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How will ingenuity fuel new opportunities for growth?

The UK Government’s Clean Growth Strategy, published in October 2017, sets out long-term plans aimed at stimulating economic growth and delivering the 80% reduction in Green House Gases (GHG) by 2050 that the UK committed to in the Climate Change Act in 2008.

In March this year, the Government published the provisional 2017 Greenhouse Gas Emissions figures, giving the latest view on the UK’s progress towards the 2050 target. The picture is mixed.

The power generation sector has delivered a reduction in CO2 emissions of 57% between 1990 and 2017, driven largely by a switch from fossil fuels to renewables. The business and industrial sectors have shown a reduction of between 40 and 50% against the 1990 baseline, but a major driver here has been loss of industry and output from the UK economy.

The residential sector (mainly domestic heating) has delivered a more limited 18% reduction, but the transport sector, however, has delivered no significant reduction from the 1990 baseline. The total 2017 GHG emissions are estimated to be 456mtCO2e, split across the sectors as shown in the diagram below.

Provisional UK Greenhouse Gas Emissions for 2017

EY - Provisional UK Greenhouse Gas Emissions for 2017

Clearly, an 80% reduction by 2050 can only be achieved with extensive decarbonisation across all sectors. This means further significant reductions in power generation and a transformation in the harder to reach heating and transport sectors, where progress to date is very limited.

This level of decarbonisation across all sectors is the most complex and long-term economic, technical, and regulatory challenge facing UK energy. With the existing national infrastructure designed for a centralised fossil fuel system there is a need to renew, extend or construct new forms of national scale infrastructure. This means very large investments are needed over a long timeframe, so finding the right technology path amongst the many options is critical to minimising costs at a system level and avoiding large stranded investments.

We think that hydrogen could play a significant role in this decarbonisation, not just as a green gas to enable decarbonisation of heating, but as a means of storing carbon-free renewable power and through this linking together the decarbonisation of the power, heat and transport sectors. This conclusion is reached by taking a system wide perspective and viewing hydrogen as not just a green gas but as a controllable load and high capacity storage medium for carbon-free power generation and a carbon-free fuel for heat and transport – made possible by producing hydrogen through the electrolysis of water.

An energy system with carbon-free electricity, and carbon-free hydrogen production, has the flexibility of two decarbonised energy carriers, which can enable the UK economy to meet the full challenges of decarbonisation. Policy support for large-scale, long-duration energy storage and power to gas applications is needed to facilitate the development of hydrogen’s role in the energy system.

These targets and challenges are not unique to the UK, with decarbonisation being a top priority for many countries globally. So whilst this report focuses on the UK, the conclusions are applicable to global decarbonisation.

Taking a system wide view

The issues and decisions related to long-term decarbonisation across sectors are highly interconnected.

The most appropriate long-term solution depends on making critical decisions in areas where there is rarely a consensus and a range of views are publically expressed. The diagram below captures some of the elements which need to be considered in taking a system wide view of decarbonisation.

Decarbonisation issues across the power, heat and transport sectors

EY - Decarbonisation issues across the power, heat and transport sectors

The complexity here results from different existing policy measures tackling challenges in individual sectors, from a range of competing technology solutions, from the wide range of interest groups which huge financial exposures to the pathway followed, from the scale of infrastructure investments related to the technologies and from the far reaching impacts of the choices on many aspects of public and private life.

A challenge for policy making in this environment is not to focus on solving only one limited part of the system or focusing only on short term actions, as this risks committing large investments to a solution which is not optimal for the system as a whole or for the long-term targets.

As a way of navigating this complexity, this article makes certain key assumptions below, which then provide visibility on likely outcomes. Not all will share these assumptions, but it does enable a discussion on actions required for longer-term targets.

Renewable power generation will be the main long-term source of carbon-free energy

There are a limited number of options for the energy sources to decarbonise electricity, heat and transport sectors up to 2050: renewable power generation, nuclear power generation or decarbonised fossil fuel combustion (i.e., with Carbon Capture and Storage (CCS)).

With 167GW of new capacity added in 2017, the levelised cost of energy from solar PV decreasing by 73% since 2010 and recent offshore wind tenders at around €50/MWh (International Renewable Energy Agency), the evidence points to renewable power generation being the dominant source of carbon-free energy.

There are of course challenges with this, but the scalability and inherent long-term sustainability of renewable technologies, coupled with the pace of deployment and associated cost reduction of key technologies (notably solar and offshore wind) appears irresistible. These technologies are quickly becoming an economic choice even in the absence of environmental policy and social drivers.

Global Solar PV capacity and additions 2006-2016

EY - Global Solar PV capacity and additions 2006-2016

Renewable energy auction process in 2016

EY - Renewable energy auction process in 2016

Nuclear is still expected to play a role, as evidenced by the Government’s renewed commitment to projects beyond Hinkley Point, but it is losing ground on cost and speed of deployment – with risks to public acceptability and political sentiment as a result.

There remain strong drivers for the continued use of fossil fuels, but these can only play a role in a decarbonised economy if coupled with CCS. As discussed later in this article, evidence suggest that a decarbonisation strategy should not rely heavily on CCS.

Such is the pace of cost reduction and deployment of solar and wind renewable technologies that we should expect them to be a source of carbon-free energy not only for power demand but also to play a major role in the decarbonisation of heat and transport systems. How can this be enabled?

The energy system will need large-scale, high-capacity energy storage

Assuming a continued massive expansion in renewable power generation, beyond power demands alone, a number of significant consequences for the power system result, in addition to the well documented challenges of intermittency:

  • Even in the event of a massive increase in renewables capacity, there will be times when power demand exceeds supply, so renewables need a form of firm generation to supplement.
  • There will be extended periods when renewable generation exceeds demand, and without a productive load this energy will be wasted (see figure below).
  • Significant expansion of the power transmission and distribution systems will be needed to accommodate the decentralised renewable capacity and overall increase in peak capacity, with a risk of low utilisation.

Curtailment as % of available wind and solar generation (2030 – High RES)

EY - Curtailment as % of available wind and solar generation (2030 – High RES)

A DNV GL study estimated that in a high renewable scenario, the UK would waste as much as 30% of all renewable power generated by 2030

This clearly points to a need for large-scale energy storage, crucially with the ability to provide a load for long periods and store very large amounts of energy.

Batteries and demand side management will be key tools in managing important aspects of the above challenges and must be progressed. They perform well in relatively low capacity (hours of discharge) and shorter duration (hours and days) applications. However, a form of high-capacity storage (many hours and days of storage and discharge) and long duration (with a high energy storage to power capacity ratio) is needed to realise renewables’ full potential and avoid massive waste of carbon-free energy.

Electrification yes, but decarbonisation of heat will be simpler with a gaseous energy source

The provisional 2017 UK emissions show that progress to decarbonise the energy used for heat is limited and this is recognised as being a major policy challenge.

Carbon-free electricity from renewables offers the potential to decarbonise the heat sector through electrification of heat demand, e.g., through replacement of domestic gas boilers with electric heat pumps. This undoubtedly has a role to play, but does come with significant challenges:

  • adding peak heat demand to peak power demand will drive a further massive investment requirement in generating capacity (expected to be many 10s of GW) and in grid infrastructure
  • electrical heating has significant limitations for industrial processes where very high heating rates are often required
  • this is a major conversion challenge and a huge change for domestic consumers, for whom the functionality of natural gas heating and cooking are taken for granted

A decarbonised gas energy source would offer a number of important advantages in the context of decarbonising heat load:

  • it could utilise the existing gas network, potentially avoiding significant investment
  • gas can be more readily stored in large volumes, fulfilling a key system requirement
  • it could limit the change in technology and functionality for domestic and industrial customers facilitating adoption

A significant role for hydrogen?

The analysis above suggests a long-term excess of renewable electricity generation, a need for large scale, long duration energy storage and a need to look beyond just electrification as a means to decarbonise heat loads.

The Clean Growth Strategy mentions hydrogen as an alternative fuel, in particular to decarbonise the heat sector, referring to hydrogen generation from natural gas via Steam Methane Reformation (SMR), which then requires CCS to create a decarbonised heating fuel.

Let’s consider hydrogen generation through electrolysis of water instead – a process which uses electricity – and if the electricity is carbon free then so is the hydrogen produced. If we take the above assumptions and impacts together, hydrogen has a potentially wider role as a controllable load to absorb and store excess renewable energy, and as a green gas energy source which can contribute to decarbonising the heat sector.

Hydrogen production via electrolysis is large-scale, high-capacity storage of excess renewable power – addressing the need for energy storage identified above. The chart below shows that very few technologies can operate in this domain.

Size and discharge durations by storage technology

EY - Size and discharge durations by storage technology

When renewable energy is stored in this way, the resulting hydrogen is a decarbonised gas energy source which can help decarbonise the heat sector. Hydrogen can also be used as a feedstock to produce synthetic methane (and other hydrocarbons). This method of decarbonisation offers a potential route to mitigate the technical and social obstacles of using hydrogen as a combustion gas.

In this way, hydrogen links the power and heat decarbonisation challenges, addressing problems in both power and heat sectors by storing and transporting green energy – rather than simply an alternative fuel for gas grids.

There are a number of initiatives underway in relation to hydrogen. Trials are already underway for injecting hydrogen into the natural gas system and for fully converting areas of the gas distribution system to hydrogen. Hydrogen is already widely used as an industrial gas and could be used to decarbonise industrial use of natural gas.

Whilst positive, these are targeting hydrogen as an alternative fuel, rather than taking a system wide view.

What about transport?

In 2017 transport was responsible for 34% of UK GHG emissions. Urban emissions reductions are also a very strong driver for technology change in cars, with many cities driving the adoption of electric cars to abolish emissions at point of use and with the UK legislating to ban new diesel cars from 2040.

The Government says toxic air causes up to 50,000 early deaths – 9,000 of them in the capital – and costs the country £27.5bn each year, and has been taken to court three times for failing to take robust action (Guardian, 2017).

There are two main options to reduce emissions from road transport:

  • Electric vehicles using battery technology
  • Electric vehicles using fuel cells, run on hydrogen.

Batteries appear to be well ahead as the electric power source for cars, and current issues with cost, range and charging time will be aggressively developed with massive funding – significant progress should be expected. There may be challenges longer term with the need for significant grid reinforcement if domestic penetration is high – but this could be mitigated with increased centralised charging, using existing grid infrastructure.

For public transport such as buses and trains, when direct electrification is not possible, energy density and refuelling speed are major drivers. These assets need high utilisation, unlike domestic cars which can be charged overnight. In these applications, hydrogen is at the forefront of development because of the advantages it has on these features, eg through the Joint Initiative for Hydrogen Vehicles across Europe programmes (JIVE 1&2).

These large scale transport applications with centralised refuelling infrastructure are potentially an early demand stimulus for hydrogen generation, and we are already seeing regional schemes bringing together hydrogen generation to fuel bus fleets.

A recent German Energy Agency report found that, even in a battery electric drive dominated scenario, the final energy demand of all EU transport modes will be met with more than 70% of ‘e-fuels’ such as liquid or gaseous fuel generated from renewable electricity in 2050, the majority used for aviation, shipping and freight transport.

Hydrogen production via electrolysis offers distinct advantages to hydrogen production from natural gas as a long-term solution

There are two main methods of hydrogen production:

  • Electrolysis of water (carbon free if the electricity is carbon free)
  • Steam Methane Reformation (SMR) (carbon free if the CO2 produced is captured and stored via CCS)

The Clean Growth Strategy targets CCS as an enabler for decarbonising heat and specifically industrial processes, where substituting fossil fuels is more difficult. However, given previous attempts to stimulate large scale private investment in CCS there remain major technical, infrastructure, economic and regulatory obstacles to it being seen as an investible technology.

Both previous government CCS competitions (2007-11 and 2012-15) were cancelled before they reached awarding funding, significantly denting investor confidence in the UK Government’s CCS initiatives. CCS has yet to make a convincing impact, and, in the case of power generation, has been leapfrogged by the growth and economics of renewables.

In terms of hydrogen production,  SMR and CCS does not link the power and heat decarbonisation challenges or address the need for energy storage resulting from excess renewable generation.

There are clearly drivers to monetise fossil fuel reserves, so a drive for CCS is understandable. However, hydrogen production from domestic renewable electricity increases UK energy security versus imported natural gas, and presents a truly long term and sustainable decarbonisation solution.

Electrolysis is not a new technology, but is only recently coming into focus as a way to generate hydrogen to decarbonise heating, transport or industrial processes. Currently, individual installations of electrolysers have reached a scale of around 10MW, which can produce approximately 55GWh of hydrogen per annum, enough to heat around 3,000 homes or fuel more than 100 buses.

Electrolyser technology is modular, so individual installations can be scaled by adding more units, and it also benefits from flexibility in siting, so could fit to either a central or decentral, on grid or off grid, deployment.

Manufacturers have developed designs in the low 100 MW range, already targeting the scale of installation needed for semi centralised hydrogen production or decarbonised energy supply of a major industrial facility.

Current capital costs are around €1000/kW for a 1-5MW unit, with a 2016 report forecasting a potential cost of €300/kW by 2050 for a 100MW unit in volume production (Agentur für Erneuerbare Energien (2016) “Metaanalyse: Investitionskosten von Energiewende-Technologien”). Conversion efficiency and operating costs are also critical, but this will depend on the application and cost of the electrical power. In a world dominated by renewables, energy costs will be dominated by capex, with the marginal cost per kWh potentially very low, giving the opportunity to access low cost power for clean hydrogen generation.

Hydrogen generation by electrolysis is not yet at a scale of deployment which has a significant impact on the energy system. However, the path to scale both in terms of individual facilities and total installed volume does not appear more complex than for other new technologies, and the electrolyser manufacturing industry could respond to demand stimulus in terms of increased volume and reduced cost. Its modular nature could also support different paths to scale – both central and decentral.

Summary

The UK’s long-term decarbonisation targets must be viewed from a system wide perspective, considering the challenges across power, heating and transport.

Hydrogen could play a significant role in decarbonising power, heat and transport as a high capacity storage medium for carbon-free power generation and a carbon-free fuel for heat and transport – made possible by producing hydrogen through electrolysis of water.

An energy system with carbon-free electricity and carbon-free hydrogen production has the flexibility of two decarbonised energy carriers, which will enable an economy to meet the full challenges of decarbonisation.
There are significant complexities and obstacles to significant penetration of hydrogen into heating and transport, but there is an emerging need for high capacity storage in the power system and applications in both heating and transport where hydrogen offers a solution.

Only hydrogen links the power and gas systems like this and enables the further build out of renewables as the dominant source of carbon-free energy across sectors.

There are many technical, societal and economic questions still to be addressed in relation to testing this hypothesis, as there are in relation to any other view of the long-term future energy system. It is good to see the Government encouraging additional focus and investment in developing applications for, and technologies related to, hydrogen, including:

  • Hydrogen injection into the natural gas system
  • Conversion of local natural gas supply to hydrogen for domestic heating
  • Fuel cell electric vehicles – both cars and buses.

However, these relate to specific parts of the decarbonisation agenda rather than a holistic view of hydrogen’s role in a decarbonised energy system.

The Government’s Clean Growth Strategy can go further to recognise and enable the significant role that Hydrogen can play in meeting the UK’s long-term decarbonisation targets, specifically:

  • Incentivising high-capacity, long-duration storage (eg removing incentives for curtailment of renewable power and removing final consumption fees from storage)
  • Linking power and gas systems to enable wider decarbonisation (eg diversion of funds away from CCS towards power to gas applications).

These are clear actions that could be taken to enable the role of Hydrogen described in this article and with it open up a potential path to the UK’s long-term decarbonisation targets.

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