A Trading Nation - realising Scotland's hydrogen potential: plan for exports

3. Assurance of Supply

Our policies on hydrogen support a twin approach to accelerate and scale up renewable and low-carbon hydrogen production capacity and enable their use across multiple sectors. This approach will be critical for developing holistic domestic supply chain capabilities and skills. We are currently seeing a growth in hydrogen production activity in Scotland, with over 90 hydrogen production projects at varying stages of development, the vast majority of which are renewable hydrogen production.

Source: Scottish Enterprise, data correct as of August 2024.

Scottish projects are among those that have attracted UK Government HAR1 funding and 15-year production contracts in accordance with the UK Government’s hydrogen production business model. The UK Budget this year included confirmation of support for the first round of electrolytic hydrogen production contracts, HAR1. This totalled £2.3bn in revenue support for over 15 years. The production projects to be funded include two in Scotland, Scottish Power Whitelee Green Hydrogen Project at the Whitelee wind farm near Glasgow and the Cromarty Hydrogen Project in the Highlands being developed in partnership between Scottish Power and Storegga, to support low carbon hydrogen production and directly create good quality, local jobs.

Both projects will produce renewable green hydrogen for use in a combination of transport and industrial heat applications, and the Cromarty Hydrogen Project is exploring export of hydrogen from the region in future as the project scales up. Many projects based in Scotland are targeting future HAR to secure low-carbon hydrogen agreements. The Scottish Government continues to support Scottish hydrogen projects seeking to participate in these and has provided funding to projects’ early development phase work. Similarly, HAR2 project applications with around 1 GW of projected capacity have received letters of support from the Scottish Government.

The recently announced Great British Energy will also look to invest in clean energy projects across the length and breadth of Scotland and the wider UK, including in world leading technologies such as floating offshore wind and green hydrogen and the development of local energy projects closer to home.

The UK’s National Wealth Fund (NWF) builds on the success of the former UK Infrastructure Bank. It will have a broader mandate, extending beyond infrastructure to support delivery of the wider industrial strategy in areas where there is an undersupply in private finance. At least £5.8 billion of the NWF’s capital will focus on the sectors announced in the manifesto: green hydrogen, carbon capture, ports, gigafactories and green steel. The UK Government is also exploring options to reward clean energy developers who invest directly in their supply chains.

Accelerating progress of the first tranche of renewable hydrogen production projects, which will be operational by 2030, will build confidence, drive investment across the value chain, bring forward more projects in the development pipeline, and pull a range of hydrogen technologies through to commercialisation.

This successful delivery and operation of hydrogen production and hydrogen products at scale will provide confidence for more investments in production capacity and other key hydrogen export facilitators such as ports, pipelines, and large-scale storage.

Similarly, integrated energy infrastructure connecting points of production and storage with end uses across the UK will be critical to enable the domestic hydrogen market to develop and ensure security of supply, drive down costs and produce surplus quantities of hydrogen for international export. Continued cooperation and engagement between the Scottish Government, its Enterprise Agencies, industry, and the UK Government will be key to strategically enable the hydrogen sector to grow from its relatively fragmented initial stage to a highly integrated system that can optimise export opportunities to Europe.

3.1 Scotland’s Hydrogen Sector Market Development

At present, neither renewable hydrogen nor low-carbon hydrogen are cost-competitive against fossil-based hydrogen without intervention to bridge the cost between fossil fuel alternatives.

There are two main factors that will impact the cost competitiveness of green hydrogen production: capital cost reductions and reductions in the cost of renewable power.

Capital costs are expected to fall as a result of technology improvements such as electrolyser efficiencies and a significant scale-up of supply chain capacities driven by the automated production of electrolysers and other supply chain key components.

While the cost of electrolysers and other key components will continue to be a factor, falling renewable electricity costs will be the key driver in lowering the cost of green hydrogen into the 2030s.

There is also considerable uncertainty regarding demand growth and the supply chain’s capacity to scale up – both of which are intrinsically linked to the scale and deployment timescale for the pipeline of hydrogen production in Scotland. Here, government has a crucial role in identifying barriers to deployment and implementing targeted interventions to mitigate them.

Despite these expected cost reductions, it is clear that government support will be required if renewable hydrogen is to compete with fossil fuels^[15]. As noted, the UK Government Hydrogen Business Model is a key enabler to facilitate this and increase production capabilities. There are many production projects currently in varying stages of development in Scotland. While these projects are sized to meet growing UK domestic demand, with individual project capacities ranging between 50 MW to 499 MW, production scales are anticipated increase from 2030 when large scale offshore renewables come online.

Stimulating demand will be equally important, and we are working with industrial hydrogen producers and prospective hydrogen off-takers to identify barriers and opportunities to facilitate match-making between suppliers and customers. This includes engagement with major industrial emitters, the public sector, and other key stakeholders.

The current number of project announcements is very high compared to those currently reaching Final Investment Decision (FID). Without operational support and offtake demand to justify expenditure many of these projects might not reach FID. Completion of technical design phases is also an important milestone in project development, and we are working with our Enterprise Agencies to support companies as they go through development phases. To that end, in Autumn 2024 we launched a funding call with Scottish Enterprise as delivery partner, aiming to provide support to projects.

As well as reducing production costs, lowering delivery costs will be a key factor in ensuring that Scotland can become a major competitor in the EU market. Scotland’s proximity to demand markets in the north of Europe is key to enabling this through the development of hydrogen pipelines as the most cost-effective option for large scale transport of hydrogen^[16].

The provision of a supportive political and regulatory environment, including clear planning and consenting guidance, is also key to the deployment of hydrogen production in Scotland. We will publish comprehensive guidance for hydrogen consenting across onshore and offshore regimes before the end of the 2024. This guidance will cover all relevant consenting processes to support developers navigating the planning and consenting systems and serve as an aid for local planners and decision makers.

To raise awareness of the role that hydrogen may play in the future energy mix, we have worked with Edinburgh University, University of Strathclyde, and Aberdeen University to design a Continuous Professional Development (CPD) course entitled ‘An Introduction to Hydrogen for the Public Sector’. This is intended for all local planning professionals throughout Scotland as well as members of the public.

Government support must help close the cost gap to enable Scotland to become a major competitor in the EU market. The Scottish Government is committed to supporting the scale up of offshore wind and hydrogen production to support domestic security of supply, net zero goals and realise economic benefits from a growing international hydrogen export market.

3.2 Hydrogen Derivatives and Products

Hydrogen can be transported and stored in its pure form either as a compressed gas or as a cryogenic liquid. However, due to its physical and chemical properties, it may be more suitable in some instances to convert it to a derivative such as ammonia or [energy-carrying] product such as LOHC or synthetic hydrogen carbons to facilitate its transport and storage. Each hydrogen carrier has a unique set of advantages and challenges, influencing its suitability for different applications as outlined in the report, ‘North Sea Alliance – Matching Scottish Production to German Demand’^[17].

Many of these hydrogen products are both useful for storing and distributing hydrogen and much sought-after sustainable commodities in their own right. Further understanding Scottish production capabilities, as well as domestic and international demand for these derivatives and products, is key to understanding which sectors of the economy are most likely to stimulate domestic and export demand for hydrogen and to quantifying the scale of the economic opportunity in producing, consuming and/or exporting hydrogen derivatives and products.

Research is currently underway to assess Scotland’s capabilities for the production of hydrogen derivatives and products. This work is being conducted by ClimateXChange on behalf of Scottish Government and is expected to be completed soon. This will further identify potential offtake sectors and markets both domestically and internationally, as well as assess the scale of demand. It will be critical to identifying gaps in existing policies and regulations as well as policies stimulating or hindering the growth of hydrogen derivatives and product demand.