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Decarbonising UK industrial clusters – potential and risks to manage

22/6/2022

4 min read

Head and shoulders photo of Adrian Del Maestro, Director of PwC Strategy& Photo: PwC Strategy&
PwC Strategy&

Photo:  Adrian Del Maestro, Director of PwC Strategy&

Adrian Del Maestro, Director of PwC Strategy&, looks at the prospects and funding challenges facing industrial hubs as they move to decarbonise operations.

Decarbonising industrial clusters will be an important step forward in helping the UK meet its net zero ambitions. While industry generates about 19% of national emissions, some 424mn tCO2eq in 2021, industrial clusters alone represent about half of industry’s overall contribution.

 

Although emissions from these industrial players are some of the hardest to abate, with companies ranging from refineries to steel makers and cement producers, decarbonising these clusters can make a sizeable dent in the net zero transition of UK industry – removing some 40mn tCO2e.

 

But success in carbon reduction across the clusters will be important for other strategic reasons. The clusters are also a litmus test for new low carbon technologies that need to be scaled up, primarily carbon capture and hydrogen.

 

These industrial segments equally illustrate the power of partnership between government and business, which will be an ongoing feature of the energy transition. And crucially, from a political and economic perspective, decarbonising the clusters will attract the investment needed to generate new jobs and industries that will support the government’s levelling up agenda. So clearly there is a lot to play for.

 

How to ensure the success of the clusters
First, the demand side of the equation in hydrogen needs to be addressed. While there is much focus on hydrogen production across the clusters, demand stimulation will be a key success factor. Project developers in hydrogen output need to know where the demand anchors will be for their product. This could be, for example, local councils looking to source hydrogen for their decarbonised municipal bus fleets, heavy industry substituting gas feedstocks or, in the medium term, the need to replace gas in heating networks.

 

It will be important for the business case of any project that potential producers are able to demonstrate offtake agreements to secure demand. Incentives will need to be in place for potential consumers to encourage the switching of fuel sources. The government is in the process of implementing various programmes which will result in the awards of low carbon hydrogen support.

 

Second, clusters will need to attract more investment from infrastructure funds and other capital sources to finance future growth. The UK Investment Bank can help by targeting funding at more innovative low carbon technologies, such as hydrogen and carbon capture. In its discussion paper Potential private sector opportunities in priority sectors, the UK Investment Bank highlighted its interest in identifying early opportunities to accelerate the deployment of these new low carbon technologies.

 

More broadly, a number of business models will need to be in place to attract funding. For example, there is currently no business model in place to fund investment in hydrogen transportation and storage. The government is looking to address this by 2025.

 

Another important factor to consider is the need for UK government departments to coordinate efforts among themselves to ensure the regulatory framework for the clusters remains consistent. For example, the Department for Business, Energy and Industrial Strategy (BEIS) is looking at hydrogen blending for heating but has yet to make a decision. Ofgem has not developed the required regulation to allow blending. Both parties will need to ensure their approach is aligned as clusters decarbonise.

 

It’s also important to recognise that the UK supply chain is stretched and resources to deliver clusters are constrained. This will make meeting local content requirements challenging. The supply chain is also dealing with inflationary factors around raw material prices. This is part of the broader challenges facing global supply chains. The same can be said of the need to ‘upskill’ thousands of current employees. Government will need to consult with the supply chain to better understand how to address these resource constraints.

 

Partnerships and collaboration
Finally, partnerships and collaboration will be key ingredients for success in the clusters. Partnerships are essential to syndicate risk and funding, as well as develop capabilities and they will be key to the energy transition. More partnerships are required, such as industry potentially partnering with infrastructure funds to channel investment into the clusters.

 

Regarding the latter, the funds have large and available pools of capital, but deployment of these funds will need to meet the necessary risk/reward criteria. As for informal collaboration across companies and clusters, this will be essential to share best practice and to identify solutions to tackle the complex interdependencies across the clusters.

 

This article is based on an industry perspective: The road to responsible growth published by PwC Strategy&.

 

The views and opinions expressed in this article are strictly those of the author only and are not necessarily given or endorsed by or on behalf of the Energy Institute.

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