Why UKEN Storage

Why Hydrogen

Hydrogen can support the decarbonisation of the UK economy, particularly in ‘hard to electrify’ UK industrial sectors, and can provide greener, flexible energy across power, transport and potentially heat. Hydrogen produced in the UK could create thousands of jobs across the country, and provide greater domestic energy security, lowering our reliance on energy imports. Analysis by the department for Carbon Budget 6 suggests 250-460TWh of hydrogen could be needed in 20501, making up 20-35 per cent of UK final energy consumption.

British Energy Security Strategy (BESS) government doubled its ambition to build up to 10GW of new low carbon hydrogen production capacity by 2030.

Hydrogen transport and storage infrastructure will be critical to enabling this 10GW ambition, and the related economic benefits. It will connect producers with consumers, and balance misalignment in supply and demand. However, lengthy development lead times, high capital costs and uncertain financial investment returns in a nascent market means this infrastructure is unlikely to materialise without a supportive policy framework.

We propose 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’.

We consider the model best delivered through a private law contract lasting at least 15 years.

Hydrogen storage infrastructure

Why we need storage 

Hydrogen storage will play a vital role in the hydrogen economy and wider energy system.

As the hydrogen economy develops, there will be times when the supply of hydrogen will not align with demand from offtakers which will result in periods of a surplus or scarcity of hydrogen, creating security of supply risks. Storage infrastructure will be key to address imbalances in hydrogen production and demand.

We consider hydrogen storage to be required for the following roles:

  • Managing within-day network balancing when there is a mismatch between entry and exit volumes in hydrogen networks.
  • Allowing hydrogen producers to better manage the demand and production mismatch, particularly for electrolytic producers, and energy security more broadly as hydrogen becomes more important in the wider energy system.
  • Supporting decarbonisation of the power system and the 2035 net zero power target through avoiding curtailment of renewables via electrolytic hydrogen production and hydrogen-fuelled power generation.
  • Potentially reducing overall hydrogen production capacity requirements by maximising supply and allowing production facilities to optimise their output.

Overall strategic objective 

Our overall strategic objective is to ensure hydrogen storage infrastructure, as a part of wider system architecture, is available to meet the needs of users in the emerging hydrogen economy.

The business model needs to be available to deliver revenue certainty to prospective storage providers as soon as possible to enable final investment decisions to be taken promptly on projects which are low regrets and/or those considered to be of strategic importance.

These include, for example, projects that provide critical resilience and confidence to producers and offtakers in and around industrial regions.

Delays to the business model could result in delays to the delivery of critical infrastructure which could threaten government’s ambition to have 10GW of low carbon production capacity by 2030, and ultimately our net zero target.

We recognise the role of hydrogen storage and the barriers facing prospective storage providers. It is therefore important the business model design enables the necessary early investments in hydrogen storage infrastructure.

Future of the hydrogen storage market 

Our aim is to establish a self-sustaining market for hydrogen storage. We expect this market to have several competing firms. This is because:

  • 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
  • Storage does not have all the characteristics of a natural monopoly 10 Our vision of a competitive market informs our approach to the design of the business model.

We need to de-risk investment in hydrogen storage facilities as soon as possible. We are therefore designing a business model that is compatible with a range of options for the future market framework for hydrogen storage, and which can secure investment in storage facilities notwithstanding the current uncertainties about that market framework.

Interaction between transport and storage

Hydrogen transport and storage will interact with and depend on each other in several ways. Transport infrastructure such as networks will connect storage facilities with storage users such as hydrogen producers and offtakers (see figure 3.1). Storage facilities will help to balance supply and demand for hydrogen gas on networks. Ensuring the development of

For example, in National Grid’s Future Energy Scenarios 2022, the “consumer transformation” scenario entails annual storage of at least 11TWh of hydrogen by 2050.

Users of hydrogen storage

The key market barrier that developers and investors face is demand risk. This is the risk that the facility is not able to raise enough revenue from sales to storage users to cover its costs (either due to low volumes of sales, or low prices, or both). This means that in the absence of government intervention it is unlikely storage developers would choose to invest in hydrogen storage facilities. Whilst the Net Zero Hydrogen Fund (NZHF) and Hydrogen Production Business Model (HPBM) offer some early investment support with the cost of limited hydrogen storage where it is linked to production projects, this is not sufficient to bring forward investment in geological storage which we expect will be required within the next ten years and beyond.

Geological storage 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.

Needs of the main parties 

Storage providers and their investors need:

  • Confidence that proposed storage facilities will generate sufficient revenue in order for final investment decisions to be made.
  • Visibility and predictability of returns on capital invested to justify investment.
  • Ability to price competitively to attract a variety of users.

 

Government needs:

  • To ensure allocation of support is provided to the projects which maximise the benefits of hydrogen production and align with our strategic objectives.
  • To ensure the right duration of support to trigger investment and establish a self- sustaining market
  • To ensure security of supply to enable the development of the hydrogen economy and its role in the wider energy system.
  • To ensure the development of hydrogen storage supports broader energy security objectives of government.

The cavern will be built 2,400m (approx. 1.5 miles) below ground level

Key risks and how they will be allocated 

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 (volume risk) and/or low prices (price risk).

Demand risk is different insofar as it 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.

Risks relating to hydrogen storage projects 

RISKDESCRIPTIONALLOCATION
Demand risk, including volume riskRisk that the facility is not able to raise enought revenue from sales to storage users to cover its cost, due to low volumes of sales (volume risk) and/or low prices (price risk)The subsidy provider will provide a large degree of protection against demand risk, sufficient to de-risk investment in the facility. The operator will still have an incentive to raise as much revenue from users as possible.
Change in law, policy or regulatory framework riskRisk that any change in law, policy or regulation impacts use of hydrogen storageSince the subsidy provider will be providing protection against volume risk, the storage facility will be protected to an extent from changes in law, policy and regulation that impact the use of hydrogen storage, e.g. changes that accelerate or decelerate the build-out of hydrogen production plant.
Beyond this, we will consider whether it is necessary for the business model to include any additional provisions to protect the storage facility from certain unforeseeable and material changes.

Recipient of support 

Our minded to position is for storage providers to be the target of business model support. This is in line with our design principles that the business model should be investable, and that it should provide value for money for government. Storage providers need financial reassurance before taking on the upfront capital expenditure and investment costs.

Description of geological storage 

FACTOREXPLANATION
DescriptionUnderground storage in specific geological formations which have been
engineered to store hydrogen such as salt caverns
Technology readinessOnshore salt caverns are currently considered most mature for hydrogen
storage (they are already used for natural gas storage) and have been
demonstrated in Teesside.
QualitiesSalt caverns, depleted gas fields and aquifers have the potential to store
large volumes of hydrogen over a long duration with limited loss of gas
DemandFaces demand uncertainty due to the large capacity and reliance on a variety of users to utilise the capacity.
Existing supportNo existing support.
Government support will be necessary for projects to take final investment decisions whilst the hydrogen economy is nascent.

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 since it can provide greater storage capacity at lowest cost of the options available and best support energy security. This type of storage is unlikely to be built without government support.

As part of our work on allocation criteria (see section 7, allocation of support), we plan to set out a mandatory TRL that projects must meet to be eligible for storage business model support.

Description of geological storage 

Table 3.6 below outlines our view of the use cases which could emerge with the development of the hydrogen storage economy. The use cases are not mutually exclusive, and we acknowledge a storage facility could provide multiple. The list may not be exhaustive and may be subject to change but represents our work to date.

As part of the development of allocation criteria, government may choose to distinguish between projects on the basis of intended use case (see section 7, allocation of support). This is unlikely to affect initial allocation round(s), since early allocation will be limited by the number of projects coming forward. Stakeholders will be consulted before any final decisions are made.

Description of geological storage 

USE CASEBENEFIT TO THE HYDROGEN ECONOMYORGANSISATIONAL BENEFICIARYOFF TAKING BENEFICIARYSTORAGE TYPESSTORAGE PROFILETIMING
Strategic ReservesTo provide security of supply and insuranceH2 transmission network operator, government regulator (Ofgem)H2 to power, H2 for heatGeological storageMonthly, seasonalMay be needed over the longer-term
Operating source/sink for unplanned supply and demand changesTo provide storage during irregular weatherIntermittent renewable power generators, electrolytic/CCUS-enabled H2 producers, national gridH2 to power, industrial sectorGeological storage, above-ground storage & linepackIntraday, daily, weekly, can require fast cycling and high volumesNeeded in the near-term
Operating source/sink for planned supply and demand changesTo balance network pressureH2 transmission network operator, H2 shippers, H2 suppliersAny transmission system off taker (transport industrial, etc).Geological storage, above-ground storage & linepackIntradayNeeded in the near-term

Number of business models 

We believe it possible to design only one business model by our 2025 target, since this is already a challenging timeline.

On the basis of this assessment, we are minded to design a single business model for hydrogen storage.

Geographical coverage 

Our intention is for the storage business model to be UK-wide. The development of hydrogen storage infrastructure represents the critical next step in the growth of the hydrogen economy across the United Kingdom.

To meet government’s ambition of up to 10GW of hydrogen by 2030 will require not just hydrogen production, but also transport and storage infrastructure to be in place.

Storage will provide these end users with confidence that the supply of hydrogen is reliable and resilient to risk of outages in production or periods of particularly high demand.

In this regard, a well-developed hydrogen transport and storage network could be especially valuable for wider energy system resilience and security through enabling ‘excess’ renewable electricity – produced at times of high wind or solar generation but low demand – to be used to produce hydrogen. This hydrogen can then be stored over time and be converted back into electricity at times of low generation and high demand or used to decarbonise sectors of the economy such as heavy transport or energy-intensive industry.

The hydrogen storage business model applying UK-wide is subject to the relevant legislative processes as part of the Energy Bill’s passage through Parliament.

Commercial Design

Solution to demand risk: Revenue Floor

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

A revenue floor would be a minimum amount of revenue the facility is due, regardless of the extent to which the facility is used. It should be noted that this minimum would however still be subject to other conditions being met, including but not limited to the facility being available for use.

If the facility is not used at all, and therefore no revenue is earned from users, a subsidy provider would pay enough subsidy to the facility to ensure their total revenue equals the revenue floor. If the facility is used and therefore receives revenue from users, less subsidy revenue would be required to keep the facility’s total revenue above the floor.

Demand for storage is likely to follow annual cycles so our current expectation is that the floor would probably be defined in terms of an annual minimum revenue. An annual minimum revenue could be paid in several instalments each year.

What the Floor Will Cover

What the floor will cover The sum of 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 relatively low return on capital investment. The low return would be commensurate with the fact that the facility is taking relatively little risk, given that the floor provides extensive protection against demand risk.

By setting the floor at this level, we would ensure that the business model is investable, and the facility is highly likely to remain operational for the duration of the agreement, notwithstanding demand uncertainty.

User revenue and incentive for sales 

We want storage facilities to have an incentive to maximise the revenue they earn from users, just as firms in an efficient market would typically engage in revenue-maximising behaviour.

The net effect is that storage facilities will have greater total revenue if they are able to generate more user revenue (figure 3.2). This provides an incentive to achieve sales to users, and by extension will focus the facility developer/owner on the needs of users. The magnitude of the incentive for achieving sales to users will require careful consideration and be subject to affordability constraints and value for money.

A solution to this is to link the amount of subsidy revenue to the amount of user revenue as we have set out above.

Incentive for availability 

There will be an incentive for ensuring the facility is available for use.23 This could take the form of an availability factor: for example, the business model could include a provision that the facility should be available for 95% of each year, and if actual availability falls short of this factor, subsidy revenue would be reduced, for example through reduction of the floor 23 The more the facility falls short of the availability factor, the greater the reduction in subsidy revenue we would apply, according to an agreed formula.

In this context, we would consider a facility to be “available for use” if it was operational and capable of providing storage services to users. If the facility was full to capacity with hydrogen gas, we would still consider it to be “available” as long as it was capable of providing withdrawal. 24 The figure given here for the availability factor (i.e. 95%) is purely illustrative. The actual availability factor might be higher or lower than this. In the natural gas sector, some underground storage facilities achieve availability rates of 95% or greater, but we are mindful that hydrogen storage may be subject to different engineering or regulatory constraints than natural gas storage.

Incentive for being built on time 

It is important for us to ensure the facility is built on time, i.e. at the time we and the developer plan on it being built by when the contract is signed, so that it can serve relevant users who may be reliant on it. We are therefore minded to apply a target commissioning window, which is a mechanism we have successfully used for previous energy infrastructure projects and has been accepted by investors. The target commissioning window would likely depend upon the technology employed by the facility.

Upside

We are minded to include a mechanism that gives the subsidy provider a share of “upside” demand risk, i.e. a mechanism that ensures that if user revenues are particularly high, the facility must make payments to the subsidy provider (reversing the typical flow of payments).

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

If returns are disproportionately high, it is only fair that a portion of these should be returned to the party that was instrumental in making them possible, i.e. the subsidy provider.

There are various options for how we might participate in upside, including:

  • A cap on revenue: if revenues exceed the cap, any excess must be given to the subsidy provider.
  • A gainshare arrangement: the facility must share a portion of its revenues (or net revenues) with the subsidy provider. Gainshare could be applicable only to revenues/profits above a certain level. The proportion shared with the subsidy provider could increase as the level of revenue/profit increases.
  • As an addition to either of the above arrangements, the facility could have the option of making a lump-sum payment to the subsidy provider to terminate the contract early (and thereby disapply any revenue cap or gainshare arrangement).
  • Government could take an equity stake in exchange for awarding a business model and therefore receive a portion of profits via dividends and/or increases in the value of its shares.

We have not decided which of these mechanisms we would use, and it would be possible for us to use a combination.

Duration of support

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

A duration of at least 15 years would make it very likely we support some of the first storage facilities through a number of years where their utilisation could be relatively low.

Capital repayment profile 

We are considering sculpting the profile of capital repayment that the business model provides: the level of the revenue floor does not necessarily have to be the same every year; it could be somewhat higher in earlier years and provide for a more front-loaded profile of capital repayment.

Delivery mechanism 

However, we consider that the most suitable delivery mechanism for our purposes is private law contracts because they can be implemented relatively quickly and give us enough flexibility to support a range of projects.

Using private law contracts means creating bilateral contracts between a storage provider and the government (or a counterparty nominated by the government). As with any contract, these agreements would be legally binding and subject to contract law. They would likely be signed before construction of the asset.

Delivery mechanism 

Industry, and specifically prospective developers have set out that they need a high degree of certainty as to future revenue, but not necessarily for that revenue to be determined by an economic regulator rather than agreed as part of a contract. An appropriately designed private law contract is just as capable of providing a high degree of revenue certainty as a regulated revenue model, and therefore we believe it is capable of meeting the needs of developers and investors.

Counterparty

Our business model will be supported by an external subsidy mechanism, which itself will be delivered through revenue support contracts. These revenue support contracts will be private law contracts between a hydrogen storage provider and a government-appointed counterparty. The government-appointed counterparty will manage the contracts and act as a conduit for subsidy funding.

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. The amendments will allow an operationally independent counterparty to manage the revenue support contracts, whilst allowing the Secretary of State to oversee the contractual process.

Commercial Context

Ownership and unbundling 

We are aware of several prospective geological storage projects and we have been engaging with the companies involved with these. They include companies from the upstream oil and gas sector, the chemicals sector, and the natural gas storage sector. In future, geological hydrogen storage may be owned and operated by companies like these, among others.

Although we welcome investment in storage from companies that have other interests in the energy sector, we may create rules to ensure the operational independence of geological storage facilities from some of those other interests. We note that similar rules exist in the natural gas storage sector today, although we would not necessarily replicate them exactly for hydrogen storage.

Some stakeholders suggested regulated network infrastructure companies should make capital investments in geological storage facilities using their regulated revenues. We are minded not to permit this: our aim is to create a competitive market for storage, and we consider giving control of facilities to regulated monopoly companies would not be an effective way of doing this, and could also create conflicts of interest. Networks might, however, pay for the use of storage facilities, like other users.

Users and charging structure 

Users would likely provide storage facilities with:

  • payment for the option to use storage capacity;
  • payment for the options to use injection and withdrawal capacity;
  • usage fees, paid when these options were taken up, reflecting the operating costs of using the storage.

This would ensure that user fees reflect the structure of costs facilities face.

Pricing

Ultimately our intention is that storage pricing should, as far as possible, be driven by supply and demand in a competitive market and tend to reflect the long-run marginal costs of storage facilities, so that facilities make a fair return on investment and private investment will be forthcoming when new facilities are required.

The aim of the business model is not to lower the price of storage (although it is likely to have at least a marginal effect on prices, by reducing the cost of capital); it is to ensure that investment in facilities is unlocked. Accordingly, the design of the model incentivises facilities to maximise the revenue they recover from users, including through pricing.

We intend to examine further how the price of storage might be set and change over time, and how operators might charge for their services, in light of the factors listed above and the interaction between revenue from storage users and revenue from the business model (including the revenue floor and the sales incentive). Our current view is that the price of hydrogen storage is difficult to forecast (like many other prices in the energy market), and one of the benefits of the revenue floor is that it will provide significant protection against price risk for storage operators.

Protecting users of storage 

We want to unlock investment in storage because we consider it to be critical for growing the hydrogen economy by providing a vital service to the users that rely on it.

We are exploring what steps we should take to ensure this will be the case, especially early on when limited amounts of geological storage will be available.

It is possible that we may act to promote the interests of storage users by attaching conditions to the hydrogen storage business model that help to ensure storage will be available and affordable for users. Another possibility would be to use legislation and regulation as the means of implementing such rules. At this time, we are open-minded as to whether we would use legislation/regulation, conditions attached to the business model, or both. Any such conditions or rules would only be imposed if we decided they were a necessary and proportionate means of protecting users. We would not attach any conditions that jeopardise investment in storage, given that it is in the interests of users for storage to be built.

This might be appropriate if we thought that storage providers were likely to have significant market power throughout their lifetime, but our current assessment is that this is not the case – we expect a competitive market to emerge. Therefore, we think economic regulation would be a disproportionate approach.

Protecting users of storage 

We want to unlock investment in storage because we consider it to be critical for growing the hydrogen economy by providing a vital service to the users that rely on it.

We are exploring what steps we should take to ensure this will be the case, especially early on when limited amounts of geological storage will be available.

It is possible that we may act to promote the interests of storage users by attaching conditions to the hydrogen storage business model that help to ensure storage will be available and affordable for users. Another possibility would be to use legislation and regulation as the means of implementing such rules. At this time, we are open-minded as to whether we would use legislation/regulation, conditions attached to the business model, or both. Any such conditions or rules would only be imposed if we decided they were a necessary and proportionate means of protecting users. We would not attach any conditions that jeopardise investment in storage, given that it is in the interests of users for storage to be built.

This might be appropriate if we thought that storage providers were likely to have significant market power throughout their lifetime, but our current assessment is that this is not the case – we expect a competitive market to emerge. Therefore, we think economic regulation would be a disproportionate approach.

Funding the business model 

We are seeking powers to enable the external subsidy mechanism to be funded by both Exchequer funding and levy funding, with the decision to be made in the future.

The Energy Bill already included powers to allow the business model to be funded via Exchequer funding. However, to provide the option to fund the external subsidy mechanism via a levy, we have tabled amendments to the Energy Bill to enable the establishment of a levy. For clarity, the powers we have sought expand levy powers which existed in the original draft of the Energy Bill to fund the cost of hydrogen production contracts. The amendments we have tabled include provision for storage within the scope of these hydrogen levy provisions.

The rules are set out in sections 8R (independence of storage facilities) and 19B (Acquisition of rights to use storage facilities) of the Gas Act 1986, and in Ofgem guidance pursuant to those legislative provisions. Gas storage facilities can apply to Ofgem for exemptions from these rules if they are “minor facilities,” i.e. facilities that are not technically or economically necessary for the functioning of the gas market. We intend to do further work to consider how these rules might be interpreted in the context of the hydrogen market and whether they would be appropriate.

Allocation of support 

We anticipate that hydrogen storage contracts will be negotiated bilaterally between the department and prospective storage providers, rather than a price competitive process (e.g. via auctions). This is primarily due to the relatively small number of storage projects we expect to come forward.

The minded to positions set out in this document provide a starting point for storage providers to understand which types of projects will be eligible for the first awards of the storage business model.

The next level of detail will be how we envisage contracts being allocated to prospective storage developers which we will set out through allocation criteria that will be developed in parallel with the development of the storage business model contract. Allocation criteria will provide more clarity to market participants about the evidence they will need to provide to gain government support.

A number of topics raised in this document will be addressed further through our work on allocation criteria. These include but are not limited to:

  • Use cases of hydrogen storage – we will decide whether to distinguish between projects based on use case, and if so, which use cases will be supported.
  • A minimum technology readiness level will be set to ensure government supports projects that are technologically viable and ready for commercial scale deployment.
  • Location – we will decide whether and how to prioritise allocation based on location of a project, including proposed hydrogen transport links with the surrounding network
  • Projected users / demand – facilities will need to be able to demonstrate reasonable likelihood of demand emerging for their storage facility. We will decide whether and how to prioritise allocation based on the projected users of a storage facility and any agreements storage facilities have been able to secure with members of their surrounding network.

We envisage a coordinated allocation process with the hydrogen transport business model to ensure that hydrogen networks develop in a cohesive way. Strategic planning will play a role in how support is allocated, and we expect the Future System Operator will take on a role in strategic planning activities for hydrogen, at an appropriate time following its establishment. We set out our initial view and next steps on strategic planning in chapter 4.

We aim to set out further details on how the hydrogen storage contract will be allocated in by the end of 2023 as part of the hydrogen networks pathway.

Support for expansion of facilities over time

There may be an economic case for building some storage facilities in stages. For example, in the case of a storage site comprising several caverns, the developer might take the following approach:

  • In the first stage, five caverns are built, along with the necessary above-ground infrastructure to mine and operate those caverns.
  • In the second stage, three additional caverns are built. These can be mined and operated using the above-ground infrastructure that was built in the first stage, thereby saving costs. However, this requires that the above-ground infrastructure built to operate the caverns from the first stage must be somewhat larger than it would otherwise need to be.

Building storage sites in stages like this allows facilities to benefit from economies of scale (i.e. the re-use/sharing of the above-ground infrastructure across the various caverns), while limiting the extent to which assets are under-used due to being constructed too far in advance of demand.

If we did support multi-staged facilities, we are minded to not start remunerating the developer for latter stages of the facility until they have been constructed. This will remove the risk of us paying for assets that are never actually delivered and improves value for money by deferring subsidy costs. We would implement this in the following way:

  • A single contract signed prior to construction of the first stage would set out terms for both stages of the build.
  • After the first stage was built, the floor would cover the fixed costs associated with all the infrastructure built at this stage, i.e. the initial set of caverns and all of the above ground infrastructure.
  • If the second stage is built, the floor would rise, to provide coverage of the fixed costs (plus a return) associated with the caverns and any other infrastructure built in that stage. In calculating the increase in the floor, we would take into account that the second set of caverns will use above-ground infrastructure that has already been subsidised.

Next steps 

We intend to provide regular updates to stakeholders on our progress, with an update planned for publication by the end of 2023.

We have tabled amendments in the Energy Bill to enable the hydrogen storage business model. Given the contractual nature of the business model, these powers will enable government to designate and direct a counterparty to manage hydrogen storage business model contracts, and, subject to further design of the business model and consultation, enable the potential funding of the hydrogen storage business model via levy.

We are planning to make revenue support regulations to define who will be eligible to enter into hydrogen storage revenue support contracts.

We continue to believe that the barrier to investment the business model must address is demand risk, including volume risk.

Because of this demand risk, in the absence of government intervention, investors are extremely unlikely to invest money in geological storage facilities on the timescale that we need them to.

It is estimated that salt caverns purpose built for storage build time of 5-10 years and converted salt caverns have a build time between 3-5 years; the Hydrogen Production costs report assumes a three-year build time for hydrogen production plants, see: https://www.gov.uk/government/publications/hydrogen-production-costs-2021 .

Price risk

Our consultation document emphasised the issue of volume risk, i.e. uncertainty about the volume of storage services users will demand. Another aspect of demand risk is price risk, i.e. uncertainty about the prices storage services users will pay. Although we have focussed on volume risk in order to narrow down our options for the business model, we note that the option we are minded to adopt (a revenue floor) would provide protection against price risk as well as volume risk.

Typical costs of a geological storage facility.

Geological storage facilities are capital-intensive. Even relatively small salt cavern sites are likely to have capital costs in excess of £100m and larger sites (comprising many salt caverns) may cost several times this amount. Depleted gas fields or aquifers may be larger still and could have capital costs greater than £1bn.

Strategic planning 

The Need for Strategic Planning

Hydrogen transport and storage infrastructure will be essential to the development of the hydrogen economy, linking hydrogen production with demand to drive forward decarbonisation. Hydrogen networks infrastructure is both dependent on and essential to enable hydrogen production and demand.

Subject to the timings of the Energy Bill and other factors, the FSO is anticipated to become operational in 2024.

Early Strategic Planning

The Role of Government in Interim Strategic Planning

We believe it is necessary for government, working closely with Ofgem and industry, to take a leading role in providing early strategic direction for the build-out of hydrogen T&S infrastructure. As discussed in earlier chapters, there will be complex trade-offs when considering the nature, scale and timing of projects to be supported through the business models, and we think government will be better placed to address these trade-offs in the early stages. We expect the strategic coherence of early projects to be intimately tied to government decisions on the hydrogen production business model allocation rounds, as well as wider decisions on CCUS cluster sequencing.

Eligibility for allocation will be informed by the strategic importance of an asset’s contribution to the hydrogen economy and the wider energy system, as well as other criteria, such as deliverability and value for money. In the consultation, we set out a three-lens assessment to determine projects’ strategic importance: does the asset meet a known immediate or future need, can it play a market building or capacity enabling role, and does it provide wider benefits to the energy system as a whole.

To assess the immediate need for an asset, considerations might include:

  • Whether the asset is linked to confirmed current or future hydrogen production.
  • Whether the asset is providing services to one or more credible hydrogen demand sources.

 

To assess the market building potential of an asset, considerations might include:

  • Whether the asset is futureproofed, through either oversizing or scalability, to meet and/or act as an enabler for a range of future production/demand scenarios.
  • The extent to which an asset opens up new growth avenues for the hydrogen economy, by connecting or servicing potential demand or production types.

 

To assess the wider systemic benefits of an asset, considerations might include:

  • Decarbonisation potential of an asset that enables additional or timely fuel switching of carbon intensive demand.
  • The contribution an asset is expected to make to energy security or system resilience, by balancing misalignment between entry and exit volumes, or providing redundancy.
  • The extent to which an asset can alleviate or mitigate wider system constraints, both across energy and potentially beyond, especially those that are costly or otherwise damaging.

Non-economic regulation 

Alongside this and in line with stakeholder comments received, government considers the issue of leakage and potential fugitive hydrogen to be important. Now that a Global Warming Potential for hydrogen has been identified, the department will continue to collaborate with other government departments, UK specialists and the National Physical Laboratory (NPL) to develop more reliable estimates of GB fugitive emissions, identify their impacts and increase our capability to detect, measure and quantify hydrogen emissions in a more systematic way, and ensure this is suitably reflected in applicable standards and regulations.