition.^{[footnote 3]} Alongside connecting hydrogen producers with consumers, a well-developed hydrogen transport and storage network could be especially valuable for wider energy system resilience and security. Hydrogen storage infrastructure can enable ‘excess’ renewable electricity (produced at times of high wind/solar generation but low demand) to be used to produce hydrogen that can then be stored over time. This hydrogen can then be converted back into electricity at times of low generation and high demand or used to decarbonise sectors of the economy such as heavy transport or energy-intensive industry.

In the British Energy Security Strategy (BESS), the government committed to “designing, by 2025, new business models for hydrogen transport and storage infrastructure, which will be essential to grow the hydrogen economy”. We consider that business models for hydrogen transport and storage are required to remove market barriers and stimulate private investment in the necessary supporting infrastructure, to deliver this vision of how hydrogen can play its full role in decarbonising the UK economy.

These business models will give investors the long-term revenue certainty they need to establish and scale up the deployment of hydrogen transport and storage infrastructure. The business models are intended to help overcome the key barriers to investment in this infrastructure: high upfront costs and uncertain financial investment returns in an emerging market.

In order to progress work to meet this BESS commitment, we ran a consultation on the high-level design options for both the hydrogen transport and storage business models between August and November 2022. A link to the consultation and the details of the high-level design options is included in the further information section.

The consultation set out our vision for hydrogen transport and storage infrastructure. We aim to reach a large, liquid and competitive hydrogen market enabled by an integrated and resilient network, connected to several hydrogen storage facilities at various scales. In time, we expect the market to be able to operate free of subsidy, although likely not free of regulation (much like the existing gas networks today). Following analysis of consultation responses, we consider that an external subsidy mechanism will be required to support these business models, helping to remove market barriers associated with hydrogen transport and storage infrastructure. This external subsidy mechanism would be delivered through revenue support contracts – a private law contract between a counterparty and a hydrogen transport or storage provider receiving the subsidy.

Alongside these revenue support contracts, it is considered that another element of the hydrogen transport business model should be a Regulated Asset Base (RAB) to facilitate and support the financing of certain hydrogen pipeline projects.

Further detail will be set out in our response to the consultation, which is expected to be published in Q2 2023.

The Bill will enable business models to be brought forward which are intended to provide revenue support contracts to hydrogen transport and hydrogen storage providers. For the hydrogen transport business model, the Bill is intended to also enable the allocation of a RAB. This RAB and revenue support can be used together or separately.

How the Bill will achieve this

The Bill will provide a legislative framework underpinning the delivery of the business models. The detailed design of the business models will be set out in due course.

To enable delivery of these business models, we are seeking the following broad measures.

Counterparty

The contractual nature of the revenue support contract within the business models requires a counterparty to manage the contracts and act as a conduit for funding. The Bill gives the Secretary of State powers to designate and direct a counterparty.

Hydrogen Levy

It is anticipated that the hydrogen transport and storage business models will need an external subsidy mechanism, and this will need to be funded. No decision has yet been taken with regards to how the hydrogen transport and storage business models will be funded. We are seeking powers in the Bill to establish a levy to provide the option of funding the external subsidy mechanism this way. This measure would provide the Secretary of State with powers to appoint a levy administrator and to make regulations to establish a levy to fund the external subsidy mechanism associated with both business models, and related costs.

Transport licensing

We consider that a RAB will be required to support the development of hydrogen pipelines. The Bill contains provisions to enable the allocation of a RAB to facilitate and support the financing of certain hydrogen pipeline projects and to enable the allocation of such a RAB to align and effectively operate with any accompanying subsidy. It is intended that such a RAB will be implemented via gas transporter licences under the Gas Act 1986. To support this, measures include powers for the Secretary of State to grant and modify gas transporter licences in respect of hydrogen pipeline projects allocated a RAB.

FAQ

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

At this stage of policy design, it is anticipated that the external subsidy mechanism associated with the hydrogen transport and storage business models may need to be funded via a levy. However, the funding source for any subsidy support provided through the hydrogen transport and/or storage business models will be subject to future decisions.

No decision has yet been taken with regards to how the Hydrogen Transport and Storage Business Models will be funded. The decision on funding, and whether to introduce a levy, will take into account wider government priorities and policies – including considerations related to the affordability of energy 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 hydrogen transport and storage business models are part of a range of government interventions intended to stimulate investment in projects that are considered necessary to help 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 transport and storage 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^{[footnote 4]} 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 low carbon hydrogen production projects with upfront costs, stimulating private sector investment, and developing the pipeline of projects needed to deliver low carbon hydrogen production at scale by 2030
• a further £26 million is being provided through the Industrial Hydrogen Accelerator, £55 million through the NZIP Industrial Fuel Switching Competition, and up to £60 million 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 Transport and Storage Business Models Consultation
• British Energy Security Strategy

1. This is an example of the scale of our 2030 low carbon hydrogen production ambition only. As set out in our UK Hydrogen Strategy, hydrogen is a potential energy solution for harder to electrify areas like parts of industry, heavier transport such as aviation and shipping, and potentially heating buildings, as well as the important role it can play in the power sector. ↩

2. Government has committed to taking strategic decisions in 2026 on the role of hydrogen in decarbonising heat. However, these legislative changes are required regardless of the outcome of these strategic decisions. ↩

3. Developing a hydrogen economy will require overcoming the ‘chicken and egg’ problem of needing to develop new production and use cases in tandem and balancing supply and demand. ↩

4. Million tons of carbon dioxide equivalent. ↩