Energy and Utilities

The Energy Transition: Hydrogen subsidies and Energy Network Association flexibility tool

Published on 25th Apr 2022

This week, we look at the government's decision to exclude gas blending from initial hydrogen subsidies, the Energy Network Association's launch of a new flexibility measurement tool, First Hydrogen's plans to develop four green hydrogen projects in the UK, and more.

First wave of hydrogen subsidies to exclude gas blending

The government has released its response to the consultation issued in August 2021 on a Low Carbon Hydrogen Business Model. The initial consultation set out the Department for Business, Energy and Industrial Strategy's (BEIS) proposed business model for supporting deployment of low carbon hydrogen projects. In its response, the government stated that blending hydrogen into the gas grid will be a transitional option only. Although it is recognised that blending has a potential valuable role as a demand-sink for hydrogen producers facing volatility, the  government wants to ensure blending does not displace the supply of the pure hydrogen required by end-users to enable decarbonisation. The response also confirmed BEIS' view that hydrogen is less valuable in the heat sector when compared to other areas such as heavy transport and power generation.

The government has not yet decided whether to facilitate blending of up to 20% hydrogen into gas networks and aim to make a policy decision in 2023. This means that support for blending will not be included in the initial contracts to subsidise low-carbon hydrogen production. However, the government has stated that it will consider re-opening these initial contracts to enable support for blending in the future. Read more on this in our Insight.

Energy Networks Association launches new flexibility measurement tool

The Energy Networks Association (ENA), the industry body representing energy network operators in the UK and Ireland, launched a new flexibility measurement tool earlier this month. The tool is designed to help flexibility providers follow a more accurate approach for measuring how much flexibility they have delivered to Distribution Network Operators (DNOs).

The flexibility tool was developed over two years through a project led by Scottish and Southern Electricity Networks (SSEN) Distribution, working in collaboration with the ENA's Open Networks programme and specialist energy consultancy TNEI. Flexibility providers will be able to use the tool as a way of ascertaining their baseline calculations for participating in flexibility markets. A baseline is required to allow ongoing understanding and verification of the volume of flexibility services provided.

Benefits of the new tool include:

  • A standard and consistent decision-making process across all DNO’s: those providing flexibility services, whatever the location, will know exactly what criteria will be used to assess their delivery.
  • More transparency: DNOs and flexibility providers will be able to validate more accurately how much flexibility is being provided. 
  • More competitive outcomes: the new tool allows for a more accountable and transparent approach and customers will ultimately benefit from more cost-efficient solutions. 
  • Increased stakeholder confidence: delivery into the distribution flexibility market and visibility of any potential earnings will be consistent and easier to assess. 
  • Increased participation: a clear and common approach will make it easier for providers to engage with flexibility services. 

ENA commented on the significance of this launch, stating that: "This work is crucial to providing confidence to energy industry stakeholders in the future commercial viability of flexibility services, which will accelerate the transition to a smart, flexible energy system."

First Hydrogen to develop UK green hydrogen projects

Transport and energy firm, First Hydrogen, has announced plans to develop four green hydrogen projects across the the UK. Four industrial sites have been identified as targets and First Hydrogen is engaging with landowners and local authorities to secure land rights. The four projects will serve the areas of Greater Liverpool, Greater Manchester, Greater London and Thames Estuary, and will have a total hydrogen production capacity of between 80MW and 160MW.

First Hydrogen's announcement follows on from the recent release of the government's Energy Security Strategy which confirmed plans to increase the UK's 2030 target for hydrogen generation capacity from 5GW to 10GW. The government also intends to launch a £240 million Net Zero Hydrogen Fund to support this move, and First Hydrogen anticipates that the four projects will qualify for government financial support.

Once the hydrogen production facilities are built, First Hydrogen hopes to secure a domestic supply of fixed-price long-term green hydrogen fuel and distribution arrangements with customers. This is intended to support First Hydrogen's development of hydrogen vans by supplying green hydrogen to its mobile refuelling stations.

BEIS rejects move to a more frequent Renewables Obligation settlement system

On 20 April 2022, BEIS published a response to its 2021 consultation on addressing supplier payment default under the Renewables Obligation (RO), which was run in conjunction with Ofgem. In the response, BEIS has rejected the proposals for the more frequent settlement of the RO scheme.

The RO was introduced in 2002 as an incentive for the deployment of large-scale renewable energy in the UK. Under the RO, UK electricity suppliers are required to source a specified proportion of their electricity from eligible renewable sources and those who do not must pay a penalty. The funds collected by way of penalties are re-distributed to those suppliers who did source sufficient energy from renewable sources.

BEIS and Ofgem launched the 2021 consultation with the aim of finding a solution to the issue of energy retailers defaulting on their RO penalty payments. The 2021 consultation outlined three possible solutions:

  1. A legislative requirement for suppliers to settle their RO more frequently to lower the amount that they can default on.
  2. A licence-based requirement for suppliers to protect their accruing obligation against the risk of default.
  3. Continuing with the existing policy.

The responses to the consultation were mixed. Whilst a slight preference was shown for addressing payment default through the more frequent settlement of RO (option 1), the detail provided in some responses highlighted that this solution would have a negative effect on some suppliers' businesses. Further, since the consultation closed in August 2021, the energy market has changed significantly with many suppliers exiting the market as a result of the gas crisis.

Driven by both the mixed responses and the changes to the energy market, BEIS has decided to issue a further consultation later in the year, with a view to gathering more evidence to further develop policy thinking around the RO. The new consultation will also call for opinions on the option of moving the RO to a Fixed Price Certificate (FPC) based system. Moving the RO to FPCs was originally proposed in 2011 as a possible solution to counter the volatility that was expected as large generators retired from the scheme. However, this anticipated volatility has been delayed following a sharp increase in the number of generators joining prior to 2017.

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