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Gas networks face uncertain future as Britain charts course towards net zero

by SuperiorInvest

When Hong Kong tycoon Li Ka-shing swooped on one of the UK’s major gas distributors in 2012, the Paris climate accords were seven years away and Prime Minister David Cameron was preparing to “stop the nonsense green”.

More than a decade later, efforts to address climate warming have put the future in cloud for these pipeline network owners, including Wales and West Utilities, acquired by Li’s CKI Holdings 12 years ago.

One of Britain’s four gas network owners, it faces uncertainty as ministers plan to ditch methane or natural gas for home heating as a key target to reach net zero emissions by 2050.

WWU claimed in its latest accounts published in September that the review of the energy system could lead to a “loss of value/business”, summarizing the concerns of the entire gas sector.

To secure their future, networks have pinned their hopes on ministers backing hydrogen as a low-carbon alternative to methane or natural gas, along with measures to switch homes to electric heat pumps.

But so far, the signs are not good for hydrogen as an option for heating homes. In November, the National Infrastructure Commission (NIC) urged ministers to reject the fuel source and opt for heat pumps.

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He argued that heat pumps were much more efficient and readily available, unlike hydrogen, and added that the government should make plans to decommission parts of the gas network that would no longer be needed.

Lord Martin Callanan, energy minister, said that same month that hydrogen “will not play a major role in heating homes”.

In another setback, hydrogen trials at Redcar and Whitby, near Liverpool, which networks hoped would strengthen the case for gas, were scrapped due to local opposition and a lack of supplies.

Only one trial remains in Britain in Fife, Scotland, due to start in the second half of 2024, to demonstrate the benefits of hydrogen before ministers make a final decision on the NIC recommendations in 2026.

Some gas groups have already recognized the likely impact on their businesses.

Northern Gas Networks said in its accounts in August that the “most likely scenario” for the company is an overall 46 per cent drop in gas transported across its network by 2050.

The uncertain outlook makes it difficult for energy regulator Ofgem to assess how much network owners should be allowed to invest and charge customers, with the risk that money for pipeline upgrades could backfire if they end up being decommissioned.

In December, the regulator warned that households could face higher bills as distributors recover costs from fewer and fewer customers, a nod to a possible switch to heat pumps.

Richard Lowes, of the NGO Regulatory Assistance Project, warned that consumers could suffer if landlords are allowed to invest large sums of money in improvements, which must then be recouped through bills despite the possibility of falling customer numbers. “The country is being exposed to these financial risks,” he said.

The government has supported, pending safety approval, mixing up to 20 percent hydrogen with methane or natural gas transported through pipelines. However, he stressed that the aim is to support further hydrogen growth in the economy, rather than decarbonise heating.

Li Ka-shing
Li Ka-shing’s CKI Holdings bought Wales and West Utilities 12 years ago. © Kin Cheung/AP

A positive aspect for gas groups is the possible complications in the deployment of heat pumps. This could lead to the government backing hydrogen for home heating, as well as the NIC’s call for pumps.

Only around 250,000 pumps have been installed in British homes, a fraction of the home heating market. The latest figures show 72,000 installed in 2022, despite subsidies for conversions, well below the government’s target of 600,000 installations per year by 2028.

By contrast, 85 per cent of UK homes use methane gas.

Electrical grid capacity will also have to increase if demand for pumps increases.

“We have never electrified heating in the UK before and we have never decommissioned the gas network before,” Sarah Williams, director of regulation and asset strategy at WWU, said shortly after the NIC decision.

He warned of the risk that “we either don’t have a resilient energy supply or we have a resilient energy supply that costs much more than necessary.”

Cadent, the UK’s largest gas distribution network, has submitted a report it commissioned from Imperial College London to the NIC, arguing that switching to hydrogen could save £5.4bn a year by 2050 compared to switching completely to heating electrical.

“Hydrogen for heating is a viable option to cost-effectively decarbonize heat,” the document argues.

Colm Gibson, CEO of the Berkeley Research Group, added that the NIC analysis does not “give due weight” to emerging methods of hydrogen production, such as pyrolysis.

It involves splitting methane into hydrogen and solid carbon at very high temperatures.

Supporters argue it could be cheaper than producing it from methane or natural gas at lower temperatures, since it would not require infrastructure to capture carbon dioxide emissions.

WWU’s Williams also insists that investors “absolutely see a future for the gas network.”

“They are [investors] They are extremely understanding in terms of their view of the long-term future of their own investment in the UK. And I am hopeful that that will continue.”

The colors of the hydrogen rainbow

Silhouettes of two people on a beach contemplating a sunset.  Wind turbines can also be seen in the distance.
© Christopher Furlong/Getty Images

green hydrogen Manufactured by using clean electricity from renewable energy technologies to electrolyze water (H2O), separating the hydrogen atom it contains from its oxygen molecular twin. Currently very expensive.

blue hydrogen Produced using natural gas but with carbon emissions captured and stored or reused. Tiny quantities in production due to lack of capture projects.

Gray hydrogen This is the most common way of hydrogen production. It comes from natural gas through steam methane reforming but without emissions capture.

brown hydrogen The cheapest way to produce hydrogen but also the most harmful to the environment due to the use of thermal coal in the production process.

turquoise hydrogen It uses a process called methane pyrolysis to produce hydrogen and solid carbon. Not tested at scale. Concerns about methane leaks.

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