[Author: Alexandra Damerau]
The UK government is advancing its commitment to a low-carbon economy by proposing a levy on gas shippers (the Gas Shipper Obligation (GSO)), a funding mechanism designed to support the Hydrogen Production Business Model (HPBM). This initiative aims to bridge the cost gap between low-carbon hydrogen and traditional fossil fuels, thereby encouraging investment in hydrogen production and usage. The government is seeking input on the potential scope, impact, operation and administration of the GSO.
What is the GSO?
The GSO is a levy which gas shippers will be required to pay as their share of the amounts needed to fund payments to hydrogen producers under Low Carbon Hydrogen Agreements (LCHAs).
HBPM Funding
HBPM support is allocated through Hydrogen Allocation Rounds (HARs). The first allocation round (HAR1) has closed, with 11 successful projects, and the second round (HAR2) is now underway. The government intends to fund the HPBM up to 2027 after which the GSO will cover these payments.
How will the GSO operate?
The GSO will initially apply in Great Britain to entities operating on a Gas Shipper Licence, with potential future expansion to Northern Ireland. Government proposes that the Low Carbon Contracts Company (LCCC) administer the GSO . In designing the levy, government has assumed that the shippers will pass the cost to the end users of gas and has sought to ensure that the costs are passed through fairly.
Two primary approaches are under consideration:
- Per Meter Point Charge: Shippers would be charged based on the number of gas meter points they serve. When the cost is passed through to end users, it is likely that a shipper with a greater number of domestic gas meters would increase the charge per unit of gas more than a shipper with a smaller number of industrial gas meters shipping large volumes.
- Volumetric Charge: Charges would be proportional to the volume of gas shipped to meter points. This would likely translate in the same increase in charges per unit of gas for all end users.
The government favours the volumetric approach, as it aligns charges with actual gas consumption.
Collection amounts and payment frequency
Two approaches are being considered, with the first being the preferred position:
- charging GSO to shippers in proportion to their market share of quantities of gas shipped; and
- setting a pre-determined obligation rate in advance of the obligation period.
The government proposes a monthly obligation period, and the same payment frequency.
Risk of default
Shippers would be required to provide credit support to the levy’s administrator. If a shipper defaults, the administrator will draw on the shipper’s credit cover and will have powers to run a mutualization exercise to recover any outstanding payments from the non-defaulting levy base. Any costs subsequently recovered from the defaulting shipper will be repaid to the non-defaulting shippers in proportion to their contribution.
Exemptions
The government has ruled out exemptions for domestic gas users. However, it is seeking views on what exemptions for non-domestic users might be appropriate, for example, for gas quantities shipped to CCUS-enabled hydrogen producers.
Input sought
The consultation seeks views on various aspects of the GSO’s design, including:
- mechanisms to determine the quantities of gas shipped;
- ways of aligning the obligation periods and collection periods; and
- approaches to mitigate the risk of under-collection and overcollection.
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