Hydrogen has received renewed attention recently as a fundamental part of the global energy transition. According to the Hydrogen Council, more than 30 countries had a hydrogen strategy at the start of 2021 and governments across the globe have already committed more than US$70 billion in public funding for hydrogen projects. Europe (including the UK) is the most mature hydrogen market with 126 of the 228 projects announced globally located in the region, but Europe still requires a drastic scaling-up of production capacity to meet net-zero targets.
In this insight we review the latest developments in the European hydrogen sector and the current policy framework, as well as assess some of the opportunities across Europe.
- The UK has committed to achieving net-zero emissions by 2050 and sustainable hydrogen is expected to play a key part in achieving this.
- Recent UK Government plans include a commitment to achieve 5GW of low-carbon hydrogen production capacity by 2030 (using both blue and green hydrogen), to be supported by a £240 million Net Zero Hydrogen Fund.
- The UK will publish a dedicated hydrogen strategy later this year.
- The UK's strategy is best viewed as an industrial strategy to support the Government's plans to boost the local economies of historically deprived areas of the country. The UK, however, lacks a formal industrial strategy.
- The EU has also committed to net-zero by 2050 and has a low-carbon hydrogen target of 40GW of installed electrolyser capacity by 2030.
- The EU's hydrogen strategy focuses heavily on green hydrogen, with blue hydrogen viewed as a stop gap measure for existing grey hydrogen production facilities. This strategy risks ignoring the role blue hydrogen can play in decarbonising more quickly.
- Several EU member states have also published their own hydrogen strategies in recent years with independent targets and financing plans.
An overview of hydrogen
Produced by mixing bituminous coal (black coal) with oxygen or steam at high temperatures to create carbon dioxide and hydrogen (gasification).
Also produced using gasification but with lignite (brown coal) rather than black coal.
Produced by mixing natural gas and steam to create hydrogen and carbon dioxide (steam methane reformation). Most hydrogen production in the UK and EU is currently grey hydrogen.
Also produced using steam methane reformation but with the carbon emissions being captured and stored, or reused using carbon capture, usage and storage ('CCUS') technology.
Produced by using renewable electricity to separate the hydrogen and oxygen atoms in water (electrolysis).
Also produced using electrolysis, but powered by nuclear energy.
Policy overview - UK
The UK committed to achieving net-zero by 2050 in June 2019, and recently went a step further by increasing its emissions reduction target from 68% by 2035 (compared to 1990) to 78%. The Government's 'Ten Point Plan for a Green Industrial Revolution' (Ten Point Plan) (November 2020) sets out a framework for achieving net-zero, with hydrogen identified as a prominent contributor in achieving net-zero. This set a target of 5GW of low-carbon hydrogen production capacity by 2030. The 5GW production target has been set assuming a mix of blue and green hydrogen, a key difference from other European markets.
This will be supported by the £1 billion Net Zero Innovation Portfolio (which will invest in 10 priority areas, including hydrogen, floating offshore wind, advanced modular nuclear reactors, energy storage solutions and CCUS solutions) and a £240 million Net Zero Hydrogen Fund to support the development of both blue and green hydrogen production capacity. The Government expects, whether as a result of this support or otherwise, over £4 billion of private investment in support of the hydrogen target.
The 'Ten Point Plan' committed the Government to publishing a dedicated Hydrogen Strategy later this year, which will give us more detail on how it intends to reach the 2030 target, but the 'Ten Point Plan' did include a rough time line:
- 2021 - Hydrogen Strategy published, industry consultations on business models begins.
- 2022 - Government to finalise hydrogen business models.
- 2023 - Complete testing necessary to allow up to 20% blending of hydrogen into the existing gas distribution grid for all homes on gas grid.
- 2025 - Achieve 1GW of low-carbon hydrogen production capacity and achieve a large village hydrogen heating trial to test use of domestic hydrogen.
The 'Ten Point Plan' was complemented by the Energy White Paper which set the UK's low-carbon production target at 42TWh by 2030 (compared to current production of 27TWh). Read more about the Energy White Paper in our 'Powering our Net Zero future' article.
The 2021 Spring Budget included further financial support for the energy transition including the creation of a UK National Infrastructure Bank which will act as an early, enabling cornerstone investor in projects in underdeveloped or challenging markets (including hydrogen) to de-risk projects for the private sector. Read more about the Budget announcements in our 'Budget 2021: what does it mean for the energy and infrastructure sectors?' article.
2021 has been a busy year for the UK hydrogen sector so far, with a number of recent deals being announced:
- bp announced its intention to build the UK's largest blue hydrogen plant in Humberside, capable of generating 1GW of hydrogen and capturing 2 million tonnes of carbon dioxide annually.
- SSE and Equinor announced plans to develop the UK's first hydrogen-fired power station, to be powered by blue hydrogen, in Lincolnshire. Both companies are also collaborating on the world's largest offshore wind farm at Dogger Bank off the Lincolnshire/Yorkshire coast.
- Scottish Power applied for planning permission for a 20MW electrolyser to be located close to the UK's largest onshore wind farm at Whitlee, near Glasgow. The electrolyser will be powered by surplus power generated by the wind farm as well as a new 40MW solar farm and a 50MW battery storage project.
Equinor has previously announced plans in mid-2020 to develop a 600MW blue-hydrogen production facility in Teesside. Other UK projects worth mentioning include:
- Gigastack - a demonstrator project in Humberside combining an electrolyser powered by offshore wind providing green hydrogen to a nearby refinery. The Sponsoring consortium comprises ITM Power (electrolyser), Ørsted (wind power), Phillips 66 (refining) and Element Energy (consultancy). This is funded in part by the Department for Business, Energy and Industrial Strategy ('BEIS'), receiving a further £7.5 million to support the Phase 2 development.
- HyNet North West - a net-zero carbon industrial cluster across Merseyside and Cheshire, aiming to bring together offshore wind, hydrogen production, CCUS, refining, power generation, hydrogen fuelled transport, and hydrogen storage. The project has a range of partners but is being led by Cadent Gas and Progressive Energy.
Analysis - UK
The UK approach to the energy transition is better seen as an industrial strategy, rather than a pure climate strategy. Stimulating growth and creating jobs in underdeveloped areas of the UK is a key goal of the 'Ten Point Plan'. The 5GW hydrogen target is expected to create 8,000 new jobs located in hubs of renewable energy in the industrial heartlands of Britain. These hubs are also expected to create thousands more jobs in the supply chain for the offshore wind, hydrogen and CCUS sectors. This strategy is inherently political and is driven partly by the results of the 2019 General Election in which Prime Minister Boris Johnson's Conservative Party achieved a majority of 80 seats in the House of Commons by triumphing in areas of the country traditionally dominated by the opposition Labour Party (particularly Teesside, Humberside, and Lincolnshire) - the so called 'red wall' areas. The 'Ten Point Plan' also forms part of the larger agenda to improve the 'left behind' regions and communities of the UK, which the Prime Minister refers to as the 'levelling up' agenda.
This political landscape is potentially beneficial as creating hubs in the North East and North West of England will not only create centres of technical excellence strategically located near renewable power sources, but also create industrial hubs with a variety of offtakers that can support scaling-up across the supply chain and reduce production and distribution costs by providing proximate demand (often onsite). A strong offtake market will stimulate the growth of project financings in the hydrogen sector as production projects become more 'bankable'. The UK must be careful to avoid undercutting this with policy risk over the coming years.
However, the UK currently lacks a clear regulatory regime for hydrogen - it is regulated by Ofgem as part of the gas network under the Gas Act 1986 and a patchwork of applicable legislation. A proper legislative framework for the production, transportation and use of low-carbon hydrogen will be necessary to stimulate investment at the levels required to meet the UK Government's target. The Energy White Paper was light on detail for legislative proposals - we expect that the Hydrogen Strategy will include further detail on any proposed legislation.
The legislative regime will be supported by a hydrogen business model and revenue support mechanism. The projects announced in the UK to date are at the front end engineering and design stage and therefore reliant on Government support to make them financially viable but it is not yet clear what form the Government's support will take. BEIS is currently considering a report by Frontier Economics on the possible business models. The Government's timeline includes releasing details of a revenue support mechanism in 2021 and finalising the business model by 2022, which is cutting it fine for the interim target of 1GW of production capacity by 2025. The Hydrogen Strategy should include much needed detail on this and whether hydrogen will be eligible to participate in the UK's existing Contracts for Difference ('CfD') regime.
Policy framework - European Union (EU)
The EU committed to a net-zero target by 2050 in March 2020 and the European Commission detailed its hydrogen strategy in July 2020, placing much emphasis on green hydrogen to achieve net-zero. The EU is aiming to install at least 6GW of green hydrogen electrolysers by 2024 (Phase 1), and 40GW by 2030 (Phase 2). This is a significantly higher target than the UK's at 5GW of blue/green mix. The Commission admits that blue hydrogen may be needed but is prioritising green hydrogen and is hoping to jump from grey to green over the coming decade - a tall order when 96% of the EU's hydrogen currently comes from fossil fuels.
Phase 1 (2020 - 2024) is expected to decarbonise existing hydrogen production by installing electrolysers in refineries, steel works and chemical plants. These electrolysers will be powered directly by local renewable energy sources. This will be complemented by retrofitting existing hydrogen production plants with CCUS technology. During Phase 1, the Commission aims to create a regulatory framework for "a liquid and well-functioning hydrogen market" as well as creating the necessary State Aid rules to bridge the funding gap.
The Commission expects green hydrogen to become cost-competitive during Phase 2 (2025 - 2030) and start to play a role in Europe's electricity system by creating hydrogen via electrolysis when renewable power is cheap during periods of slack demand.
Phase 3 (2030 - 2050) should see green hydrogen deployed at large scale to start decarbonising the hard to abate sectors. The Commission expects renewable electricity production to "massively increase" by Phase 3 as a quarter of renewable electricity could be used for green hydrogen production.
The Commission is making a significant investment to support the push for green hydrogen by deploying both EU funds and European Investment Bank financing. It estimates that Phase 1 requires between €24 billion and €42 billion invested in electrolysers, with a further €220 billion - €340 billion to scale up and connect 80 - 120GW of solar and wind capacity to the electrolysers. Retrofitting half of the existing hydrogen production plants is estimated to cost around €11 billion. A further €65 billion will be required for hydrogen infrastructure.
To coordinate the massive amounts of capital required, the Commission has created the European Clean Hydrogen Alliance to implement the EU's hydrogen strategy by identifying a pipeline of viable hydrogen projects and support the necessary investments. The Commission also identified carbon contracts for difference ('CCfD') as a possible solution for bridging the financing gap, whereby the public counterparty would pay the investor the difference between the CO2 strike price and the actual CO2 price under the existing Emission Trading System, although the Commission doesn't go as far as establishing such a regime.
Analysis - EU
The EU's strategy must perform a delicate balancing act as several Member States have produced their own hydrogen strategies, most notably France, Germany, the Netherlands and Spain. The EU's hydrogen strategy was released while Germany held the rotating presidency of the EU Council, and is influenced heavily by Germany's own hydrogen strategy which focuses primarily on green hydrogen. The Netherlands sees more of a role for blue hydrogen, possibly due to its proximity to North Sea wind and gas installations. France, with a greater reliance on nuclear power, is a prime candidate for reliance on 'pink' hydrogen, and Spain favours green hydrogen powered by onshore wind, thermal solar and photovoltaic installations.
The EU's approach is also very different to the UK's, which is aiming for a blue/green mix by 2030, while the EU sees blue as a stop gap measure not worthy of a detailed strategy. It is estimated that 65GW of electrolysis capacity is required to allow green hydrogen production to break-even with grey hydrogen, so the EU's approach possibly overlooks the role blue hydrogen can play in the medium-term. This is particularly so given Europe's historical reliance on natural gas which risks undermining its push for green hydrogen - for instance Germany is pressing ahead with the Nord Stream 2 gas pipeline from Russia at the same time.
Hydrogen opportunities across the UK and EU
North Sea O&G
The repositioning of "Big Oil" companies as 'energy majors' presents an opportunity as oil majors look to exit unprofitable positions in North Sea oil and gas ('O&G') and try to pivot towards renewable investments. The UK is attempting to capitalise on this through the 'North Sea Transition Deal'. The Transition Deal recognises that the O&G sectors are well positioned to enable the production of low-carbon hydrogen at scale through access to existing infrastructure and a skilled workforce. In the short term, North Sea natural gas can be used onshore to create blue hydrogen with captured carbon being shipped using existing port infrastructure and stored under the North Sea seabed in depleted gas fields. In the medium to long term, it is considered that oil rigs with installed electrolysers can support the production of green hydrogen due to easy access to renewable power from offshore wind farms and connections to existing gas pipelines to pipe hydrogen back onshore.
This transition risks being undercut as North Sea M&A activity picks up again with US$2.5 billion worth of North Sea O&G deals done since January 2021, led primarily by private equity. The UK Government is also facing a judicial review claim from climate activists challenging the UK's ongoing support of North Sea O&G in light of legally binding net-zero targets.
Hydrogen fuel cell technology is attracting less interest in Europe than elsewhere, with the major European car manufacturers investing heavily in production facilities that support electric vehicles instead. It is more likely that we will see fuel cell technology adopted for vehicles requiring higher density fuels such as cross-border freight transport and rail travel in Europe.
The UK Government has recently granted £4.8 million in funding for a hydrogen hub in North Wales to pilot the use of hydrogen fuel cells in HGVs. Across the English Channel, approximately 50% of the European rail network is not electrified, meaning hydrogen powered trains could quickly decarbonise the industry. Siemens partnered with Deutsche Bahn in late 2020 to develop a new hydrogen train for use across Germany, and France will introduce hydrogen powered trains built by Alstom in 2023. It is estimated another 4,500 to 5,000 diesel powered trains across Europe will need replacing soon. Hydrogen trains are also on the UK's radar. The HydroFLEX demonstrator project is developing the UK's first hydrogen train by converting an electric train to be powered by hydrogen. The UK also has the manufacturing infrastructure to support future hydrogen rolling stock production with Bombardier, Siemens and Hitachi all having a manufacturing facility in the UK.
The UK is already well placed to export hydrogen technology and know-how, something we expect only to grow. AIM-listed ITM Power manufactures electrolyser equipment that it exports around the world and is currently looking to grow its after-care operations and maintenance offering to support installed electrolysers globally. According to the Financial Times, ITM's value has risen more than 2,000% since 2019 as interest in green hydrogen grows.
The UK also boasts an established offshore wind sector that can support the scaling up of green hydrogen. The North Sea Transition Deal will also add to Britain's capabilities as the O&G sectors refocus on renewables, including hydrogen. The City of London remains a key financial centre for equity investors, debt finance providers, capital markets and project advisors. The Government plans to leverage the City's reputation and deep pools of capital to support the 'Ten Point Plan' through green finance and a green taxonomy.
Where do we go from here?
The UK's recent local elections showed strong gains for the Prime Minister's Conservative Party in industrial areas, winning a by-election for the parliamentary seat of Hartlepool in Teeside and winning re-election to the Teesside mayoralty, showing that the 'levelling up' agenda is electorally popular in these traditionally 'red wall' areas of the UK. The Scottish National Party retained control of the Scottish Parliament, raising the prospect of a second Scottish independence referendum, which has the potential to dampen investment in Scottish renewables projects over the coming years as a second independence referendum looks increasingly likely. The world's eyes and scrutiny will be on Scotland as it hosts COP26 later this year. German federal elections are scheduled to take place in September 2021 with the ruling coalition expected to lose as the Green Party currently poll highly. This could mark a fundamental change in German energy policy as the Green Party favours cancelling the Nord Stream 2 pipeline. French voters will also go to the polls in its presidential election in early-2022, in which President Macron faces strong challenges from right-wing parties partially in light of his handling of the gilets jaunes energy protests.
Much of the global investment to date in hydrogen will rely on ongoing governmental support in the form of subsidies or a revenue support mechanism. This will need to be supported by a proper legislative regime to avoid policy risk deterring investors. The Hydrogen Council estimates that only US$80 billion of the US$300 billion invested in hydrogen to date can be considered "mature", leaving a funding gap of US$220 billion. The UK, EU and EU Member States will quickly need to establish the requisite legislative regime and support mechanisms if we are to achieve the 2030 targets. This will need to be matched by accurate hydrogen pricing until the market is liquid enough to allow participants to buy at spot prices. Accurate spot prices will be required to ensure a proper functioning CfD regime but also to encourage early project financings by allowing Sponsors to implement a commodity hedging strategy. S&P Global Platts is leading this area, having launched the world's first hydrogen price assessment in December 2019.
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Follow the links for more on:
 Hydrogen Insights Report, Hydrogen Council and McKinsey & Company, pg iv
 Hydrogen Insights Report, pg 6
 Hydrogen Insights Report, pg viii
 EU Hydrogen Strategy, pg 6
 Hydrogen Insights Report, pg viii
 The new North Sea players riding the wake of the retreating majors
 Climate activists bring legal challenge over UK oil and gas strategy
 Hydrogen Insights Report, pg iv