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Momentum building for the United Kingdom to lead carbon capture and hydrogen fuel development

Climate change commitments from governments and businesses to reach net-zero carbon emissions by 2050 are intensifying interest in new sources of renewable energy and advanced technologies that could help reduce, remove, or capture carbon emissions in hard-to-abate sectors.
Alastair Hamilton

Leads McKinsey’s net-zero work in the United Kingdom and supports clients in the public and private sectors to build new green businesses

Among a range of new technologies, two possible approaches gaining attention include carbon capture, use, and storage (CCUS) and hydrogen fuel. CCUS technologies capture CO2 for use in valuable products or services, or for permanent storage in deep geological formations. Hydrogen, when produced from low-carbon methods, can be used as fuel or feedstock to decarbonize home heating, transport, and industrial processes. It has the advantage of being nontoxic to the environment and, as a chemical energy vector, can be transported in bulk and stored over long periods of time.

A team of UK-based McKinsey consultants and experts attended the third annual UK CCUS and Hydrogen Decarbonisation Summit in early May in Birmingham, where they reported a renewed sense of optimism for the industry-led energy transition in the United Kingdom. It was well recognised that several complexities inherent to the scale of such a transition remain unresolved, but progress in three major areas encouraged delegates to enthusiastically share their plans for action. The McKinsey team explain what these three areas are:

Critical policy support to bring economic viability to hydrogen and carbon-capture technologies will be in place by the end of 2022

Government guidance helps investors and industry leaders find and raise the required funds needed to proceed with projects at scale.

Will Lochhead from the Department for Business Energy & Industrial Strategy (BEIS) emphasised the United Kingdom’s ambitions for the sector.

  • Two industrial clusters were selected by BEIS for development in October last year: the HyNet and East Coast Clusters . The Scottish Cluster has been selected as the reserve cluster. These clusters create focal points for industry leaders to collaborate, build capabilities, and generate investment.
  • Business models, which will detail how the government will support hydrogen producers and CCUS developers, will be announced by the end of 2022. Prior to this announcement, fundamental questions, such as the broad structure of the support packages, and who will own the liability for stored carbon dioxide, (UK government)—have now been defined and will allow investors to prepare their own valuation models and investment in anticipation of announced strike prices.
  • Allocation rounds for electrolytic hydrogen production will be run this year for 2023 production, and are expected to continue on a competitive basis through 2025.
  • The fundamental question of liability insurance for CO2 stored under UK land and waters has also now been resolved; it will be retained by the UK government.

Industry leaders have already started taking material action to prepare for hydrogen and CCUS rollout

  • Throughout the energy-industry value chains, leaders are reshaping capabilities and investing heavily to prepare for scale-up in these technologies. Energy majors are announcing multibillion-pound investments into the industrial clusters; service companies have built integrated offerings that package technology, design, and construction of CCUS and hydrogen infrastructure. Individual equipment manufacturers are adapting portfolios—for example, installing flow meters that are able to meter flow rates of hydrogen gas blends in the national network. Work by industrial gases suppliers to test fuel switching in furnaces, glass-making and cement have all proved that hydrogen is a technically viable fuel alternative, although delivery by pipeline currently appears to be the only feasible option.
  • Regulatory bodies, such as the Environment Agency, are also proactively working with companies looking to install hydrogen and CCUS infrastructure, and growing teams to ease the administrative burden associated with permitting processes.
  • Progress is not limited to production and use. Multiple transmission operators and utilities are actively working on hydrogen transmission and storage projects to enable intra- and intercluster hydrogen transport and supply security. For example, National Grid will begin safety and performance testing of a realistic hydrogen network in the “Future Grid” project later this year. Others are actively looking at storing hydrogen in large scale salt caverns with GWh capacity to come online between 2025-2030.

There is growing alignment on what else will be needed for the United Kingdom to execute on announced projects in line with strategic government targets

  • As the industry matures, critical questions continue to emerge that impact when investors will feel confident about proceeding. For example, How will scale enabling infrastructure for long-term decarbonisation be incentivised? How will fugitive emissions from hydrogen be insured and paid for? How will hydrogen storage be licensed and monitored? How will the potential storage opportunity of uncharacterised saline aquifers be derisked? How can we both incentivise and derisk first-of-its-kind CO2 sequestration sites in greenfield saline aquifers?
  • Tight integration between technologies—hydrogen, CCUS, renewable energy, and energy storage—value chains, and geographies, can help generate viable markets at pace. Engineering, procurement, and construction companies are struggling to find suppliers to complete projects, while would-be developers are nervous to invest before purchasers can be identified.
  • Continued innovation will help deliver change. Contributions by technology start-ups were welcomed enthusiastically. While established technologies—such as amine-based capture solvents—are generally those being commercialised in current projects, it is clear that the scope for disruptive ideas is considerable in these relatively nascent markets. New catalysts to create polymer feedstocks from carbon dioxide and usage of coal slag for hydrogen production were just two of several innovations discussed.
  • The pathway for developing the enabling infrastructure, including pipeline and storage, will help coordination across the ecosystem of potential users to ensure it supports low-cost decarbonisation and supports business cases in the long run. For example, investor coordination mechanisms could ensure that infrastructure is built with significant capacity to allow multiple transition projects, not just those in the first round of business cases. Exercising foresight could prevent the need for upgrades or new build infrastructure, that could increase costs for all parties.

While several challenges remain, the sense of momentum was clear. The summit went beyond the academic and strategic discussions, bringing together all parties to launch hydrogen and CCUS as pillars of the United Kingdom’s energy transition, and each came with reports of actions they were already taking. One presenter, having flown to the conference, told the group about an ad shown on her flight for a bold technology about to change the game for global decarbonisation: carbon capture.

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