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Government’s ‘minded to’ revenue support for hydrogen storage.

Key points from the Department for Energy Security & Net Zero document, August 2023

“Geological storage [e.g. salt caverns] in particular is key to the hydrogen economy and will not develop without government support. As a result, we consider a hydrogen storage specific business model is necessary to ensure the timely delivery of geological hydrogen storage infrastructure.”

“We expect initial allocation of the storage business model to focus primarily on geological storage. We have reached this view as we consider that this type of storage is essential to establishing a hydrogen network and hydrogen economy.”

“Large numbers of storage facilities are likely to be required, even in net-zero compliant scenarios with comparatively low amounts of hydrogen production and use.”

“Support for (storage) providers can kick-start the long lead times required to develop geological storage facilities. Storage providers face demand risk from potentially low volume of sales and/or low prices and therefore require revenue security for facilities to be built.”

“The business model will provide protection against demand risk, which is the risk that facilities will not make enough revenue from sales to users to cover their costs, due to low volumes of sales and/or low prices.”

“Demand risk is ……. largely beyond the control of the developer/owner and not a risk they can afford to bear, and therefore creates a significant barrier to investment.”

“To provide sufficient revenue certainty despite significant uncertainty around demand, we believe it is necessary for the business model to provide a revenue “floor”.

“The minimum annual revenues ensured by the floor over the entire length of the contract would be equal to the total capital costs of creating the storage facility, plus fixed operational costs, plus a …… return on capital investment.”

“Storage facilities will potentially have very significant user revenues in the long run.”

“There will be an incentive for ensuring the facility is available for use.”

“For geological storage, we are minded to award business models of at least 15 years.”

“These revenue support contracts will be private law contracts between a hydrogen storage provider and a government-appointed counterparty.”

“We have tabled amendments in the Energy Bill to provide the Secretary of State with powers to designate a hydrogen storage counterparty by notice and to direct the counterparty to offer to enter into contracts.”

“Hydrogen storage contracts will be negotiated bilaterally between the department and prospective storage providers, rather than a price competitive process (e.g. via auctions).”

Downloads & Presentations

Please find below our recent presentations and downloads.

Department for Energy Security & Net Zero Paper

Hydrogen transport and storage networks pathway

Hydrogen transport and storage (T&S) infrastructure will be critical in supporting our low carbon hydrogen production ambitions by 2030. T&S connects producers with consumers and balances misalignment in supply and demand.

In line with our British Energy Security Strategy (BESS) commitments, the Department for Energy Security and Net Zero (DESNZ) is developing business models at pace to provide the support necessary to bring forward T&S infrastructure. Alongside that work we are assessing the growing evidence of emerging hydrogen T&S network needs to determine what infrastructure is needed, where, and when. As part of a wide-ranging consultation on T&S, government consulted on whether T&S infrastructure required strategic planning1.

In August 2023 we published our government response in which we set out our minded to position that there is a need for a degree of strategic planning, led by DESNZ in the interim with the Future System Operator (FSO)2 taking on strategic planning activities for hydrogen in due course. As part of that, we committed to publishing a ‘hydrogen networks pathway’ to set out the next steps in our vision for the strategic development of hydrogen T&S in the UK and the role of the FSO.

Strategic planning can provide greater certainty on network requirements both in the short and longer term. It can give clarity and confidence to potential consumers, producers and infrastructure projects, fuelling the growth of the hydrogen economy. It is also intended to inform the allocation of the hydrogen storage and transport business models.

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Department for Energy Security & Net Zero Paper

Hydrogen transport and storage infrastructure: minded to positions