Scottish hydrogen: assessment report

8 Key Messages and Next Steps

It is clear that hydrogen will play a role in decarbonising Scotland's energy system and economy by 2045, though the extent of that role is uncertain. Targeted investment in hydrogen can help Scotland to realise a secure, flexible, cost effective and low carbon energy system while achieving green economic recovery from the Covid-19 downturn and a Just Transition from an O&G dominated economy.

8.1 Key messages

The stakeholder engagement and the analysis conducted for this assessment identifies key themes that need to be considered if Scotland is to maximise economic benefit and overcome the challenges of decarbonisation. 

Scotland could grow a strong hydrogen economy supporting jobs and GVA growth 

Value can be captured through investing in innovative technology and commitment to infrastructure. 

Green hydrogen production from offshore wind can be a catalyst to generate nearly £20 bn of GVA and employ over 200,000 people in 2045. The natural advantage that Scotland has in renewable energy supply, combined with the considerable offshore expertise from O&G, can be leveraged to position Scotland as a key exporter of high purity, green hydrogen. 

Blue hydrogen production can be used to develop expertise and services in the sector that could be exported worldwide, in a similar way to the capabilities in the O&G sector that are exported currently.

However, gaps remain in the supply chain for both green and blue production that will need to be filled in order to ensure that Scotland gets the most out of a transition to hydrogen.

Co-ordination of efforts across industry and government 

Better co-ordination will enable an efficient transition and ensure economic opportunities are maximised. 

There is already significant momentum from both industry and government in hydrogen demonstration and development, supported by a complex network of research and innovation programmes and funding sources. The regulatory framework is complex, risking possible gaps and overlaps in terms of roles and responsibilities. 

Co-ordination of these programmes across the hydrogen supply chain will ensure efficient delivery and value for money. A number of stakeholders raised the possibility of:

• A dedicated co-ordination/regulatory body for hydrogen, similar to the role of the OGA; 
• A body co-ordinating research and innovation, similar to the role of the Catapults or OGTC; and 
• Creation of a public-private sector leadership steering group to ensure that industry and government work closely in developing and delivering the strategy.

Clear strategy with proposed ambitions 

There is significant focus globally on the opportunities that can be realised from developing an indigenous hydrogen economy, that aligns with the needs of a global market. 

Germany, the Netherlands, Australia, South Korea and Japan are among nations who have published national strategies with clear direction of travel and ambitious targets that align with their specific strengths. These strategies encompass aspects including decarbonisation of the energy system, industrial strategy and effective use of natural resources. 

Stakeholders were clear in their desire for Scotland to develop a clear central strategy, setting out its proposed ambition for hydrogen, aligned with its strengths. Such a strategy will give industry a clear signal of ambition and allow industry and investors to respond with confidence. 

Going beyond the pilot project stage and into commercial scale projects 

To date, most hydrogen projects in Scotland and the UK have been wholly or significantly paid for by the taxpayer, through public funding, or bill payer through Ofgem innovation funding. This will need to continue in the short term in order to ensure that the evidence base for a hydrogen transition is solid. However, for many stakeholders the next important step is to move beyond the small pilot stage and into large scale commercial projects. 

To achieve this, viable business models that allow for and stimulate private sector investment need to be imagined. The UK Government is exploring the creation of business models that would support hydrogen production and is considering related policy mechanisms⁷¹. Expediting the implementation of an enduring fiscal regime will be critical to creating the pipeline of post demonstration projects.

Maintaining flexibility 

Hydrogen is still in the early stages of commercialisation as an energy vector and could develop in several different ways. 

This assessment concluded that there are demand applications that are low regrets, e.g. heavy duty transport, and should be moved to widespread deployment in the short term. For others, such as domestic and commercial heating, more development and demonstration are required to create an evidence base which will inform the optimal solutions. 

Ruling out options now would be premature, in the context of seeking net-zero 2045 solutions. At this stage all options, including blue and green hydrogen, or use of hydrogen in the gas heating network should be kept open. 

Hydrogen needs to be seen within a whole energy system context 

Hydrogen will complement increasing electrification, by improving system flexibility and resilience. Some of its benefits will only be understood when looking at the wider system context. 

Understanding where hydrogen is the optimal decarbonisation solution needs to take into consideration the geographical/regional specific requirements, and how that complements the wider system functionality. 

There is little consensus in studies undertaken to consider the macro-economic benefits of electrification and hydrogen pathways, due mainly to residual uncertainties about costs, captured benefits and technology pathways. Support should be given to all viable options, but as the evidence base builds, decisions should be taken on preferred solutions in the context of the wider system.

Speed of deployment 

If Scotland wants to capture more of the economic value from hydrogen activities it needs to act quickly and decisively. 

For example, Scotland could become a centre for skills and services in green hydrogen production with global potential. Moving determinedly to deploy significant production capacity would require the creation of supply chains close to deployment. This has the potential to attract manufacturing activity to Scotland for electrolysis systems or key demand applications like buses. 

However, if Scotland is slow to deploy, then there is a risk that supply chains will be developed elsewhere, reducing the opportunity in Scotland.

8.2 Considerations for next steps

The study and engagement identified a number of specific areas for further focus that could underpin growth in the hydrogen energy vector. 

Table 12: Further focus areas.

Report finding	Additional insight / knowledge required
Green hydrogen is likely to feature in some capacity in Scotland's energy economy and its role will likely grow in the long term.	Stakeholders agreed that green hydrogen is the ultimate goal and that Scotland should move decisively to crystallise that opportunity. Scotland should set an ambitious 2032 target and ensure there is a fiscal regime to support delivery against the target as has been done by the EU and other countries such as Germany. Clear future targets for green hydrogen production will give producers and investors a clear framework to work within. Action should be taken to cement economic value in Scotland e.g. system integration or manufacturing.
Scotland could become a large scale producer of green hydrogen for export, most likely to Europe.	The cost competitiveness of green hydrogen from Scotland needs to be explored and understood particularly in relation to other potential sources of green hydrogen production including solar power in the southern Europe and North Africa. The practicalities of mass export of large amounts of hydrogen need to be investigated, i.e. whether hydrogen is transported by ship (as liquid hydrogen, ammonia or via liquid organic hydrogen carrier) or via gas pipeline. The needs and requirements of potential export markets, such as Germany, need to be understood with some degree of co-operation between import and export markets.
Hydrogen is an opportunity for rural areas and islands to harness their renewable energy sources.	Rural areas and islands need support to unlock their renewable potential by understanding what the best options for hydrogen use locally are considering distribution of supply, demand and export.  There is a need to evaluate how hydrogen costs compare to the current energy costs in order to understand where it can be deployed.
Blue hydrogen could be an important part of Scotland's future in the short to medium term.	Commitment should be made to build out of a blue hydrogen project (such as Acorn), which can provide a low cost supply at volume in the short term.  Evaluation should be undertaken of the scale up of production of blue hydrogen in conjunction with wider CCUS initiatives. Consideration should be given on how this would help to match supply with demand and potentially allow the gas network to be leveraged.
There are low regret options for building hydrogen demand in the short to medium term, especially fleet vehicles. This can be led by buses but also includes HGVs, non-electrified rail and water transport.	Support mechanisms for vehicle operators, bus companies, local councils etc should be explored.  Further transport routes that could benefit from hydrogen could be identified and existing routes should be expanded.  Points of demand need to be matched with sufficient, secure supply of high purity hydrogen. Continue to build upon existing transport initiatives such as the: Automotive Industry Advisory Group H2 Accelerator in St Andrew's Michelin Scotland Innovation Parc
Hydrogen is a good option for industrial applications.	Need to understand more about Scotland's specific industrial demands e.g. process heat or feedstock. The demands of a few users will have a large proportional impact.  There is an opportunity to potentially accelerate deployment of hydrogen for specific demand sectors such as food and drink production.
There are decisions to be made as to whether hydrogen should be used in the gas distribution network. Hydrogen is a potential option but there are other options, electrification, district heating and CCUS (for industry).	It is likely that all heat decarbonisation solutions (hydrogen, electrification, CCUS and district heating) will be required to decarbonise the range of heat applications. Research needs to continue to determine the best decarbonisation solutions for each application (domestic, commercial and industrial heat) considering safety, techno-economic viability and consumer acceptance. This should include at scale demonstration of hydrogen for heating in domestic, commercial and industrial applications.
Hydrogen production, either blue or green, could bring significant economic value and jobs to Scotland particularly if more of the supply chain could be captured within Scotland.	Development of supportive policies and assistance to establish an adequate supply chain, whether locally or extended will unlock value. Undertaking detailed analysis and mapping of the hydrogen production supply chain, examining Scotland's strengths and gaps could help to identify areas where Scotland could look to build capabilities in order to capture GVA and jobs.  Targeted innovation funding can allow for energy skills transition.
There is a complex regulatory, framework, and a lack of clarity of roles in some areas.	There is a need to work with key UK and Scottish regulators to ensure that the regulatory position for hydrogen is clearer. Funding mechanisms need to be developed to support the policy objectives.  Coordination is required to ensure value-for-money from innovation project funding.