Post - Blog
Enlit Africa 2024
Gavin Watson , Partner at Pillsbury Winthrop Shaw Pittman LLP
It is two years since the UK launched its hydrogen strategy, outlining the country’s ambition of 5GW of low carbon hydrogen production capacity by 2030 and laying bare a roadmap for hydrogen’s role in delivering on net zero by 2050. The 5GW target didn’t come without its critics, and so when the Government opted to double its target to 10GW last year, questions as to how exactly the country will deliver this scale of low-carbon hydrogen have only increased.
The hub and spoke model
Beyond the short-term financing mechanisms and policy frameworks required to consolidate hydrogen’s role in the energy transition, the UK would be remiss not to double down on infrastructural solutions for the delivery of low-carbon hydrogen. One such solution is the “hydrogen hub and spoke” model – a model combining economic free zone concepts (the hub) with critical national infrastructure thinking (the spoke) to cultivate the infrastructural and economic environment for hydrogen energy to take flight.
Straight to the source
The creation of a ‘green hub’ involves the concentration of green energy sources and solutions – in the case of a ‘hydrogen hub’ this could include hydrogen production, storage, power generation and/or storage of renewable power in hydrogen fuel cells some or all co-located in the same area.
By co-locating like-minded individuals and businesses from within the hydrogen sector in one geographic location, the hub can act as a centre for innovation – creating momentum for the development of new hydrogen technologies and products. The hub construct is dependent on access to a significant and reliable volume of hydrogen, particularly as this overcomes immediate barriers in transporting the energy source to the rest of the country. When choosing the location for a hydrogen hub, it is logical to look at existing low (or zero) carbon centres. In the case of hydrogen, targeting existing projects with carbon capture and hydrogen production infrastructure allows for the hub to evolve around an existing source.
Economic Free Zones
The success of a hydrogen hub to generate demand for the sector is dependent on the necessary financial incentives to attract innovators, developers, and other stakeholders to move to the site. The economic free zone concept offers a useful model for the Government to follow to nurture the right economic eco-system around the hub to maximise innovation and development potential. Under the economic free zone concept, a geographic area for the hub would be identified and a suitable package of economic benefits and inducements made available to businesses operating in the designated zone through appropriate legislation and regulation.
Typically, the founding legislation would also, in conjunction with implementing rules and regulations, seek to simplify the corporate set-up and registration requirements for the zone, reducing associated timeframes and costs, and where possible introduce real-estate incentives alongside financial and tax incentives to encourage innovation and R&D collaboration within the zone.
The government could also explore tax break options for businesses, in addition to credits for R&D expenditure on hydrogen as an additional stimulus for innovation. Rent subsidies (or holidays) offer a further measure to foster the necessary economic climate to draw in the individuals and businesses pioneering the transition. The economic zone is then built and curated to offer the optimal conditions to catalyse hydrogen innovation and technological development within the hub.
Diversifying the hydrogen use case
The hub model has the potential to generate major demand for hydrogen across a range of potential investors. Critical to this mission, however, is getting hydrogen to the point of offtake.
Investors in hydrogen production developments need to be convinced that the use case of the hydrogen produced is sufficiently robust if they are to fund the necessary scale of hydrogen production. There has been significant progress in near-term use cases in the conversion of hydrogen to ammonia given established fertilizer markets; its use for marine fuel markets; and in hydrogen fuel cells. Its potential in the aviation sector is already attracting investment, with Manchester airport presenting an exciting opportunity for development of the aviation use case and scope to develop a direct hydrogen pipeline (from a low carbon hydrogen production hub). The diversification of sectors benefiting from hydrogen is critical to boost near-term demand and is central to innovation. Near-term applications must be considered in tandem with future, longer-term hydrogen uses currently at incubator stage to generate demand.
From hub to spoke
The ‘spoke’ within the model is the infrastructure required to transport the energy source from the hub to demand centres. In the case of hydrogen, this could take the form of a pipeline to storage facilities at airports and public transportation nodes or direct to significant end user facilities (ammonia production, vessel bunkering locations, blending point and inlet for national gas grid).
The spoke is crucial if hydrogen’s role in the energy transition is to be realised and should be treated in the same way as ‘critical national infrastructure’ to benefit from the streamlined planning and permitting regime applicable to national critical infrastructure. As witnessed by some of the early cluster projects being developed in the UK, failure to designate hydrogen-related infrastructure as such is already causing investment and funding delay as developers contend with the vagaries of the UK planning system.
In a country frenzied by conflicting energy commitments, applying the hub and spoke model to the hydrogen sector offers the security in hydrogen delivery necessary to prevent demand-side uncertainty from stifling supply-side investment. By placing innovation and investment front and centre, through the creation of green, or low carbon, hubs located within economic free zones and coupled with designation of spoke infrastructure as national critical infrastructure, we might begin to feel more hopeful that at least some of the Government’s 10GW target can be achieved by 2030.