Stephenson Harwood's latest panel discussion about batteries and hydrogen (recording here) agreed that although discussions surrounding decarbonisation has tended to focus on individual solutions, more effective results are likelier to come from diversified, collaborative strategies.

Stephenson Harwood's partner Lisa Marks and senior associate Cathal Leigh-Doyle were joined on the panel by Steven Meersman, Founder-Director of Zenobe Energy Limited ('Zenobe') and Christopher Jackson, CEO and Founder of Protium Green Solutions ('Protium').

While sharing their insights on the challenges and opportunities facing the battery and hydrogen sectors in assisting the UK meet its Net Zero 2050 targets, five points of particular interest raised by the panel were:

1. Encouraging cross-sectoral collaboration

The urgency of Net Zero by 2050 means society is running out of time to develop reliable, bankable, low risk solutions to achieve meaningful decarbonisation at scale.

Partnerships are key. There is a tendency to talk about 'the energy market', but it is actually many different services working together.

Energy-as-a-Service models (frequently referred to as 'EaaS' models) are increasingly prevalent, whereby instead of the customer needing separate solutions for heating, transport and power, the renewables provider integrates all the net-zero solutions they need into one contractual structure with one counterparty. The customer only has to provide an output specification (the energy needs that must be supplied), not an input specification (the type of power required to meet those needs). This model is seen to be key to transforming the energy system. EaaS projects must be collaborative by definition. If a bus operator has separate teams managing infrastructure, software and facilities, all of these decision-makers are linked in the successful implementation of any renewable solution. At a national level, the UK is in the process of merging its energy, transport and heat networks, involving multiple regulators - all of whom must develop a single policy. Simple, collaboration-oriented tweaks at management level can demonstrate commitment to Net Zero and encourage development of innovative solutions.

Finally, the software and data at our fingertips can enable greater system-engagement. Information-sharing is especially key against a backdrop of supply chain irregularities like post-Brexit logistical problems.

Integrating sustainable solutions into existing infrastructure

For a successful transition to Net Zero by 2050, it is crucial to integrate variable and intermittent renewables into our existing energy systems. The US's National Renewable Energy Laboratory (NREL) found that hydrogen power can help existing infrastructure be more efficient, because just adding electrolysis to a national grid can increase the amount of deployable solar and wind energy significantly. This enables customers to make no-regret decisions that do not involve discarding their existing energy infrastructure, but instead investing in efficiency and optimisation.

By embedding themselves within the customer's infrastructure, renewables' potential impact is much greater. This underlines the importance of change at a systemic level. When building operational infrastructure to help a client, developers must think about how all the client's needs work together.

The speakers agreed that a focus on cost-reduction to the exclusion of renewables' other benefits is short-sighted. This is because energy is only one factor in a business's operational costs. If an HGV company's key concern is staffing its fleet – at a time of national shortages of drivers, and further challenges in training and retention - a battery-electric sustainable proposition also offers a smoother driving experience as well as other improved features for drivers. So, it becomes an attractive solution, even if fuel costs may go up by 10% or 20%.

3. Re-thinking financing models

Energy financing has tended over the last 20 years to be dominated by individual, large-scale, 15-year fixed-offtake projects valued at £500 million or greater. However, the future of energy will involve smaller, more distributed, and resilient networks of assets across multiple locations. Smaller projects valued at £10, £20 or £30 million are likely to become more widespread – particularly in a market like the UK which simply does not have unlimited space for many large-scale wind or solar farms.

This is complex to finance, and although there are signs of change in approach, more needs to be done to encourage it. The financial community must shift towards offering support earlier in project development (currently an underfinanced stage), and perhaps require less due diligence requirements to be fulfilled in consequence.

However, renewables should not 'let perfect be the enemy of good' by waiting for the ideal financing partner. Instead, they should look within the current market for the right investor relationships. In Zenobe's first battery project financing, building strong relationships with banks was key to encouraging them to get involved. Other institutional investors such as pension funds and insurers are also entering the renewables financing space. These are a welcome addition, as they can invest for the long-term and may have fewer regulatory restrictions on their capital costs than banks.

Current renewable energy financing models often focus on improving certainty within volatile a market (batteries in early 2022 command prices twice as high as in 2021, but still 30% less than five years ago). Yet by contrast, most power projects funded shortly after the markets were liberalised several decades ago were in fact not long-term fixed-offtake models. Financiers need to disregard the aberration of the last 20 years and return to pricing more typical of the energy markets over the past century.

Finally, financiers must realise the scale of the challenge. Global energy investment annually was €1.6 trillion in 2021, of which only €300 billion was in renewables. Capital therefore remains to be deployed at a vast scale.

4. Pushing for transformation at scale

The enormous transformation required is not only in financing. The vastness of the global energy system emphasises the progress yet to be made in the energy transition. For instance, 15 million battery-powered electric vehicles (EVs) have been sold globally, yet there remain 1.2 billion non-EV vehicles to replace.

A further challenge is storing renewable energy in sufficient quantity to meet demand. In February 2022, the entirety of the UK's stored hydrogen was 0.3 terawatt-hours. But a single salt cavern storing crude oil or other petroleum substances can hold 0.18 terawatt-hours, and the UK holds 50 terawatt hours' worth of diesel energy. It will be a challenge to replace the amount of energy stored by fossil fuels with renewable solutions, which underlines the scale of the Net Zero by 2050 goal. In 120 years following the invention of electricity, it only achieved a 20% market share of global energy. In the next 28 years, we need to achieve a more dramatically extreme transition.

Although hydrogen itself is not a new technology (electrolysis has existed since the 1940s), supply chain challenges mean there are still few players with capacity to scale it up to large commercial operations. Those who can include ITN Power, ThyssenKrupp AG, Siemens and John Cockerill. There are numerous smaller players who can work to the scale of 60-/100-/200-megawatt production, such as Green Hydrogen Systems or Enapter.

The intersection of this potentially stretched market capacity with geopolitical considerations could result in resources becoming scarce. For example, if it is demanded that the UK produces more of its renewable energy capacity locally, this could impact the energy transition. However, a rush of smaller producers wishing to scale up their production capacity will also encourage capital investment to follow.

The key is ensuring that more and more companies and decision-makers buy in to the Net Zero 2050 goals. We have witnessed the same process with EVs over the last decade, during which they went from niche product to widely-accepted renewable proposition. This is a profound cultural shift that needs to be replicated throughout the energy markets.

5. Educating governments and consumers

Finally: energy transition has always been led by consumer choice. When electric lighting replaced gas, the former was less safe, less reliable and more expensive. However, electric offered a better quality of light allowing people to work in a different way, and it did not flicker or give off any smell. Consumers appreciated it not because of cost savings but because it was a fundamentally better product. In the same way, continuous consumer education will be key to getting over the hurdle of early adoption of EaaS models and renewable solutions.

The UK government has tried to incentivise industry players to commit to a sustainable future, for example via the end-to-end-integrated Hydrogen Industrial Accelerator Program set up by BEIS. However, the government's renewable energies strategy still presents opportunities for improvement. If different government departments pursue non-aligned goals, opportunities for collaboration are missed.

The UK government could improve energy policy-making by focussing on long-term rolling schemes rather than stop-start funding opportunities. It would do well to follow the German model for funding of EV projects, under which applicants present their applications, which are assessed, and there is a clear counter showing the remaining funds available for allocation. This incentivises other applicants to move quickly.  

A final complication is the role of subsidies. Governments must avoid creating counter-productive or oppositional subsidies environments. Subsidies exist to address distortions in the market – which be there for good reason, such as protecting vulnerable consumer groups – via pricing support to correct that distortion. However, every subsidy correcting a distortion in turn creates a distortion in a different direction, sometimes leading to a cross-subsidising effect. The recent government-funded ITM-Gigastack report on the UK Government's work with ITN to decarbonise a refinery found that a third of the total project cost was grid fees. Thus the government's pricing support in that case was not less supporting the hydrogen industry, and rather a cross-subsidy to the electricity networks. Instead of subsidies, the government bodies should consider enhancing their investments in existing energy networks.

Conclusion

Hydrogen- and battery-powered energy are driving wider changes across the UK's energy network to build a sustainable future.

To maximise both techs possibilities, it requires: i) a newly diverse and distributed network of infrastructural assets; ii) enough network modernisation to leverage the opportunities presented by technology; and iii) sophisticated understanding by consumers, operators and financiers to develop business models that take advantage of and enhance the operational efficiencies presented by renewable power.

Stephenson Harwood's previous seminars on hydrogen can be found here.

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