The Government has launched the "Funding mechanism for the Hydrogen Production Business Model: proposed design of the Gas Shipper Obligation" consultation on a proposed funding mechanism for hydrogen projects.

One of the Government's top priorities is to shift towards a low-carbon, clean energy system by 2030 and fast-track the journey to net zero.

The Department for Energy Security and Net Zero (DESNZ) has indicated that hydrogen is expected to play a significant role in achieving net zero. Without hydrogen deployment, the UK would need to adopt other decarbonisation technologies to meet its carbon budgets, but these alternatives are likely to be more costly.

The Government forecasts that hydrogen-powered energy generation, combined with long-duration energy storage, could deliver savings of between £13 billion and £24 billion to the power system from 2030 to 2050. They regard the transformation of low-carbon hydrogen into low-carbon electricity as a crucial technology to support the commitment to a decarbonized and secure power system.

To deliver low carbon hydrogen in the UK, the Government has created the Hydrogen Production Business Model (HPBM) to provide revenue support to producers and bridge the cost gap between low carbon hydrogen and high carbon fuels. The Energy Act 2023 provides powers to introduce revenue support for hydrogen production, transport, and storage through levies or Government funding. The proposed Gas Shipper Obligation (GSO) levy requires licensed gas shippers to make payments to a levy administrator, which is expected to be the Low Carbon Contracts Company. In launching the GSO consultation, the Government is seeking to engage with stakeholders on this proposed funding mechanism to ensure the system is refined and effective for initial and future hydrogen production projects.

Charging Approach

The GSO is a long-term funding strategy under the HPBM which places a levy on gas shippers based on the volume of gas they ship; ensuring that those who ship more gas contribute more to the funding mechanism. This charging approach is considered more reflective of actual gas consumption, compared to other potential designs such as a meter point-based levy, and allows for flexibility in adjusting the levy rate in response to changes in gas consumption patterns or funding needs ensuring the GSO can remain effective over time.

The levy rates will be determined by using a combination of gas consumption data, market conditions, cost requirements associated with supporting hydrogen projects and meeting the HPBM's financial requirements. These rates will be subject to regulatory oversight to ensure transparency, fairness, and compliance with the policy objectives. Input from stakeholders during the consultation process will also be considered.

The GSO will initially apply to licensed gas shippers in Great Britain but could expand to Northern Ireland depending on the consultation and policy development. The funds collected through the GSO will provide revenue support to hydrogen producers under the HPBM which is crucial to making hydrogen production competitive with other forms of energy. The Government is also developing other models to support the transportation and storage of hydrogen and it's possible that the GSO will fund these transport and storage models in future, however, as the Government has not yet decided on the funding for these models this consultation only focuses on funding for the HBPM.

GSO Design

The GSO system should align with the following principles: -

  • Solvency: The GSO should provide adequate funding to the relevant hydrogen business models for long-term certainty on revenue support.
  • Simplicity: The GSO is designed to be straightforward for stakeholders including gas shippers, administrators, and consumers, to reduce administrative burdens and compliance costs.
  • Affordability: The system aims to minimise the long-term financial impact on energy consumers.
  • Policy Coherence: The GSO should support broader Government decarbonisation objectives.
  • Market Stability: The GSO aims to maintain stability in the gas market.
  • Flexibility: The GSO is designed to be adaptable to future developments in the energy sector. This includes the potential geographical expansion and adjustments based on consultation feedback.
  • Compliance: Ensuring that gas shippers comply with the GSO is crucial. The design includes measures such as a credit cover lever, mutualisation, and penalties for non-payment to enforce compliance and maintain the integrity of the funding mechanism.

Impact on energy users

Charges like levies are often passed through to end users as additional costs. The Government has indicated that it will be a commercial decision for the gas shippers whether they choose to pass on some or all of the GSO costs to their customers, therefore it's likely the GSO will increase the cost of gas for domestic and non-domestic consumers based on the precedent set by the Green Gas Levy. The Government estimates that the Gas Shipper Obligation (GSO) will add approximately £2.60 to £4.50 per year for the average dual fuel household. Non-domestic gas users may experience an increase in gas prices of up to 2%. The Government expects that in the absence of hydrogen deployment funded by the GSO, alternative decarbonisation technologies would be required to contribute to decarbonisation targets. DESNZ analysis predicts alternative decarbonisation technologies would be more expensive and that increase in cost would most likely be borne by end users. Therefore, the impact on bills in the absence of the GSO funding hydrogen deployment would be greater than the incremental rises predicted above.

The Government is exploring measures to mitigate the effects of the pass through of costs on vulnerable households, and exploring exemption options for some non-domestic users, including gas-intensive industries and projects which produce hydrogen using carbon capture technology. However, these exemptions are still under consideration and the consultation aims to gather feedback on their feasibility and impact.

The Government anticipates the GSO will be introduced in 2027, subject to the appropriate legislation being in place. The consultation gives an insight into the potential costs and impacts of the levy and provides an opportunity for stakeholders to offer feedback on the proposed levy, design choice and impact assessment.

The consultation closes on the 9th of April and the Government response is expected to be published later in 2025.

Contributor

Lois Herriot

Solicitor