An overview of the (UK hydrogen) pipeline: market, policies and opportunities

An overview of the (UK hydrogen) pipeline: market, policies and opportunities.

As the world continues to seek progress in the energy transition process, hydrogen’s contribution is necessary to achieve global net zero goals: OUCHModels show that a six-fold increase in hydrogen use is needed to reach 10% of total net-zero final energy consumption by 2050.

Hydrogen, and in particular green hydrogen, has versatile use case potential and has catalyzed many technologically exciting recent projects. (National Grid’s quick explanation of the “color spectrum of hydrogen” is linked here.)

This UK-focused blog provides an overview of hydrogen project opportunities for investors, as well as insight into the state of the UK market and its close interaction with politics – in particular the Net Zero Hydrogen Fund and the Hydrogen Business Plans.

It should be noted that despite the selective focus here on the role of hydrogen in decarbonisation policies, hydrogen is also an important part of the UK’s energy security strategy and growth plan. of the Chancellor presented to Parliament on September 23, 2022.

What are the opportunities ?

The hydrogen industry is brimming with opportunities for investors across the value chain. In addition to a variety of green hydrogen production technologies (mainly steam reformers and electrolysis), there is a wide range of ways to use the hydrogen produced. These include:

  • industrial use such as petroleum refining, ammonia production, steel manufacturing, methanol production;
  • transport, such as fuel to drive cars (replacing fossil fuels), trucks, ships and planes; and
  • the production of electricity or possibly heat, including by blending hydrogen into existing natural gas networks or for use in the storage of excess renewable electricity at low cost.

Major risks for industry players include construction risk and cost overruns. The ambitious timeline proposed as eligibility criteria for the Net Zero Hydrogen Fund and the Hydrogen Business Model (see below) will add another layer to this challenge.

In addition, the technological risk for hydrogen projects is linked to a tension between the supply and demand market (see the previous Freshfields blog post including this topic here). Likewise, the requirement for any applicant for the Net Zero Hydrogen Fund and the Hydrogen Business Model to have already identified at least one buyer will attract careful consideration.

Greenfield hydrogen-related transaction activity over the past two years has included hydrogen production facilities (green and blue hydrogen), hydrogen power plants, storage facilities, distribution facilities, electrolyzers and turbines with a related mergers and acquisitions market and a debt provision from corporate financings, refinancings and asset financings.

At this point, the primary role for investors in brownfields might be primarily through venture capital or growth funds, but as projects grow, more opportunities may open up.

Investment opportunities can be anywhere in the value chain (i.e. at the level of production, distribution or delivery to end users) and there are also considerations whether to be involved upstream or downstream, in green hydrogen versus blue hydrogen, and in different types of projects such as repurposing existing assets rather than building new infrastructure.

The UK government publication has released a helpful guide showing the wide variety of investment opportunities in this space.

Any investment in the hydrogen industry could contribute to:

  • increase the scale of project deployment;
  • establish demand and/or reduce costs; and
  • increase capital expenditure, including to build or upgrade necessary infrastructure.

As suggested above, growing investment in the hydrogen industry could also increase M&A and financing opportunities for brownfield investors.

Where are we now?

Our overview of the developing hydrogen market in the UK shows, especially at this stage, synergy with government policy initiatives. The UK is targeting 10GW of low-carbon hydrogen production capacity by 2030, more than half of this from electrolytic hydrogen.

The main initiatives underway in the UK hydrogen strategy aimed at achieving these key objectives are:

  • the Net Zero Hydrogen Fund – funding of £240 million which will be distributed through four strands and grant applications of up to £80,000 each
  • the hydrogen business model – design of an allocation cycle for electrolytic hydrogen projects, with a market engagement exercise where up to £100m for initial H2 electrolytic projects can be awarded .

Earlier this year, stakeholders provided feedback on some of the issues raised in BEIS proposals for these initiatives, after which a publication of the government’s response has been published and questions of clarification are in progress.

Some of the key questions that prompted discussion (both in the consultation process and in follow-up clarifying questions) include:

  • The requirement for eligible projects to reach commercial operation date by the end of 2025 at the latest, as this would mean that projects would need a positive final investment decision ideally before the end of this calendar year
  • a minimum capacity threshold for projects to be eligible of 5MW, as it has been suggested that this may not promote market development and learning, or increase competition
  • a criterion that producers wishing to apply must have identified at least one buyer of hydrogen (this buyer must also meet certain qualifications and will be mentioned throughout the application, for example in the “project risk register” submitted)
  • compliance with the Low Carbon Hydrogen Standard – 20 g per megajoule
  • the weighting of the project’s “deliverability” score, calculated according to the project’s performance against the three key factors of BEIS.

Applications for streams one and two of the Net Zero Hydrogen Fund, which provides development expenditure for initial engineering design (FEED), post-FEED activities and capital expenditure support, are already closed. Currently, applications for the third stream – the “first cycle of electrolyte allowance” – are open.

Stream 4 will focus on supporting capital expenditures for Carbon Capture, Utilization and Storage (CCUS) enabled projects that require a hydrogen-specific business model and are part of the carbon sequencing process. phase 2 clusters.

What happens afterwards?

The outcome of allocations under the Net Zero Hydrogen Fund and the Hydrogen Business Model could affect the viability of proposed hydrogen projects – failure to obtain a grant could result in hydrogen projects being scaled back or delayed, although that alternative external investments may be available.

The winning projects will still work according to a very ambitious schedule in order to be operational before the end of 2025 and these projects will therefore still be able to benefit from additional external support. The proposed schedule would mean that, in order to solidly hedge against major construction and cost overrun risks, all contracts, including off-take contracts, would need to be completed by July 2023.

In addition, the simultaneous development of the infrastructure necessary for operational hydrogen projects should take place – notably transport (i.e. either the construction or repurposing of pipeline networks, or a robust compression of the hydrogen to transport the product by road) and storage.

Finally, international investors will also have an eye on other hydrogen policy developments outside the UK. The EU’s ‘hydrogen accelerator’, for example, is expected to attract considerable investor interest and, taken together, these incentives are sure to add color to the development of investment in hydrogen.

LILY the latest news shaping the hydrogen market at Hydrogen Central

An overview of the (UK hydrogen) pipeline: market, policies and opportunities, September 30, 2022

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