DESNZ ‘minded’ to underwrite new hydrogen network with RAB plus top-up funding

The Department for Energy Security and Net Zero has indicated a ‘direction of travel’ for likely support for hydrogen transport and storage.
The department says the initial focus for the business model will be on large-scale pipeline infrastructure, which transports hydrogen as a gas. It set out ‘minded to’ options to be included in a new framework designed to allow a new industry to grow. The framework would probably comprise :
• A regulated asset base (RAB) business model, which would mean the framework for a hydrogen network is aligned with that for gas, electricity and water networks. The Future System Operator would take on some responsibilities for strategic network planning.
• An external subsidy mechanism will be created alongside a RAB to ensure that charges to users of the pipelines and networks are not prohibitive, and allow hydrogen transport providers to make a reasonable return on their investment. This would be delivered through private law revenue support contracts between a counterparty – possibly the Low Carbon Contracts Company, which already has this role in other mechanisms such as electricity Contracts for Difference – and a hydrogen transport provider receiving the subsidy.

The Department says that according to analysis by Frazer-Nash, published in 2022, the levelised costs for transporting hydrogen by road is £1.23/kg and by pipeline £0.17/kg.3 It says “we consider pipelines to be the most cost-effective way of scaling-up”.
DESNZ notes that in a RAB model the ‘allowed revenue’ is recovered from users of the infrastructure through network charges. But at the start there will be few users of a hydrogen network, so relying only on them to recover costs will make charges prohibitively high. Rather than capping charges it is minded to introduce an external subsidy to top up the revenue. That might be a mechanism the Contracts for Difference (CfDs) scheme, for which the Low Carbon Contracts Company (LCCC) acts as the counterparty.
DESNZ has not taken any decisions on how such a subsidy would be funded, but options include the Exchequer or a levy.
The Department flagged potential market interventions to support hydrogen to power generation and as large-scale long duration electricity storage, which it said would have to work with the RAB and exteral subsidy.
As regards hydrogen storage, DESNZ is looking at a revenue ‘floor’ to mitigate demand risk for storage providers; an incentive to maximise sales to users and a mechanism to give the subsidy provider a potential share of the ‘upside’. That would be delivered through a private law contract lasting at least 15 years.
It expects support to be targetted at geological storage initially but may support above-ground storage where it faces similar market barriers.
DESNZ will publish a response to a consultation on offshore hydrogen regulation in the autumn.
It also plans to consult soon on ‘minded to’ positions on hydrogen blending into gas networks.

Leave a Reply

Your email address will not be published. Required fields are marked *