Oil and Gas Regulation 2022 Clean Hydrogen

Introduction

Clean hydrogen has recently become a topic of the day in energy circles around the globe. Unlike other nascent technologies, such as, for example, fusion power or direct air capture of carbon dioxide, which are arguably more “futuristic”, the idea that hydrogen could be used as a fuel is not new. What is new is the idea that clean hydrogen could displace the use of fossil fuels in a number of different sectors, and that this could be done on a very large scale. In this chapter, we consider the opportunities offered by clean hydrogen, as well as some of the challenges and how these are being addressed, with the UK hydrogen strategy as a key example.

What is Clean Hydrogen and Why is it Important?

Hydrogen has the potential to play an important role in global efforts to reduce carbon dioxide emissions. In contrast to natural gas, the chemical composition of hydrogen means that no carbon is emitted when hydrogen is combusted. However, hydrogen is currently produced in relatively small quantities, mainly for use in various industrial processes (e.g. in the food industry, hydrogen is used to make hydrogenated vegetable oils) rather than being used as a fuel. Moreover, most conven¬tional hydrogen production involves hydrogen being produced from natural gas, crude oil or coal, and this production process involves the emission of carbon dioxide. As is discussed in more detail below, hydrogen can also be produced using electrolysis, whereby an electric current is used to split water molecules into oxygen and hydrogen. However, hydrogen produced using elec¬trolysis can also have carbon emissions associated with it if the electricity used has been generated from fossil fuels (rather than from renewable energy sources). Hydrogen produced using these methods is referred to as “conventional hydrogen”.

In general, the term “clean hydrogen” is used to refer to hydrogen produced using methods where, in contrast to conven¬tional hydrogen, the production method either does not involve carbon emissions or the carbon is abated.

The Different Types of Clean Hydrogen: A Rainbow of Colours

Varied nomenclature is used to refer to clean hydrogen, depending on the production method used. The key terms and what they refer to are summarised below.

“Green” or “renewable” hydrogen: this refers to hydrogen produced using electrolysis, using electricity from renewable energy sources. This mode of production of hydrogen is generally considered the most environmentally sustainable, and in the long term is likely to be prioritised over other forms of clean hydrogen.

“Blue” or “low-carbon” hydrogen: this refers to hydrogen produced from natural gas, using steam methane reforming, where the carbon that is released during this process is abated or captured using carbon capture and storage (CCS) technology.

Blue hydrogen is seen by many stakeholders as playing a greater role than green hydrogen in the short to medium term. One reason for this is because, currently, blue hydrogen is cheaper to produce than green hydrogen, although this is predicted to change over time and there is a lack of consensus about how the costs of blue and green hydrogen compare, with particularly large variations in the cost estimates of green hydrogen. The Global CCS Institute largely attributes this variation in cost esti¬mates for green hydrogen to the assumed utilisation of the elec-trolyser (i.e. capacity factor of the dedicated renewable gener¬ation capacity), the price of electricity and the capex for the electrolyser which is predominantly a function of scale.

Other terms are also used to further distinguish between different types of renewable hydrogen – such as “pink” hydrogen, being hydrogen produced using electrolysis where the electricity is generated by nuclear power – however, the above distinction between “green” versus “blue” hydrogen is a key one in terms of policy development and the business models that can be used to support these technologies.

Conventional hydrogen produced from natural gas is also occasionally referred to as “grey” hydrogen, while conventional hydrogen produced from brown and black coal can be referred to as “brown” or “black” hydrogen, respectively.

Main Uses for Clean Hydrogen

Currently, the greatest focus has been on the potential use of clean hydrogen in transport and heating.

In transport, hydrogen fuel cells present an alternative to conventional electric vehicles, particularly for heavy vehicles such as trucks and buses. In fuel cell electric vehicles (FCEVs), the hydrogen is stored in one or more tanks built into the FCEV and it reacts with oxygen, which comes from ambient air, across an electrochemical cell to produce electricity, water and heat.

Hydrogen is also one of the technologies that may play a vital role in decarbonising heat. In the UK, for example, domestic and non-domestic heat accounts for over a third of the total greenhouse gas (GHG) emissions. Countries where the majority of heating is currently provided by natural gas, such as the UK, must make strategic decisions about whether natural gas is displaced by hydrogen, electricity, ground and air source heat pumps or district heating schemes, or a combination of these. Where hydrogen is used for heating, this could either take the form of pure hydrogen or a blend of natural gas and hydrogen. The latter option would result in only a reduction of carbon emissions; however, it is being considered a potential transitional option on the pathway to net-zero carbon. The potential for blending hydrogen with natural gas is currently being explored in the UK – see Figure 1 below.

However, clean hydrogen also has potential for applications in industry, both by displacing conventional hydrogen and by displacing other fuels for heating and other processes in manufac¬turing. Hydrogen could also be used as a fuel to generate electricity, in place of natural gas. While it may seem inefficient to generate electricity from clean hydrogen, particularly given that renew¬able energy is used to produce green hydrogen, hydrogen-fired gas turbines could take the place of natural gas fired turbines to balance electricity grids, providing dispatchable electricity to coun¬terbalance non-dispatchable intermittent renewables.

Figure 1 – Blending of hydrogen with natural gas in the UK

The HyDeploy demonstration project in the UK is testing the potential for blending up to 20% hydrogen with natural gas in the existing gas grid. The project is being delivered by a consor¬tium of partners, led by Cadent, a gas distribution network operator. The first phase involved the hydrogen and natural gas blend being supplied to 100 homes and 30 faculty build¬ings at Keele University in Staffordshire, using a private gas network. In March 2021, it was reported that the first phase was completed successfully. The second phase commenced in August 2021 and is expected to run for 10 months, involving the public gas network and supplying 668 homes, a church, a primary school and several small businesses. To allow this demonstration project to proceed, the health and safety regu¬lator, the Health and Safety Executive (HSE), granted HyDeploy an exemption from the current limit of 0.1% hydrogen in the UK gas network after the project gathered extensive evidence to demonstrate the hydrogen blend would be as safe as natural gas.

Cadent also commissioned a study to identify the changes required to the gas commercial framework that will enable hydrogen blending in the GB gas grid. The study, carried out by Frontier Economics, focused on six aspects of the commercial framework: connection; dispatch; system operation; network pricing; shrinkage; and billing. In relation to connection, for example, the final report recommends that before a hydrogen production facility is connected by the network operator, a preconnection impact assessment should be undertaken by the relevant network operator to determine a hydrogen producer’s likely impact on the ability of other hydrogen producers to inject into the grid. Once connected, the hydrogen producers would need to be subject to constraints on their rights to inject gas into the grid, to ensure that any hydrogen blend limits are not breached in any part of the network.

HyDeploy is just one of a number of different pilot projects being deployed in the UK to examine and test the feasibility of clean hydrogen production and use in different sectors. The H21 programme is funded by the regulator Ofgem and led by Northern Gas Networks (another gas distribution network operator) in partnership with other stakeholders, including the HSE. The focus of the H21 programme, which involves a number of different projects, is complete conversion of the gas grid to 100% hydrogen.

In the hydrogen strategy published in August 2021, the UK Government has committed to supporting industry to conduct first-of-a-kind hydrogen heating trials, including a neighbour¬hood trial by 2023 and a village-scale trial by 2025. The village trial will look to build on learning from the neighbourhood trial, involving a larger and more diverse range of consumers, and conversion of existing local area gas infrastructure to 100% hydrogen. These trials are intended to inform the UK Government’s decision on the role of hydrogen in heating, a decision which the Government has committed to make by 2026.

What is Required to Make Clean Hydrogen Commercially Viable?

While there is growing enthusiasm about the potential offered by hydrogen, there are a number of challenges to overcome before developers are comfortable making large-scale invest¬ments in this nascent technology. We consider the key chal¬lenges below.

Revenue stream: market creation

At the risk of stating the obvious, in order to be viable, there must be a market for clean hydrogen. In this context, it is useful to compare and contrast clean hydrogen and renewable energy projects: renewable energy projects have simply taken the place of conventional generators, and the only barrier, which has been addressed through incentive schemes, has been the capital cost of renewables (although this has been considerably reduced in recent years for many technologies). Hydrogen, on the other hand, faces a two-fold challenge:

• in order to displace other fuels, changes or adaptations must be implemented by the potential users or offtakers. For instance, if hydrogen is to take the place of natural gas for heating, adaptations must be made to existing natural gas distribution and transmission networks and appliances; and

• clean hydrogen technologies are still in the early stages of deployment and therefore attract high operational costs, particularly in comparison with conventional hydrogen, natural gas, or more developed low-carbon alternatives. Government policy and support mechanisms will need to play a role in addressing these challenges. Early demonstrator projects are likely to need revenue support and long-term hydrogen offtake arrangements (e.g. with a heavy industry user or energy supplier). This is important as investors need business models that give a level of predictability of returns.

What has worked for renewable energy projects may not neces¬sarily work for hydrogen. For example, feed-in tariff schemes, which provide generators with a price “top up” for electricity, have been effective in many jurisdictions in encouraging invest¬ment in renewable energy projects. However, while such price support mechanisms may have a role to play, and may be particu¬larly useful in allowing, for example, green hydrogen to compete with blue hydrogen, legally mandated targets or quotas will be required to create market demand. This will need to be accom¬panied by government support for infrastructure, as discussed in more detail below.

New infrastructure

Both blue and green hydrogen require upstream and down-stream infrastructure. Given that hydrogen is currently only produced and used on a relatively small scale, new infrastruc-ture is required to allow hydrogen to be produced, transported and supplied to end users.

For blue hydrogen, in addition to the hydrogen production plant, access to carbon transport and storage infrastructure is a prerequisite; therefore, the production of blue hydrogen will only be viable in countries where CCS is being developed. CCS infrastructure comprises two main elements – a storage facility for the carbon dioxide, and a transportation system (usually a pipeline) for the transport of the carbon dioxide from the carbon-emitting facility (in this case, the hydrogen plant) to the store. In the UK, the Government’s CCS programme is intended to play a key role in supporting the development of blue hydrogen.

For green hydrogen, an electrolysis plant is required, together with access to large amounts of electricity from renewable energy sources. For this reason, it is envisaged that green hydrogen production plants should be co-located with large-scale renew¬able energy products that can dedicate all or part of their output to the plant.

It has been recognised that for both blue and green hydrogen, cost reduction can be achieved through economies of scale and by also having the necessary infrastructure located close together. It is therefore anticipated that if commercial-scale production of clean hydrogen proceeds, then large-scale hubs, in which hydrogen production facilities are co-located with other decarbonisation technologies, may play a key role. In the UK, for example, there are plans for such hubs which could include facilities onshore and also offshore in the North Sea; these could include onshore methane reforming and carbon dioxide trans¬port facilities, and offshore renewable energy generation (typi¬cally offshore wind), carbon dioxide transport and store, and offshore electrolysis.

A major barrier, which will likely need clear government policy and backing to overcome, is the infrastructure needed to allow hydrogen to be used in the heating and transport sectors. As mentioned above, in the case of heating, in most jurisdictions the challenge is that the existing infrastructure may need to be retrofitted. Further studies are required to determine whether blending hydrogen into the natural gas network can be achieved without the need for major modification to pipes or household appliances, and further evidence gathered required to support the case for 100% hydrogen conversion of the grid. In some jurisdictions, such as the UK, work is already being undertaken to examine the feasibility of hydrogen blending and grid conver¬sion – see Figure 1 above.

In the context of transport, a nationwide network of refu-elling infrastructure is required to roll out hydrogen transport technologies. Government support is key to avoid a situation where there is no incentive for industry to build the infrastruc¬ture without the demand and there is no demand because there is no infrastructure/supply. As in the case of electric vehicle charging deployment, the vehicle capex and opex gap between conventional internal combustion engine and hydrogen trans¬port technologies will need to be addressed.

Regulatory Frameworks for Clean Hydrogen

The regulatory frameworks in most jurisdictions do not contem¬plate the large-scale production of hydrogen or its use as a substitute for other conventional fuels; therefore, there is a regu¬latory gap. This regulatory uncertainty is a barrier to invest¬ment. In particular, the right safety management regulations will need to be implemented to manage hydrogen. Standards and rules provide stakeholders with the information needed to safely build, maintain and operate facilities.

If incentive mechanisms are put in place to support clean hydrogen, appropriate standards and definitions will also need to be included in the regulatory regime. At a policy level, deci¬sions must be made as to whether to distinguish between green and blue hydrogen, and if so, provide for such a distinction within the regulatory framework and any incentive mechanisms.

The UK Government took an important step in August 2021, with the publication of a hydrogen strategy, which confirms that clean hydrogen is a key component of the UK’s net-zero carbon road map. The hydrogen strategy states that the Government’s vision is that “by 2030, the UK is a global leader on hydrogen, with 5GW of low-carbon hydrogen production capacity driving decarbonisation across the economy and clear plans in place for future scale up”. Significantly, the strategy was also accom¬panied by consultations on a hydrogen standard, as well as the business models for the deployment of hydrogen – recognising the importance of a clear regulatory framework as the basis for investment by industry.

Standards

A key element of any framework that seeks to incentivise the investment in clean hydrogen – whether through supply quotas or price support – is the need to be able to certify that the relevant hydrogen being produced and then introduced into the supply chain is in fact clean hydrogen. Such certifica¬tion schemes have been developed in the context of electricity from renewable sources as well as some biofuels. One notable example is the Guarantee of Origin (GoO) scheme that operates in the European Union. The CertifHy scheme is intended to build on the success of GoOs and apply in a similar way to clean hydrogen (see Figure 2 below).

Recognising the importance of standards, the UK Government published a consultation on a UK hydrogen standard alongside its hydrogen strategy in August 2021. The UK Government has said that its intention is that low-carbon hydrogen producers seeking government support, through the Net Zero Hydrogen Fund, and/or the Hydrogen Business Model (further discussed below) would be required to comply with the hydrogen standard in order to secure support. In developing the hydrogen standard, the Government is seeking to define:

• the methodology for calculating GHG emissions; and

• the maximum acceptable levels of GHG emissions associ¬ated with low-carbon hydrogen.

The UK Government has indicated that the low-carbon hydrogen standard could be developed into a certification/GoO scheme.

Figure 2 – the CertifHy scheme

The concept of electronic GoOs was first introduced under the EU Renewable Energy Directive, requiring EU Member States to have in place an electronic system which would allow renew¬able energy generators to verify, along the electricity supply chain, that the electricity is in fact generated from renewable energy sources. No equivalent scheme for clean hydrogen was at that time contemplated by EU legislation. The European CertifHy scheme, launched in 2019, was established to fill a gap and build on the success of GoOs, as well as to provide certifi¬cation for both green and blue hydrogen.

A key point to note is that the CertifHy scheme is industry based – rather than being based on EU legislation or the legis¬lation of individual European countries – but it has received backing from the European Commission (EC) as well as the Association of Issuing Bodies (which was established to facil¬itate the transfer of GoOs between different Member States).

The new Renewable Energy Directive (2018/2001/EC) (referred to as RED 2) expanded the scope of GoOs to hydrogen. It is contemplated that in the future, individual EU Member States will develop their own GoO schemes, which would operate in parallel with the CertifHy scheme, or Member States will choose to adopt the CertifHy scheme.

While the CertifHy system is seen as being a key part of the overall framework for clean hydrogen in the EU, there are some challenges left to overcome. One of these is the fact that while CertifHy is intended to apply to both green and blue hydrogen, RED 2 does not deal with low-carbon hydrogen. Moreover, RED 2 does not deal in detail with GoOs for hydrogen, so there may be different approaches used by Member States to implement GoO schemes for hydrogen. However, further changes to the EU’s approach to GoOs are on the horizon, as changes to RED 2 are an element of the EC’s “Fit for 55” package, which seeks to adapt existing climate and energy legislation to meet the new EU objec¬tive of a minimum 55% reduction in GHG emissions by 2030.

Support and Business Models

Some companies are already committing to clean hydrogen projects on the basis of having a market. For example, in the UK the recently announced Whitelee green hydrogen project, near Glasgow, is expected to supply green hydrogen to the trans¬port sector. However, as discussed above, appropriate business models, based on a regulatory framework, are required to create market demand on a much larger scale.

In the UK context, the Government’s consultation on hydrogen business models proposes a delivery mechanism in the form of private law contracts (with statutory backing) between hydrogen producers and a government counterparty. The business models consultation expressly acknowledges that the model proposed, where an appropriate level of subsidy will be paid to the producer, has the disadvantage of not guaranteeing demand, but considers that the alternative, where a subsidy would be paid to poten-tial users of low-carbon hydrogen, has more disadvantages, including complexity and the fact that it is unlikely to give suffi¬cient certainty over demand to unlock investment in larger-scale production projects. However, there are also other key policy and regulatory interventions by the Government that will play a key role in creating a market for clean hydrogen. For example, the Government is developing plans to phase out the installation of new natural gas boilers and ending new connections to the gas grid for new-build domestic properties in England by 2025.

Future Outlook

The expectation is that the coming decade will see the integra¬tion of clean hydrogen into different sectors to take the place of existing fuels, even if the extent of its role in different sectors is not completely clear right now. The fact that the interna¬tional community is committed to achieving international and domestic net-zero carbon goals means that the pace at which clean hydrogen is being developed is being accelerated. However, in the short to medium term, it seems likely that we will see a gradual transition to clean hydrogen, with blue and green hydrogen being used alongside conventional fuels and other decarbonisation technologies.

Please note this International Comparative Legal Guide was first published on ICLG.com.