Decarbonisation of the LNG Supply Chain: challenges and the way forward

Why decarbonisation?

Projections from various organisations all show a significant role for gas in the energy mix to meet global energy demand in 2050.

Indeed, gas has widely been seen as a “transition fuel”; a bridge between an economy running on coal vs one running on renewables. However, increasingly the lifecycle emissions of gas as an energy source are being compared to those of renewable energy sources, where gas does not fare as favourably.

Decarbonising gas is therefore unavoidable to ensure a role for gas in the energy transition and to fulfil Net Zero 2050 ambitions.

The LNG Supply Chain: a carbon-intensive process

For many countries without domestic gas production or the option of pipeline gas from nearby countries, uptake in gas demand will be met by LNG.

By its very nature, LNG spans continents and involves different industry processes and the emissions from LNG have up until now been considered on this more segmented basis. However there is an increasing focus on the lifecycle emissions of the whole LNG supply chain, which involves carbon emissions along every step of the chain up to final combustion.

The challenges to decarbonising the LNG Supply Chain

Decarbonising the LNG supply chain, however, comes with its challenges.

One main pre-requisite for decarbonisation is a robust emission monitoring, reporting and verification system that provides clear data in order that the emissions footprint of the supply chain can be better understood. However, there is currently no such national or supranational overarching system and with very little data available on emissions across the LNG supply chain, it is difficult to achieve decarbonisation.

The drive for decarbonisation is also slowed by other considerable challenges, such as:

  • a fragmented gas value chain, with reporting and commitments by companies often covering their own operations only instead of the whole supply chain,
  • the lack of a consistent methodology to measure emissions, and
  • the absence of appropriate certification authorities ensuring the credibility of emission estimates from different elements of the supply chain.

Companies and industry bodies have started to fill the void by developing their own methodologies and setting emissions targets (see, for example, the tender process run by Pavilion Energy – and awarded to Qatar Petroleum in November 2020 – for a long-term LNG supply agreement which required parties to jointly develop and implement a greenhouse gas (GHG) quantification and reporting methodology for emissions).

The future: carbon-neutral LNG cargoes

LNG players essentially have two options to mitigate the carbon footprint of LNG: reduce GHG emissions and/or offset GHG emissions. Transparency of data at each stage of the LNG supply chain from a robust monitoring, reporting and verification system is a prerequisite to both.

A “carbon-neutral” LNG cargo refers to an LNG cargo where its GHG emissions have been reduced to zero or otherwise offset in full. Typically this would take account of the entire product lifecycle GHG emissions (from well to wheel), although there are differences in approach being applied in the market (further reflecting the lack of a robust MRV system).

There are now a number of examples of carbon neutral LNG cargoes being sold in the market (eg. Shell, Tokyo Gas, JERA, ADNOC, Total and CNOOC have all been involved in deals for carbon neutral cargoes). However, the scalability of this model currently looks challenging given the limited size of the offset market and the current cost of offsets compared to relative carbon prices.

Achieving decarbonisation

For decarbonisation of LNG to take hold, a comprehensive model should be developed to permit financial viability and emission reduction. In order to start producing and delivering what is now being called “advantaged” or “differentiated” gas, technological and regulatory changes have to be implemented at each stage of the supply chain from upstream production to downstream combustion.

While exporting and importing countries have their role to play by expanding their existing regulatory arsenal,[1] companies can also lead the way by offsetting the carbon from their LNG cargos[2] or exploring other alternatives, for example reducing flaring and venting, using carbon capture and storage and other abatements technologies, and exploring alternative low or zero-emission fuels such as hydrogen. In light of high costs likely to be associated with some of these alternatives, securing funding should be at the heart of companies’ strategies, and it is critical for companies and governments to reorient capital flows towards such investments[3] while thinking how the increased costs will be allocated between the different players in the supply chain (including, ultimately, consumers as end users and tax payers).

Conclusion

In order to successfully implement a global decarbonisation strategy of the LNG supply chain a series of outcomes need to occur. These include increased regulation of emissions (including carbon pricing mechanisms), increased access to government support for technologies which currently are not financially viable, international harmonisation of different regulatory regimes to create a level playing field for advantaged gas, and ultimately the political will to share any additional costs across wider society. The growth of the LNG industry over the past decades has in many ways been a real success story, playing a major role in meeting the rising energy demands of the world – but this next chapter and how effectively the industry tackles the issue of decarbonisation may ultimately determine the success of the industry in the decades to come.

[1] The EU is leading the way by considering a carbon border adjustment mechanism aimed at shielding selected industries against imports from countries with less strict climate policies and reducing the risk of carbon leakage.

[2] However, offsets have been criticised for continuing to allow emissions and so there is a view they should be used as a last resort.

[3] The EU is also leading the way in this area, having introduced a “green taxonomy” as part of its Action Plan on Sustainable Finance to try to provide a “common language” for classifying environmentally sustainable activities.

For more information, please do not hesitate to contact Lewis McDonald, Partner, Reza Dadbakhsh, Partner, and Eliza Eaton, Senior Associate, and we would be very happy to discuss this further with you.

Lewis McDonald

Lewis McDonald
Partner, Global Head of Energy
+44 207 466 2257

Reza Dadbakhsh

Reza Dadbakhsh
Partner, London
+44 20 7466 2679

Eliza Eaton

Eliza Eaton
Senior Associate, London
+44 207 466 2469

Green finance and innovation – point 10 of the UK Government’s Ten Point Plan

In the final limb of its Ten Point Plan (the Plan), the Government acknowledges the significant investment required to achieve net zero through the developments and innovations elsewhere in the Plan. It seeks to leverage public and private sources of financing, increasing investment in research and development (R&D) while cultivating a green finance sector, including through the issue of UK Sovereign Green Bonds from 2021. This builds on the Government’s 2019 Green Finance Strategy and the establishment last year of the Green Finance Institute.

Net Zero Innovation Portfolio

The Government has committed to raising total R&D investment to 2.4% of GDP by 2027 and the first contributor to this is the £1 billion Net Zero Innovation Portfolio, which aims to accelerate the commercialisation of low-carbon technologies, systems and processes in the power, buildings and industrial sectors. The portfolio is designed to focus on priority areas that align with those emphasised in the Plan, including:

  • floating offshore wind;
  • nuclear advanced modular reactors;
  • energy storage and flexibility;
  • bioenergy;
  • hydrogen;
  • homes;
  • direct air capture and advanced carbon capture and storage;
  • industrial fuel switching; and
  • disruptive technologies, including AI for energy.

This builds on recent investments, such as the first phase in November of a £100 million injection in new greenhouse gas removal technologies, including direct air capture, a method of capturing CO2 from the air for storage in geological formations or use in industrial processes. In the Plan, the Government has pledged a further £100 million for energy storage and flexibility innovations, noting the increasing importance of such technologies as the UK more heavily relies on renewable sources of electricity generation and has to counteract their inevitably less predictable generation.

Nuclear fusion

Further to the commitments it makes to large-scale nuclear projects and advanced nuclear technologies in Point 3 of the Plan, the Government has emphasised its continued focus on commercialising nuclear fusion technology. It notes its ongoing £222 million investment in the STEP programme, which aims to build the world’s first commercially viable nuclear fusion power plant in the UK by 2040, as well as £184 million for new fusion facilities, infrastructure and apprenticeships to establish relevant expertise in the UK, creating a so-called “global hub for fusion innovation”.

Transport

In the transport sector, the Government has pledged to invest £3 million in the Tees Valley Hydrogen Transport Hub, which will lead research, development and testing of new hydrogen transport technologies across all modes of transport. This will sit alongside the world’s biggest hydrogen refuelling station in Teesside, plans for which have already been backed by Government. Aiming to address one of the more challenging aspects of decarbonising road transport, the Government has also committed £20 million to trials of zero emission heavy goods vehicles.

Financing – the public and private sectors

In terms of public funding, the Government has indicated that it intends to issue Sovereign Green Bonds in 2021, subject to market conditions, to be followed by subsequent issuances, the proceeds of which will finance sustainable projects and infrastructure. The Government will hope to tap into the exponentially increasing market for environment, social or governance-oriented investments, with around £190 billion of green bonds having been sold last year – 3.5% of global bond issuance.

In the private sector, the Government is continuing to encourage greater private investment in green innovation, building on 2019’s Green Finance Strategy and the corresponding launch of the Green Finance Institute. This organisation, chaired by Sir Roger Gifford, was established to promote collaboration between the public and private sectors, bringing together global experts and practitioners to design new ways of channelling capital into sustainable initiatives. It has since established a Coalition for the Energy Efficiency of Buildings and a Zero Carbon Heating Taskforce, as well as launching a Green Finance Education Charter.

The Plan sets out the Government’s next steps to encourage greener private investment, including introducing mandatory reporting of climate-related financial information across the economy by 2025, with a significant portion of mandatory requirements in place by 2023, aligned to the recommendations of the Taskforce on Climate-related Financial Disclosures. Measures will first be applied to entities such as premium listed companies, with their reach broadening over time, and will allow investors to better understand the impacts of their exposure to climate change, price climate-related risks more accurately and support the greening of the UK economy.

The UK and City of London will also be promoted as a leader in the global voluntary carbon markets, including in response to the recommendations of the Taskforce on Scaling Voluntary Carbon Markets. In relation to compliance markets, the Government wants to formulate a clear carbon price as the UK leaves the EU Emissions Trading System, and has since begun implementation of a replacement, domestic Emissions Trading System.

In order to facilitate informed investment, the Government will implement a green taxonomy that defines which economic activities are environmentally sustainable. The UK taxonomy will take the scientific measures in the EU taxonomy as its basis and a UK Green Technical Advisory Group will be established to review these to ensure their suitability for the UK market.

Together, the Government feels that these measures will provide investors a clear framework in which to deliver the low-carbon finance needed to achieve net zero by 2050. The Government predicts that enhancing green finance overall could attract £1 billion of matched funding and potentially £2.5 billion of follow-on private sector funding to supplement the Government’s own £1 billion investment.

Further measures directed at consumers and taxpayers, including on tax and regulations, are expected as part of HM Treasury’s Net Zero Review.

Matthew Job

Matthew Job
Partner, London
+44 20 7466 2137

Amy Geddes

Amy Geddes
Partner, London
+44 20 7466 2541

Jake Jackaman

Jake Jackaman
Partner, London
+44 20 7466 2883

Joining the race to zero – UN launches Green Hydrogen Catapult

Aiming to drive down the cost of green hydrogen, the Green Hydrogen Catapult initiative launched by the UN on 8 December 2020 sees a coalition of global green hydrogen leaders come together with a target to deploy 25GW of renewables-based hydrogen production over the next six years.

The Green Hydrogen Catapult coalition, which includes ACWA Power, CWP Renewables, Envision, Iberdrola, Ørsted, Snam, and Yara, also hopes to produce green hydrogen at less than US$2 per kilogramme, which would halve the current cost of production. The coalition are also working together on other aspects including the acceleration of the necessary technology to achieve their targets.

Green hydrogen, produced through using electrolysers to split water into hydrogen and oxygen, is considered pivotal in the transition to net zero and critical to meet climate change objectives.

The EU’s roadmap for green hydrogen, set out in the EU’s Hydrogen Strategy, sees the installation of at least 6GW of green hydrogen electrolysers by 2024 and 40GW by 2030, and aims for green hydrogen technologies to be deployed at large scale by 2050 (see more here).

In Italy, the Ministry of Economic Development has just published the Preliminary Guidelines for the National Hydrogen Strategy, which have been the subject of growing criticisms as the preliminary guidelines mainly focus on green hydrogen thus underplaying the role and potential of blue (low carbon) hydrogen technologies in Italy, such as Eni’s carbon capture and storage (CCS) project in Ravenna.

The UK’s ambitions for hydrogen are outlined in the Government’s recent Ten Point Plan, which includes the production of 1GW of low carbon hydrogen by 2025 and 5GW by 2030, and a Net Zero Hydrogen Fund of £240 million for new hydrogen production facilities (see more here). The 5GW ambition was repeated in yesterday’s energy white paper (Energy White Paper – Powering our Net Future Zero), which also stated that hydrogen projects can access the £1 billion UK energy innovation fund. Low carbon hydrogen is considered an important stepping stone to green hydrogen and ultimate decarbonisation (see more here). The UK Government is due to consult on preferred business models for hydrogen in 2021, aiming to finalise the models in 2022, and is due to publish its hydrogen strategy in 2021, which will set out the business models and revenue mechanism for private sector investment.

With the UN Climate Change Conference (COP26) taking place in the UK in 2021, the role of hydrogen in the road to net zero is gathering momentum globally, and the Green Hydrogen Catapult aims to build that global momentum in advance of the summit.

Watch this space.

Lorenzo Parola

Lorenzo Parola
Partner, Milan
+39 02 3602 1405

Steven Dalton

Steven Dalton
Partner, London
+44 20 7466 2537

The electricity licence exemptions regime – so how is it all going?

With the aim of increasing its understanding on how the electricity licence exempt sector is currently operating, the Department for Business, Energy and Industrial Strategy (BEIS) has published a call for evidence on the exemptions from the requirement for an electricity licence regime.

Exemptions regime review

This call for evidence is part of a wider review of the exemptions regime, which includes legislation, powers to exempt and policy, taking into account the future development of the electricity industry, the need for market participants to pay their fair share of network and policy costs, and the need for the exemptions regime to support the Government’s net-zero 2050 target.

The evidence obtained will form a basis for considering whether changes to the regime are needed to reflect the aims of policy, and will inform future consultation on potential changes. The call consultation period runs from 30 October 2020 to 1 March 2021.

Current regime

The current regime has been in place since the Electricity Act 1989, under which generators, distributors and suppliers of electricity must be licensed unless they fall under an exemption; the Secretary of State can exempt individuals or classes of individuals under section 5 of the Act. For those falling within the conditions of the class exemption, this happens automatically and it is not necessary to inform the Government or the regulator. The individual and class exemptions are used by a wide range of market participants including large industrial sites, ports, airports, shopping centres, caravan and motorhome parks, and other small business developments. The call for evidence seeks not only the views of those stakeholders that currently benefit from individual and class exemptions, but also those wishing to benefit from such exemptions, and other stakeholders, including licensed stakeholders, consumers and trade bodies.

Changes on the horizon

With the energy sector having changed substantially since the regime was first introduced, and continuing to develop and change rapidly towards a low-carbon net-zero future, smart metering, electric vehicles, and electricity storage are becoming part of the energy mix, and stakeholders currently benefitting from, and those wishing to benefit from, the current exemptions regime will need to watch this space closely as changes may be on the horizon.

Potential steps to be taken now

The call for evidence states that once it is concluded, BEIS will develop proposals for potential changes to the exemptions regime on which it will consult. There are a number of practical steps which those with an interest in the exemptions regime should think about taking at this stage. The obvious first step is to consider whether to respond to the call for evidence.  Any response to the call should make clear that you are a stakeholder and have an opinion and/or information which is relevant and should be taken into account by BEIS. It is worth identifying at this stage any additional topics or proposals to those not covered in the call for evidence which should be included in the proposed consultation, and any further information which BEIS should provide in its consultation paper in order to ensure properly informed responses. Insofar as any response to the call for evidence includes material of a commercially sensitive nature, then it will be important to flag that to BEIS on provision of the material, and possibly to provide a redacted version for public dissemination.

Interested individuals/entities should also now think about starting to gather together relevant material and to contact those whose assistance might be required at the consultation stage. It is important to ensure that all relevant expert and factual information is put before BEIS at the consultation stage, as it will be difficult to introduce new points after the consultation closes. It is also worth considering at this stage whether there would be a benefit in making requests for information under the Freedom of Information Act and/or Environmental Information Regulations (whether of BEIS or other public bodies) which might assist in the preparation of a response to the consultation.

Sarah Pollock

Sarah Pollock
Partner, London
+44 20 7466 2786

Silke Goldberg

Silke Goldberg
Partner, London
+44 20 7466 2612

Nusrat Zar

Nusrat Zar
Partner, London
+44 20 7466 2465