The Energy Transition | Energy Profits Levy and new proposals for green hydrogen

UK government announce Energy Profits Levy

On 26 May 2022, the Chancellor announced a temporary windfall tax on oil and gas companies and an emergency aid package to address household energy bills. We discuss these announcements and consider what they mean for the UK energy sector in this Insight.

EU Commission publishes draft proposals on the production of green hydrogen

The European Commission has drafted new rules on how the renewable electricity used to produce green hydrogen can be legally counted and verified as being "additional" to other uses of electricity. Green hydrogen - hydrogen generated by renewable energy or low-carbon power is expected to play a significant role in the decarbonisation of the transport sector and the proposed rules set out the requirements that must be satisfied in order to classify the hydrogen produced as being from fully renewable sources.

The requirements stipulate that there must be both a temporal and geographical correlation between the renewable energy used to produce the green hydrogen and the production of the green hydrogen itself.

In order to satisfy the temporal requirements, one of the following three requirements must be met:

• the green hydrogen and renewable electricity must be produced during the same one-hour period;
• if the renewable electricity used to produce the green hydrogen comes from a storage asset, that asset must be located behind the same network connection point as the green hydrogen electrolyser and must have been charged during the same one-hour period in which the renewable electricity has been produced; or
• the green hydrogen is produced during a one-hour period where the clearing price of electricity resulting from a single day-ahead market is lower than or equal to €20 per MWh, or lower than 0.36 times the price of an allowance to emit one tonne of carbon dioxide equivalent during a specified period.

To satisfy the geographical requirements, one of the following three conditions must be met:

• the renewable electricity installation and the green hydrogen electrolyser are located in the same bidding zone;
• the renewable electricity installation and the green hydrogen electrolyser are located in neighbouring bidding zones, provided that the electricity prices in the zone in which the renewable electricity installation is located is equal to or higher than the prices in the bidding zone in which the green hydrogen electrolyser is located; or
• the installation generating renewable electricity is located in an offshore bidding zone adjacent to the bidding zone where the electrolyser is located.

In addition, there should be no electricity grid congestion between the electrolyser producing renewable hydrogen and the installation generating renewable electricity, and the renewable power capacity must enter into operation not earlier than 36 months before the electrolyser is installed.

The draft rules, published on 20 May 2022, are open to a four week public consultation period ending on 17 June. Following this, the EU Commission will publish its final proposals and the draft text will be submitted to the European Parliament which has four months to reach a decision.

UKPN and Google develop world-first digitalised maps of electricity cables

UKPN has partnered with DeepMind, Google's Artificial Intelligence (AI) arm, to produce digital versions of its electricity cable maps which span over 180,000km of electricity wires. Through the use of image recognition software, thousands of maps, some hand-drawn and over 100 years old, can be scanned and remastered into a fully-interactive digital files, showing each electricity substation, cable and overhead line on UKPN's network.

Until now, no AI software has been capable of recognising hand-drawn straight lines as electricity cables and recreating them in digital format. Utility firms have had to manually scan maps of underground equipment in order to produce electronic versions and many of these firms face an extensive backlog of maps to update. The new software aims to make this process significantly quicker and cheaper. It is estimated that the software can reduce 20,000 hours of scanning work down to just 15 minutes and save up to 90% on costs. UKPN has stated that money saved through the project will be re-invested into the electricity network, with the intention of increasing reliability and enabling the UK's transition to a low-carbon economy.
The use of digital maps will allow UKPN to provide better and faster services to the more than 15,000 customers each year who apply for upgraded electricity connections, such as the installation of electric vehicle charging stations. The digital maps will also be made available to the rest of the industry for free, allowing organisations such as battery operators, local authorities and energy aggregators to plan where to install new equipment or bid for flexibility contracts. The maps will also help ensure the safety of those carrying out excavation works by clearly showing where power lines are located.

Alex Mahon, Head of Analytics at UKPN, has said: "Not only will [the software] help keep people safe and help more low carbon technologies connect, but it has huge implications for utility sectors across the world who may wish to do the same. This innovation could save millions of pounds for customers and help enable net zero: that’s the power of digital innovation."

UK Infrastructure Bank and Octopus Investments partner to fund new infrastructure projects

The UK Infrastructure Bank (UKIB) and Octopus Investments have launched a sustainable infrastructure fund to support new green projects across the UK. The Octopus Sustainable Infrastructure Fund (OSIF) will provide growth capital to sustainable infrastructure projects in emerging sectors, including battery storage and electric vehicle charging, and in particular, will target projects that are unable to access mainstream debt financing.

UKIB will invest up to £100 million on a match-funding basis which will unlock between £100m to £300m of private capital for next generation infrastructure projects. Although operationally independent, UKIB is wholly owned and backed by HM Treasury and was set up in June 2021 as part of the government's National Infrastructure Strategy to support projects that will enable the UK to reach its net zero ambitions. This deal marks UKIB's sixth financing agreement since its inception and UKIB hopes that the OSIF will enable consumers to benefit from innovation in their local area.

Head of Alternative Investments at Octopus Investments, Robert Skinner, said: "The scale of the UK’s net zero ambitions will require billions of pounds of investment. Some of that money needs to be channelled towards scaling up the emerging infrastructure technologies, companies and assets across critical sectors, such as digital infrastructure like small cells and green data centres, battery storage, electric vehicle charging and waste management. … We are incredibly fortunate to have the support of the UK Infrastructure Bank in seeking to unlock this much-needed funding. … There is now a tremendous opportunity for institutional investors to align their capital with the UK’s net zero goals, supporting job creation, powering economic growth, and bringing the next generation of infrastructure to every corner of the country, while generating the necessary financial returns.”

Government announces £553 million funding to upgrade heating systems in public buildings

The Department for Business, Energy & Industrial Strategy (BEIS) has announced £553 million in government funding to upgrade public buildings with affordable, low carbon heating and energy efficiency measures. This funding will enable public buildings to cut their use of expensive fossil fuels by switching to electrified heating solutions. The upgrades will include heat pumps, electric heating systems, insulation, double glazing, LED lighting and renewable energy such as solar PV.

The first round of funding, awarded through Phase 3a of the Public Sector Decarbonisation Scheme, will be given to 160 public sector organisations, including the Queens Medical Centre in Nottingham, Birmingham Children's Hospital, Greater Manchester Fire and Rescue Service and more. BEIS estimates that this will save local authorities, public bodies and taxpayers an average of £650 million per year on energy bills for the next 15 years.

The Public Sector Decarbonisation Scheme aims to decarbonise public sector buildings to reduce the 2017 emission levels by 75% by 2037. The newly announced £553 million government funding is the first part of Phase 3 of the scheme which will run until 2025 and aims to allocate £1.425 billion overall. Guidance on how to apply to the next round of funding will be published in July 2022 with the application window due to open in September 2022.

Lord Callanan, Business and Energy Minister, said: "Using cleaner technology to heat our civic buildings is helping to shield public sector organisations from costly fossil fuels, especially at a time of high global prices. This funding will bring significant savings for taxpayers of well over half a billion pounds each year by making public buildings cheaper to run, heat and cool, whilst supporting economic growth and jobs across the country."