2.6.1  Hydrogen - a clean, flexible energy carrier

308.  Hydrogen is a critical component of our broader strategy to deliver energy security, create economic growth and reach net zero. The production of hydrogen provides an important transition moment for the offshore industries, at the same time as helping to decarbonise foundational and energy intensive industries. In a decarbonised energy system, there will be a need to replace high-carbon fuels in hard to abate industries and provide flexible energy for power, industrial processes and heavy transport.

309.  Low carbon hydrogen could play a significant role, for example, in lowering the carbon intensity of steel production by providing an alternative to coking coal and other high-carbon fuels currently used for industrial heating. It could also be fundamental to achieving the full decarbonisation of shipping, aviation, and road transport, with potential in areas of heavy transport such as heavy goods vehicles, buses, and trains.

310.  The hydrogen transition presents a significant economic opportunity for the UK and could transform our North Sea energy industry and industrial heartlands. In July 2021, the Hydrogen Council estimated total global investment into the hydrogen economy will reach $500 billion by 2030.246

"The UK is a prime global zone for low-carbon hydrogen. This is due to North Sea CO2 storage, wind power, and proximity to European demand. There is significant potential for the UK to develop hydrogen as an export market -boosting investment in UK industries for production, transport, and storage, and supporting the government's aspiration to become a net energy exporter by 2040." 247 - Shell

311.  Investment in hydrogen to de-risk early projects is expected to unlock 12,000 jobs and over £9 billion of private sector co-investment by 2030 in production alone.248 The market will also be on our doorstep. The EU's ambition is to import 40GW of H2 electrolysers by 2030, presenting a huge opportunity for the UK.249

312.  Electrolytic hydrogen (sometimes referred to as 'green hydrogen') presents a particular opportunity for the UK on the global stage. Demand for electrolysers in the EU is expected to increase by a factor of 650 by 2050, compared to 2020 levels.251 The EU is moving quickly to increase its market share in electrolyser design and manufacture, and the UK must follow suit. The UK has competitive strengths in the design and manufacture of electrolysers because of existing facilities and strong academic research,252 and the UK has already proven it can export electrolysers with ITM Power winning multiple European contracts to date. The Offshore Renewable Energy Catapult estimate that the production and overseas export of electrolysers would produce up to £320bn of GVA and 120,000 jobs by 2050.253 As discussed in Part 1, electrolytic hydrogen becomes ever-more crucial for achieving net zero in case high gas prices persist globally.

313.  However, low-carbon hydrogen production has yet to take-off. Currently, the most common way hydrogen is produced is from steam methane reforming or coal gasification from fossil fuels, which releases CO2 into the atmosphere ('grey hydrogen'). The main low-carbon methods of producing hydrogen, where CO2 released from this process is captured using carbon capture and storage ('blue hydrogen') or where the hydrogen is produced through electrolysis of water using renewable electricity (electrolytic or 'green hydrogen'), are virtually non-existent.

314.  This is down to a combination of:

•  Cost - hydrogen is currently significantly more costly to produce and use than other fuels. Alongside 'blue' and 'green' technologies being nascent and lacking cost competitiveness with 'grey' hydrogen, the dependency on input fuel (natural gas for blue hydrogen, and electricity for electrolytic hydrogen) is a significant factor, and these have seen substantial price rises in the past 18 months.254 Capital expenditure on hydrogen production is also significant and needs to fall quickly to reach competitiveness.255

•  Policy/regulatory uncertainty - a range of legislative changes are necessary to give investors the confidence they need to establish and scale up hydrogen businesses. These include establishing the legislative framework for business models across the value chain and an updated regulatory framework for production and end-use. Whilst some of these have been trailed, they are not currently in place, presenting a significant barrier to progress.

• Delivery challenges - slow growth has inevitably been caused by technical challenges associated with deploying first-of-a-kind technologies across the value chain and coordinating activity across a broad range of stakeholders and multiple levels of government.

315.  Government has made some progress in creating the conditions needed to kick start low carbon hydrogen production in the UK. The British Energy Security Strategy set out the ambition to raise the UK's low carbon hydrogen production capacity to up to 10GW by 2030, signalling intent to be a global leader. To support this ambition, the Government has launched a £240 million Net Zero Hydrogen Fund to support low carbon hydrogen production, set out a plan for the Hydrogen Business Model to provide revenue support for low carbon hydrogen production, consulted on a business model for hydrogen transport and storage infrastructure, supported end use through the £315 million Industrial Energy Transformation Fund, and developed a low carbon hydrogen standard.

316.  However, we must move further and faster. For hydrogen to play a role in our journey to net zero, we need to transition quickly towards blue and electrolytic hydrogen. The US Inflation Reduction Act, and more recently Canada's commitment to introduce a new tax credit of up to 40% for hydrogen production, has ramped up global competition for investment. If we are to secure a position as a leader in the global market, predicted to be worth $2.5 trillion by 2050,256 we need to secure final investment decisions for notable projects in the early-mid 2020s.