Energy and Utilities

The Energy Transition | UK government updates hydrogen strategy

Published on 16th Dec 2022

This week we look at the government's hydrogen strategy, the world's first carbon tariff, Ofgem's decision on CLASS balancing services, National Grid's Eye in the Sky initiative, a recent breakthrough in nuclear fusion and a consultation on Contracts for Difference.

Energy storage fields, with solar panels and wind turbines

UK government publishes update to hydrogen strategy

The UK government announced an update to its 2021 hydrogen strategy on 13 December 2022. There is a focus on creating a supportive regulatory framework to make the UK a competitive and integrated market for low carbon hydrogen. Jane Toogood has been appointed as the UK's Hydrogen Champion, a role which involves engaging with stakeholders to understand the key challenges for the deployment of hydrogen projects, and the economic opportunities presented.

The update includes plans to publish a consultation on Decarbonisation Readiness requirements, which would require all new build and substantially refurbished combustion power plants to be able to decarbonise easily, through converting to carbon capture or hydrogen generation technology within the plant's lifetime. The government also committed to making all domestic gas boilers hydrogen-ready by 2026. It suggests that the change will save 21 million tonnes of CO2 by 2050, as well as helping to decrease energy bills.

As part of the update, the heads of terms for the Hydrogen Production Business Model (HPBM) were also published. The HPBM will form the basis of the Low Carbon Hydrogen Agreement (LCHA), which is the business model contract between the government-appointed party and a low carbon hydrogen producer. The LCHA has been designed to bridge the gap between the expensive production of low carbon hydrogen and cheaper high carbon fuels.

The government aims to foster the flow of private capital into the UK hydrogen market, and has committed a further £25 million in funding to accelerate the development of new technologies that will generate clean hydrogen from biomass and waste. Hydrogen from bioenergy with carbon capture and storage is a technology that allows carbon dioxide to be permanently removed from the atmosphere, as it is absorbed by biomass, which is then captured and stored when hydrogen is generated.

Several competitions have also been funded since the last update to the strategy in July 2022. These include the £26 million Industrial Hydrogen Accelerator competition, which funds demonstrations and feasibility studies that generate evidence on end-to-end industrial fuel switching to hydrogen, and the £40 million Red Diesel Replacement competition which supports the development of low carbon fuels as a substitute for red diesel.

EU announces world's first carbon tariff

Agreement was reached between MEPs and the European Council on the EU Carbon Border Adjustment Mechanism (CBAM) on 13 December 2022. The CBAM is the world's first carbon tariff, and has been set up to prevent carbon leakage. The mechanism will equalise the price between the price of carbon paid for EU products under the Emissions Trading System (ETS) and the price paid for imported goods. Importers will buy certificates to cover their excess CO2 emissions.

The tariff is to be levied on high carbon goods – such as iron, steel, cement, aluminium and fertilisers – and electricity, hydrogen and indirect emissions under certain circumstances. The goal is to cover all goods included under the ETS before 2030. As domestic EU industries are already required to buy permits in the ETS when they pollute, the mechanism aims to incentivise non-EU countries to decarbonise their manufacturing processes. The CBAM follows the announcement of the creation of an international climate club aimed at improving green industry.

The CBAM will apply from 1 October 2023, but during this transition period importers will only be faced with a reporting obligation. The end date of the initial period is set to be finalised next week. The European Commission will review the CBAM in 2027. A decision remains to be made on the timeline for when the tariff comes into force and whether EU exports will be compensated.

Ofgem decides CLASS balancing services will continue under RIIO-ED2

Ofgem has published its decision on the regulatory treatment of Customer Load Active System Services (CLASS) as a balancing service in the RIIO-ED2 network price control.

Ofgem has decided to continue to allow DNOs to provide CLASS balancing services to the electricity system operator (ESO). This follows its consultations in February 2020 and March 2022 on this issue.

CLASS balancing services will continue to operate as they have done under RIIO-ED1 until March 2023. After this, they will be included under the Directly Remunerated Services (DRS) in RIIO-ED2 and more specifically DRS8. This is a new DRS category and it is hoped will provide better visibility of CLASS net revenues reported by DNOs.

Ofgem has justified this decision by highlighting that CLASS balancing services are a low cost, low carbon, reliable technology that will be able to meet the ESO's future balancing service needs. Ofgem also noted that this decision will create greater opportunity for competition in the balancing service market, as well as provide efficient incentives for DNOs to invest in CLASS.

Ofgem's final decision on this matter, however, is subject to its decision on licence modifications to be made to the electricity distribution licence following the statutory licence consultation for RIIO-ED2.

National Grid's Eye in the Sky initiative aims to boost network resilience

National Grid's Eye in the Sky initiative is exploring the use of satellite imagery and data analytics in order to improve the understanding of the UK's electricity and gas network infrastructure. It hopes that a better picture of the infrastructure will assist it in monitoring its condition.

The use of this technology will enable National Grid to strengthen the energy network reliability and emergency response capability. The technology will provide satellite images to specialist engineers who will then be able to assess any changes in the infrastructure and enable them to rapidly risk assess and respond to any damage.

The technology will also be able to produce predictive models for future events such as climate change. This will help National Grid's understanding of the impact of weather events on its infrastructure.

It has been estimated that the use of this technology could lead to cost savings of up to £22 million over 10 years, alongside providing benefits to consumers in terms of quicker emergency responses, system recovery and reliability.

The initiative's initial phase is now complete. This consisted of trialling the technology on over 1,700 miles of energy network. It has now won extended funding through Ofgem's Strategic Innovation Fund to develop the next phase of the initiative.

National Ignition Facility achieves major nuclear fusion breakthrough

The National Ignition Facility in California has made a major breakthrough by achieving fusion ignition.

The experiment, conducted in early December, involved a controlled fusion experiment which achieved a scientific energy breakeven. This means the amount of energy produced from fusion was greater than the laser energy used to drive it. This is the first experiment in history to achieve this milestone.

This breakthrough will provide insight into the prospect of being able to achieve clean fusion energy in the future. It is expected that clean fusion energy could be key to achieving the US's net-zero targets.

UK government consults on Contracts for Difference

The government is seeking views on potential amendments to the Contracts for Difference (CfD) scheme. The consultation is to review whether the CfD regime remains suitable for an evolving electricity system, and invites views on changes to Allocation Round 6, due to open in 2024.

Policy updates include a proposal to make electricity supplied by private wire to offshore oil and gas facilities ineligible for the regime, and to consider whether factors other than price should be accounted for in contract awards.

The government has requested views on whether the definition of offshore floating wind should be amended to reflect the changing nature of the technology, and whether the phasing policy should be retained for fixed-bottom offshore wind projects. Responses are also encouraged to answer whether the CfD appeal process is appropriate for annual auctions and whether the scheme is appropriate to support repowered projects.

This article was written with the assistance of Saskia Zant-Boer and Hannah Wooderson, trainee solicitors.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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