Hytime to certify: UK consults on Hydrogen Certification Scheme

United Kingdom

On 9 February 2023, the Department for Business, Energy and Industrial Strategy (“BEIS”), and the Department for Energy Security and Net Zero (“DESNZ”) (noting that from 7 February 2023, the relevant functions of BEIS have been transferred to DESNZ) published a consultation (the “Consultation”), outlining the Government’s key proposals for the design, content and delivery of a globally-recognised low carbon hydrogen certification scheme.

The overall objective of the low carbon hydrogen certification scheme is to support the decarbonisation of the hydrogen economy through tracing and verifying the greenhouse gas emissions of hydrogen production. Whilst some markets for hydrogen already exist, there is currently no globally recognised way for producers of low carbon hydrogen to prove the greenhouse gas emissions impacts of their product, leading to greenwashing concerns. The scheme aims to stimulate the growth of green hydrogen markets, by promoting confidence in the transparency and traceability of hydrogen and its derivatives. It also aims to create a streamline approach to reporting and to provide the mechanics for hydrogen producers to demonstrate eligibility and compliance with other subsidy schemes.

Scheme Design

The Consultation sets out that the primary goal of the scheme is to connect producers and end users through a certification method that both verifies and traces the emissions of low carbon hydrogen. The scheme is proposed to be offered UK-wide, and eventually scaled up to facilitate cross-border trade in low carbon hydrogen. At present there is little in the Consultation on how the UK scheme would work with other certification schemes being developed in other markets.

The Low Carbon Hydrogen Standard (“LCHS”), published in April 2022, sets an emissions threshold and methodology for calculating production emissions of hydrogen. The Consultation proposes to use the LCHS as a basis for the calculation of emissions in the certification scheme. This means that the certification scheme would be open to any producers that are able to produce LCHS compliant hydrogen, and any end users that can demonstrate that they are using low carbon hydrogen that meets the LCHS.

The certification scheme is expected to follow the evolution of the LCHS, however the Consultation considers the consequences of this, including the discrepancy for those producers who may have certified hydrogen at a given time but can no longer comply with the certification scheme due to the LCHS emissions thresholds becoming more demanding overtime. Options considered for addressing this issue include the provision of “legacy” certificates for those previously compliant with the scheme.

The scheme proposals refer to comparable hydrogen certificates schemes around the world. All of these involve one or both of the two basic elements: (1) factual disclosure, which describes the properties of the hydrogen, and (2) labelling, which provides a simple assessment on whether the product meets the emission standards. The Government’s ‘minded to’ position for information disclosure is to include both factual disclosure and a label. The factual fields would be mandatory, while others would be voluntary to allow harmonisation with requirements of other schemes (international and domestic). For methods of labelling, the Government is open to a more flexible approach, to support a range of hydrogen production methods.

Other key design considerations of the Consultation include the choice of units in the certificate to ensure it is easily understandable and aligned with standard metering and reporting of hydrogen. The Government’s preference is to use volume based energy-based units (MWh) for hydrogen certificates. The Consultation also outlines the Government’s intention for the certificates not to provide evidence for the reduced UK Emissions Trading Scheme, which will continue to operate alongside the certificate scheme.

A secondary priority of the scheme is to facilitate cross-border trade in low carbon hydrogen. The Government notes that an approach will need to be developed to certify the emissions content of hydrogen imports and certificates to prove the emissions of UK hydrogen being exported. Options such as mutual recognition of other international certification schemes and differing scheme methodologies are being considered.

The Consultation mentions the Government’s additional considerations for the scheme, which includes a review of the different approaches to consignments and how the Government can resolve any issues arising from the mid-stream part of the hydrogen value chain.

Chain of Custody

A key focus point of the Consultation is the “Chain of Custody” process by which hydrogen can be traced throughout the value chain, including if blended into the gas grid. The Consultation outlines the four main approaches to the Chain of Custody: Identity-Preserved, Segregation, Mass Balance and Book and Claim approaches. The Consultation refers to the LCHS consultation, and concludes that of these approaches the Mass Balance Chain of Custody would likely provide the most confidence in both a baseline scenario (where the hydrogen market configuration is similar to today) and a complex future scenario (where developments lead to a more complex hydrogen market). The Mass Balance system allows certified and non-certified hydrogen to be mixed along the supply chain with low carbon hydrogen certificates also passed along the supply chain until a consumer takes the certified hydrogen out of the system.

The Consultation asserts that this system would enable a level of confidence in a future blended hydrogen pipeline because an offtaker would agree with a producer to take a specified energy content of hydrogen via a system that they are both physically connected to. Although the specific molecules of hydrogen cannot be traced, the Chain of Custody would be maintained by being physically connected to the same system and ensuring the energy content matches by way of the passing of certificates through the supply chain. The Consultation indicates that this system can perform the best against policy objectives, as the strict relationship between the certificate and hydrogen, will ensure that low carbon credentials can only be claimed where hydrogen has been consumer, as well as potentially being compatible with other schemes such as the Renewable Transport Fuel Obligation.

Delivery and Administration

The Consultation proposes to minimise duplication of reporting requirements by aligning the information requirement for the scheme certificates with the reporting requirements for other funding schemes, such as the NZHF and HPBM/LCHA. This includes monthly data reporting and a primary form of verification via annual audits conducted by approved third parties.

The Government’s “minded to” position is that if the Chain of Custody is Mass Balance, certificates will need to follow the hydrogen through the value chain. To achieve this, any change of certificate ownership will need to be recorded. This is likely to be managed through an IT system – similar to Ofgem’s CHP Register - where the prior owner of the certificate will need to transfer the certificates at the point of sale of the hydrogen. Similarly, it may require users to use an IT system to ensure that certificates are retired after the associated hydrogen is used.

The proposals include setting up of a certification body, which will manage eligibility for the scheme and ensure compliance and audits, and an issuing body to manage the certificates, and manage the IT registry, to ensure the certificates are issued and retired as required.

Next Steps

This Consultation is a key step in developing a tradable certification market and allowing procedures of low carbon hydrogen to confidently demonstrate to hydrogen consumers that hydrogen is truly low carbon.

There are a number of analogous markets which the UK can take inspiration from such as the Renewable Energy Guarantees of Origins (REGOs)/ Guarantees of Origin (GoOs) regimes and/or schemes such as the EU and UK Emissions Trading Scheme (ETS) schemes. However it will be key that the UK scheme works with other emerging international schemes such as CertifHy and TÜV SÜD as well as the thresholds being proposed through the US Inflation Reduction Act (IRA) 2022.

Consultation closes on 28 April 2023.