Green Hydrogen As Stimulus To Scottish Independence (April 2021)

What Actions, If Any, Could The Scottish Government Take To Stimulate A Green Hydrogen Economy In An Independent Scotland?

(An Imagined Policy Memo For The Cabinet Members Of A Sovereign Scottish Government)

Executive Summary

Scotland, with a similar population and oil/gas reserves (historical and future) to Norway⁽¹⁾, has no sovereign wealth fund from this asset. Norway has a trillion dollar fund⁽²⁾, over $200,000 dollars per citizen. This lack of prosperity-planning is often seen as a legacy of Westminster rule and failure. Scotland has 25% of Europe’s offshore wind and tidal resources and 10% of Europe’s wave resources⁽³⁾, which are the resources necessary for the electrolysis of green hydrogen from water. Green hydrogen is not only undergoing test projects, such as Eday in the Orkneys⁽⁴⁾, but forms part of the EU’s 400 billion Euro/2030 Hydrogen Investment White Paper⁽⁵⁾. This policy memo argues that a newly independent Scotland satisfies its citizens’ needs and desires specifically by embracing green hydrogen as an industry that can help underpin social equity and wealth creation, whilst also generating a key position for Scotland politically and economically within Europe and wider. It aims to be consistent with the SNP’s stated values of “Justice, Fairness, Education, Economy, Environment”⁽⁶⁾. The memo advises the development of green hydrogen via three suggested pathways; private investment only, private-public partnerships, and citizen-public partnerships.

Why Green Hydrogen?

This policy memo does not seek to deter the Scottish Government from the benefits associated with hydrogen creation from existing fossil fuel industries. However, the global green hydrogen market is expected to be worth $2.28 billion within six years⁽⁷⁾. By 2050, PWC estimate⁽⁸⁾ green hydrogen export markets to be worth $300 billion, and account for 400,000 jobs. The newly independent nation of Scotland benefits already from near-unrivalled strengths in renewables, existing offshore and energy industrial infrastructure/expertise, and an enviable tradition of academic excellence. In order to establish itself with a unique, green identity, Scotland benefits from bravery in treading the path less taken. Glasgow is also the home for the COP26 summit in November this year, and the city publicly states its desire to be the first carbon neutral city, by 2030, in the former UK⁽⁹⁾. IRENA⁽¹⁰⁾ has outlined policies and strategies that enable green hydrogen to compete by 2030, indicating the economic argument is also close to its tipping point. As of April 17^th 2021, ScottishPower⁽¹¹⁾ has announced plans for a 20MW electrolyser near Glasgow, with 50MW storage, for the daily production of 8 tonnes of green hydrogen (enough for 550 buses on the daily commute from Glasgow to Edinburgh). The international will of carbon neutrality (COP26), the expected market viability (IRENA), the visibility and ambition of Glasgow, and Scotland’s new, independent status all point to “added value” from green hydrogen in particular. Further benefits are detailed throughout this policy memo.

Problem Analysis

Energy Policy has been reserved to Westminster, and although Scotland’s wind-powered electricity generated enough to power Scottish homes twice over in 2019⁽¹²⁾, both heating and cooking benefit from the conversion of existing gas infrastructure to hydrogen. Hydrogen fuel cell vehicles also offer many advantages over electric battery vehicles (refuelling time, range), and this market is in its infancy. However, Westminster has only signed off, to 2030, less than 100m million pounds of research investment⁽¹³⁾ (1/4,000^th the EU’s policy). The problem then is one of Westminster under-investment, yet this is married to Scotland’s unique opportunities to not only distance itself from Westminster, but also to position itself as a nation building a 21^st and 22^nd Century ethic of wellbeing, inclusiveness, and wealth from a position of a circular and sustainable economy. Allied to Westminster’s under-investment, a recent report co-authored by a UK Government adviser⁽¹⁴⁾ has also shown, before it was removed from the LSE website, that Scotland can emulate the success of both the Czech and Slovak Republics once they de-coupled from each other. Not only does this show the “divorce” to be beneficial to one party, in actuality it has been beneficial to both parties.

In order to kickstart the green hydrogen economy, the following is proposed. Recently, the price cap on auctioned Scottish seabed plots for windfarms was raised tenfold owing to their market undervaluation, generating a potential windfall to the Treasury of £860m⁽¹⁵⁾. Zones of green hydrogen development are proposed, via auctions. Initially these will be for the production of green hydrogen, but the template can be maximised at the policy design and implementation stages to stimulate the ancillary industries around hydrogen (fuel-cell development, transportation, storage, vehicle design and manufacture, R & D, education etc are all positive externalities). As the market value of green hydrogen is a heavily fluctuating variable over the next decades, auctions are deemed to uncover the perceived overall value best, as the tenfold value increase in windfarm rights has demonstrated.

A 25-year licence is recommended, in order that incumbents do not come to rent-seek in perpetuity.

Policy Goals (Economic Efficiency, Equity, Political Feasibility)

The economic efficiency of the models presented will be assessed across a competitive bid system. In other words, those who desire being involved in Scotland’s green hydrogen industry will compete with each other for the rights, via sealed bids, across each market sector that applies to their circumstances. It is expected that larger corporations may feel unsettled they are in competition with the public and citizen sectors, but the prize of the green hydrogen economy is anticipated to be too substantial for them to under-bid, especially with a Scottish Government commitment to making Scotland a home, if not the home, for the green hydrogen economy. It is also expected that such competition, from citizens and public-private partnerships, will helpfully undermine the rent-seeking and oligopolistic tendencies of larger energy generation incumbents, thus generating social justice, equity, and cost efficiencies. A large multinational’s self-interest will propel them towards bidding, for failure to do so equates to future losses. Likewise, the allocation of funds from the bid processes will help underwrite equity concerns, whilst allowing a simpler political route to acceptance and adoption by the public. This is explained in more detail later. The auction bid system tells all investors that Scotland is very much open for business, but that multinational corporations, in order to benefit from Scotland’s resources, will now be required to pay more for that privilege than Westminster has previously asked from them, and those payments are to benefit the citizens of Scotland, the ultimate custodians and owners of those resources.

Solution Analysis

Status Quo

The status quo has been anything but settled since 2016. Whilst the former UK had generally been acknowledged to be at the the forefront of climate change legislation and implementation, particularly under the Blair/Brown years, the last 5 years have been unusual. Whilst the UK has high installed capacity for electricity generation from wind, the 2016 result of Brexit, the 2016 election of Donald Trump, the confused posturing of Westminster governance regarding trade deals with the US under Trump (who pulled the US from the Paris Accords), and distancing from the EU, have left the status quo resembling an increasingly malnourished child. Were that confusion not enough, over a year of COVID has left so much of the status quo in tatters. The only thing that can be gathered from wishing to remain in the status quo is that there is no longer such a thing as the status quo. Least of all for Scotland, independent and free to legislate how it sees fit. The net outcome of the status quo has been that the UK Government has lost ground over those 5 years, and still has not published a hydrogen strategy. Scotland published its hydrogen strategy in February 2021⁽¹⁶⁾, and the EU in July 2020⁽¹⁷⁾.

Economic Efficiency

The economic efficiency of doing nothing is simply that nothing appears to be lost. In relative terms however, if everyone else moves forwards whilst you stay static, you actually go backwards. There is nothing to be gained from the status quo, except economic stagnation. It is therefore rejected completely.

Equity

Very low. The SNP stands on a dynamic centre left platform, with social equity, justice, and wealth creation outside of the bonds of Westminster a key argument in gaining independence.

Political Feasibility

Unfeasible. Independence has been delivered on a manifesto of change. The apparent status quo, very much in the case of Scotland’s independence, is extreme disequilibrium in any meaningful sense. A change as large as Scottish independence requires other changes of equal if not greater magnitude in order to establish a new dynamic, and indeed new equilibria.

Public-Private Partnerships

A 50/50 split with private investors and the Scottish Government, the business model will maximise market values. However, the positive externalities/IPRs of R & D will be jointly owned. Being 50/50 owned, the fees paid to the Scottish Government for the licence privately also account for the Scottish Government’s 50% towards the auction fee, incurring no net loss. However, operating costs and profits are split equally between the winning private bidders and the Scottish Government. In order that private bidders do not seek to monopolise risk exposure solely by bidding on public/private partnerships instead of private investment only (see below), only those who are successful in a private bid will be invited to share in the joint-risk of a public-private partnership.

Economic Efficiency

Moderate to very high. Being operated along predominantly commercial lines, the model should achieve high efficiency. Private investors (anticipated to be major energy multinationals in large measure) will have two motivating factors. One is not to miss out on a green hydrogen bonanza, the other is to share risk where possible, with particular reference to their exposures in sole ownership situations as per below.

Equity

Extremely high for those benefiting from the Treasury’s ability to redistribute wealth according to Scottish Government policy. Potentially low to medium for the private investors. They will be spending a lot to get a slice of the pie. However, a new industry can take regulatory risks to avoid rent-seeking and monopolistic/oligopolistic behaviours, and with the interest of the Scottish Government in developing the green hydrogen economy throughout both generation, use, and stimulation of related industries, R & D, and academia, business will see the Scottish Government as a trusted partner. Business will have to dig deep in its pockets, but fear of losing out will drive most private investors. Those who don’t will probably be superceded by those who do, as hydrogen, and green hydrogen in particular, are highly disruptive. Scotland’s re-emergence as a stand-alone nation after 300 years is also highly disruptive. Investors will be as afraid of missing out as they will be uncertain of putting in.

Political Feasibility

High. The shared public/private risk, which also assumes zero actual Treasury input for the licence itself, appeals to financial probity. It also encourages Scotland’s largely centre-left populace to recognise they have a public stake in industry. More importantly, it will be recognised that 50% of the profits belong to the Scottish people via the Treasury, and taxation of all the profits likewise.

Private Investment

Scotland already has strong links with multinationals for oil, gas, and wind development. They are well placed, with the expertise of large departments, to understand what value they place on zones of green hydrogen development. However, their ability to benefit from Scotland’s resource will require financial commitment from them. The Scottish Government will charge them, via the auction process, for the right of wealth creation. It is Scotland’s (renewable) resource to dispose of how it sees fit. The commitment of the Scottish Government to education, training, zero-carbon, and innovative new industries create confidence amongst investors.

Economic Efficiency

Very high. The virtuous feedback loops of positive externalities provide further investment opportunities as ancillary green hydrogen/hydrogen industries mature alongside the energy source. Although the cost of entry will be high, the benefits are equally high. Scotland has already shown, via its oil and gas industries, that it is a good home for private income. The orientation now is towards the Scottish Treasury, rather than Westminster, and the Scottish Government’s citizen equity initiatives.

Equity

Medium for investors. Although they will perceive high costs of entry, a highly competitive auction process will determine perceived values. No one will bid more than their estimate of value, but they will lose out should others bid more. The auction process delivers efficiency via perceived investment equity/value to the investors. To the general population, this is the least equitable process, because the resource is the property of the private investor to maximise returns from. However, it is the original licence funds from private investment that underwrite both the citizen-public and public-private initiatives detailed in this memo, from which high equity is extracted for the citizens. The aggregate equity is therefore high.

Political Feasibility

On its own, low. However, in conjunction with the other policies below, very high. The SNP could be seen to have replaced the perceived cronyism of Conservative Westminster if it relied purely on private investment for private wealth creation, but the auction fees generated are reinvested socially, as well as the licence having a term of 25 years only, compared to 60 years for windfarms⁽¹⁸⁾.

Citizen-Public Partnerships

The SNP is committed to a constitution⁽¹⁹⁾, rejects the legitimacy of the unelected Westminster House of Lords, extends the vote to 16 and 17 year olds, favours proportional representation and democratic reform, and has instituted a Citizens Assembly⁽²⁰⁾. 50% of the auction capital from private business in 3) above is to be reinvested, with the remaining 50% provided by the citizens involved in the concern. This will be the case for working capital as well. The Scottish National Investment Bank (SNIB)⁽²¹⁾ with a specific remit towards renewables projects, and the ability to raise “green debt bonds”⁽²²⁾ (humorously known as “kilts”, rather than gilts) are existing financial levers that will be involved in funding the citizens’ stakes where needed, and the “Scottish Central Bank” will be utilised for different policy initiatives than the former central bank, the Bank of England. All IPRs generated will be joint-stock of the Scottish Government and the citizen partnerships. The partnerships will be co-operative in nature, seeking to maximise market revenues, benefit employees fairly and equitably, and with a portion of profits earmarked for further investments, with a bias towards the positive externalities of the hydrogen economy.

Economic Efficiency

Cooperatives have a mixed history. Some will achieve high efficiency and returns, some will fail. It is suggested that for these licences there is a biennual “health review” to ensure the business model is efficient, with an emphasis on “2 carrots, 1 stick” – ie, expertise is brought in to grow the business and staff, not threaten them, wherever possible.

Equity

High to very high. Scots are looking for something that speaks for them collectively, and the regular re-elections of the SNP on centre-left platforms, both for Scottish Elections and Westminster Elections, differentiate Scotland from England.

Political Feasibility

High to very high. The SNP would carry the majority of citizens with it for investment programmes that both value and reward those citizens. Scotland has not given a majority vote share to the Conservative Party in UK General Elections since 1959⁽²³⁾, whereas England has done so on 12 occasions⁽²⁴⁾ in the same period. This data alone indicates Scotland’s preference for national policies of left and centre-left bias (all majority vote shares in Scotland have been either Labour or SNP since 1959). Finally, for the problems of freeriders within any community, the “2 carrots, 1 stick” health review can lead to best practice outcomes for both profit and equity.

Policy Recommendation

Maintaining the status quo is unfeasible and dismissed. It is recommended that, in order to achieve maximum investment, visibility, social equity, profit, and social justice that the combinations of private investment, shared public-private partnership, and citizen-public partnership are applied across the available licence zones. A post-independence Scotland can do things differently and largely unilaterally, making its assets work for its citizens, and growing its intellectual and industrial/technological capital to a level commensurate with its ambitions via positive feedback loops. Should these approaches be accepted in principle by you as the client, the next step would be to ascertain the number of green hydrogen production zones that should be auctioned initially, and assess the likely values of those zones, to include a minimum reserve below which a zone licence will not be sold. Finally, it is also suggested that the remaining 50% of the auction fee from private investors unused in the citizen-public partnerships is invested in a new “Renewable Wealth Fund”, the absence of which from oil and gas revenues over the last 45 years is a shameful legacy from Westminster/UK. This neither excludes nor precludes the injection into such a fund of other capital derived from the Scottish green hydrogen or other renewables industries.

References

⁽¹⁾https://www.theguardian.com/politics/reality-check-with-polly-curtis/2012/mar/02/oil-revenues-if-scotland-became-independent [Accessed 30th April 2021].

⁽²⁾https://www.forbes.com/sites/davidnikel/2020/11/17/norway-oil-fund-hits-record-12-trillion-value-following-coronavirus-vaccine-boost/?sh=1535b7ee694e [Accessed 30th April 2021].

⁽³⁾https://www.gov.scot/publications/foi-202100132049/ [Accessed 30th April 2021].

⁽⁴⁾http://www.emec.org.uk/projects/hydrogen-projects/eday-flow-cell-battery-project/ [Accessed 30th April 2021].

⁽⁵⁾ https://ec.europa.eu/energy/sites/ener/files/hydrogen_strategy.pdf [Accessed 30th April 2021].

⁽⁶⁾ https://www.snp.org/our-vision/ [Accessed 30th April 2021].

⁽⁷⁾https://www.grandviewresearch.com/industry-analysis/green-hydrogen-market [Accessed 30th April 2021].

⁽⁸⁾ https://www.strategyand.pwc.com/m1/en/reports/2020/the-dawn-of-green-hydrogen/the-dawn-of-green-hydrogen.pdf [Accessed 30th April 2021].

⁽⁹⁾https://www.scottishpower.com/news/pages/glasgows_path_to_net_zero_revealed_in_detail.aspx [Accessed 30th April 2021].

⁽¹⁰⁾https://irena.org//media/Files/IRENA/Agency/Publication/2020/Dec/IRENA_Green_hydrogen_cost_2020.pdf [Accessed 30th April 2021].

⁽¹¹⁾https://www.scottishpower.com/news/pages/green_hydrogen_for_glasgow.aspx [Accessed 30th April 2021].