This time last year, front-month National Balancing Point gas contracts were trading at around 50p per therm (p/th) – fairly typical for gas prices in recent years.
Since then new records have been routinely broken with front-month contracts closing at more than 500p/th on 7 March. While this high was thankfully short-lived, the closing price has not dipped below 200p/th since.
Although gas is not yet subject the large and growing number of sanctions on Russia and continues to flow westward for the time being, the invasion has prompted a complete rethink of energy strategies among European nations.
They are now hurriedly seeking to wean themselves off Russian oil and gas – a vital source of funding for the Russian war machine which, following the rise in prices, is now estimated to be worth $1 billion per day – dwarfing the value of aid being sent to Ukraine.
This will be no easy task. According to the International Energy Agency, the EU imported 155 billion cubic meters of gas from Russia in 2021, representing 45% of the trade bloc’s imports and close to 40% of its total gas consumption.
On paper, the UK is less exposed to Russian gas, with direct LNG imports from its Yamal facility supplying less than 4% of Britain’s gas last year. However, the UK is closely integrated into the European gas market – it will be competing with neighbouring countries for supplies and will have to pay higher prices to secure them.
This new milieu will have significant implications for the UK’s plans going forward, in particular concerning the use of hydrogen as a low-carbon alternative to natural gas.
The government has previously committed to a “twin-track” approach to the development of hydrogen – supporting both “blue” hydrogen, produced by reforming natural gas and capturing the carbon emissions from the process, and “green” hydrogen, produced by electrolysing water using renewable power.
In its British Energy Security Strategy, released earlier this month in response to the Ukraine crisis, the government raised its hydrogen production target from 5GW to 10GW by 2030, of which at least 5GW will be green hydrogen. Although there is no minimum for blue hydrogen capacity, the door has still been left open to significant capacity.
Richard Lowes, senior associate at the Regulatory Assistance Project, says this makes no sense: “It just seems absolutely crazy that you’d do an energy security strategy which is about reducing gas imports and you’d have something in there that would increase gas demand.”
He continues: “If you’re replacing something that’s using gas right now with blue hydrogen, it will not only increase gas demand, because you need more primary energy to make that hydrogen, but it’s also likely that will be imported because we’re importing more and more gas every year.”
The website for Equinor’s proposed Saltend H2H autothermal reforming plant – an anchor project for the Zero Carbon Humber industrial cluster – quotes a minimum efficiency figure of 80%.
Lowes says 5GW of blue hydrogen production capacity would equate to around 8% of the UK’s total demand, which in 2020 stood at 811TWh according to the latest Digest of UK Energy Statistics (DUKES) from the Department for Business, Energy and Industrial Strategy (BEIS).
As well as increasing gas demand, Lowes says the reforming process would add extra costs, as would the carbon capture and storage needed to make it low-carbon. He says blue hydrogen remains “nothing more than desk-based analysis and modelling” and so the scale of these additional costs is very uncertain.
He also notes that the imperfection of the carbon capture process and fugitive emissions from natural gas production mean that, unlike green hydrogen, blue hydrogen is not zero carbon.
One of the arguments of blue hydrogen proponents is that it can act as a bridge to green hydrogen, allowing production to be scaled up quickly and networks and gas users to carry out the necessary conversions. As large volumes of surplus renewable generation become available and electrolysers costs came down, blue hydrogen could gradually be replaced with green hydrogen.
However, Lowes says this argument has been completely undermined by the recent gas price rises, which have made blue hydrogen look “hugely expensive”. He says investing in blue hydrogen as a bridge now amounts to a “huge leap of faith”.
Question marks
His sentiments are shared by Colm Britchfield, a researcher for the environmental think tank E3G: “Soaring gas prices – for which Russia’s invasion of Ukraine is partly responsible – end whatever economic case there may have been for blue hydrogen.
“There were already question marks about how affordable blue hydrogen would prove to be, but the fact gas prices have risen so sharply – and are likely to remain elevated – makes the investment case exceptionally difficult to make. The UK should take Europe’s lead and shift its focus to green hydrogen.”
Britchfield is particularly critical of the proposition that blue hydrogen be used to facilitate the conversion of domestic heating to hydrogen boilers: “The gas demand involved to produce the hydrogen would be enormous, and with bills already set to exceed £3,000 this year using gas directly, it is clear that hydrogen for heating would be a consumer disaster.
“The government should move on from the distraction that is hydrogen for heating and press ahead with electrification, the only model for heat decarbonisation that will reduce the UK’s exposure to high gas prices.”
“It is simply never going to work,” he adds, “and the current open-question is acting as a delaying factor at a local level, where some local authorities have been convinced to wait for hydrogen conversion that is not going to happen.”
Like Lowes, Britchfield does not believe the use of green hydrogen to heat homes would make sense either: “Using green hydrogen to heat homes would be radically inefficient – heat pumps have efficiency of between 300 – 400%. The amount of extra renewable capacity you would need to build to produce green hydrogen to then pump into domestic boilers would be mind-boggling.
“Again, it is unlikely interested industry will accept this, but in reality, the proposals for large-scale conversion of gas networks to hydrogen are about protecting the lifetime and value of existing assets, not about the practical usefulness of using hydrogen to heat homes.”
Euan Graham, a senior researcher at E3G, says the government’s decision to retain a twin-track approach to hydrogen production makes “zero economic sense” and amounts to a “complete folly”.
“From our perspective, it also demonstrates the significant lobbying influence that’s at play here,” he adds.
Shortly after releasing its energy security strategy, the government also issued its response to a consultation on its proposed support mechanism for hydrogen production.
This would take the form of a contract for difference (CfD), whereby producers would be paid the difference between a “strike price”, reflecting the cost of producing hydrogen, and a “reference price”, reflecting the market value of hydrogen. The cost of the top-up payments would be recovered through a levy on energy bills.
Graham says subsidising blue hydrogen on the backs of customers would be “completely unacceptable, especially since the economics of it are so bad now.”
He notes a study from Bloomberg NEF last year, which concluded green hydrogen would reach cost-parity with blue hydrogen in all geographies by 2030.
He says skyrocketing gas prices mean: “That tipping point is getting closer. The question is: is the government going to have tied its hands to blue hydrogen production through these revenue mechanisms that place these levies on consumers’ bills.”
‘We can’t just turn off the tap’
But Chris Manson-Whitton, director of Progressive Energy, says forgoing the use of blue hydrogen is simply not practical given the huge scale of the challenge the country faces.
He says the UK has been doing “brilliantly” on technologies like offshore wind, the expected backbone of the future electricity system – “I’m not knocking it at all”.
According to DUKES, offshore wind generation totalled 40.7TWh in 2020, whilst onshore wind generation provided another 34.7TWh. Together they accounted for almost a quarter (24%) of total electricity generation during the year of 312TWh.
However, Manson-Whitton says this remains a small fraction of the UK overall energy demand, which as previously noted included 811TWh of gas consumption in 2020.
Despite progress, he says the country remains heavily dependent on fossil fuels like natural gas: “We can’t just turn that off because if we did, we’d risk the safety and security of people, we’d risk our industry, we couldn’t carry goods around the country, and at the end of the day we’d just freeze our economy.”
“The question is: how can we square that with maintaining our climate commitments?”
He says the UK will need to keep using natural gas in some form for some time to come, either by applying carbon capture and storage directly or producing blue hydrogen. In the case of the latter: “You’re not then just trying to capture CO2 from loads of places. You centralise it, you do it as efficiently as possible, but also you set up a new set of energy infrastructure… There are no emissions at the point of use. It gives us a parallel energy system along alongside electricity”.
“I do recognise that longer term using renewable electricity to generate our own green hydrogen is clearly going to be important,” Manson-Whitton adds. But, he stresses: “We don’t have enough renewable electricity to satisfy our electricity demand at the moment, let alone more.”
He says green hydrogen producers will have to compete with other consumers for this electricity, raising costs.
“If we can build the infrastructure and we can develop hydrogen now that gets us going, we can capture 97% of the CO2 from the process, so in terms of the climate impact it is making a massive step change,” he remarks.
The UK’s gas networks likewise argue that full electrification of the energy system would require huge investment in electricity networks to get power to where it’s needed.
Progressive Energy is the leading the HyNet industrial cluster in the North West, which also involves gas distribution network Cadent.
Manson-Whitton is keen to emphasise the significant interest they have received from energy users, saying the project is “grounded in finding a solution for industry”. There are 40 partners involved in the project so far, including multiple household brands – Unilever, Kellogg’s, Kraft Heinz, Heineken and Jaguar Land Rover.
He says for many of their processes electrification is not a viable alternative to gas: “You’ve got heavy industry running on gas. It needs gas to run on and they’re paying whatever the gas price is. If we can strip the CO2 before they use it, then we are decarbonising them.”
Manson-Whitton also believes there is a place for blue hydrogen in domestic heating, particularly for homes in regions with industrial clusters like HyNet: “We are going to see a mixture of heat pumps and hydrogen in our energy mix. It will not be one or the other. It will be a mixture of the two.
“If I’ve got a new build property, absolutely putting in a heat pump make sense. If I haven’t, and you have to recognise that 80% of the properties that will exist in 2050 have already been built today, not all of them will be suitable for heat pumps. There will be all sorts of reasons why they may not be.”
Importantly, he does not believe that the current high gas prices will persist over the long term and will have dropped back down by the time blue hydrogen plants begin operating from 2025 onwards.
Costs will fall
Clare Jackson, chief executive of the newly form trade association Hydrogen UK, takes a similar line: “Whilst it is important to reduce our reliance on natural gas, we can’t turn the taps off overnight. The key will be using our gas resource as cleanly and efficiently as possible, and that’s where the blue hydrogen piece comes in of enabling us to continue to use natural gas, which we are going to need, in a way that is clean.
“Blue hydrogen projects aren’t going to come online until 2025 which means they won’t be directly impacted by current price spikes. This will give chance for the global situation to settle.”
“We should absolutely be deploying more heat pumps and renewable generation,” she adds. “However, this won’t be possible without also deploying hydrogen to provide an energy store enabling us to match supply and demand. Let’s not forget that our power domain is still reliant on gas today.
“The reality is that you can’t decarbonise domestic heat without both heat pumps and hydrogen. You need both solutions. The large-scale rollout of hydrogen for domestic heating probably won’t start in earnest until 2030. During this decade, the cost of hydrogen is expected to fall rapidly as production scales to meet industrial demand”.
When asked whether the current high prices could nevertheless the slow the development of low-carbon industrial clusters like HyNet, she responds: “It is hugely important that it doesn’t because it’s not just about scaling hydrogen production projects. It’s also impacting the end users they are servicing.
“If you look at these projects, they are primarily demand led. Industry is crying out for hydrogen. You just can’t decarbonise industry without hydrogen and so if we don’t invest now, then we risk offshoring the industrial heart of this country.”
She does believe the current high gas prices will provide further impetus to those looking to develop green hydrogen production: “We need deploy more offshore wind, more renewables. That’s only possible if you have a proper storage mechanism like hydrogen. The counterfactual that you’re often looking to displace is natural gas so a higher natural gas price certainly helps.”
One company focussed on this is ITM Power, which designs and manufactures proton exchange membrane electrolysers, and last year began production at its first gigafactory at Bessemer Park in Sheffield. The firm was mentioned by name in the government’s energy security strategy.
Chief executive Graham Cooley welcomes the increased hydrogen target but says “if I was the UK government, analysing the energy industry today, I would have made it 10GW of electrolysis only.” He says there is “a whole hosts of reasons” why the government should only be supporting green hydrogen.
He says the high gas prices mean green hydrogen is now already cheaper to produce than blue hydrogen and, if you include the carbon price, is even comparable to grey hydrogen (produced by reforming natural gas without carbon capture) and natural gas itself.
Exactly how much cheaper is unclear as the costs of blue hydrogen remain uncertain: “It certainly adds 50% of the cost of moving from grey hydrogen to blue hydrogen.”
Furthermore, he adds: “You can’t incrementally build up blue hydrogen. You have a to do a huge infrastructural project that in my view will mean that you’ll spend a lot of money on something that is a stranded asset.”
He does not expect gas prices to go back down any time soon, instead normalising at between 150p and 200p/therm: “It won’t go back to where it was before.”
Cooley says green hydrogen costs are also extremely stable by comparison: “If you connect at electrolyser via a power purchase agreement to renewable power, then you get no price volatility. The price of natural gas is now incredibly volatile.”
And he says green hydrogen will actually improve the UK’s energy security by ending its reliance on imports: “I am confused with putting out energy strategy that’s supposed to help us get us off of importing gas and then including blue hydrogen, which is made by imported gas.” He says this will also have the added economic benefit of improving the country’s balance of payments.
On top of all this, Cooley says green hydrogen is zero carbon rather than just low carbon.
Ultimately, he believes policy-makers will come to the same conclusion: “I believe that they will continuously up the green hydrogen target – the electrolysis target – and they will reduce the blue hydrogen target as they understand the effectiveness of the technology, the capital costs required, the length of time, as they analyse more and more, their own policy and energy security.”
Whether or not there is a place for blue hydrogen in the future energy system now hinges on developments in the gas market more generally, including whether Europe can find enough alternative sources and reduce demand by enough to fill the hole that would be left by cutting off Russian supplies and bring prices back down.
If not and if the prices we are now seeing persist for longer and become the new normal then it is hard to see how blue hydrogen can be developed at the scale envisioned by its proponents, particularly for uses such as domestic heating, where it is not the only game in town.