Let’s be absolutely clear. The energy crisis we are undergoing has one source: natural gas.
The cost of day-ahead UK natural gas rose from about 50 pence a therm in January 2021 to a whopping 450 pence in mid-December and was trading just below 200 pence this week. That has pushed next-day wholesale power prices from about £90/MWh this time last year to almost £230/MWh in September before falling towards £200 in the following months.
The cost of renewable energy, by contrast, has not moved, and has been below the wholesale electricity price for several months, leading to a situation where subsidies are actually being repaid to the government by wind and solar projects.
The causes of the surge in gas prices are numerous but some are clearer than others. International Energy Agency chief Fatih Birol last week accused Russia of reducing gas supplies to Europe by about a third, stoking the continent’s energy crisis as it seeks to negotiate with NATO and win approval for a gas pipeline into Germany, Nordstream 2, while threatening an invasion of Ukraine.
Despite having substantial gas reserves in the North Sea, the UK is a net importer of the fuel on which it relies for about one third of its electricity generation and 75% of its household heating. The North Sea provides the UK with about 50% of its natural gas, a figure that is expected to fall dramatically in the coming years as dwindling reserves become more expensive to exploit and investment declines.
The North Sea currently provides the UK with about 50% of its natural gas, a figure that will fall dramatically as reserves dwindle.
Energy security is a complex issue and there is more to achieving it than reducing imports. However, if a key source of your energy is as unreliable as Russia, your energy security has clearly been compromised
Bolstering energy security has many dimensions, but a key piece of the puzzle is sitting right under our noses in the form of hydrogen.
“Price volatility has been a feature of the oil and gas system,” Francesco La Camera, director-general of International Renewable Energy Agency (IRENA), told the Financial Times this month. “Moving to the new energy system, where hydrogen plays a significant role, brings us less volatility.”
The UK is a net importer of gas on which it relies for about one third of its electricity generation and 75% of its household heating.
Hydrogen could meet 20% of the world’s energy needs by 2050. If its full potential is realised the strong likelihood is we’ll then be in a world where global emissions have been cut sufficiently to meet the Paris climate goals and limit warming to 1.5C. That would significantly change the geopolitics of the global energy industry, which is currently dominated by a small number of oil and gas producers who can influence prices by manipulating supply.
“What is happening right now really emphasises the need for a faster transition,” said Elizabeth Press, IRENA’s director of planning. “It shows that we need a different energy mix that will make it safer, secure and more diverse.”
One of the major appeals of green hydrogen, in particular, is that it can be produced locally by any country with the necessary renewable energy resources, meaning less need for international trade. A greater diversity of major producers – IRENA points to Australia, Chile, Saudi Arabia, Morocco and the US as best placed to become exporters – also means a reduced likelihood of the market being hijacked by a few bad actors.
The cost of renewable energy has been below the wholesale electricity price for several months, leading to a situation where subsidies are actually being repaid to the government by wind and solar projects.
The UK is already making great strides in this nascent industry: hydrogen hubs are being created across the country around existing industrial clusters on the Humber, Teesside, and the west coast of Scotland, among others; British companies, including Wrightbus, JCB, and Ryze Hydrogen are leading the development of the technologies that will drive the hydrogen economy, while Cranfield is emerging as a focus of innovation for the aviation industry’s exploration of hydrogen fuels.
Boris Johnson’s government has been making the right noises about hydrogen and published its Hydrogen Strategy in August of last year, but it is yet to announce the funding mechanism through which it has pledged to support a goal of building 5 GW of clean hydrogen capacity by 2030. It is also yet to show any preference for blue hydrogen (derived from natural gas with carbon capture) or green hydrogen (made from water and renewable energy).
The market is waiting eagerly for both. It needs certainty to make the necessary investments and it needs the right mechanism to drive growth in the industry at this crucial stage in its development. Yet, even if the government does come through on its promises, which we expect it to, it is hard to describe its hydrogen plans as ambitious.
As Labour leader Sir Keir Starmer said in a recent interview with the Yorkshire Post, the government’s current investment in hydrogen development is dwarfed by the amounts being committed in France and Germany. France is aiming for 6.5 GW of green hydrogen production by 2030 and Germany is targeting 10 GW, twice the UK’s target for both blue and green hydrogen.
Sir Keir Starmer pictured behind the wheel of a Wrightbus zero-emission hydrogen bus, manufactured in the UK, January 2022. The leader of the opposition has long called for greater commitment to hydrogen from the UK government.
“The Government should be investing at scale in hydrogen,” he said. “There’s this huge opportunity in relation to hydrogen because of our natural resources but it is an opportunity that I fear the government will miss because it lacks the strategy and the ambition.”
We have no political affiliation here at HYCAP, but the man has a point.
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