Hydrogen Hurdles: navigating the path to net zero in the UK

The UK has committed to reaching net zero by 2050 with the Government recently updating its interim commitment to an 81% reduction in emissions by 2030 (an increase on the former 68% target under previous governments).  The Climate Change Committee concluded in July 2024 that only a third of the emissions reductions required to achieve the country’s 2030 target are currently covered by credible plans^[1], therefore, in order to meet this ambitious new target, urgent deployment of low carbon solutions will be required nationally.  

Here we consider the role hydrogen will play in the UK’s transition to net zero together with the key legal issues currently hindering the rapid development of hydrogen production in the UK.

Contribution to decarbonisation & net zero

Hydrogen has been identified as a critical part of the UK’s decarbonisation strategy.  In August 2021, the former Conservative government published the UK Hydrogen Strategy which states that the UK’s “geography, geology, infrastructure and expertise make it particularly suited to rapidly developing a low carbon hydrogen economy, with the potential to become a global leader on hydrogen and secure economic opportunities across the UK”.  In particular, hydrogen is seen as a vector to decarbonise traditionally carbon-intensive sectors such as industry and transport, where hydrogen fuel can replace existing fossil fuels used in operations.  

At present, most hydrogen production in the UK is via steam reforming, which brings together natural gas and heated water in the form of steam to produce what is known as “grey” hydrogen – with carbon dioxide as a by-product.

The British energy security strategy published in April 2022 set a goal to develop 10GW of low-carbon hydrogen production capacity by 2030. The opportunities available to reach that target include “green” and “blue” hydrogen (with the strategy seeking that at least 5GW of the overall 2030 target be green hydrogen):

• Green hydrogen is effectively the “gold standard” as no carbon dioxide is emitted during production.  It is made by using electricity from renewable energy sources, such as solar or wind power, to electrolyse water, splitting it into it two component parts of hydrogen and oxygen.
• Blue hydrogen relies on steam reforming, but uses carbon capture and storage (CCS) units to trap the carbon by-product. Blue hydrogen is the clear intermediate step required to rapidly expand a relatively new hydrogen market.

There are opportunities to produce green hydrogen outside the UK, where there are plentiful supplies of renewable energy, to supplement that produced locally.  Ammonia is considered an efficient energy vector for the development of hydrogen as it is easier to store and transport than hydrogen.  There is well-developed technology for “cracking” ammonia whereby the ammonia molecule is split out into its nitrogen and hydrogen component parts. Shipping “green” ammonia to the UK for storage and cracking provides an additional source of low carbon hydrogen.   

Stimulating a hydrogen market

The UK is clearly well placed to develop a leading green hydrogen market as it is already a world leader in renewable energy: published energy trends confirm that for April to June 2024, 51.6% of electricity generation was through renewable sources, being the third consecutive quarter that renewable electricity generation has exceeded 50%^[2].  While the UK has the potential for its electricity to be 100% renewable, its ailing grid system currently prevents that. Among other issues, the current grid infrastructure struggles to accommodate the intermittent nature of renewable (solar and wind) energy which may peak when demand is low (and vice versa) - the grid is insufficiently flexible to balance those fluctuations. When renewable energy supply is high but demand is low, many offshore wind farm operators (predominately in Scotland) are required to turn their turbines off and instead receive a curtailment fee from the government.  If this surplus renewable energy could be harnessed for hydrogen production, it would set the UK on a clear course to be a global leader in green hydrogen production as well as advancing on its 10GW target.

More broadly, there are policies and initiatives aimed at stimulating a burgeoning hydrogen market:

• The Government’s Hydrogen Production Business Model^[3] is intended to incentivise the production and use of low carbon hydrogen through the provision of revenue support to overcome the cost gap between low carbon hydrogen and higher carbon counterfactual fuels.  Hydrogen allocation rounds (HAR) allocate the revenue support through this business model (and the quantum of funding for HAR1 has been recently confirmed in the Autumn Budget 2024).
• Hydrogen is identified as a renewable fuel of non-biological origin for the purpose of the Renewable Transport Fuel Obligation (RTFO) scheme. The RTFO scheme delivers greenhouse gas emission savings by encouraging the supply of renewable fuels for use in UK transport through requiring suppliers of transport fuel to meet an annual obligation using certificates which are awarded for the supply of sustainable renewable fuel.
• The Low Carbon Hydrogen Standard is intended to help create a level playing field between different sources of hydrogen. It sets a maximum threshold for the amount of greenhouse gas emissions allowed in the supply chain for hydrogen to be considered ‘low carbon hydrogen’. Hydrogen producers seeking support from government schemes and policies that have adopted the standard will need to comply with it.

Despite it being unequivocally demonstrated that hydrogen is a critical piece of the UK’s net zero puzzle, there remain obstacles to the development of a hydrogen market in the UK.  We consider these below.

Funding & subsidies

The Labour manifesto promised to invest in hydrogen (alongside carbon capture and storage) through the National Wealth Fund, including £500m to support green hydrogen production, as well as £1bn to accelerate the deployment of CCS (which is critical to the development of blue hydrogen).

Making good on this promise, the Autumn Budget 2024 demonstrated a clear commitment to hydrogen development in the UK, confirming £3.7bn of funding for carbon capture, storage and usage and green hydrogen projects; a significant uplift on the £1.4bn from the previous financial year. The Track-1 projects that will benefit from this funding are the East Coast Cluster and the HyNet North West Cluster together with 11 green hydrogen projects located across England, Scotland and Wales in HAR1.  This £3.7bn is in addition to the Chancellor’s earlier commitment of £21.7bn over 25 years to fund two CCS (including blue hydrogen) clusters at Teesside and Merseyside.  

Developers and producers will take comfort from the level of funding offered in this budget as an indicator of what may similarly come forward under future hydrogen allocation rounds.

Consenting and regulatory regime

Despite the importance of hydrogen in the UK’s decarbonisation plans, the consenting and regulatory regime does not expressly cater for hydrogen production, storage and transportation. Currently, therefore, developers of hydrogen facilities have to pick through the existing regimes applicable to the chemical and gas processing industries, as well as power generation and CCS, to identify what is relevant for their specific development.  

Hydrogen is captured within the definition of “gas” in the Gas Act 1986 (s48) and is therefore regulated as part of the gas network meaning that in some instances (depending on the development), it will also be necessary to obtain the relevant licence from Ofgem for the transport and/or supply of hydrogen.

In addition to the current difficulties often faced in obtaining any kind of planning permission at present (such as a lack of resources in local authority planning departments and other statutory consultees), hydrogen projects may face other barriers including:

• lack of experience with hydrogen, in local authorities, other statutory consultees, and with developers;
• public attitudes and opposition to development generally and hydrogen specifically;
• difficulty co-ordinating involved parties (including regulators, local authorities, and local communities) throughout the planning process; and
• lack of published guidance for hydrogen planning.

In terms of obtaining planning permission, there are several potential routes, depending on the project:

Development Consent Order (DCO) under the Planning Act 2008

Certain nationally significant infrastructure projects (NSIPs) are governed by the Planning Act 2008 and require development consent. A DCO incorporates planning permission and other consents that would normally need to be obtained separately, e.g. environmental permits (subject to some limitations). Whether a project qualifies as an NSIP depends on criteria set out in the legislation (relating to size, scale and type of development).  In order for hydrogen facilities to proceed under the Planning Act 2008, they would need to meet the relevant criteria set out in sections 15-21, as appropriate, for energy development. Accordingly, hydrogen gas-fired electricity-generating infrastructure with a generating capacity of over 50MW in England and new hydrogen pipelines and underground hydrogen storage (which meet the criteria in sections 21 and 17 of the Planning Act 2008, respectively) will require development consent.  Where there is no clear criteria under the Planning Act 2008 applying to the proposed development e.g. hydrogen production facilities, it is possible to seek a direction from the Secretary of State under section 35 to treat the development as requiring development consent, in order to progress through the NSIP regime. The Labour government’s recent consultation on the National Planning Policy Framework sought views on changing NSIP thresholds for solar and onshore wind projects under the Planning Act 2008 regime, but did not address the consenting regime for hydrogen projects. The advantage of a DCO is that it can cover the entirety of a project (including pipelines and other services), obviate the need to obtain certain other consents separately and could include compulsory purchase powers if necessary. Further, those examining the application may have more experience in dealing with complex energy and infrastructure projects than local authorities. However, whilst there are set timescales for parts of the process, the overall process can be lengthy, burdensome and expensive.  The NSIP process includes robust provisions for community engagement and there is a right for people to make representations engage in the process.

Planning permission under the Town and Country Planning Act 1990

Developers may consider pursuing separate or combined planning applications for various elements of the project alongside other consents and permits. Should one element fail or become delayed, however, the whole project may be held up.  As set out above, issues relating to delay, lack of resource or familiarity with the relevant technology, and local opposition, all factor into this process.

Local Development Orders

May be an option for development which is not Schedule 1 development requiring environmental impact assessment under the Town and Country Planning (Environmental Impact Assessment) Regulations 2017.  A local development order deems planning permission to have been granted for development or classes of development within a defined area as set out in the order. Local development orders are intended to help speed up the planning process as a planning application is not required for development within the ambit of the local development order.

Careful thought is also needed as to the timing of any application, where the detailed technical project design is still being worked up in parallel.  Decisions on investments may require planning to have been granted, in which case resource and funding to develop detailed design may not be available. There needs to be sufficient clarity on the project design however to ensure that suitable parameters for design development can be set and to underpin environmental assessments.

Where hydrogen production involves the cracking of ammonia, this will also import an additional layer of complexity in terms of the hazardous substances and control of major accident hazard regimes.

All of the above consenting options of course carry risk of third party challenge, which might be mitigated to some degree by clear national policy in support of hydrogen.  Where a DCO application has been made and there is a National Policy Statement (NPS) in effect, the Secretary of State is required to decide the application in accordance with any relevant NPS (subject to limited exceptions set out in section 104 of the Planning Act 2008).  Accordingly, NPSs clearly confirming a need for certain hydrogen development and/or confirming a presumption in favour of granting hydrogen development would go some way to de-risking those hydrogen projects progressing as an NSIP and seeking development consent.  

There is no dedicated NPS for hydrogen development, however:

• NPS EN-1 (Overarching National Policy Statement for Energy) establishes an urgent need for all types of low carbon hydrogen infrastructure to allow hydrogen to play its role in the transition to net zero and confirms that where an application for development consent is made for hydrogen development following a section 35 direction i.e. the development is not covered by sections 15-21 of the Planning Act 2008, the Secretary of State should give substantial weight to the need for low carbon hydrogen infrastructure established in the NPS;
• NPS EN-2 (natural gas electricity generating infrastructure) confirms that while the guidance in the NPS has been drafted in respect of natural gas-fired electricity generating infrastructure, it may also be important and relevant to hydrogen gas-fired electricity generating infrastructure; and
• NPS EN-4 (natural gas supply infrastructure and gas and oil pipelines) addresses new hydrogen pipelines and underground hydrogen storage stating that the NPS only has effect for natural gas infrastructure, however it may form part of other matters the Secretary of State thinks important and relevant to their decision on applications for hydrogen infrastructure, in which case NPS EN-4 would need to be taken into account.

Site location 

As with any large industrial development, one of the key challenges is identifying suitable development land and acquiring the necessary interests in that land.  

There are many considerations when seeking a suitable site in terms of space and proximity to key infrastructure and consumers. The lack of power and connectivity is proving a huge barrier to investment and development in many sectors including logistics and the creation of hydrogen is no different. Whilst hydrogen looks set to become a key part of the country’s energy security, the production of hydrogen in itself requires large amounts of water and electricity, and so is impacted by the immediate challenge the country faces regarding utility capacity. Given that many of the hydrogen projects and clusters the government is looking to support are near the coast, as noted above, developers could look to obtain their power from existing offshore wind capacity or by constructing their own offshore or onshore capability. Whilst that is possibly a neat solution and would harness an obvious strength of the UK, it comes with its own layer of complexity, cost and delay not least securing agreement with the Crown Estate for offshore development.  It will be interesting to see the extent to which the recently announced partnership between the Crown Estate and Great British Energy facilitates swift negotiation of Crown Estate leases / licences for future projects; certainly for projects falling within Great British Energy’s remit, it can reasonably be expected that these may reach agreement with the Crown Estate more quickly than those outside it.

Ideally a developer would have both the funding and the option to acquire the relevant site on an outright basis to secure the flexibility to adapt design and layout if required and to allow for future expansion. However, the nature of the cluster approach employed by governments encouraging similar energy projects in close proximity makes the market for suitable sites very competitive and given the location, the sites are often owned by entities that would not or cannot sell. That leaves would-be operators with the option of taking a lease, requiring significant negotiation to cater for the complexities of construction and future operation and expansion of a hydrogen production plant.

If the lease is being granted by a Port Authority for example there may be specific agreements and consents required in respect of stevedoring, berthing arrangements and other port-specific considerations. Developers will also need to consider the level of security offered by lease arrangements including the length of term and possible options to renew at the expiry of the contractual term.

Given the scarcity of suitable sites it is possible that easements across land owned by third parties will be required to allow the laying of utility connections between storage and production facilities. This again requires negotiation with third parties and, in the absence of compulsory purchase powers, leaves the developer exposed to ransom in terms of negotiating commercial terms.  In these circumstances, the options for acquiring compulsory purchase powers should be carefully considered in the consenting strategy.

Comment

The UK is uniquely placed for strong uptake in hydrogen and while there are a number of hurdles to overcome, these are not insurmountable.  The government’s financial incentives confirmed by the Autumn budget are a step in the right direction and underscore the important role hydrogen has to play in the UK’s transition to net zero.  

 
[1] UK off track for Net Zero, say country’s climate advisors - Climate Change Committee
[2] Energy Trends September 2024
[3] Hydrogen production business model - GOV.UK