UK walking into a trap with hydrogen levy: think tank
Think tank Onward is warning the UK government it would be a mistake to implement a levy on household energy bills to support the early hydrogen industry, Kallanish reports.
According to a research note signed by Jack Richardson, Onward’s head of energy and climate, if the government goes ahead with its plans, the bills for an average dual fuel household would go up by £118 ($147) per year. This would be “regressive and unfair” since households wouldn’t benefit from unlike renewables and insulation schemes, he says.
However, a hydrogen levy could also risk long-term investment by undermining public and political support for net zero. “It is also counterproductive to the government’s ambitions to have the lowest energy prices in Europe by 2035 and its efforts to tackle fuel poverty,” he adds.
A solution would lie in carbon pricing. By using revenue raised from the phase-out of free allowances in the UK Emissions Trading System (UK ETS) from 2026, the government can support hydrogen development without a burden on Treasury or domestic consumers. Onward calculates that the 10 gigawatts of low-carbon hydrogen production the UK is targeting by 2030 would cost £53 billion over 20 years. Financial support for the hydrogen industry would rise to £3.5 billion per year from 2030, according to the note.
Richardson argues that with carbon pricing, under three different scenarios, there could be little or no need for the Treasury to step in. His study shows that phasing free allowances out faster by 2028 or even 2027 would enable higher revenue raising to support heavy industries. He believes a carbon border adjustment mechanism (CBAM) and more generous capital allowances for net-zero infrastructure such as renewable farms, electrolysers and power transmission lines are key to reaching energy security and net-zero targets.
Another recommendation to support the development of a hydrogen market would be to allow hydrogen blending into the gas network, although ensuring this would be a “last resort” to producers.
The UK ETS currently provides free allowances to those sectors at risk of carbon leakage. Industries receiving the allowances will need to buy fewer allowances to cover their emissions, reducing their carbon price. It’s also possible for heavy industries to sell their allowances on the secondary market and make a profit.
The government expects that from 2025 “at the latest” all revenue support for low-carbon hydrogen production will be levy funded. It adds: “as policy development on the levy is ongoing, with a number of key decisions still pending, there is uncertainty regarding the precise impact of the levy on consumer bills.”
Around £1 billion is available to fund carbon capture and storage infrastructure, needed to produce blue hydrogen, and £240 million under the Net Zero Hydrogen Fund to kickstart the hydrogen economy in the early 2020s. The latter provides upfront cost support, stimulating private sector investment and developing a project pipeline needed to deliver hydrogen at scale by 2030, the government says. A further £26m is available through the Industrial Hydrogen Accelerator funding scheme.
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