United Kingdom
UK government policies on industrial decarbonisation
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Net zero target
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Key climate policies
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Energy Bill (2022)
Energy Bill 2022 (proposed) will accelerate the growth of low-carbon technologies including carbon capture usage and storage (CCUS) and hydrogen. This is accomplished by business models which will attract private investment by providing long-term revenue certainty.
Additionally, the measures on CO2 transport and storage (T&S) will put the country on a path to seize market share and grow the economy.
The Bill features:
- Financial assistance: Providing the Secretary of State with UK-wide powers to incur expenditure and provide long-term financial assistance to support the establishment of CCUS and low carbon H2 production
- Counterparty: The contractual nature of the ICC and hydrogen business models require a counterparty to manage the contracts and act as a conduit for funding. The Bill provides the Secretary of State with powers to designate and direct a counterparty.
- Competitive Allocation: Initial projects are expected to be allocated support through a bilateral process. In the medium term, the business models are expected to move to a more competitive allocation process, similar to the low carbon contracts for difference, to reduce costs to the government and the consumer.
- Hydrogen Production Levy: It is expected that from 2025 at the latest, all revenue support for low-carbon hydrogen production will be levy funded, subject to consultation and legislation in place.
- CO2 Transport and Storage (T&S) licensing framework: The Bill establishes an economic regulation model for CO2 T&S, with statutory objectives and legal powers for Ofgem as the economic regulator of CO2 T&S.
Further information: Energy Bill 2022
Powering Up Britain
Powering Up Britain is the UK’s current energy and climate strategy, which collectively set outs how the UK’s net zero targets and energy security and affordability goals will be met. The plan puts industrial decarbonisation, particularly through deployment of CCS, at its centre, and includes commitments to:
- Provide £20bn over 20 years for immediate deployment of selected CCS projects in the Track 1 clusters
- Support the development of two additional carbon storage clusters by 2030, taking the total to 4
- Develop policies to support non-pipeline transport of CO2
- Extend the duration of the UK ETS scheme, and expand the sectors covered
- Consult on policy options to mitigate the risk of carbon leakage
Further information: Powering up Britain
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Carbon pricing
UK Emissions Trading Scheme (UK ETS)
The UK ETS opened for trading in May 2021, replacing the country’s participation in the EU ETS on 1 January 2021.
The UK ETS cap is expected to align with the UK’s net zero targets from 2024. The total cap for Phase 1 (2021 – 2030) is proposed to be reduced by 30-35% from current levels. As of August 2022, the UK ETS covers: energy-intensive industries, the power generation sector and aviation. Domestic maritime and waste sectors are to be introduced incrementally by mid-2020s and late-2020s.
The price trajectory of allowances is expected to continue and even accelerate as the total number reduces to align the scheme with the UK’s net zero target, in addition to fewer free allowances. It is likely that this will increase the cost base for businesses either through a direct effect where companies are required to purchase allowances at a higher carbon price, or an indirect effect as the higher price is passed along the value chain. As a result, businesses will have to undertake emissions reduction measures.
Further information: UK ETS
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Hydrogen strategy
To meet these ambitions, the UK has committed to supporting both electrolytic and CCUS-enabled hydrogen production.
By mid-2020s, we could start seeing larger (100MW) electrolytic hydrogen projects and the first CCUS-enabled hydrogen production facilities based in industrial clusters. By the end of the decade, there could be multiple large CCUS-enabled (500MW+) production facilities across the UK.
Currently, over a dozen large-scale hydrogen projects are ongoing or pending (e.g. Acorn, Gigastack, H21).
By setting up a hydrogen certification scheme by 2025, a new Low Carbon Hydrogen Standard is being established. This will support the UK in playing an active role in the international hydrogen market.
Further information: Hydrogen Investor Roadmap; UK Hydrogen Strategy
The Net Zero Hydrogen Fund (NZHF)
The Net Zero Hydrogen Fund (NZHF) which is worth up to £240 million, will fund the development and deployment of new low-carbon hydrogen production to de-risk investment and reduce lifetime costs. NZHF’s grant allocation is split into the following 4 strands:
- Strand 1: Development expenditure (DEVEX) for front-end engineering design (FEED) and post-FEED activities, aims to build the pipeline of hydrogen production projects to measurably move these closer to deployment. The application window for strand 1 has now closed.
- Strand 2: Capital expenditure (CAPEX) support for hydrogen production projects that do not require revenue support through the Hydrogen Business Model (HBM). Applicants for Strand 2 must demonstrate how they will develop a credible project that will contribute to the at-scale production of low-carbon hydrogen by 2025. Strand 2 closes on 13 July 2022.
- Strand 3: CAPEX for non-CCUS enabled projects which require revenue support through the hydrogen business model.
- Strand 4: CAPEX for CCUS-enabled projects which require revenue support through the hydrogen business model. Strand 4 NZHF’s Expression of Interest process will launch following the announcement of the Phase-2 shortlisted projects, followed by a Strand 4 application process in early 2023.
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Other policies
CCUS Business Models (proposed)
The UK government has helped a number of consultations to inform its approach to incentivising CCUS deployment through creating clear business models, which has led to the following proposals being adopted:
- Deploying CCUS in the 2020s: Key strategic priorities include timely deployment, unlocking private sector investment, and reducing impact on consumers and taxpayers.
- Parameters, Integration and Usage: The government is designing a portfolio of business models for CO2 Transportation and Storage (CO2 T&S), power, industry, and low carbon H2.
- T&S Regulatory Investment Business Model (TRI Model): The T&S company is responsible for the development, construction, financing, operation, maintenance, expansion, and decommissioning of the T&S infrastructure. The T&S company will be granted a license, pursuant to which it receives an “allowed revenue” by charging a regulated T&S fee to users to transport and store their captured CO2.
- Industrial Carbon Capture Contracts (ICC Contracts): CO2 emitters in sectors like chemicals, refining, steel, and cement will invest in carbon capture and connect to the shared T&S infrastructure. The UK will grant contracts that provide the CO2 emitter with a payment per tonne of captured CO2 to cover operational costs, T&S fees, and repayment of capital with a rate of return. Other support such as capital grants will also be provided.
- Dispatchable Power Agreements (DPAs): Dispatchable power stations with carbon capture will be supported through contracts based on the contracts for difference (CfDs) used for renewables.
Further information: CCUS Business Models (proposed)
Funding
Funding opportunities
Spring Budget 2023
The UK government earmarked new funding to support CCUS projects as part of the country’s Spring Budget 2023.
£20 billion was allocated over the next two decades for the early development of local carbon capture and storage projects that pump emissions underground, starting with projects from East Coast to Merseyside to North Wales, and paving the way for CCUS everywhere across the UK.
Further information: Spring Budget 2023
The Carbon Capture and Storage Infrastructure Fund (CIF)
The Carbon Capture and Storage Infrastructure Fund (CIF) represents £1bn of investment in CCUS in the UK and it is an important element of the government’s support of an emerging sector with significant potential. To enable the establishment of a new CCUS sector, the UK is seeking to develop CCUS clusters with T&S networks acting as the enabling infrastructure for a range of capture projects, including gas power plants, industry, low carbon hydrogen production, bioenergy, and direct air capture (DAC). Each of the areas of CCUS (T&S, power, industrial carbon capture, bioenergy with carbon capture and storage and low carbon hydrogen) will be supported differently and business models will be designed. This will provide bespoke commercial frameworks for each area.
Further information: CIF
The Industrial Decarbonisation Challenge
The Industrial Decarbonisation Challenge supports the development of low-carbon technologies and infrastructure, increasing industry competitiveness and contributing to the UK’s clean growth. It will reduce the carbon emissions from energy intensive industries, such as iron and steel, cement, refining and chemicals.
Further information: The Industrial Decarbonisation Challenge
Industrial Decarbonisation & Hydrogen Revenue Support
Through Industrial Decarbonisation & Hydrogen Revenue Support, the government will invest £140 million to fund new hydrogen and industrial carbon capture business models. This will include up to £100 million to award contracts of up to 250MW of electrolytic hydrogen production capacity in 2023, with further allocations in 2024.
Further information: Industrial Decarbonisation & Hydrogen Revenue Support
Further information: CCUS Investor Roadmap; The Ten Point Plan
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