Written evidence submitted by UK H2Mobility (HCC0020)

Hydrogen and carbon capture in Scotland

Consultation response from UK H2Mobility

UK H2Mobility is delighted to provide written evidence to the hydrogen and carbon capture in Scotland inquiry.

We are a consortium of industrial partners who are committed to accelerating the use of hydrogen as a fuel for mobility in the UK to help meet Net Zero targets and unlock private investment for job creation. This is achieved by addressing the key barriers to hydrogen vehicle and infrastructure deployments. The group includes the following industrial members:

The group also benefits from the insight and advice from observer partners from: BEIS, DfT, OLEV, Transport Scotland and the Welsh Assembly. Note that this response reflects only the views of the industrial stakeholders.

Our key points to the committee are:

• Hydrogen mobility is a crucial part of the business case for green hydrogen production.
• Hydrogen mobility is currently seen by UK Government as a vehicle technology trial, but sectors like the passenger cars and buses have been in operation for over 10 years and have reached series production. These technologies require commercial deployment programs which have been lacking.
• To appropriately scale up green hydrogen production, supported by a pseudo-commercial ecosystem of hydrogen mobility, Scotland should implement the following aspects:
• Consult on the creation of a dedicated Scottish hydrogen mobility strategy
• Create strategic demand centres via the use of vehicle capex support mechanisms and refuelling station incentives
• Support in lobbying of UK Government’s DfT to adjust the RTFO to be an appropriate incentive for the construction of green hydrogen assets over high carbon alternatives.

Please note that this response will only address questions specifically related to hydrogen for transport, and that individual UK H2Mobility members will be providing responses from the hydrogen industry perspective.

Q1: To what extent are the ambitions of the UK Hydrogen Strategy, published August 2021, adequate for Scotland?

The UK Hydrogen Strategy was an important moment for the hydrogen industry in that it recognised hydrogen as a key part of the energy mix in the UK. However, it is UK H2Mobility’s view that the strategy was lacking in several areas, specifically:

• There was a consistent focus on trials for hydrogen mobility, without a clear ambition to move to a supported commercial deployment phase (‘trial’ or ‘demonstration’ were mentioned 8 times in the 6 pages dedicated to hydrogen mobility). This lack of commercial focus, and associated lower funding commitments, is in contrast to the rest of Europe. In particular, Germany has committed billions to investing in hydrogen development and promotion of a climate-friendly mobility sector[1], and have a dedicated support scheme to fund up to 80% delta funding for the difference between the zero emission and conventional fuel vehicle capex. This level of policy security enables industrial players to make informed, long-term commercial decisions when investing in the hydrogen sector.
• There was no clear medium term roadmap to develop the sector to achieve the long distance goals set, and no clear strategy to develop the pockets of Hydrogen activity (e.g. Tees Valley, Holyhead, Aberdeen) into a coherent and integrated network which can support the decarbonisation of the whole of the UK.
• The 5 GW low carbon production commitment by 2030 was low, especially given Scottish Government’s previous commitment of the same size.

Mobility is a high value market for hydrogen which is essential for supporting the business case for large scale green hydrogen assets. As such, UK H2Mobility’s principal recommendation is for Scotland to more seriously consider the rollout of a hydrogen network to facilitate intra-city and inter-city transport. UK H2Mobility recommends that this requires the following steps:

Scottish Government should consult on what a hydrogen mobility roadmap looks like for Scotland for the period until 2035 (the end of sale of almost all internal combustion road transport modes). Key questions to answer are:

• What are the strategic locations to develop as initial hydrogen hubs?
• What should be the emerging makeup of a medium to long term hydrogen mobility supply chain and skeleton mobility network in Scotland?
• What is the level of investment needed to realise this plan and through what mechanisms should this be targeted?

Following on from this, Scottish Government will be able to make an informed decision on initial investment prospects to support hydrogen mobility development. UK H2Mobility recommends that these initial investments are made in a way which stimulates a pseudo-commercial operation by the hydrogen industry, i.e. funding high vehicle demand to support offtake for large, highly reliable stations and drive demand for hydrogen. This will allow Scotland to continue to lead the world in its plans for low carbon hydrogen production, which should not be scaled back due to UK Government’s lower ambitions.

Figure 1: Illustrative hydrogen mobility strategy for Scotland

Q2: What should be the focus of UK Government investment to ensure that Scottish industry, supported by Scottish research, is able to become a world leader in green hydrogen for domestic use and export?

The key barriers UK H2Mobility sees to scaling up green hydrogen production are as follows:

• The lack of hydrogen mobility deployment support results in a worse business case for large scale green hydrogen production facilities by removing a high value revenue stream.
• The current RTFO additionality clause limits the scale up of green hydrogen by slowing the rate at which clean hydrogen production infrastructure can be built.

Local transport demand should be developed as an early high value demand source to support green hydrogen production facilities achieve the scale they need to be cost competitive on a global stage. Hence, UK H2Mobility recommends that demand linked projects in nascent hydrogen hubs are set up. These initial clusters should be sited in a way that capitalises on local demand, as well as accommodating supply routes and nearby hydrogen production sources where possible. Funding hydrogen demand in this way encourages the hydrogen industry to act in a commercial manner, and results in the most efficient use of tax payer funds by driving private investment in production, distribution and dispensing infrastructure to match the demand increase.

In addition to demand, the RTFO is the other essential requirement to facilitate green hydrogen production. Today, gaining access to the RTFO will make or break the business case for the construction of hydrogen production facilities, offering up to £7.33/kg subsidy for hydrogen retailers, however, the current rules make gaining access to the RTFO for green hydrogen production prohibitively difficult for some green hydrogen supply chains. The specific changes we recommend are undertaken are:

• Modify the “additionality” requirement: The ongoing requirement for “additionality” of renewable electricity is the biggest barrier to investment. In simple terms, the current rules insist that to qualify, hydrogen must be produced with electricity from new renewable resources. This greatly restricts where in the UK hydrogen production facilities can be based as renewable hydrogen projects require an artificial development timeline between renewable energy deployment and renewable hydrogen project deployment. New wind farms can take five years to be built, making it very challenging to ensure matched completion dates in the short term. The need for “additionality” is therefore an unnecessary restriction of the flexibility for getting renewable hydrogen projects moving.  We request a moratorium on the additionality requirement while the hydrogen sector is expanding or simply a removal of the requirement on the basis that it will be irrelevant in the highly renewable-dominated energy system of the future which is now firmly established as the basis for UK energy strategy (meaning that concerns leading to the additionality requirement will become academic).
• Amend the 30-minute temporal match: The requirement for a very precise temporal match (30 minute) between input electricity and the source of renewable energy also constrains the opportunity to source renewable energy for renewable hydrogen production, given the inherent intermittency of renewable energy production. Whilst the need for temporal correlation between renewable energy production and renewable hydrogen production is understood, a mechanism (as is being debated as part of the RED II discussions in Europe) to allow some time shifting of power and hydrogen production, e.g. over a month or year when the characteristics of the grid allow this, would again help to facilitate renewable hydrogen deployment.

Importantly, these steps are not just advocated for by UK H2Mobility. The UK Hydrogen and Fuel Cell Association (UKHFCA), the Hydrogen APPG, the Hydrogen Taskforce and Hydrogen Strategy Now have all recommended similar reforms.

Q3: Which market mechanism should be used to incentivise investment in producing low-cost green hydrogen?

Q4: What infrastructure, and investment in infrastructure, is needed for green hydrogen to be easily available for heavy transport and buses across the whole of Scotland?

UK H2Mobility will address these points together as the group views the two aspects as being intrinsically linked.

End use

The group recommends that the principal market mechanism which should be used to incentivise investment in low-cost green hydrogen production is providing security of offtake demand. Achieving scale and asset utilisation is critical to enabling the cost down curve for infrastructure investments, and it reduces the capital cost amortisation on a £/kg basis for hydrogen production and hydrogen refuelling station infrastructure for mobility applications (see Figure 2).

Figure 2: Hydrogen refuelling station amortisation and fixed opex contributions to final hydrogen price

In order to access the level of demand required to achieve diesel parity prices (>1 tpd, equivalent to c.50 buses), there needs to be a dedicated support scheme to incentivise the uptake of vehicles. The existing trials for hydrogen mobility are small compared to other nations[2], and future funding will be competition dependent meaning that Scotland has the potential to miss out on any large pots of centralised government funding. Therefore, a dedicated hydrogen mobility support scheme, informed by a Scottish hydrogen mobility strategy, is a key aspect which should be implemented by Scottish Government to ensure Scotland continues pace as a centre of excellence for hydrogen. Germany is a good example of a country implementing an appropriate mobility support scheme, with the German government funding 80% of the difference between the capital costs of zero emission and conventional fuel vehicles, with a €15M/year cap assigned to each commercial vehicle operator. The same intervention applies to the fuelling infrastructure capital delta. A similar scheme, scaled to Scotland’s needs and ambitions for hydrogen mobility development, should be implemented to stimulate hydrogen offtake demand.

UK H2Mobility’s main recommendation for this support scheme is that it should be in the form of a non-siloed multimodal transport fund, meaning that consortia looking to develop city hubs could bid into the fund for deployment support for the range of vehicle types they wish to target. This would then be a competitive process, with the most appropriate bids winning funding to implement the city hub or freight infrastructure. This coordinated, demand and industry led approach has the benefit of using funds in a more cohesive way than the siloed funds for hydrogen development, e.g. ZEBRA (buses) or ZERFT (trucks) by achieving scale by aggregating demand in one location, and provides incentives for the development of hydrogen solutions across all mobility sectors:

• Existing mechanism funding objective (siloed funding): 50 x 44t articulated trucks across 5 different sites, 5 x 500 kg/day stations, £10-12/kgH2 hydrogen price.
• UK H2Mobility proposal (grouped funding): 10s of buses, rigid trucks, articulated trucks, vans, taxis, coaches, 1s of planes, ships across 2 cities, 2 x 2+ tonnes per day  stations, £6-8/kgH2 hydrogen price

The Tees Valley Hydrogen Hub is an example of this approach by UK Government, however, the location has been government led as opposed to a competitive process where industry investment and demand centres are used to inform the optimal locations for first mover sites. UK H2Mobility have been actively trying to initiate multimodal hub projects such as this across the UK, and have a good understanding that a funding ask of c.£10M per hub is required to stimulate the purchase of vehicles to achieve close to diesel hybrid TCO parity. The funding ask for this is relatively small, given the already planned investments across siloed funding mechanisms, and only a small funding increase would be required to achieve a nascent ecosystem of hydrogen fuelling infrastructure and vehicles in Scotland.

Figure 3: Better utilisation of funds results in a relatively small funding gap to stimulate hydrogen mobility in Scotland

Hydrogen retail

In parallel with driving demand for hydrogen, Scottish Government should look to de-risk investment for refuelling stations with a demand guarantee. Using a demand guarantee mechanism for station investments, rather than a flat capex grant, is one of the most cost effective ways to incentivise investment in hydrogen infrastructure, as illustrated in Figure 4. Under this funding mechanism, government would guarantee a hydrogen price (e.g. £4/kg) for stations below a certain utilisation threshold (e.g. 300kg/day), to incentivise the build of large, reliable and publicly accessible stations. This helps drive investment from the private sector, as it de-risks the failure case of vehicle deployments being delayed, and, given the projections for hydrogen mobility deployments over the next decade, there is expected to be only a short operational period where a station would be below this utilisation level. This means that guarantee mechanisms have the potential to be a better utilisation of tax payer funds than flat rate capex grants. Availability of the minimum guarantee should be linked to evidence that the station supports the build out of a nascent hydrogen network in strategic locations, and that the station achieves certain availability targets (e.g. 99%+) to ensure that all subsidised stations are appropriately engineered to meet the quoted demand capacity.

Figure 4: Indicative value of the government guarantee to a station deployment in its initial years

Production

Through subsidising hydrogen demand, the hydrogen energy system is incentivised to act in a commercial manner. To ensure this hydrogen is as green as possible, Scotland should lobby to modify the RTFO to appropriately incentivise the creation of a market for green hydrogen rather than high carbon, cheaper production sources. For sectors other than mobility, a similar incentive linked to a carbon emission requirement should be implemented, to ensure that the business case for large scale green hydrogen production is improved relative to the high carbon alternative.

March 2022