Scotland looks to unlock its hydrogen economy

Welcome back to Energy Source, coming to you from London after a brief summer break.

The UK will be closely watched by energy investors this week, as the government is set to announce the winners of its latest round of subsidy contracts for renewable projects (known as “contracts for difference”).

The results are set to be particularly important for the UK’s offshore wind sector — the world’s second largest after China — where developers are struggling with rising costs.

Last year, the government granted offshore wind projects a guaranteed price of £37.35 per megawatt-hour. But after Sweden’s Vattenfall said in July it could no longer build at that price, there are questions over the appetite for this year’s round.

Offshore wind is the starting point for today’s main item, which looks at Scottish efforts to use the country’s vast wind resources to become a major hydrogen exporter.

Plans are being floated for a £2.7bn new hydrogen pipeline to Germany, one of several such developments being considered around the world as part of the shift towards cleaner energy.

The size of the future hydrogen market remains uncertain and open to fierce debate. Should society be looking for more unconventional solutions? For the debate on climate engineering, look no further than this fascinating Big Read.

Enjoy reading. — Rachel Millard

PS How can the energy industry find the right balance between sustainability, security and affordability? Please join us for discussions with leaders from across the sector October 31 — November 2 for our Energy Transition Summit in London and online. See the full agenda and register here.

Scotland looks to harness its hydrogen hopes with wind power

As the world looks towards life beyond oil, Scotland is among the best placed to find its feet in the energy system of the future.

The country has some of the strongest wind speeds in Europe — helping it become one of the world’s largest offshore wind markets.

It is looking at turning that strength into a new export opportunity by way of the clean-burning gas on which many green hopes are pinned: hydrogen.

Aberdeen’s Net Zero Technology Centre (NZTC), chaired by BP’s former UK head of country Peter Mather, last week proposed a new pipeline that would carry hydrogen from Scotland to Europe.

The Hydrogen Backbone Link would use electricity from Scotland’s growing fleet of offshore wind farms to make so-called “green hydrogen” (hydrogen split from water using clean electricity), which would then be piped over to Germany.

It is one of several hydrogen pipelines around the world being considered as new trading relationships evolve around renewable energy. The NZTC’s plan marks one of the first concrete proposals looking at what’s needed for hydrogen to become a tradeable commodity.

Expectations in Scotland are high: The NZTC said Scotland could use the pipeline to supply up to 10 per cent (about 35 terawatt-hours per year) of Europe’s projected hydrogen imports by the mid-2030s. Europe is expected to import about 333 terawatt-hours of hydrogen in 2030, climbing to 1000 terawatt-hours per year by 2050.

It could also, NZTC forecasts, create 700 jobs in Scotland in the 2030s and support thousands more by helping to develop the hydrogen economy.

“Everyone is looking for a home for their hydrogen [production] projects,” said Roy Stenhouse, chief impact officer at NZTC. “Right now they’re all struggling. I think you could unlock the whole hydrogen economy [via the pipeline].”

The H2 Interconnector between the Danish island of Bornholm and Lubmin in north-east Germany, and a new route between Norway and Germany are among dozens of other potential hydrogen pipelines identified earlier this year by consultants at Rystad Energy.

“New hydrogen infrastructure is starting to materialise as the world seeks to accelerate its path to net zero,” it said, in a report. “Simply switching existing oil and gas infrastructure to hydrogen is not always viable.”

Sceptics might say the pipeline plans are overly optimistic, given the relatively slow pace at which low-carbon hydrogen production and demand are being scaled-up.

But the NZTC’s plan shows the seriousness with which such infrastructure is being considered — and fleshes out some crucial details for investors and consumers.

The Hydrogen Backbone Link has attracted early-stage investment from the likes of London-listed Shell and EnQuest, with the Scottish government also contributing to its £3.2mn development budget up to 2025. The total cost of the project, though, is estimated at £2.7bn.

Analysts at Wood Mackenzie predict that with the pipeline running at 90 per cent capacity and assuming a 32 pence per kilogramme tariff, investors would get a 6 per cent initial rate of return.

These transportation costs should make green hydrogen from Scotland “cost competitive to other globally sourced hydrogen from countries and regions with lower production costs such as Canada, Chile and the Middle East,” NZTC argues.

Boosting Scotland’s exports is not all that’s driving the project: Wind farm developers also need another route for their electricity given constraints on Britain’s creaking electricity grid.

“In some cases, the amount of energy available compared to the cable capacity . . . it’s not possible,” Stenhouse added. Scotland’s post-oil future looks hopeful, but much has yet to be worked out.

Data Drill

Rising costs and high interest rates are preventing smooth sailing for offshore wind projects, but the latest data on renewable energy’s cost path gives a sunnier outlook.

The average global cost of developing new solar projects fell 83 per cent between 2010 and 2022, according to a new report from the International Renewable Energy Agency (Irena), while onshore wind is down 42 per cent and offshore wind is down 34 per cent.

The levelised cost of electricity — which measures the cost of generating a unit of electricity from a project across its lifetime — fell over 2022 for solar, onshore wind and geothermal projects, according to Irena’s calculations.

Meanwhile, higher turbines have helped offshore wind farm developers get more out of their projects, with farms now producing on average 42 per cent of their theoretical maximum output (known as the capacity factor), compared to 38 per cent in 2010.

It is a mixed bag, with China driving global average cost reductions for solar and onshore wind, outweighing costs increases in some markets.

But given soaring fossil fuel prices, 2021-2022 amounted to “one of the largest improvements in the competitiveness of renewable power in the last two decades”, according to Irena.

Power Points

Energy Source is written and edited by the FT’s global energy team. Reach us at [email protected] and follow us on X, formerly Twitter, at @FTEnergy. Catch up on past editions of the newsletter here.