Cost inflation hits hopes for hydrogen in Scotland

With the SNP Government confident that low carbon hydrogen can help end Scotland’s dependence on fossil fuel while turbocharging the economy, investors are showing huge interest in the fuel, experts reckon.

Weeks after Scottish Enterprise made support for the emerging sector a pillar of its new plan to boost growth, sector watchers say interest in hydrogen is surging with some firms already working on significant schemes in Scotland.

“We get a huge number of enquiries around hydrogen generally,” said Murray Douglas, VP Hydrogen Research at the Wood Mackenzie energy consultancy.

“You’ve got all the big legacy [oil and gas] majors that are spending a lot of time and money trying to figure out how to develop hydrogen businesses but you’ve also got some of the largest power utilities around the world, some of the largest chemical companies, fertiliser companies, steel companies right through to marine fuel,” he added.

Enrique Cornejo at Offshore Energies UK noted that a hydrogen forum launched by the trade body recently had already signed up 90 members. These range from major offshore operators to relatively small services businesses that hope to be able to capitalise on a drive that could result in billions of pounds of investment.

Enrique Cornejo of Offshore Energies UK

This will be required to fund the development of facilities in which hydrogen will be produced along with transportation and storage infrastructure and the kit users will need to fit if they are to switch from other fuels.

Mr Cornejo noted that significant players are working on plans to produce both main forms of hydrogen in Scotland.

Storrega plans to convert North Sea gas into ‘blue’ hydrogen through a process called reformation. Carbon dioxide resulting from the process will be sent for storage beneath the North Sea using facilities planned for the Scottish Carbon Capture Cluster.

Environmental campaigners oppose plans for blue hydrogen production and carbon capture and storage, which they claim will perpetuate dependence on oil and gas.

Two Scottish projects won UK Government support in the first ‘green’ Hydrogen Allocation Round in December. This was open to firms that plan to produce hydrogen from water using electrolysis facilities powered by renewable energy.

Scottish Power won funding to support its plan to produce green hydrogen at Whitelee windfarm near Glasgow. The facility is expected to be the largest of its kind in the UK.

The Spanish-owned giant also applied successfully with Storrega for support for the Cromarty Hydrogen project, output from which will be used by whisky distilleries.

If successful, the projects may help justify the Scottish Government’s confidence that hydrogen could be used to play a big part in cleaning up industrial processes and in maximising the potential of windfarms.

By harnessing renewable energy to power electrolysers, green hydrogen production could avoid the wastage that currently results from the fact that weather conditions may mean windfarms and the like produce lots of power in times of low demand.

Firms that won licences in the ScotWind offshore leasing round expect to use the output from giant windfarms they plan to develop off Scotland to power electrolysers onshore.

OEUK’s Mr Cornejo noted that Scotland’s oil and gas heritage could provide huge benefits for Scotland as countries around the world look to get into hydrogen.

Sector players have accumulated decades of experience of developing and operating production, storage and transportation facilities in Scotland and offshore. There is extensive infrastructure in place that could be adapted for use in the hydrogen economy.

For example, North Sea heavyweight EnQuest is working on plans to produce green hydrogen in Shetland, which will involve utilising facilities at Sullom Voe oil terminal.

Speaking in advance of Jeremy Hunt publishing the latest Budget, OEUK expressed alarm about the prospect of Labour increasing the windfall tax on oil and gas firms if it wins the General Election that is expected to be held later this year. It has warned such a move could hamper efforts to boost investment in support of the energy transition.

There are big issues to be addressed if hydrogen is to have the impact that ministers hope. These include questions about the economics of green hydrogen given current market conditions. Fewer projects than expected won support under the HAR 1 round following cost increases, which meant the funding available did not go as far as envisaged.

Noting that the price of electricity will determine how much it costs to produce green hydrogen, Mr Douglas at Wood Mackenzie said funding challenges have heightened in the last 12 to 18 months.

“Part of the challenge right now is that the cost of renewables, onshore and offshore, has been creeping up. There’s a lot of cost inflation in those industries and that feeds straight through to the cost of electrolytic hydrogen,” he said.

The list of potential uses for green hydrogen has narrowed as specialists have concluded the fuel may not be ideal for some applications about which there was early excitement, such as domestic heating and cars.

“There has been a sobering moment. Lots of applications for low carbon hydrogen don’t make sense … there was probably a bit of over-excitement two years ago,” said Mr Douglas.

As production volumes are likely to be limited for the next decade, it would probably make sense to prioritise using hydrogen to tackle hard to decarbonise industries and forms of transport.

However, Scottish hydrogen specialist Logan Energy has won a vote of confidence from international investors after developing pioneering refuelling facilities for cars and buses in Edinburgh and Belfast respectively.

Singapore-based Lanxing New Energy supported a £5m funding round completed by Logan Energy in February. It said then: “Over the coming months we aim to announce several new capabilities for the hydrogen market as we further develop Logan’s strategic plan.”.

Bill Ireland, CEO of Logan Energy. The Musselburgh hydrogen specialist is attracting funding from foreign investors

OEUK’s Mr Cornejo noted the 11 projects supported under the HAR 1 round will generate power at a cost comparable to other nascent energy forms such as tidal. But he reckons one area of the supply chain that needs to be beefed up is electrolyser production.

Mr Cornejo said the UK Government has provided a robust framework to support the development of the hydrogen industry and has moved faster than many countries.

Huge subsidies will be required to persuade firms to develop production and transportation facilities and to encourage potential buyers to switch to hydrogen. HAR 1 projects are in line to get £2bn revenue support.

Regarding plans for schemes in Scotland, Mr Douglas observed: “To get any of these projects up and running this decade is going to require subsidies and these subsidies are being run through DESNZ (Department for Energy Security and Net Zero) as part of UK wide schemes.”

If all goes to plan Scotland may be able to produce more hydrogen than it needs, raising the prospect that it could become a significant exporter.

“The export opportunity is the bigger piece, both on the impact on emissions in other countries and on that jobs, GVA (Gross Value Add) type opportunity for Scotland” said Caragh McWhirr at the Xodus consultancy.

Germany may need to import huge amounts of hydrogen to help it reduce emissions. There are already firms in Scotland looking at large scale export projects but the outlook for such schemes is unclear.

“At the moment how that hydrogen gets to market is a challenge,” said Ms McWhirr. While pipelines might provide a solution it could be costly to develop the kind of network that would be required to transport output from a range of developments in or off Scotland to Europe.

“We could see Norway doing this,” observed Ms McWhirr.