In our July post EU Hydrogen Strategy – a call to action we looked at the EU’s Hydrogen Strategy, which sets out the European Commission’s vision for how the EU can harness the power of hydrogen to achieve its commitments to decarbonise the continent and transition to clean energy by 2050.
In today’s post we look at two reports published in August:
- the UK Oil and Gas Authority’s (OGA) UK continental shelf (UKCS) energy integration report
- and the UK Government’s carbon capture usage and storage (CCUS) response on business models for CCUS
Both reports highlight the vital roles carbon capture and storage (CCS) and hydrogen will play in achieving the UK’s commitments to decarbonisation and transitioning to net zero by 2050.
Whilst conceptually, a lot of good work at policy level has been done, the next step is a detailed analysis as to what would need to change in UK legislation to underpin policy and which review would go beyond the business models and touch on anything from safety and security standards to network development plans.
OGA UKCS energy integration report and Government CCUS response: key takeaways
Both the OGA’s UKCS energy integration report and the Government’s CCUS response show that there is clear political and regulatory impetus for decarbonisation and greater integration between renewable and fossil fuel systems. As an important stepping stone to green hydrogen and ultimately to decarbonisation, the UK will continue to use blue hydrogen (i.e. natural gas with CCS) and, given its access to offshore storage sites and the existing transportation and storage infrastructure, the UK is considered well positioned to develop and incorporate blue hydrogen.
In light of this impetus for change and the importance of UK offshore energy sources, the OGA’s report focusing on the integration of energy systems across the UKCS finds that UKCS energy systems could significantly contribute to the goals of decarbonisation with the use of offshore electrification, green hydrogen/offshore wind, and CCS (stand alone and with blue hydrogen). In achieving these outcomes, the OGA report looks to the Government for assistance in the areas of regulation (including cross sub sector regulatory coordination) and better use of and ease of access to data.
For CCUS business models, the policy response is still evolving. The Government’s response however notes that a one size fits all approach for CCUS will not work and is looking to individual business models, with the preferred business models following stakeholder consultation being:
- power CCUS: a low carbon generation capacity availability payment and a variable payment;
- industrial CCUS: a Contract for Difference (CfD) with upfront government grant support for early projects;
- transportation and storage: a regulated asset based (RAB) funding model in the long-term; and
- low carbon hydrogen (either methane reformation with CCUS (blue hydrogen), or electrolysis or biomass gasification with CCUS (green hydrogen)): a number of business model options are being considered and assessed, including CfD, obligation, RAB, direct grant, tax credit and end use business model options; and although none of these business models have yet been settled, more details of these models are expected later this year and through 2021.
At the end of each report’s review we highlight the next steps, which include for (i) the OGA enabling and accelerating early energy integration projects and coordinating regulatory processes, and for (ii) CCUS business models, continuing work with stakeholders in developing commercial frameworks and delivery capabilities, updating on progress and publishing of final business models in the coming two years.
OGA’s energy integration report
On 6 August 2020, the OGA published its UKCS Energy Integration Final Report on how different energy systems (oil and gas, renewables, CCS and hydrogen) across the UKCS could be integrated for environmental and economic gains. The OGA sees an integrated offshore energy sector with closer links between oil and gas and offshore renewables as vital to decarbonisation and to accelerating the UK’s transition to clean energy. The report was published in collaboration with Ofgem, The Crown Estate and the Department for Business, Energy and Industrial Strategy (BEIS).
Energy integration across the UKCS
The UKCS Energy Integration Final Report summarises the findings of the Energy Integration Project (phase two) and follows on from the OGA’s UKCS Energy Integration Interim Findings report published in December 2019, which summarised the project’s phase one findings. The Energy Integration Project, set up in early 2019, in phase one looked at the technical aspects of how oil and gas infrastructure and capabilities could be used for CCS, hydrogen generation, transportation and storage, and renewable energy production; phase two looks at the economic and regulatory aspects of energy integration across the UKCS.
The project identifies the UKCS as a critical energy source that could provide solutions to achieving 60% of the UK’s net zero emissions abatement needs with energy integration technologies, i.e. offshore electrification, blue and green hydrogen, and CCS, contributing potentially 30%; and energy integration technologies supporting the expansion of offshore green energy, adding another potential 30% abatement.
Energy integration technologies
The report notes that the use of offshore electrification could contribute significantly to a reduction in GHG emissions, as about 70% of all offshore oil and gas emissions comes from the use of thermal power, which with offshore electrification would be substituted with power from offshore windfarms. The use of offshore windfarms could also contribute significantly to windpower growth with resulting power demand supporting a potential 2GW of new offshore windpower capacity. Blue hydrogen is considered essential to support the growth of offshore windpower in addressing issues of intermittent power and potential losses through long-distance transmission from, e.g., the Northern North Sea areas.
The report further notes that UKCS technologies could provide an efficient green hydrogen supply to the UK with 60GW-75GW of installed offshore wind capacity expected by 2050. The UKCS could also contribute significantly in relation to CCS as UKCS reservoirs have an estimated CO2 storage capacity of 78Gt, enough for, the report notes, the UK’s CCS needs for hundreds of years. The report also considers the use of energy hubs where energy integration technologies usage is combined to achieve efficiencies of scale and sharing of site facilities, noting that key issues for further consideration in relation to energy hubs include market access and access to energy sources.
Economic and regulatory findings
The report notes that for offshore electrification the key economic issues include electricity supply, the cost of modifications, the installation of generation equipment, and carbon pricing. Onshore supply is considered the highest cost option with offshore supply offering synergies leading to breakeven. Blue hydrogen with CCS provides value-enhancing technology and can be a cost effective solution to decarbonise natural gas. This solution could provide capex/process efficiency where the reusing of oil and gas infrastructure could see a 20%-30% capex savings on specific projects. The key issues in relation to green hydrogen include electricity prices, and the report notes that the costs of electrolysers would need to fall and efficiencies would need to improve; however it is believed significant improvements are possible.
On regulatory aspects, the report notes that close cross-regulatory coordination between existing regulatory regimes that cover different energy sectors on the UKCS is needed for energy integration projects and notes that more clarification and further guidance is also needed, for example, there is currently no guidance on local planning for H2 projects. Criteria and guidance, the report suggests, should be adapted, for example, changes need to be made to current guidelines on oil and gas offshore platforms eligibility as energy intensive industry users. Further examples of aspects in need of change include the sharing of data of UKCS environmental and infrastructure data across industry and regulators, and coordination of processes.
Recommendations and next steps
The OGA will continue to work with stakeholders to implement the report’s recommendations, which include the acceleration and enabling of early energy integration projects, the use of oil and gas assets and capabilities, coordination of regulatory processes for the use of UKCS energy integration technologies, and use of digital and data for better identifying cross-industry opportunities and speeding up planning and regulatory activities. The report also sets out the next steps and actions to be undertaking in the implementation of these recommendations, which include:
- Building on past work and supporting energy integration pioneering projects by helping to identity key economic barriers and finding ways of improving project viability; current projects include HyNet – a blue hydrogen and CCS repurposing oil and gas infrastructure;
- Enhancing regulatory coordination, including ensuring companies and relevant regulators have timely open dialogue in relation to energy integration opportunities, aligning guidance and coordinating responses to industry needs, promoting actions on, for example, infrastructure access; and
- Promoting greater data availability and better access to information, and enhancing data quality and ease of access.
UK Government’s CCUS response
On 17 August 2020, BEIS published Carbon capture, usage and storage – A Government Response on potential business models for Carbon Capture, Usage and Storage, the UK Government’s response to the 2019 stakeholder consultation on ‘Business Models for Carbon Capture, Usage and Storage’.
CCUS and low carbon hydrogen – essential to the UK’s green recovery
In its response, the UK Government highlights how CCUS and low carbon hydrogen will play an essential role in the UK’s transition to a net zero economy by 2050. Low carbon hydrogen can be produced through electrolytic splitting of water using renewable electricity, through reforming of fossil resources with CCUS, or through converting renewable biomass with or without CCUS.
The Government sees CCUS as a technology in which the UK can lead the world and that by capturing and permanently storing CO2 emissions, CCUS can transform UK industries into net zero global leaders. The response, following stakeholder consultation and engagement, sets out the progress made in relation to the selection of preferred business models to incentivise CCUS and progress in relation to the CCS Infrastructure Fund, and its commitment to deploying CCUS in the next ten years, including the establishment of at least two clusters by 2030.
The response also outlines delivery plans for 2020 and beyond, noting that it is essential to act now to be on track for the UK’s 2050 emission goals and, in light of the impact of Covid-19 on the economy, to drive business growth and employment across the country.
Business models to incentivise CCUS
The Government is considering a series of individual business models rather than an integrated approach, noting that previous attempts to have a business model that included all aspects of carbon capture, transportation and storage were unsuccessful. Following from this, it is envisaged to have separate business models in the areas of power, industry, transportation and storage, and low carbon hydrogen:
- Power CCUS: The Government’s aim is to decarbonise the economy through the use of renewables but that to maintain security of supply and address the issue of power intermittency, thermal power with CCUS (power CCUS) will need to be used. The Government therefore supports the construction of the UK’s first CCUS power plant.
For power CCUS, the preferred business model under consideration is a combination of a low carbon generation capacity availability payment and a variable payment. Further work on the detail of the structure of the revenue mechanism is to be done during 2020 with the aim of having an update on the business model for power CCUS in the last quarter of 2020.
- Industrial CCUS: A Contract for Difference (CfD) business model with upfront government grant support for early projects is the preferred funding model for industrial CCUS. Detailed analysis of this model continues with the aim of providing an update on the proposed business model before the end of 2020, and publishing a final business model in 2022.
- Transportation and storage: A regulated asset based (RAB) funding model is the preferred funding model in the long-term for CCUS transportation and storage. However, it is acknowledged that CCUS transportation and storage will serve customers from many different industries, and from different countries, that may operate under different business models, and that it is necessary to continue to work with the transportation and storage sector to develop a suitable business model. The Government has commenced work on price discovery and on developing a common understanding of construction and operational costs and the risks associated with the use of CCUS transportation and storage networks across the UK. It is aimed to have an update on the business model for transportation and storage networks for CCUS in the last quarter of 2020.
- Low carbon hydrogen: A number of business model options are being considered and assessed for low carbon hydrogen, including CfD, obligation, RAB, direct grant, tax credit and end use business model options. It is viewed that the most effective way to have low carbon hydrogen as part of the UK’s decarbonisation efforts is to focus on the production of hydrogen and on better understanding of the interaction with distribution and end use support frameworks.
Work continues on developing an appropriate business model for low carbon hydrogen with the aim of publishing an update by the end of 2020, consultation on a preferred business model in 2021 and publishing a final business model in 2022.
The Government is also considering how the CCS Infrastructure Fund can be used to facilitate the deployment of early projects and help release capital funding; work has now commenced on the design of the fund and dialogue continues through 2020.
CCUS delivery plans – 2020 and beyond
To deliver on its commitment to deploy CCUS in the next ten years, the Government has developed a CCUS delivery plan, which includes:
- During 2020: continuing to engage with projects and develop commercial frameworks and delivery capability; framing scope and objectives of the CCS Infrastructure Fund;
- End of 2020: second phase funding of the Industrial Decarbonisation Challenge (the challenge develops and deploys low-carbon technologies with the aim of accelerating cost-effective decarbonisation of industry);
- End of 2020: update on commercial frameworks for power, industry, and transportation and storage networks;
- End of 2020: update on assessment of potential business models for low carbon hydrogen;
- End of 2020: publishing draft value for money methodology and criteria and metrics for assessing affordability of CCUS enabled industrial clusters; and
- End of 2022: final business models for CCUS and low carbon hydrogen.
We look forward to writing on these updates and to discussing the reports with you.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020