Scotland, known for its abundant natural resources, is poised to make significant strides in harnessing the power of hydrogen. However, a recent report by Addleshaw Goddard highlights five key challenges that Scotland must address to fully realize its hydrogen development potential.
With a target of achieving 5GW of low-carbon hydrogen production by 2030—an increase of around 1,000-fold from current levels—Scotland faces hurdles in various areas that require careful consideration and strategic action.
Policy Collaboration: While Scotland has its own hydrogen strategy distinct from the UK Government’s, the report notes that certain critical powers for the sector’s development are reserved to Westminster. This division of responsibilities poses a potential impediment to progress, particularly in areas such as domestic heat, where Scotland’s ability to drive necessary advancements is limited by Westminster’s jurisdiction over heat policy.
Clarity on Financial Support: The Scottish Government has committed an initial £100m to support its Scottish Action Plan, including a £90m Green Hydrogen Fund. However, there is a need for more clarity regarding the operation of the Hydrogen Business Model (HBM), the low-carbon hydrogen subsidy scheme. Full contract terms are expected to be published in 2023, shedding light on how the HBM will incentivize offtakers and facilitate the transition to hydrogen usage. Nonetheless, concerns persist that the overall support framework for hydrogen remains disjointed.
Investing in a New Asset Class: Despite a growing pipeline of potential projects, only 3% of the estimated $700bn investment required by 2030 has been committed to the hydrogen sector globally. Securing funding for hydrogen production projects remains a challenge, particularly due to the long-term nature of contracts with offtakers. As an emerging sector, hydrogen and power market prices may fluctuate significantly, raising uncertainties for investors and making long-term agreements more complex.
Electricity Grid Visibility: The development of hydrogen is closely intertwined with the electricity grid and wholesale power market. Delays in securing grid connections have historically hindered progress in the renewables industry, and similar challenges could affect hydrogen projects. The UK Government’s ongoing consideration of Reform of Electricity Market Arrangements (REMA), including the introduction of Locational Marginal Pricing (LMP), could alleviate grid constraints and incentivize location-specific investments in hydrogen electrolysis and storage. However, this reform may also introduce risks for investors and potentially impact Scotland’s renewable and hydrogen ambitions.
Streamlining Planning and Consents: Developers pursuing hydrogen projects in Scotland encounter a fragmented legislative and regulatory landscape. Consenting processes vary across different legal jurisdictions within the UK, with Scottish Ministers having consenting powers under the Electricity Act while other changes and policy decisions are reserved to Westminster. Streamlining and harmonizing the legislative and regulatory framework will be crucial for enabling efficient and effective project development.
Additionally, the report emphasizes the significance of resources, specifically the availability of skilled professionals across various fields involved in the hydrogen economy, including construction, commissioning, engineering, maintenance, and technical specialists responsible for safety codes and standards.