Building an Investable Hydrogen Value Chain in Scotland
According to a new report, Scotland is in a great position to showcase the potential of hydrogen, but only if the right decisions are made on production locations and demand models. Hydrogen Industry Leaders highlights the main findings of the report.

Published by international law firm Addleshaw Goddard and Equitix, a leading international investor in infrastructure, the report outlines challenges that need to be addressed and overcome across the value chain to establish the business case for investors to support the creation of a hydrogen economy in Scotland.

There are currently more than 60 hydrogen demonstration projects in Scotland

Currently, the global green hydrogen market is forecast to grow from $1 billion in 2021 to $72 billion by 2030, according to Straits Research. This is a compound annual growth rate of 55 per cent with Europe expected to be the leading player.

Recently, Scotland has been playing an increasingly active role in exploring the potential for hydrogen. There are currently more than 60 demonstration projects underway in the country, from hydrogen-powered double-deckers being used in Aberdeen to the tidal-powered hydrogen electrolyser in Orkney.

Both the Scottish and UK governments have signalled intent to scale up the production and use of low-carbon hydrogen. The Scottish Government’s recently published Hydrogen Action Plan sets out the role that low-carbon hydrogen can play in helping achieve the nation’s net zero targets.

The Scottish Government must ensure effective policy collaboration

Developing at-scale production of low-carbon hydrogen poses many technical and funding challenges.

In the report, it is said that the difficulties involved in transporting and storing hydrogen mean that: “Aligning early production with demand is crucial to building a robust domestic hydrogen economy.”

Industry offtake is likely to be the foundation on which demand from other applications such as transport and heat can be built up.

The UK Government’s strategy for hydrogen is focused on a small number of large industrial clusters. However, the highly distributed nature of Scotland’s industrial base means a different approach will be needed here based on creating areas of demand to support hydrogen production facilities.

How important it is to create these pockets is explained in the report, “Industry may even need to relocate to where the hydrogen is being produced rather than the other way around, a trend which is already being seen elsewhere in Europe.”

Although Scotland has its own strategy from the UK Government, and the fact that some of the most important powers for the sector’s development are reserved for Westminster is seen as a potential impediment to progress.

The report revealed that in areas such as domestic heat: “There is concern that Scotland is unable to drive the progress some believe is needed because Westminster is responsible for heat policy and is yet to take a decision on mandating hydrogen-ready boilers.”

Close cooperation on areas such as regulation and certification must be a focus for both the UK and Scottish governments to boost the hydrogen economy.

One contributor highlighted that “Decisions around blending and 100% hydrogen pipe networks should be done on a collaborative basis with the UK Government, and actually with Europe as well.”

Clarity must be gained on hydrogen financial support

Hydrogen costs are widely expected to come down in the long term and to benefit from technology and efficiency improvements. This could help to lower the price for both renewable power and electrolysers.

However, support will be needed to help establish the market while the gap between the cost of hydrogen and fossil fuels narrows.

Both the Scottish and UK governments have announced several funding initiatives to help get projects off the ground. The Scottish Government has committed an initial £100 million to support its Scottish Action Plan, including a £90 million Green Hydrogen Fund which will soon open with a call for proposals for renewable hydrogen projects.

In terms of revenue support, the Hydrogen Business Model (HBM) will use a contracts-for-difference (CfD) style mechanism. The model aims to bridge the cost gap between low-carbon hydrogen and higher-carbon fuels.

The report explained that though the progress in developing the HBM has been generally welcomed by the sector, however: “There are concerns whether a CfD mechanism is the right approach partly due to its benchmarking to power prices set by gas.”

Some in the sector believe a regulated asset-based type arrangement would be a better way to secure investment. Others felt that the HBM was “unnecessarily complex” for what is needed at this stage of the market’s development.

Another issue raised is around the extent to which the HBM model incentives off-takers given there is likely to be capital investment needed to enable switching to using hydrogen.

Scotland must secure the resources needed to scale up hydrogen production

With many other countries looking to rapidly scale low-carbon hydrogen production in the years ahead, demand for key equipment such as electrolysers will rise significantly.

Although the supply chain is starting to ramp up production, the report said that: “Transport manufacturers are reluctant to commit significant resources into developing new vehicles for an unproven market.”

Ensuring that Scotland has the people with the skills needed to develop a hydrogen economy will also be critical across construction, commissioning, engineering, maintenance and technical specialists needed for safety codes and standards.

The opportunities for developing a hydrogen economy in Scotland are undoubtedly exciting, but the challenges that will need to be overcome are not to be underestimated.

Ensuring that the necessary conversations are being had within Scotland and with the UK and Europe will be vital to ensure a joined-up approach. Given its potential impact across every aspect of the Scotland economy, the public and private sectors must move forward together.

With effective policy levers, demand visibility, and support in place, industry and funders could be provided with the confidence to take investment decisions and build supply chains.