UK hydrogen policy updates: hydrogen pipelines, regulation and geological storage

On 14 December 2023 the UK Government’s Department for Energy Security and Net Zero (“DESNZ”) published a wide array of documents on its approach to the development of the hydrogen sector in the UK, covering production, transportation, storage, networks, planning, and hydrogen to power.

This article focuses on key points to note in relation to hydrogen transport and storage, from the following publications:

1. Hydrogen transport and storage networks pathway,
2. Hydrogen Storage Business Model: market engagement on the first Allocation Round;
3. Hydrogen Transport Business Model: market engagement on the first Allocation Round;
4. The Government’s Strategic Policy Decision on Hydrogen Blending into GB Gas Distribution Networks; and
5. The Government’s response to its consultation on hydrogen blending into GB gas distribution networks.

For previous commentary on hydrogen T&S infrastructure, strategic planning, the regulatory framework and blending, please see our previous Law-Now.

For recent commentary on recent publications on hydrogen production please see our article here.

We will publish additional commentary on updates from DESNZ in relation to planning barriers and solutions in the hydrogen sector in January 2024.  

Hydrogen transport and storage networks pathway

The hydrogen transport and storage networks pathway (the “Pathway”) sets out the UK Government and DESNZ’s approach to the development of hydrogen transport and storage (“T&S”) in the UK. DESNZ’s stated intention is that both transportation and storage business models are designed by 2025, along the lines of the “minded-to” positions set out earlier in 2023, specifically:

• a Hydrogen Transport Business Model (“HBTM”) similar to that under development for CO₂ transport and storage, with a separate government subsidy contract for initial allocation rounds; and
• a Hydrogen Storage Business Model (“HBSM”) private law contract with a “revenue floor” for storage operators and a mechanism for incentivising sales of storage.

The legal framework providing for hydrogen transportation revenue support contracts is set out in the Energy Act 2023 (s57). However, the regime cannot take effect without the underlying secondary legislation (e.g. setting out details of the relevant contracts or the designation of a counterparty by DESNZ).

Further details of the proposals around the HBTM and HBSM are set out below, although most commercial details of the design remain to be announced.

Policy and Institutional Framework

DESNZ anticipates the following elements of the policy and institutional framework required to support the development of hydrogen T&S infrastructure:

• The Future System Operator (“FSO”) (as established in the Energy Act 2023) will take on responsibility for strategic planning for hydrogen T&S. DESNZ has committed to consulting on the scope of the FSO’s responsibilities by summer 2024, such that these are in place from 2025.
• Hydrogen is a “gas” for the purposes of the Gas Act 1986, and therefore any transportation, storage, supply, and shipping activities in relation to hydrogen fall under that regulatory regime. While the Pathway does not set out any substantive comment on the changes that may be required or are being considered (for example to the requirements of gas shipper and/or gas transporter licences),  DESNZ has committed to keeping the market framework and industry commercial arrangements under review during the development of hydrogen T&S infrastructure.

Hydrogen Storage Business Model: Market Engagement on the First Allocation Round

The Government has confirmed that it plans to support up to two onshore hydrogen storage projects (together with associated regional pipeline infrastructure), to be in operation or under construction by 2030.  this will be achieved through private law contracts awarded in allocation rounds. We anticipate this may be akin to CCS CO₂ storage licensing regime, licences pursuant to which were announced by the NSTA in 2023.

As per DESNZ’s minded-to positions published in August 2023, the primary support mechanism offered for storage projects is a revenue “floor”. This is intended to mitigate demand risk faced by storage providers by providing a minimum revenue for storage providers regardless of the level of take-up of their facility (subject to conditions such as availability, more details of which are yet to be provided). The floor will provide subsidy equal to the total capital costs, plus fixed operational costs and a “relatively low” return on investment. Further details of the commercial design of the support offered are yet to be provided.

Development expenditure (“Devex”) is to be included as an allowable cost in the HSBM contract for this first allocation round, allowing the recovery of Devex as part of the revenue floor. Whilst recognising the need for this interim measure to overcome the long lead times and high costs of constructing storage facilities, the approach to Devex for future rounds will be kept under review.

The HSBM plans appear to follow the process used for developing the production model which eventually resulted in the LCHA contract. Accordingly DESNZ plans to carry out market engagement in Q1 2024 and publish its application guidance in Q2 2024, ahead of launching the first HSBM allocation round in Q3 2024. However subject to negotiations on the terms, the first HSBM contracts are not expected to be awarded for another full year after that (in Q4 2025).

Whilst the form of contract is not yet available the government has proposed the following as the HSBM eligibility criteria:

• Geological storage facility located in the UK with an energy value of 50GWh (HHV).
• Can evidence of likely storage and transport partners, engagement with those partners, user demand profile post-COD, and a plan of how their facility will be connected to a local hydrogen network.
• Storage site to be commercially operational by a date between 2028-2032
• New-build or converted mothball geological gas storage facility  - applicant must have undertaken geophysical tests on the subsurface elements of the storage site and have permission to use above ground and geological operational area (or be taking substantive steps towards this.
• Minimum of technology readiness level of 7 (i.e. a “prototype near or at planned operational system, requiring demonstration of an actual system prototype in an operational environment”).
• Can evidence of ability to secure funding and attract private investment.
• Have a timetable for getting planning permission to construct or repurpose the storage facility and have a local community engagement plan.
• Be open for access by third parties.

Hydrogen Transport Business Model: Market Engagement on the First Allocation Round

The Government has confirmed that it intends to support the onshore pipeline transportation of hydrogen gas through a RAB model, in addition to an external subsidy mechanism providing revenue support through a private law contract. The stated ambition is for the first allocation window to be opened in Q3 2024, with a shortlist of projects announced in Q1 2025 and successful projects announced in Q4 2025.

As expected, only large onshore pipeline transport is currently within scope of the Government’s plans for support. Offshore hydrogen transport as well as any non-pipeline options (e.g. tube-trailers, shipping) are not addressed. The approach to the recovery of Devex for hydrogen transporters and local transport infrastructure is yet to be announced, with further details expected in Q2 2024.

Similar to recent developments around multi-purpose interconnectors, the policy for hydrogen transport requires projects to have the flexibility to connect to multiple projects with different users.

Given that hydrogen is regulated as a “gas” for the purposes of the Gas Act 1986, the regulatory regime for hydrogen transportation will likely follow the approaches seen for other gas transportation as regulated by the Gas Act 1986, i.e. subject to network price controls and a similar licensing regime. As stated above, further detail is awaited in respect of changes required to (for example gas shipper and/or gas transporter licences to account for the transportation of hydrogen.

Hydrogen blending: still no news

Despite publishing In its decision (the “Decision”) which takes into account the responses from DESNZ’s call for evidence on hydrogen blending, from September 2023, the industry is no closer to knowing if hydrogen blending will be permitted. Key points to note from the Decisions are:

• The Government sees potential strategic and economic value in supporting blending of up to 20% hydrogen (by volume) into GB gas distribution networks in certain scenarios.
• The Hydrogen Production Business Model will be the primary mechanism for providing subsidy support for blended volumes.
• Any future decision as to whether to enable blending will depend on the outcomes of ongoing trials, demonstrations and tests as to safety. If these tests support blending, Government would look to start the legislative process to implement relevant amendments to existing legislation.

DESNZ has committed to continuing to work with industry to assess the safety case for blending, and will continue to engage with stakeholders. This includes potential changes to hydrogen production business model support and the relevant allocation process if blending can be confirmed as an “eligible offtaker”.

Comment

Unlike the progress being made to support production, little progress has been made on the development of transport and storage models. This is of no surprise given that the production models (the HARs) are favouring behind the meter/private offtake-type arrangements rather than facilitating a dispersed way of selling hydrogen to multiple customers throughout the UK.

Rather, the plans for transport and storage models are only seeking to have projects in construction or operation between 2028-2032 which is around the time that awards under HARs 5-7 will be made. It is not clear whether any hydrogen transport infrastructure will be available for production projects looking to progress through HARs 1 to 5. The indecision on whether to allow hydrogen to be blended means that such producers also cannot plan to use the existing hydrogen infrastructure to seek customers located further from their point of production.

In the case of storage, while the concept of a revenue floor is welcome, the details of how such floor would operate and the level at which it is set will be key to unlocking whether investment in onshore hydrogen storage projects are feasible.