Jack Richardson is the Head of Energy and Climate at Onward and the James Blyth Associate Fellow at the Council on Geostrategy.
No one doubts that hydrogen is critical for energy security and net zero. But the Government’s current plans to fund support for this strategic resource through a new green levy are unfair and short-sighted.
In the Energy Bill, which is making its way through the House of Commons, the Government wants to place the burden of supporting the nascent hydrogen industry on consumer bills, meaning that households and small businesses will be paying. This is deeply regressive: people will be paying the same amount no matter how rich or poor they are.
Going for the hydrogen levy option is a political decision that is a result of the price tag that comes with supporting the industry. At Onward, we’ve estimated that delivering the target of 10GW of hydrogen production by 2030 could cost around £50 billion overall and about £3.5 billion annually from 2030. Put onto the gas bills of households and businesses, this would mean roughly another £118 per year for dual fuel households.
Even worse, most households are unlikely to benefit directly from hydrogen. Outside of the industrial clusters such as Teesside that will be producing tons of it, using hydrogen for domestic heating would be costly and inefficient. Heat pumps might not be the best option for every home, yet it will be rare that a hydrogen boiler is a better alternative.
But there will still be plenty of need for hydrogen. It turns excess renewable electricity into a new source of gas, lowering our dependence on gas shipped from overseas and overcoming renewable energy’s intermittency problem by providing long term storage. It can make our industries more competitive by removing carbon costs and improving access to markets where there’s a growing green premium or a carbon border tax.
At a time when energy bills are already under great pressure, consumers do not want to pay more for hydrogen. Our new polling found that 43 per cent of people do not want to pay for a hydrogen levy on their energy bills. Although a quarter would pay up to £10 per month, demonstrating the support for the industry, support falls rapidly after that.
Labour has spotted the opportunity for a political trap. In the Lords, Labour successfully amended the Energy Bill to make the Treasury and gas shippers pay for hydrogen instead of energy suppliers. Placing the costs on gas shippers would still feed through to bills and remains fundamentally regressive.
But it is clear from yesterday’s second reading of the Energy Bill that Labour is in favour of using Treasury funds instead, and is seeking to change the legislation to do so. They will say the hydrogen levy means Conservatives are forcing households to subsidise oil and gas companies.
Labour’s amendment also means the Government might have to tell Conservative MPs who campaigned for green levies to be removed from energy bills to vote for a new one. There have already been reports of brewing rebellions against the hydrogen levy.
The Treasury’s view will be there is not much money available to pay for hydrogen. Supporting a domestic hydrogen industry has an uncertain price tag and we don’t know how much we will need yet. But all of the National Grid Energy System Operator’s “Future Energy Scenarios” have hydrogen as part of them.
The Government agrees and has set its 10GW target, which was doubled from 5GW in the April 2022 energy security strategy. The question now is how to finance it.
It appears likely the Government will implement a carbon border tax from 2026. This would level the playing field for British industry, which rightly pays for its pollution, even when some of its foreign competitors do not. But it would also mean we can phase out the free allowances the Government hands out to prevent companies moving abroad to avoid pollution costs.
Onward is proposing using the revenue raised from phasing out these allowances to pay the hydrogen levy. In most cases it will cover the costs, sometimes with billions to spare. At worst, it will massively ease the burden, arguably enough that even the Treasury might be persuaded that the levy is unnecessary.
It would be a much fairer way of supporting Britain’s hydrogen industry which has public support. It was by far the most popular option for supporting the hydrogen industry, with 44 per cent in support, according to our polling. It would avoid a political trap for the Government which risks slowing the Energy Bill down even more than it already has been. Hydrogen will play a crucial role in our energy system, but it needs to be done in a fair way.
Jack Richardson is the Head of Energy and Climate at Onward and the James Blyth Associate Fellow at the Council on Geostrategy.
No one doubts that hydrogen is critical for energy security and net zero. But the Government’s current plans to fund support for this strategic resource through a new green levy are unfair and short-sighted.
In the Energy Bill, which is making its way through the House of Commons, the Government wants to place the burden of supporting the nascent hydrogen industry on consumer bills, meaning that households and small businesses will be paying. This is deeply regressive: people will be paying the same amount no matter how rich or poor they are.
Going for the hydrogen levy option is a political decision that is a result of the price tag that comes with supporting the industry. At Onward, we’ve estimated that delivering the target of 10GW of hydrogen production by 2030 could cost around £50 billion overall and about £3.5 billion annually from 2030. Put onto the gas bills of households and businesses, this would mean roughly another £118 per year for dual fuel households.
Even worse, most households are unlikely to benefit directly from hydrogen. Outside of the industrial clusters such as Teesside that will be producing tons of it, using hydrogen for domestic heating would be costly and inefficient. Heat pumps might not be the best option for every home, yet it will be rare that a hydrogen boiler is a better alternative.
But there will still be plenty of need for hydrogen. It turns excess renewable electricity into a new source of gas, lowering our dependence on gas shipped from overseas and overcoming renewable energy’s intermittency problem by providing long term storage. It can make our industries more competitive by removing carbon costs and improving access to markets where there’s a growing green premium or a carbon border tax.
At a time when energy bills are already under great pressure, consumers do not want to pay more for hydrogen. Our new polling found that 43 per cent of people do not want to pay for a hydrogen levy on their energy bills. Although a quarter would pay up to £10 per month, demonstrating the support for the industry, support falls rapidly after that.
Labour has spotted the opportunity for a political trap. In the Lords, Labour successfully amended the Energy Bill to make the Treasury and gas shippers pay for hydrogen instead of energy suppliers. Placing the costs on gas shippers would still feed through to bills and remains fundamentally regressive.
But it is clear from yesterday’s second reading of the Energy Bill that Labour is in favour of using Treasury funds instead, and is seeking to change the legislation to do so. They will say the hydrogen levy means Conservatives are forcing households to subsidise oil and gas companies.
Labour’s amendment also means the Government might have to tell Conservative MPs who campaigned for green levies to be removed from energy bills to vote for a new one. There have already been reports of brewing rebellions against the hydrogen levy.
The Treasury’s view will be there is not much money available to pay for hydrogen. Supporting a domestic hydrogen industry has an uncertain price tag and we don’t know how much we will need yet. But all of the National Grid Energy System Operator’s “Future Energy Scenarios” have hydrogen as part of them.
The Government agrees and has set its 10GW target, which was doubled from 5GW in the April 2022 energy security strategy. The question now is how to finance it.
It appears likely the Government will implement a carbon border tax from 2026. This would level the playing field for British industry, which rightly pays for its pollution, even when some of its foreign competitors do not. But it would also mean we can phase out the free allowances the Government hands out to prevent companies moving abroad to avoid pollution costs.
Onward is proposing using the revenue raised from phasing out these allowances to pay the hydrogen levy. In most cases it will cover the costs, sometimes with billions to spare. At worst, it will massively ease the burden, arguably enough that even the Treasury might be persuaded that the levy is unnecessary.
It would be a much fairer way of supporting Britain’s hydrogen industry which has public support. It was by far the most popular option for supporting the hydrogen industry, with 44 per cent in support, according to our polling. It would avoid a political trap for the Government which risks slowing the Energy Bill down even more than it already has been. Hydrogen will play a crucial role in our energy system, but it needs to be done in a fair way.