Why hydrogen? What role can it play in the UK reaching net zero by 2050?
DG: Hydrogen has the potential to replace natural gas in heating and industrial processes and petrol and diesel for hard-to-electrify transport. Domestic gas boilers can be shifted to hydrogen using the existing or an upgraded network to create a hydrogen grid. If that’s achieved, then hydrogen will play a significant role in achieving net zero. However, most hydrogen is made from natural gas and therefore this scenario is dependent on carbon capture and storage to deliver a low-carbon solution, known as blue hydrogen. Our analysis shows blue hydrogen is significantly cheaper than green, which uses renewable energy and electrolysis to produce hydrogen. But we are likely to need both to deliver net zero.
How can the cost of the technology be driven down?
DG: Innovation can drive the cost down, increasing efficiencies and the economics. Ultimately, we need to build at scale. The offshore wind sector is a success because it installed thousands of turbines and continually made the process more efficient each time with incremental innovation. The same is needed for hydrogen.
NP: Part of that falling cost has been the cost of capital. Investors are desperate to compete, therefore the capital ploughed into offshore wind is much cheaper now than it was at the beginning. Similarly, the cost of government and private sector borrowing for capital expenditure has never been lower and is likely to stay that way for the next few years.
Besides solid business and market frameworks, how else can the government incentivise investment in low-carbon infrastructure such as hydrogen?
DG: A possibility is a workable carbon tax. Some estimates suggest a carbon price needs to be as high as €200 a tonne to make projects economically viable under a net-zero environment. However, the current price would most likely shut down the UK’s steel and metal industry and make car manufacturers uncompetitive. Therefore, it’s important to manage that transition and to not lump costs on industries before they can afford them. Furthermore, penalising behaviours through increased taxes on consumption can often impact most those least able to afford it, so it’s important the process is carefully planned to ensure fairness and avoid an increase in fuel poverty.
Next year the UK will host the 2021 United Nations Climate Change Conference, or COP26. What effect could this have on hydrogen policy?
DG: The geopolitical environment on net zero is really coming together; there’s a real opportunity to make COP26 all about net zero. The government can create an economic backdrop to give the private sector the confidence to invest in hydrogen solutions in the same way everybody now accepts electric cars are the only way forward. We need to get hydrogen in the same position.
What’s the game-changer that’s going to make hydrogen and, in the longer term, net zero happen?
DG: Definitive decisions from government on what a net-zero UK will look like. This will then drive investment frameworks so the private sector can invest with confidence. The scale of the challenge requires the best of the public sector and private sector working and collaborating together. Step one is a political statement that people genuinely believe as the future. The ten-point plan is a good start, but the government needs to keep going and create the regulatory environment to shore up investor confidence and importantly deliver at a low cost of capital. If the government gets it right, the UK will be a very attractive destination for investors. We have the benefits of a sophisticated financial system, skills and expertise, and a very well respected, stable legal system to underpin investments and infrastructure. And we still have a government that has credit people will bank on. Therefore, if the government gets the policy environment right, for sure the investment will follow.
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Investing in hydrogen: Ready, set, net zero deloitte.co.uk/investinginhydrogen
Infrastructure for economic stimulus and achieving net zero by 2050
Governments grappling with containing and recovering economically from coronavirus must also plot a path to achieve net-zero emissions by 2050 to mitigate another great existential threat, climate change.
Confronted with the coronavirus recession and climate change, many governments have identified an obvious opportunity: invest in infrastructure to stimulate the economy and draw down greenhouse gas emissions. Yet a highly constrained public purse means to do this it is paramount to spend both strategically and wisely, as Deloitte outlines in its new report Infrastructure as an economic stimulus.
The UK government’s own, newly announced Ten Point Plan for a Green Industrial Revolution is, as it says, a huge opportunity to stimulate the economy and create jobs while decarbonising key sectors. The plan outlines infrastructure investments in hydrogen, electric vehicles, public transport, offshore wind, and carbon capture and storage. These investments will be backed by £100 billion of capital expenditure in the first year, a National Infrastructure Strategy and a new UK Infrastructure Bank.
However, as comprehensive as it is, the programme is only the first phase of what needs to be achieved and represents a mere fraction of the actual investment opportunity. Deloitte estimate the true level of financing needed to deliver the UK to net zero is around £1 trillion up to 2050.
Owing to the complexity of the challenge, government money alone will not suffice, private sector expenditure will also be pivotal. Yet, while the investment metrics for offshore wind and others are now well established and thus already attractive to investors, for less-established technologies it’s much more challenging. Therefore, it is essential for the government to outline clear market frameworks and compelling business models for these nascent technologies, such as low-carbon hydrogen, and carbon capture and storage.
To overcome the understandable capacity constraints within the civil service to deliver these frameworks, the government should invest in qualified and highly competent resources to expand capability, particularly within the respective departments, and utilise devolved governments to also drive the agenda. This will ensure it can create the right framework, with the right investment signals around retraining, skills development, resources and infrastructure, so the private sector can take up a chunk of the workload.
Deloitte’s framework for infrastructure investment can help every pound the government spends create returns of up to 2.7 times the initial outlay. Along with the new National Infrastructure Bank, implementing these methodologies will give the government a strong chance of succeeding in building back better, as it says, while cementing the pathway to net zero by 2050.
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