Written evidence submitted by CCSA (DHH0075)
The past and current policies for low carbon heat have lacked clear strategic direction on the Government’s approach to decarbonising heat, particularly when considering the role that hydrogen could play in facilitating its deployment. Hitherto, Government have taken too long in analysing what the right approach might be - in practice it is unlikely that a single technology will be sufficient to provide reliable low carbon heat in the UK. The UK heating system will therefore require electrification, hydrogen, hybrid solutions and additional tools such as heat networks to meet the requirements for a net zero compliant, low carbon heating system. The CCSA do recognise that all the evidence is not in place to make a comprehensive policy decision, however government could be perusing low regrets options to position itself for such a decision when the evidence is obtained. For example, developing low carbon infrastructure for CCS and hydrogen production in industrial clusters, which can send the correct signals to market. This infrastructure can then be expanded in lien with evidence and policy ambitions.
This past and current lack of clarity on low carbon heat policy has had a stifling effect on private sector investment, as it’s not clear where the market opportunities for low carbon heating exist. The upshot has been that the level of investment in the decarbonisation of heating is likely to be less than optimal to deliver on net zero. While Government has begun work progressing hydrogen policy[1],[2], a lack of strategic steer from Government has meant that the level of funding that has gone into low-carbon hydrogen has been relatively small, with most of the strategic progress stemming from industry[3],[4],[5].
The CCSA emphasise that the large-scale development of hydrogen and indeed CCUS are critical enablers for the deployment of low carbon heat, though at the moment there is a lack of clarity around Government policy on both. It is therefore unclear how a CCUS and hydrogen strategy will tie in with this heat strategy. In contrast, many international neighbours including Germany[6], Portugal[7] and Japan[8] have sent strong policy signals on hydrogen markets, often supported with material funding and production targets. To ensure hydrogen can play an effective and timely role in low carbon heating, the UK must follow these examples and move quickly to develop a hydrogen strategy. This will not only provide clearer direction on how hydrogen will support low carbon heating, but also ensure that the UK can take advantage of the international market opportunities.
Finally, a further critical lesson from previous policies on low carbon heat, is that there has been a lack of awareness of consumer preferences. This is evidenced by the poor sales of heat pumps, when compared to gas boilers. Government needs to recognise that comfort and convenience also rank very highly alongside cost, when it comes to consumer choice for their heating options.
The CCSA would like Government to establish clear policies that support the deployment of all the major low carbon heating options. This should include a clear strategy for progressing CCUS[9] and hydrogen so the UK can accelerate the development of low-carbon hydrogen in heating where appropriate. This will ensure that the UK can establish the key value chains that will support the early volumes of hydrogen required to decarbonise large parts of the heating system. Initially, green methane will not be produced in large enough quantities to meet demand, and thus the intermediate step of blue hydrogen (hydrogen with CCUS) will likely be running for several years to allow infrastructure and demand to be built up for green hydrogen.
Government must support this by ensuring the UK CCUS clusters have secured CCUS investment during this parliament. This will require a set of supporting policies and business models that will allow CCUS and hydrogen projects to make Final Investment Decisions (FID) and CCUS projects to enter their construction phase over the course of this parliament. Clarity around the CCUS and hydrogen business models will allow projects to do this by providing the commercial basis upon which to support investment as the heat system transitions to low carbon fuel sources.
It is also essential that Government engage with the regulators, particularly OFGEM, to ensure that they are adequately resourced to facilitate the scale of investment required to deliver net zero heating. OFGEM should be set up accordingly, so that it can respond to what will be a rapidly changing policy area in the RIIO-2 and RIIO-3 period, ensuring that it doesn’t hinder progress in this area. An appropriate RIIO-2 framework must be put in place to ensure the sector can move quickly to support projects in the 2020’s. RIIO-3 will also be key and networks should be encouraged in RIIO-2 to develop comprehensive business plans for RIIO-3 to ‘get ready’ for conversion. The CCSA are also slightly concerned that OFGEM see hydrogen as an innovation challenge, whereas in practice for CCUS and hydrogen, these are projects are now looking to move into early commercial scale deployment. The regulator must organise itself as an important enabler for this to happen. The early 2020’s is an important period of development for CCUS and hydrogen projects and it is not clear yet that OFGEM have put in place the funding mechanisms support the necessary investment required to support this period, bearing in mind these projects can take up to ten years to plan, design, construct, commissions and bring into operation. Please see the CCSA’s response to the RIIO-2 Draft Determinations consultation for further information[10]
Currently, there is no organisation that is responsible for the delivery of hydrogen at scale for domestic consumers. Government needs to identify how to best enable the production of hydrogen at scale for domestic use, as the current priority for the industrial clusters is only to provide hydrogen for their own consumption. On the demand side, Government should also move rapidly to implement a requirement that all new gas boilers must be hydrogen ready, over the course of this parliament. This low cost, no regrets option will ensure that as we replace our boilers (on average more than 1.3 million each year), the domestic boiler fleet starts the transition to a hydrogen ready system.
Finally, Government may also want to consider policies that encourage the development of CHP’s with CCS or fuel switched to hydrogen, given that the approach heating must be inclusive of all low carbon options. Defining the decarbonisation opportunities for low carbon CHPs with hydrogen and CCS will be an important step to ensure a whole system approach to low carbon heating is achieved. CHP’s will also add resilience and flexibility to the energy system, which will be vital as the grid transitions to peaky, less consistent renewable sources[11].
The UK will not be able to decarbonise its heat with a single technology and evidence suggests that a range of technologies will need to be progressed to support net zero. However, while the final mix is hard to predict now, it must not affect early activity to support enabling technologies that will deliver important contributions to low carbon heating, such as CCUS and hydrogen. Government must ensure a mixture of technologies can be drawn down the cost curve and made available to consumers for low-carbon industrial and domestic heating. It is also important that policy recognises that some technologies are closer to market than others and policy needs to be tailored to ensure all these technologies can play a supporting role. A low-risk policy or incentives should be implemented whilst further evidence is being developed, particularly for those that are complicated to convert.
The CCSA also recognise that the final mix of low carbon technologies used are likely to be quite regionally dependent. For example, regions located close to the UK CCUS clusters will be better placed to make use of the early volumes of hydrogen (and infrastructure) available from CCUS and hydrogen projects. In contrast, other regions may be better suited to other low carbon heating solutions[12].
Hydrogen may also play an important part in decarbonising heat networks (which are not low carbon in and of themselves) particularly for those that are currently being operated by gas systems. Some heat networks may be able to make use of early hydrogen volumes from the UK CCUS clusters noting that hydrogen can be blended into existing natural gas infrastructure to partially offset CO2 emissions, even where 100% hydrogen appliances and installations are not available as of yet.
The most significant barrier to scaling up low carbon heating, particularly with hydrogen, is the current lack of policy on both the supply and demand side. For hydrogen, there is currently no clear support for the production of hydrogen and no clear demand incentives that will encourage consumers to uptake these technologies.
Similarly, enabling technologies such as CCUS projects will need clear policy support, since they will be required for producing the large quantities of low-carbon hydrogen to meet the needs of a low carbon heating system. Government have taken steps to advance CCUS (for e.g., progress on the business models, Industrial Decarbonisation Challenge), however there is still a huge amount of work that must be done to progress UK CCUS projects through to FEED.
Progressing both CCUS and hydrogen will make an important contribution to the deployment of heating and indeed in some cases, provide additional support. For example, buffering inter-seasonal swings in demand for heating. However, to overcome these barriers, Government must[13]:
A.) develop a hydrogen strategy that is underpinned by a hydrogen business model. As mentioned in question 2, a hydrogen strategy will support the financing and infrastructure for low carbon heating through hydrogen and provide timelines for its implementation. This strategy must include production, storage and transportation of hydrogen for domestic use.
B.) Secure CCUS investment that will allow projects to progress quickly so that they are operating in the mid-2020’s. Finalising the CCUS business models and using funding support mechanisms will be essential to define the route to market for the first CCUS projects. This will ensure Final Investment Decisions can be made and projects enter their construction phase before the end of the CSR window.
C.) Establish an appropriately size early CCUS infrastructure in three UK CO2 storage regions to underpin the development of CCUS and hydrogen, to ensure that all industrial regions can realise emissions reduction in the 2020s. This will also provide certainty on where early volumes of hydrogen will be directed, making a positive contribution to low carbon heat.
The CCSA maintain that one of the most appropriate ways in which the costs of decarbonising heat can be distributed fairly across stakeholders is to develop a price on carbon. Applying an effective price on carbon is needed for heating and will be an important mechanism to help close the cost delta between clean heating technologies and generally cheaper, high carbon technologies.
However, there is also a need for interim support mechanisms in the near to medium term, that can support the investment in higher cost, low carbon technologies while the price of carbon is too low to sustain the level of investment required. For example, a hydrogen contract for difference that bridges the gap between the cost of unabated gas and low carbon hydrogen could be an effective instrument that could support early investments. Alternative investment instruments may will also be required to support investment in hydrogen heating.
There is a strong logic for these costs to be borne by consumers, as this will begin to send price signals into the market which can also encourage other positive behaviours like energy efficiency. However, the CCSA recognise there are substantial challenges if carbon prices and any consumer levies are not designed correctly - there is a risk they can be regressive and impact on the fuel poor. In addition, there is a challenge in passing those costs through to industrial consumers where they are operating in international markets where similar cost signals are not being fed into their products.
Finally, the CCSA is supportive that the cost of progressing low carbon heat should be socialised more widely, for example a region that is well placed to make an early transition towards low carbon heating should not face a materially higher fuel bill than regions where it may take substantially longer to supply low carbon heat. It is important not to disincentivise early movers. The H21 North of England report provides a useful account of the potential regulatory business model to manage the distribution of costs.[14]
The CCSA would like to point out that where we are likely to be moving towards hydrogen, then there is a strong case for putting in place incentives and regulations which can make the eventual transition, lower cost and produce lower levels of disruption. For example, further considerations should be given to mandating the requirement that all gas boilers installed after a certain date (by 2023/4 since they are now developed) are dual fuel for natural gas and hydrogen in order to facilitate the transition. There should also be regulatory measures which encourage networks to develop detailed ‘readiness plans’ for RIIO-3 for network conversion. The CCSA do recognise there are other opportunities that could be explored and therefore encourage Government to investigate these now.
It is important that Government are very clear about the scale of the challenge ahead and remain transparent about any additional costs that will be incurred. While these transition costs are manageable, it is very important that the distribution of these costs are allocated across society in a way that is fair and doesn’t penalise societal regions that may not be best placed to bear these costs. Focusing on educational campaigns will ensure that these important conversations are had with the public.
In addition, please see our response to question 6 where there may be options to introduce regulations to support dual fuel boilers to minimise the disruption in homes.
Responsibility for the coordination and delivery of low carbon heating should be focussed across two distinct levels:
National level: Government should be responsible for driving and setting the core policies that will ultimately underpin the delivery of low carbon heating. This will require support for a mixture of ancillary low carbon technologies, which as mentioned should include hydrogen and CCUS.
Similarly, regulatory bodies will need to be responsible for executing these policies with the networks; precedence should be set to introduce another technical body (like that of the Committee on Climate Change) who can coordinate the networks and ensure the work is robust. Government should also develop a dedicated heat strategy which will give project developers and consumers clarity on the direction of travel for low carbon heating. This could come in the form of a National Delivery Body for heat decarbonisation.
It is also important that Government implement a policy framework to support low carbon hydrogen and CCUS. This must include a.) a hydrogen strategy and hydrogen business models and b.) further progress on CCUS business models and using funding support mechanisms, a route to market can be defined for the first CCUS projects, to ensure Final Investment Decisions (FID) can be made and enter their construction phase before the end of the CSR window. This will require ongoing engagement through government bodies, such as BSI to engage with CEN and ISO to develop a reasonable gas quality standard for CO2, that balances purity of product with the cost of refinement to encourage CCUS.
Regional level: Regions need to develop decarbonisation solutions that meet the local requirements of the region. For example, the CCUS clusters will be best placed to provide early volumes of hydrogen for low carbon heating, due to the emerging infrastructure network. Regional governments are best placed to coordinate locally on these issues because they have a better understanding of the regional energy system. Regional governments also understand the decarbonisation pathways feasible for the regions and the organisations that can facilitate the deployment of these local projects. Local governments must therefore lay the foundation for what is needed. This should be met by national level Government commitments to develop to develop policies that ensure that decarbonisation opportunities are optimised
Finally, collaboration with local industry and regional partners will be critical to define the pathway to decarbonisation. Mechanisms such as decarbonization road maps are useful processes that tie together all aspects of regional decarbonisation including heat, transport and industry. Under the IDC, £8 million funding has been made available for the development of decarbonisation roadmaps[15]. These roadmaps have been helpful in providing high level, quality collaboration between industry and local government and provided vision on decarbonising wider sector emissions.
November 2020
[1] Low Carbon Hydrogen Supply Competition (2018). Available at: https://www.gov.uk/government/publications/hydrogen-supply-competition
[2] Hy4Heat: Demonstrating Hydrogen for Heat. Available at: https://hynet.co.uk/
[3] Hynet North West. Available at: https://hynet.co.uk/
[4] H21: Pioneering a UK hydrogen Network. Available at: https://www.h21.green/
[5] Energy Networks Association: Gas Goes Green. Available at: https://www.energynetworks.org/creating-tomorrows-networks/gas-goes-green
[6]The National Hydrogen Strategy (2020) Federal Ministry for Economic Affairs and Energy. Available at: https://www.bmwi.de/Redaktion/EN/Publikationen/Energie/the-national-hydrogen-strategy.html
[7] National Hydrogen Strategy (2020) Grantham Research Institute on Climate Change and the Environment. Available at: https://climate-laws.org/geographies/portugal/policies/national-hydrogen-strategy
[8] Giant Leap Towards a Hydrogen Society (2020) The Government of Japan. Available at: https://www.japan.go.jp/tomodachi/2020/earlysummer2020/hydrogen.html
[9] CCUS will be important for producing early volumes of low carbon fuel to support heating in both the domestic and non-domestic setting.
[10] OFGEM Consultation RIIO-2 Draft Determinations – Core Document. Response by the Carbon Capture and Storage Association (2020) Available at: CCSA
[11] BEIS Call for Evidence Combined Heat and Power: the route to 2050. Response by the Carbon Capture and Storage Association (2020). Available at: CCSA
[12] H21 North of England report (2018) Available at: https://www.h21.green/wp-content/uploads/2019/01/H21-NoE-PRINT-PDF-FINAL-1.pdf
[13]CCSA Representation to the 2020 Comprehensive Spending Review (2020) Available at: CCSA
[14] H21 North of England report (2018) Available at: https://www.h21.green/wp-content/uploads/2019/01/H21-NoE-PRINT-PDF-FINAL-1.pdf
[15] UKRI Allocates Funding for Industrial Decarbonisation Deployment and Roadmap Projects (2020) Available at: CCSA