Economic Report 2020

Regulation of CO 2 infrastructure The implementation of appropriate commercial and regulatory models will be required to facilitate the development of the required CCUS infrastructure. It is anticipated that these models will be disaggregated between components of the CCUS process, with capture on the one hand and transport and storage on the other. OGUK believes that this is a more sustainable model to allow the development of the industry at scale compared to treating the entire process as a single project. Transport and storage assets will form important pieces of national infrastructure and will therefore need some form of economic regulation. This will help give investors on the capture side certainty about availabilityof transport and storage capacity and regulatory oversight on costs and conditions of fair access to the infrastructure. Administrating this will require the development of new regulatory capability to oversee the deployment and operation of the transport and storage infrastructure. It is important that the body has a constructive working relationship with industry and investors and that it possesses the appropriate powers and duties to regulate effectively. Development of the hydrogen market Although there is a limited amount of hydrogen production and consumption in the UK at present (mainly grey hydrogen 47 ), the scale up of low-carbon production is essentially a new sector and requires both the stimulation of large-scale demand and support mechanisms if it is to garner the required investment.

Stimulating hydrogen demand will be one of the first steps to creating this market, alongside the development of supply-side infrastructure. Over the next decade hydrogen should be increasingly integrated into the natural gas system, with the aim of replacing around 50 TWh of gas consumption with low-carbon hydrogen. A competitive market should be established to supply this, with equal access to both blue and green hydrogen. Meeting this ambition will also require advancements in the mechanisms to trade hydrogen and in its methods of distribution to consumers – all of which will require significant infrastructure investment. To enable confidence in this investment, support will be required to assure a reliable return on investment whilst demand for hydrogen continues to develop. This could be provided through a model such as a contract for difference (CfD). A CfD would provide certainty over returns that will be generated through the investment, by making up the recovering the cost differential between hydrogen production and the market price (natural gas price plus carbon cost). CfDs have proved to be important and successful support mechanisms in the development of renewable power capacity. Along with advancing the lowering of emissions, the stimulationof near-term, large-scale investment innet-zero solutions in the UK will help provide important demand for the supply chain to service. This will be crucial in attracting foreign direct investment in the UK, enabling the further development of world-leading capabilities and supporting tens of thousands of jobs. These can then remain anchored in the UK and exported around the world.

47 Grey hydrogen refers to hydrogen produced by fossil fuels, usually through steam methane reformation. Blue hydrogen also derives from fossil fuels but is integrated with a carbon capture component. Green hydrogen is produced by electrolysis using only renewable power.

45