The recent natural gas price surge has brought the UK’s energy security and energy transition to the fore. Gas has been seen as a key transition energy source, but if Britain is to move into a secure, low-carbon future, alternative options need to be examined, and hydrogen looks like a frontrunner in answering the country’s challenges.
The explosion in the price of natural gas has sparked an energy crisis in the UK. At a time when the world is trying to move to cleaner sources of energy, gas is seen as a key transitionary fuel. Its carbon intensity is lower than coal or oil, networks are set up to support it, and it smooths the intermittent nature of renewables. But Britain’s reliance on gas, coupled with its lack of storage facilities, is placing it in an insecure position, particularly when supplies are dominated by Russia.
Natural gas remains the dominant fuel for central heating across the UK, according to the UK Department for Business Energy & Industrial Strategy. In 2021, 77 per cent of consumers are using it as the primary method to heat their homes1. Because of this, Ofgem caps prices for fixed and variable rates to limit consumer exposure to natural gas market prices. And that cap has pushed a number of suppliers into liquidation as prices have risen.
Responding to the price surge, Ofgem increased the cap on October 1 to over 10 per cent, but this was not enough for many suppliers who had failed to sufficiently hedge against wholesale price increases, resulting in them supplying customers at a loss and quickly running out of capital.
With much of Britain’s gas supply imported, we are particularly vulnerable to decisions taken elsewhere. The recent easing of gas prices, for example, was almost entirely a result of Russian Gazprom’s decision to start filling storage facilities on the European continent2. It only serves to highlight the need to support alternative fuel investment and take greater control of energy supplies.
“In many cases the technology already exists to transition to alternative energies, they just need to invest very, very heavily to bring down the cost and scale up production,” says Jonathan Sparks, Chief Investment Officer of UK & CI Private Banking and Wealth at HSBC.
The obvious choice for the UK is hydrogen, which is why the UK government unveiled its ambitions to “kickstart a world-leading hydrogen economy” in August this year3.
“In an ideal world, we’d have green hydrogen, where you use renewable energy to run the electrolysis process – splitting water into hydrogen and oxygen. That would work really well in the UK, because we get wind surges that we currently can’t use because we have no way to store the excess power. With green hydrogen, we could use that surge to make more hydrogen, which can then be stored,” explains Sparks.
However, while electrolysers can handle more power, the main problem is when they’re switched off. Electrolysers work best and are most cost-effective when they are run constantly. Right now, that’s not feasible for the main grid, which isn’t set up to take a constant flow of hydrogen. That’s why hydrogen is used mostly in industrial deployments, where demand is quantifiable.
But we can’t afford high demand for hydrogen while hydrogen remains expensive. Embracing hydrogen would require a massive upfront investment in infrastructure and supportive government policy and regulations to drive the transition, for benefits that won’t be seen for years to come.
“Somewhere along the line, someone's got to absorb those costs. Longer-term, we will all get a return on that investment, because we have less knock-on effects of the climate crisis and, on current trends, cheaper energy. But how do you distribute that cost?” asks Sparks.
This can only be managed by government policy, as governments are able to take a long-term view in their decision-making. Otherwise, high gas prices could cause consumers to turn back to even more polluting fuels, like coal.
“Given the carbon footprint, there has been a transition away from coal power generation to gas generation, but as global prices rose, some of that moved back to coal again just to meet demand,” Sparks points out.
Other alternatives include nuclear, biofuels and battery storage, but it’s the combination of renewables and hydrogen that answers the most questions. Renewables alone are too intermittent and unreliable to support a high-demand network. Until and unless battery storage costs and limitations can fall, green hydrogen offers a way to store and transport the power of renewables.
No one alternative will be the answer. In the future, as now, Britain will have a mix of energy sources. Britain will also have dominant fuels and making sure that investment happens in the best alternatives is a key challenge for the government. Hydrogen has enormous potential as a versatile energy source that can be stored or transported, and powered by renewable electricity. But to solve the chicken-and-egg dilemma won’t be easy.
I don't think many countries need to make a technological breakthrough to transition to alternative energies, they just need to invest very, very heavily. - Jonathan Sparks, Chief Investment Officer of UK & CI Private Banking and Wealth at HSBC