UK energy regulator Ofgem sets out role in building a hydrogen economy

UK gas and electricity sector regulator Ofgem has laid out its role in supporting the development of low-carbon hydrogen in the government's Green Industrial Revolution plan, focusing on hydrogen for heat, blending into the natural gas grid and the energy carrier's use in decarbonizing industrial clusters.

The UK government has targeted the growth of low-carbon hydrogen in its 10-point plan for a Green Industrial Revolution, published in November 2020.

Ofgem has identified three areas in which it will contribute to developing a low-carbon hydrogen infrastructure and economy in the UK, it said May 26, with work outlined for heating, gas grid blending and developing industrial clusters to meet government targets in the 10-point plan.

"Ofgem's powers come from the Gas Act, and it's interesting to note that hydrogen is included in the definition of gas," Ofgem's deputy director for gas networks price controls, Michael Wagner, said at the Westminster Energy, Environment & Transport Forum policy conference on growing the hydrogen economy in the UK.

"So what flows from that is that Ofgem would be the economic regulator for hydrogen," Wagner said. "But it's interesting to reflect on what is actually required, because it could range from a full regulatory model that's very much like the one that we have for gas at the moment or it could be something very much more limited."

Heating and blending

The government aims to begin heating trials in a "hydrogen neighborhood" by 2023, start trials in a "hydrogen village" by 2025, and conduct possible trials for a "hydrogen town" for 2030.

Ofgem will support feasibility and cost testing for using existing gas networks to transport hydrogen, Wagner said.

The regulator would also provide funding for network innovation, ensure consumer protection and provide licenses across networks and systems for trials.

The government has a 2023 target to complete testing required to allow up to a 20% hydrogen blend in the natural gas distribution grid.

Ofgem and the government would identify the developments in regulatory frameworks, codes and markets needed for blending 20% hydrogen with natural gas, Wagner said. The regulator is to also consider the system operation for blending hydrogen, and will support building an evidence base to inform a decision on blending, he said.

Here, too, Ofgem will have a focus on consumer protection.

"Blended hydrogen could impact all gas consumers and network users from day one" of a blended gas feed, Wagner said.

Industrial clusters

For the proposed decarbonization of industrial clusters, Ofgem would develop a hydrogen strategy with the government for the clusters, if a hydrogen network is involved. This would depend on whether infrastructure is developed to link the clusters, as regulation may not be needed if the hydrogen supply for a cluster was for a closed network, Wagner said.

"There's over 20 TWh of hydrogen production and distribution around industrial sites, and they're not regulated by Ofgem," he said. "There's no economic regulation of those. We're really looking to understand, what are the kind of commercial and regulatory frameworks that we need to develop covering hydrogen transportation, storage, shipping, metering and markets."

The government aims to have two hydrogen-powered industrial clusters in operation by the mid-2020s, with a further two in operation by 2030. It also has a target of 5 GW of low-carbon hydrogen production capacity by 2030.

Ofgem would also develop regulatory and commercial frameworks for hydrogen networks within the clusters, and consider regulatory changes that might be required to facilitate trials.

Ofgem has already provided funding for testing 100% hydrogen pipeline trials, including the H21 project in the north of England and the HyNTS/FutureGrid National Grid project to build a hydrogen test facility from decommissioned assets, and for the H100 hydrogen neighborhood Fife project.

It has also provided funding for the HyDeploy safety case and trial for 20% hydrogen blending on the distribution network, and is working with the UK government's Department for Business, Energy & Industrial Strategy and industry to identify potential barriers and changes required for a rollout, Wagner said.

Price controls

Ofgem said its RIIO-2 price control to ensure "the monopoly companies who own and operate our gas and electricity networks have enough revenue to run an efficient network that delivers what customers need" was adaptable to net-zero developments over the next five years.

"A key objective of RIIO-2 is to prepare network companies to deliver net-zero at the lowest cost to the consumer, while maintaining world-class levels of system reliability," Wagner said.

Ofgem was working with gas network companies on understanding upcoming net-zero projects, and RIIO-2 could fund hydrogen innovation trials for the gas network, he said.

Platts assessed the cost of producing hydrogen via alkaline electrolysis in the UK (including capex) at GBP4.67/kg ($6.62/kg) May 26. PEM electrolysis production was assessed at GBP5.77/kg, while blue hydrogen production by autothermal reforming was GBP1.74/kg (including capex and carbon).