The 2020s were always going to be a critical decade for industrial decarbonisation. Now, with the ongoing energy security crisis, expansion of the UK Emissions Trading Scheme (ETS), and increasingly stringent regulation and reporting, pressure is on for industry to decarbonise – and quickly.
We find ourselves in a new phase of policy for the net zero transition. Government is ploughing ahead with plans and funding for hydrogen, while still maintaining commitments to support electrification and carbon capture. These are the three main levers which seem to support the brunt of industrial decarbonisation plans in the UK, though uncertainty remains over how, where, and to what extent each will be deployed.
Recent decisions not to intervene in the UK-ETS carbon price despite a wave of unprecedented energy prices, along with proposals to reduce emissions caps and allowances, signal a clear direction of travel. Companies will increasingly be expected to pay for their emissions, with fewer and fewer ‘get out of jail free cards’ to ease the path. Now is the time to consider which decarbonisation methods are available to you and to start implementing them, before the financial disadvantages of inaction become too high.
With high fossil fuel and carbon prices remaining in the forward projection curves we are reaching a tipping point where uncertainty over which decarbonisation technology will win out in industry is being outweighed by the requirement to implement long-term solutions that will provide financial and carbon certainty.
Recent news that the UK is doubling down on hydrogen, expanding the target to 10GW by 2030, is welcome. Deployed in the correct project, electrolytic “green” hydrogen has strong potential to deliver significant industrial decarbonisation. For some of our industrial customer base, pioneering green hydrogen projects bidding into the Hydrogen Business Model (HBM) allocation process will represent a key strand in their decarbonisation strategy. However, the complexity and nuance of the HBM mean that this is not an area for the faint of heart and uptake will be limited.
Further, it should not be taken as certain that hydrogen will be the automatic substitute for gas in industrial processes. Given the comparative system-wide efficiencies of electrolysis hydrogen versus direct electrification of processes this area is likely to receive increasing focus from policymakers. As gas prices soar, shifting demand from gas to electrification has become more financially viable.
Looking forward, there remains a possibility that electrification may become a stronger contender, particularly for lower temperature thermal processes. Transformation will begin in this decade, and our analysis shows that this can begin immediately in certain geographic areas which already benefit from high penetration of renewable electricity.
Further clarity from government is needed on the support mechanisms which will be available for these decarbonisation technologies. The recently opened consultation on the UK ETS is a step in the right direction. However, this momentum must be maintained by further clarity from government on plans for electrification. A consultation on rebalancing of final consumption levies (FCLs) away from electricity and on to gas has been delayed until later in 2022, and a potential businesses model for electrification (recommended by CCC) has not yet been proposed by Government. Implementation of policies in these two areas would rapidly accelerate the electrification of heat.
Despite some areas of uncertainty, a few things remain clear: regulation is increasingly pushing industry to decarbonise, and markets for sustainable products are growing. Indeed, with consumer facing brands increasingly signing up to carbon reduction commitments and targeting Scope 3 carbon reductions – in addition to their own Scope 1 and Scope 2 priorities – the pressure on industry and supply chains to decarbonise is immense. We are now at the point where failure to decarbonise is becoming a strategic and existential threat to ongoing viability. Given all these drivers it is in businesses’ best interest to act now and take advantage of the opportunities which early and rapid decarbonisation can offer.
We realise that navigating the fast-changing policy in this area can be a challenge, and that creating and implementing a decarbonisation plan is a complex task. That’s why we have created our Energy Policy Insights series of briefing papers as a tool to help you understand and engage with upcoming policy changes. AMP specialises in developing cost effective and practical decarbonisation solutions and has capital funding available to support the road to net zero – to discuss how we can support your decarbonisation journey, please get in touch.