Green Hydrogen to Increase Gas Bills – Watts Up With That?

From David Turver’s Substack EIGEN VALUES

David Turver

We have covered in earlier articles how the UK has the highest electricity prices in the developed world and very high gas prices compared to international competitors like the US and Canada.

The problem of high energy prices has become mainstream with even the Energy Security and Net Zero Select Committee in Parliament launching inquiry into high energy costs. [Note that I have submitted written evidence to the inquiry, but cannot publish it until they have, so watch this space]. Readers will be dismayed to learn that the Government is now consulting on its latest cunning wheeze to further increase our energy bills by charging the cost of their cherished green hydrogen plans to our gas bills using the Gas Shipper Obligation (GSO).

Of course, hydrogen is a colourless and odourless gas, but hydrogen is assigned different colours according to the method of production. We covered the hydrogen rainbow in an earlier article. Green hydrogen is produced by electrolysis powered by renewables like wind and solar. Blue hydrogen is produced from natural gas and the resulting carbon dioxide emissions are captured and stored.

The last Conservative Government launched its hydrogen delivery roadmap back in December 2023. This called for “up to” 10GW of hydrogen production capacity by 2030 made up of 6GW of green hydrogen and 4GW of blue hydrogen.

The first tranche of this capacity was also announced in December 2023, with 11 projects totalling 0.125GW of capacity being announced in the first hydrogen allocation round (HAR1) at a strike price of £175/MWh (in 2012 prices) or about £244/MWh in 2024 money. By way of comparison, today’s elevated gas price is ~99p/therm or £34/MWh. Green hydrogen will cost about seven times the current UK gas price or ~23 times US gas prices. The Government gleefully announced that these projects would receive over £2bn of revenue support from the Hydrogen Production Business Model (HPBM). The 125MW of contracts awarded in HAR1 is only the tip of the iceberg though because HAR2 is aiming to support seven times that with 875MW of capacity under consideration.

In 2023, then energy secretary Grant Shapps appeared to rule out paying for this very expensive hydrogen though energy bills. But now, the new Government, with Ed Miliband at the helm of DESNZ has launched a consultation on what they term the Gas Shipper Obligation (GSO) to fund the HPBM.

The Government estimates the cost of HAR1 projects funded by the GSO will add £2.60-£4.50 per annum to domestic gas bills from 2028 to 2037. Industrial gas users can expect their gas bills to go up by 2%.

If we scale this up to cover the ambitions of HAR2 as well, then that could add £20.80-£36 to our gas bills and 16% to that of industrial users. If they are mad enough to deliver the whole 6GW of green hydrogen, then the cost to domestic consumers could be a whopping £124.8-£216 per year and industrial users could see their gas costs almost double.

Of course, there will be a complex system put in place to manage this new charge with attendant administrator which will also increase costs and complexity.Upgrade to paid

In the consultation, the Government raises the prospect of exemptions from the GSO charge, but it is clearly unwilling to grant exemptions for some users because then the charge will have to be spread over fewer users pushing up bills for those people even further. The only exemption they appear to be keen on is for gas used to produce blue hydrogen. They are concerned that pushing up the cost of the feedstock for blue hydrogen will make it uncompetitive.

This means that costs for gas-fired electricity generation will go up too, pushing up our electricity bills as well as our gas bills. Interestingly, they do not discuss the possibility of an exemption for gas-fired electricity with carbon capture and storage (CCUS), so even that form of electricity will cost more too.

The introduction to the consultation reads as though it was written by an Extinction Rebellion activist and probably was because one of Miliband’s SPADs was once the coordinator of their legal strategy team. They wax lyrical about fixing the non-existent climate and nature crisis and what a huge opportunity it is to transition to a low-carbon energy system. They even claim to be tackling the cost-of-living crisis, even though the consultation admits that these proposals will increase our energy bills.

We can perhaps look at the latest missive from the Climate Change Committee to get closer to the truth. As Figure 1 shows, they want to reduce the ratio of electricity to gas prices. They can do this by pushing up the price of gas and of course this proposal does exactly that.

However, there are lots of reasons not to do this, not least the collapse of many green hydrogen projects across the world. For instance, the Aurora Green Hydrogen project in Norway was terminated in 2022, citing lack of demand. McPhy’s green hydrogen project in Central Europe was abandoned just seven days after it was announced after the customer withdrew last autumn. Earlier this month, BP withdrew from the HyGreen project as part of its strategic repositioning. Hygreen was supposed to deliver a 500MW plant on Teesside when fully operational. Interestingly, BP’s 1.2GW H2Teesside blue hydrogen project appears to be still going ahead.

In addition, the CCC ruled out hydrogen for home heating and surface transport in its latest Carbon Budget. They also see only a very small role for hydrogen in electricity generation in line with the NESO Clean Power 2030 plan. Industry is not going to volunteer to use hydrogen when there are much cheaper alternatives. It seems the Government expects the market for this extremely expensive hydrogen to bootstrap itself into existence.

We already have the highest electricity prices in the developed world and UK and European gas prices are many times higher than those in the US and Canada. We simply cannot afford any more whacky projects that push up energy costs even more. In fact we should be going in the opposite direction and declaring an energy emergency to bring energy costs down.

The green hydrogen market is collapsing, because nobody wants to use such expensive fuel when natural gas is a much cheaper source of heat or electricity. Yet our Government is still pressing on with its ideological Soviet-style five-year target for a product with no market and wants us to pay for it.

We cannot afford such flights of fancy and need to change course on energy policy now. The focus should be on cheap and abundant energy to save what remains of our industry from total destruction and give relief to families struggling with energy bills.

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