The road to net zero: Why tax managers should prepare for hydrogen and CCUS

Producing clean hydrogen at scale requires tremendous infrastructure investments, which governments are looking to incentivise heavily through grants and tax incentives. Accessing these opportunities, which can substantially reduce the cost of investment, needs a proactive approach rather than a reactive one.

Tax managers should be at the forefront of helping their organisations understand how hydrogen will drive change across their entire value chain. With any business change, tax functions can add the most value early in decision-making, advising their organisation on accessing the incentives available, lowering investment costs, and mitigating downside risks.

Which sectors could hydrogen transform?

Although hydrogen use is limited now, there is a growing momentum to scale up low-emissions blue[i] and green[ii] hydrogen to make them cost-effective, transforming:

• Manufacturing processes: replacing the use of fossil fuel-based hydrogen in several industries – such as refining, ammonia, methanol production – with low carbon (blue) or carbon-free (green) hydrogen;
• Transport: as a fuel where batteries are impractical; and
• The energy system:
  • using green hydrogen as chemical energy storage for wind and solar generation, which also helps to balance the electricity grid and integrate renewables
  • decarbonising heat by injecting either green or blue hydrogen in the gas grid, thereby extending the use of the gas distribution network – rather than decommissioning it
  • enabling continued gas production from, for example, the UK North Sea and extending the use of all the associated infrastructure, technology and expertise through blue hydrogen (gas + CCUS).

While price parity between green and blue hydrogen remains some way off, the price gap is closing with the falling costs of renewables and electrolysers.
 

The $300 billion global hydrogen project pipeline

Government commitments to decarbonisation have triggered a rapid acceleration of blue and green hydrogen projects, according to industry lobby group, the Hydrogen Council, which expects at least $300 billion to be invested globally over the next decade by the public and private sectors.

Over 30 countries have released hydrogen roadmaps, and governments worldwide are committing significant public funding supporting decarbonisation through hydrogen technologies. According to the Hydrogen Council, no less than 228 large-scale projects have been announced along the value chain, with 85 per cent in Europe, Asia, and Australia.

The European Union's hydrogen strategy, published in July 2020, sets out a strong investment plan to achieve electrolyser capacity targets of 6 GW by 2024 and at least 40 GW by 2030.
 

The pivotal role of carbon capture, utilisation, and storage (CCUS)

CCUS doesn't remove the need to reduce carbon emissions. It enables the production of low-carbon blue hydrogen (allowing the use of North Sea gas and associated infrastructure), and it provides a means to reduce emissions in hard-to-abate heavy industry sectors.

Once captured, carbon dioxide can be transported via pipeline to be stored underground, for enhanced oil recovery in the oil and gas sector or used as an input such as a chemical feedstock. Research is ongoing to fund alternative uses for CO2 that may lead to the development of a specialised market.

The UK's fortunate geology allows CO2 storage in depleted fields that could even lead to establishing a CO2 storage market, where the UK could provide a permanent merchant storage facility for emissions captured elsewhere in Europe.

CCUS remains costly, but governments are ramping up tax incentives and policy initiatives to help make the technology commercially viable in the long term.

Certain incentives, such as grants, will need to be obtained prospectively rather than retrospectively (traditionally the domain for many tax incentives). This means tax managers need to be close to the business planning process to add value.
 

£ billions of UK decarbonisation incentives

Incentives schemes often have a limited window. Tax teams can enable their organisations to respond quickly, raising awareness and understanding of what is available and the associated criteria to ensure their projects' feasibility tightly matches grant requirements.

In the UK, alongside pushing part-investing in large infrastructure projects, the government is creating the policy and subsidy environment to drive the energy and extractives sectors towards decarbonisation, including hydrogen and CCUS initiatives, such as:

• £315 million to be invested through the Industrial Energy Transformation Fund available until 2024, including grants to improve the energy efficiency of industrial processes and cut carbon emissions;
• £170 million from the Industrial Decarbonisation Challenge to be invested between 2019 to 2024;
• £1 billion to be invested from 2021 to 2026 as part of the Government's Net Zero Innovation Portfolio;
• £1 billion from 2021 to 2030 to support the establishment of CCUS in four industrial clusters by the end of the decade through the CCUS Infrastructure Fund.

Alongside these incentives, the UK government has pledged to increase its research and development (R&D) budget to a record £22 billion annually by 2024-25, which includes supporting companies developing the potential of hydrogen, CCUS and zero-carbon industrial processes to decarbonise the economy.

To encourage companies' capital spending further over the next two years, the government's 2021 Budget announced additional capital allowances (tax depreciation) with a new super-deduction (130 per cent) and 50 per cent first-year allowances.

The UK government published its industrial decarbonisation strategy in March, while its hydrogen strategy is due later this year alongside a consultation on preferred business models for hydrogen.

This will build on the government's Ten Point Plan for a Green Industrial Revolution and the subsequent Powering our Net Zero Future energy white paper.
 

Indirect hydrogen opportunities – the ripple effect

It's not just businesses directly involved in the hydrogen economy that can benefit from the public funding driving hydrogen and CCUS projects.

There’s a substantial ripple effect for businesses operating close to that infrastructure with the potential to provide services aligned to the hydrogen and CCUS supply chains and those investments taking place.

Also, the development of hydrogen and CCUS projects will drive different business models, whether that's joint ventures or collaborations, as well as significant M&A activity.

As with any business change, there will be tax consequences resulting from business model and supply chain changes.

Tax functions can help their organisations understand the tax implications of those changes alongside how new fiscal environments affect their business and coordinate with project teams around incentives to maximise their chances of success.
 

Next steps

The UK and EU are ramping up incentives to develop hydrogen and CCUS projects to decarbonise economies on the road to net-zero emissions. 

Do you know opportunities and risks hydrogen and CCUS present for your organisation? Does tax have the seat at the table that it needs to add value at the right time?

To discuss this topic further, please contact one of our dedicated energy transition tax team leaders or me.

Other posts in the series:

• Three tax challenges that will determine success on the road to ‘net zero’
• The road to net zero: 3 reasons tax should contribute to big business decisions
• How tax can support the business case for investments in technology – coming soon
• Impact on Mergers and Acquisitions – coming soon
   

References:

[i] Blue hydrogen is produced from fossil fuels where the emissions are captured.

[ii] Green hydrogen is produced by electrolysing water powered by renewables.