Director, Centre for Growth
The energy transition from fossil fuels to renewable energy is one of the most pressing issues facing the UK and the world. We face unprecedented challenges, including economic uncertainty, global instability and the cost-of-living crisis. We must adopt a broad energy mix, incorporating a variety of low-carbon fuels and renewable power sources – including clean hydrogen – to achieve net zero.
Developing and implementing a strong clean hydrogen strategy could deliver significant economic and industrial benefits, establishing the UK at the forefront of a growing global industry. It could also contribute to economic prosperity and support the UK Government’s levelling up strategy. Investment in innovation today could deliver significant long-term benefits for the UK economy and its population.
The challenge for the UK is establishing itself as a leader in an emerging market sector where global competition is high. The UK isn’t alone in identifying and having access to this opportunity. Many other economies, in most cases larger than the UK, are attempting to establish their position at the forefront of hydrogen technology. To compete, the UK must move quickly, leveraging its strengths. Failing to do so could cause the country to fall behind competitors.
We have identified three critical recommendations for the UK:
Domestic and global demand for hydrogen is forecast to skyrocket in the next decade. Analysis performed by BCG into the future requirements for low-carbon fuels established that we would need approximately 380 million tons of low-carbon hydrogen and its derivatives per year if we are to limit global warming to 2°C. This figure rises to an incredible 565 million tons per year if we want to achieve the Paris Agreement goal of limiting climate rise to 1.5°C. Exhibit 1 illustrates the rapidly growing domestic demand for hydrogen in the UK.
These predictions are based on the cost of hydrogen falling to competitive levels – something we forecast will happen sooner than many expect. History has demonstrated that new energy technologies can quickly become competitive – for example, we have seen both offshore wind and solar rapidly achieve cost parity with some fossil fuels. If hydrogen follows similar trajectory and technology curves as other renewable energy technologies (wind, solar, battery), we could see production costs fall by up to 50% by the end of the decade. This is an optimistic target, but we believe it is within reach with the right investment, approach and strategy. For instance, the recent US Inflation Reduction Act provides a welcome boost for hydrogen and has the potential to dramatically reduce the costs of production worldwide. Moreover, it demonstrates the potential for the technology and the investment being made to deliver it.
The role of clean hydrogen in achieving net zero is already well known. It will play a crucial role in decarbonising hard-to-abate sectors such as shipping, aviation, and cement and steel production. Moreover, hydrogen can play an essential role in plugging the energy gap when the availability of already established renewables such as wind and solar fluctuates, partly by providing long-term storage when there is an excess of renewable energy. The result of this is a more flexible, diversified and robust energy supply that is less vulnerable to disruptive shocks.
There are several other benefits which could emerge if the UK becomes an early investor and global leader in clean hydrogen:
Growth: According to an economic impact assessment published by the Hydrogen Taskforce in 2020, clean hydrogen is expected to add £18 billion in gross value added and 75,000 jobs in the UK by 2035. This is much higher than advancing offshore wind, which is expected to add 60,000 jobs. Furthermore, clean hydrogen is a high-tech, high-productivity industry. Traditionally the UK has performed strongly in such industries thanks to its skilled workforce and culture of innovation.
Levelling up: North-east and north-west regions are in a strong position to lead and benefit from the hydrogen transition. These post-industrial areas are a focal point for ‘levelling up’, the UK Government’s strategy for stimulating growth in areas which have fallen behind. Much of the investment in the production and distribution of clean hydrogen typically occurs near industrial clusters located across the UK. Growth and jobs stemming from this industry will be spread across the UK, as the map of existing hydrogen investment shows below.
Energy security: The UK is ranked fourth globally in the World Energy Council’s 2021 Energy Trilemma Index – energy security, energy equity and environmental sustainability. Of these critical areas, by far the weakest here is energy security, where the UK ranks 19th globally. The UK’s energy security vulnerabilities were exposed this year when consumers and businesses saw significant rises in energy bills due to the rising wholesale gas and commodity prices. Having reliable domestic clean hydrogen capacity can help improve energy security in two ways. First, it can improve resilience, helping to support domestic energy supply when needed. Secondly, it can also reduce the UK’s reliance on overseas energy, which is at risk from external shocks, such as geopolitical instability or restrictions on certain rare critical minerals that are required for other technologies (e.g., lithium-ion batteries).
Exports: By investing early and building the right ecosystem and expertise, the UK could become a crucial source of clean hydrogen and hydrogen expertise. We see three key export opportunities for clean hydrogen:
There are few, if any, other technologies in the energy space that tick so many boxes for the UK.
The UK has several strengths it can build on in the hydrogen space. These, combined with the benefits mentioned above, highlight why the sector should become a focus area for the UK’s net zero and wider economic growth strategy.
Defining the Problem
Currently, the hydrogen sector in the UK faces three key challenges:
To be successful in this space, the UK needs to tackle these issues head on.
1. Double down and move faster to develop industrial clusters
To solve the ‘chicken and egg’ supply/demand conundrum, the UK must accelerate the development of hydrogen projects, getting them up and running as soon as possible. It must focus investment on developing regional industrial clusters. These clusters can capture multiple users across the hydrogen ecosystem within a geographical area – providing crucial economies of scale. Localisation will enable the UK to create sufficient scale with less orchestration required from national-level plans. Clusters can help provide a variety of local options for offtake, which in turn reduces the risk for demand and supply investments.
This approach will require a clear step-change from the way things operate now. Today, there are a host of technical pilots scattered around the country, with each player making point-to-point decisions, creating silos across the system. A few clusters have begun to emerge, such as HyNet or East Coast, which have produced strong partnerships between producers, offtakers and transport and storage providers. This provides an opportunity to start with ‘minimal viable clusters’ (around ~100-200MW) and scale up when ready.
To enable the development of clusters, we recommend:
There are also broader measures which would help to solve the ‘chicken and egg’ problem and boost industrial clusters – these need to be considered in the wider net zero context beyond just hydrogen.
2. Adopt measures to ensure economic benefits are realised
The UK ranks second globally in terms of installed offshore wind capacity. As a share of its overall energy supply, the UK is the world leader. The deployment of offshore wind is rightly seen as a success story for the UK. And yet, it is also a story of missed opportunity. The UK has successfully introduced renewable energy into the energy mix but failed to turn it into a driver of growth or development.
Despite the UK producing much more wind energy than its peers and more relative to its size than almost any other country, there are very few British firms involved in the manufacturing, development or deployment of wind energy in the UK or globally. The UK Government rightly helped to subsidise wind power development through its contract for difference (CfD) regime, and yet few, if any, firms in the UK could take advantage of it. RenewableUK has estimated that just 29% of capital expenditure on offshore wind projects is from UK content, up from 18% in 2015. This is despite CfDs for the sector being in place since 2013. The UK is now attempting to rectify this through requirements around UK content within supply chains in the new Offshore Wind Sector deal, but it is much harder to do this late in the day.
To avoid repeating the same mistakes, the UK must learn lessons from its experiences with wind energy and from the successes of other countries. Denmark, for example, provides a useful case study of how wind power has been used to drive economic development. Similarly to the UK, Denmark doesn’t have huge market scale like the other key players in the offshore wind market. Yet, Danish firms have managed to secure a significant share of the market and are known globally for their expertise in this sector.
Specifically, we recommend the UK should:
3. Build international partnerships
The UK has been accelerating its efforts to develop clean hydrogen. The British Energy Security Strategy (published in April 2022) doubled the previous production target to 10GW, with the ambition that at least half of this would be green hydrogen. Many other countries have set similar targets, but the UK lags behind them in one aspect, which could prove crucial in achieving this target. The UK does not currently have any bilateral agreements, while other countries have moved quickly in this space. These agreements broadly fall into three categories:
While the UK does have areas of competitive advantage in developing a clean hydrogen economy, it should establish partnerships where there are gaps. At this stage, agreements which focus on sourcing demand or supply should not be the priority. Domestic supply needs to develop in the UK to provide evidence that there is demand, particularly once a CfD is in place.
Therefore, the UK should target the following:
Given these aims, the countries which the UK should target for hydrogen partnerships include: the US (from both a technological and investment perspective); Canada (resources and technology); Germany (technology and manufacturing); South Korea (technology and manufacturing); and the Middle East (investment and supply if needed).
Of course, this doesn’t apply solely to the public sector. Private sector leaders should seek international partnerships where relevant to accelerate their developments. They do not need to wait for public sector support or action to begin.
The UK is looking for ways to manage the energy transition and for growth sectors of the future, and clean hydrogen ticks both boxes (and more). But global competition is ramping up quickly. The UK must learn lessons from past experiences in developing new energy technologies, as well as learning what is working elsewhere if it wants to establish a position as a global leader in hydrogen. Finally, the UK can’t let perfect be the enemy of good. Moving quickly to develop industrial clusters and focusing on areas of expertise will maximise the UK’s chances of success rather than trying to create all aspects of a brand new value chain at once.
BCG's Centre for Growth brings together ideas, people and action to drive the UK forward. We work with our global expert network to identify transformational opportunities, connect key decision-makers and build coalitions for change. We offer long term strategic insight, extensive cross-sector expertise, platforms for dialogue and bias to action.
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