The UK’s new hydrogen strategy is an important step forward – but more clarity is needed on the role the UK can play in a global hydrogen market
The accelerating transition towards clean energy sources creates fresh opportunities for countries to secure new trade benefits and geopolitical influence by establishing themselves as key players in new markets.
Alongside electricity, hydrogen will be a key energy source for a decarbonised global economy. Demand for hydrogen is forecast to grow rapidly over the next 30 years, creating a vast global market.
That growth in demand for hydrogen is as true for the UK as it is globally – and last week saw the release of the long-awaited UK Hydrogen Strategy. And while it, like other net zero documents, it was delayed, it has been largely worth the wait.
Supply and demand
An effective hydrogen strategy will require clarity on both supply and demand. On supply, the story is reasonably clear, in the short-term at least: both green (renewable) and blue (fossil + CCS) hydrogen will be pursued in a twin-track approach, supported by a new financing mechanism – similar to the Contract for Difference which has driven record renewables deployment – to bridge the cost gap between low carbon hydrogen and cheaper high-carbon alternatives.
On demand, there is still some way to go to articulate where the market pull for hydrogen will come from and how it will be incentivised. While that makes sense to a point – as the demand question may be easier to address as carbon prices rise and demand naturally increases – more clarity on demand will be needed in the coming years. In particular, the cheapest use of hydrogen may not be the most efficient for the overall energy system given the alternatives in areas such as transport and home heating.
The UK’s role in a global market
The third key strand of the document is focused around realising economic benefits for the UK - with a dedicated chapter and no fewer than 50 mentions of a UK supply chain. In his foreword, the Secretary of State is explicit that the government’s ambition for hydrogen goes beyond decarbonisation with a focus on home-grown supply chains and export opportunities.
That rhetoric indicates that government recognises the need and the opportunity for the UK to position itself in what will become a huge global market with geopolitical implications, and that it views a strong domestic supply chain as the means of positioning.
But two questions flow from that. First, what is the UK’s role in the global market; and second, how will the government make the trade-offs between securing the cheapest hydrogen (which may come from overseas) on the one hand, and securing UK supply chain opportunities on the other.
When we look at the UK’s role in the global market, it’s clear that the UK is set to be relatively small player. Figure 1 shows that despite what appears to be a very ambitious UK production trajectory in the Hydrogen Strategy, estimates for 2030 and 2050 are relatively insignificant in the context of global hydrogen production required for net zero (IEA, 2021)[i].
That need not mean that we have no role to play in the global market. But it does mean we need to identify our areas of competitive advantage and focus relentlessly on them while the global market is still in its infancy. This lesson was learnt the hard way on offshore wind in the UK, where impressive deployment has masked a failure to build a strong domestic supply chain. This in turn has resulted in limited export opportunities in what is now a rapidly growing global market.
On trade-offs, the UK will need to keep its technology strategy under close review. While it is currently pragmatic for the UK to progress both green and blue hydrogen production, especially given potential competitive advantages in both, care must be taken to avoid backing a white elephant. Research shows that green hydrogen is likely to dominate in the long-term, both from a cost and emission perspective[i], and therefore the government must undertake further work to ensure that near-term investments in blue hydrogen capabilities will be economic in the long-term.
And more broadly, the trade-off between domestic production and economic efficiency will require close attention as the market develops. Will it, in the long-run, be preferable to pay more for UK-made hydrogen if cheaper options are available as the global market develops? The government needs to communicate how the reality of such trade-offs will be managed. The example of German investment in solar shows the perils of investing heavily in a technology without due consideration of the global market.
In a world dominated by near-term focus and quick wins, countries that take a long-term strategic vision on net zero will reap the benefits. The UK Hydrogen Strategy displays positive signs of strategic thinking, but further work is needed to establish niche areas of focus and management of trade-offs. It’s time to zero in on the UK hydrogen opportunity.
[1] Net Zero by 2050 – Analysis - IEA
[1] 'Green' Hydrogen to Outcompete 'Blue' Everywhere by 2030 | BloombergNEF (bnef.com)