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Hydrogen in the UK: Challenges of a clean hydrogen strategy

While hydrogen offers many possibilities, its production brings new risks. In this article, we examine the difficulties of a hydrogen strategy, including cost considerations.

03/02/2022 · 7 minute read

Hydrogen is firmly on the UK’s agenda with the Government launching their plan for a world-leading hydrogen economy. The UK Government has said that more than a third of the country’s power consumption by 2050 could be hydrogen-based and this energy source will be critical to the UK meeting net zero emissions targets. As discussed in the first part of our UK hydrogen series, while hydrogen offers many possibilities, its production brings new risks. In our second article, we examine the difficulties of a hydrogen strategy, including cost considerations.

First movers

With the UK planning over £4 billion of investment in clean hydrogen (blue hydrogen produced from fossil fuels where CO2 is captured and green hydrogen produced from electrolysers that utilise renewable energy sources), a surge in its availability should develop by 2025. Early demand for clean hydrogen is expected to come from:

  • hydrogen cluster alliances
  • transportation projects
  • fertiliser producers
  • oil majors
  • power majors and developers.

The reduction in carbon emissions achieved by switching to clean hydrogen will support the UK’s ambition to reach net zero by 2050. Take the production of ammonia, for example — the nitrogen and hydrogen compound made in huge quantities for use in agricultural fertilisers. Presently, natural gas or other fossil fuels generate both the hydrogen and energy used in its manufacturing process. As a result, ammonia produced by these methods accounts for 1% of global CO2 emissions, according to estimates. Reducing how much greenhouse gases the ammonia-production process makes by deploying green hydrogen or capturing CO2 could drastically reduce the fertiliser industry’s carbon footprint.

Strategic challenges

There are a number of considerations across the value chain that have to be addressed in order to produce and use clean hydrogen at scale in the UK.

1.     Cost of  clean hydrogen

While the cost of production is expected to reduce significantly as utilisation and innovation gets underway, it is currently much more expensive to make green and blue hydrogen than grey hydrogen produced today from fossil fuels. Green hydrogen currently costs approximately US$4-US$5 per kilogram (kg) and blue hydrogen US$2-US$3 per kg, compared to US$1-US$2 per kg for grey hydrogen. There are, however, a number of factors that could lead to a drop in the cost of producing clean hydrogen, including the following:

  • Global technological development. The cost of electrolysers, plus their efficiencies and size will determine the reduction in costs.
  • Price of renewable energy supplies.
  • Local/UK specific “learning by doing.”
  • Economies of scale.
  • Initiatives to encourage investment in hydrogen technologies.
  • Incentives to bridge the gap between the cost of clean hydrogen and that of grey hydrogen.

The UK currently produces and uses about 700,000 tonnes of hydrogen per annum. This is primarily grey hydrogen, made from natural gas using carbon intensive processes. In comparison, the current production levels in the US stand at approximately 10 million tonnes per annum. Global hydrogen use is forecast to grow to 500 to 800 million tonnes per annum by 2050, accounting for 15-20% of total energy demand from 115 million tonnes presently, according to the Energy Transitions Commission. Ensuring the cost of clean hydrogen drops to that of grey hydrogen is therefore key to promoting usage and ensuring CO2 emissions from current production practices are reduced.

2.     Need for infrastructure

The widespread use of hydrogen in the UK will require new networks and storage facilities that are integrated with current utility providers as well as carbon capture, utilisation, and storage (CCUS) clusters. An entirely new system could be built for the distribution of clean hydrogen or it could be blended with natural gas and delivered using the existing natural gas grid. As the UK is a relatively small country, with multiple large population centres, constructing a new hydrogen network may be feasible, but no firm decision has been taken on this yet.

The UK Government has committed to investing £1 billion to support the establishment of CCUS in the country. The East Coast Cluster will capture emissions produced across the Humber and Teesside region and the HyNet North West project in Liverpool Bay will generate low-carbon hydrogen from natural gas and utilise carbon capture and storage. Both projects are expected to be operational by the mid-2020s, with a further two clusters to be up and running by 2030.

3.     Green hydrogen production unproven at scale

Hydrogen technology is currently unproven at scale. At present, 10 megawatt (MW) electrolysers would be considered standard; however, there are 20 MW electrolysers, such as the one planned for a facility outside Glasgow that are in production. It is likely that larger electrolysers will be required if the UK is to reach its target production capacity of 5 gigawatts (GW) by the end of the decade.

4.     Need for first-of-a-kind investment

Scaling up will require addressing “first mover disadvantage” — the risks and high costs faced by pioneers (who provide a proven market for rivals) — in order to bring forward early projects. At the same time, a sustainable environment will need to be created for increasing investment in hydrogen in the longer term.

5.     Policy and regulatory uncertainty

Hydrogen is currently a nascent area of energy policy, with the industry looking to the Government to provide capital and revenue support, regulatory levers, and incentives. However, at the moment there is uncertainty as to what continued form government intervention will take, outside of the support noted above for CCUS — for instance, the UK could place a monetary value per tonne on CO2 captured. 

Overcoming hydrogen’s hurdles

The UK’s hydrogen sector currently faces technological and regulatory uncertainty, major cost and risk considerations, and a requirement for infrastructure. Clean hydrogen projects — some involving technology mixes and onshore and offshore components — are undoubtedly complex.

There are solutions available to help facilitate finance and enhance the bankability of the hydrogen transition. One-stop insurance programmes are obtainable covering exposures of new clean hydrogen facilities. These include construction, third-party liability, loss of profits, operational, business interruption (BI), carbon credit BI, and reservoir leakage insurance. Capital is increasingly more accessible for projects that have robust risk management in place right from the start.

In the third article in our hydrogen in the UK series, we will be looking at how to increase insurability of a project.

If you have any questions about hydrogen, please contact your Marsh adviser.

Meet the authors

Photo © Joel Chant www.joelchant.com Tel/Fax:020 8509 7928 Mobile: 07976 291 576 email: info@joelchant.com 15/10/10 - UNP- 26005- Marsh Ltd Marsh Marine & energy Practices - business heads shots

Andrew Herring

CEO, Energy and Power, Marsh Specialty UK

  • United Kingdom

Mark Heneghan

Mark Heneghan

Global Hydrogen Practice Leader

  • United Kingdom

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