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19 March, 2021updated 12 Oct 2021 05:15

Can FDI rescue the UK’s Green Industrial Revolution?

If the government wants to realise even part of its Green Industrial Revolution it will need to attract significant FDI and support the creation of a local supply chain for emerging technologies.

By Jon Whiteaker

uk-offshore-wind

The Rampion offshore wind farm off the Sussex coast. The UK is a global leader in offshore wind, but its mass roll-out of wind farms has not been matched by the creation of an integrated local supply chain. (Photo by Mike Hewitt/Getty Images)

The UK government announced on 11 March 2021 that GE Renewable Energy will build a new wind turbine factory at the Teesworks freeport development site near Middlesbrough in the north-east of England.

The investment is in some ways the government’s Green Industrial Revolution initiative in action, but it also highlights the challenges facing the plan.

Teesworks is one of several prospective industrial clusters in the UK intended to support green energy technologies such as offshore wind, hydrogen production, and carbon capture, usage and storage (CCUS).

The government hopes to create thousands of jobs and significant economic activity by developing local supply chains and manufacturing facilities to support these emerging energy technologies.

While the UK is often described as a global leader in offshore wind, the thousands of wind turbines stood in the shallow waters around its coastline represent both a success and a failure. Most of those turbines were built overseas by non-UK companies, with a mass roll-out of wind farms not matched by the creation of an integrated local supply chain.

The investment at Teesworks by GE Renewables, a France-based subsidiary of US conglomerate General Electric, is expected to support 750 jobs directly and a further 1,500 in the supply chain. Much more foreign direct investment (FDI) will be required if the government is to reach its target of 250,000 well-paid green jobs by 2030.

Some fear, however, that the same mistakes made in offshore wind could be repeated in other emerging sectors.

Did the UK budget meet green expectations?

In its March 2021 Budget, the UK government made an number of announcements related to its Green Industrial Revolution.

What we didn’t get from the Budget is what the funding mechanism is going to be and how varied it will be for different technologies. Andy McDonald, Scottish Enterprise

It established a new state-run infrastructure bank and announced funding for a number of prospective industrial sites intended to support its green energy plans, including the Aberdeen Energy Transition Zone in Scotland, Holyhead Hydrogen Hub in Wales, and the Able Marine Energy Park in the Humber region, as well as the Teesworks.

It also announced new capital allowances of the sort economists such as David Bailey, professor of industrial strategy at the University of Birmingham, had been calling for to support manufacturers. The super-deduction tax incentive represents a £0.25 cut in business taxes for every pound spent on plant and machinery.

While Bailey welcomes this initiative, he says the overall funding offered by government in the Budget was “nowhere near enough” and describes the proposed infrastructure bank as “a rather poor substitute for the European Investment Bank”.

“I thought the greening of the economy, green manufacturing revolution, building back better part of the budget was its weakest bit,” says Bailey.

Andy McDonald, head of low-carbon transition at Scottish Enterprise, welcomed commitments to more government spending on the energy transition but says that major capital projects will also need clear funding models to attract the required private investment.

“What we didn’t get from the Budget is what the funding mechanism is going to be and how varied it will be for different technologies,” says McDonald. “We want to bring through a variety of technologies and we know from history that you can accelerate technologies with the right level of support, but you can also stifle investment if you get it wrong.”

Dr Jen Baxter, head of innovation and policy at green hydrogen services company Protium, says that while the budget was focused in capital project infrastructure, less was said about planning, permitting and skills development.

“These are technologies that few people have got experience with,” she says. “We need to retrain engineers, train new engineers and get apprentices into these companies that are part of a wide-scale roll-out of commercialised technologies.”

Bailey is most alarmed by the government’s decision to drop its industrial policy commitment in favour of a more ad hoc approach to economic growth. He argues that effective modern forms of industrial strategy involve long-term planning with government and business working closely together.

“My fear is that we are shifting away from that collaboration that we have seen work very well in the automotive council and aerospace alliance, to a more centralised approach where the government will dole out bits of money to companies or places in a very top-down way that doesn’t work very well,” he says.

Decarbonised industrial clusters

The Green Industrial Revolution has been set out as a ten-point plan but can be thought of as having two main objectives. One is to decarbonise existing industries and services, the other to create new industries to support emerging energy technologies.

CCUS, which the UK government calls a “necessity, not an option”, is a technology that could address both objectives. CCUS traps carbon dioxide (CO2) produced in heavy industry and transports it to a storage site. The increasingly depleted reservoirs of the North Sea basin are seen as ideal storage locations for this CO2.

The UK government is running a cluster sequencing assessment in 2021 to pick two CCUS projects for government funding. One of the competing projects is HyNet North West, led by Progressive Energy and backed by Italian oil and gas company Eni and gas network company Cadent, which is owned by a consortium of international investors.

David Parkin, a director at Progressive Energy, explains that while the UK has made a strong start to decarbonising electricity, this accounts for only a fraction of the country’s energy consumption.

“The rest is what we call ‘hard-to-reach sectors’,” says Parkin. “Areas of the economy such as domestic heat, heavy industry and heavy transport. They are all very difficult to electrify with low-carbon electricity.”

CO2 is produced as part of the manufacturing process for many products made in the UK, such as fertilisers, cement and vehicles. Parkin says to reach net zero “we either need to do carbon capture and storage, or we need to shut down these industries”.

Baxter says renewable energy contributes roughly 50% of the power to the grid “on a good day”, yet the grid represents just 16% of all energy consumed in the UK, meaning more than 90% of the energy system remains to be decarbonised.

Many of the CCUS proposals feature a hydrogen production element. Hydrogen is an alternative fuel for transport and heating, and can also act as a store for energy. Until now hydrogen has only been produced at very small scale around the world and almost all of it through a process that reforms natural gas through electrolysis, a process that emits CO2.

Blue hydrogen production using CCUS offers a way of reducing the emissions of this process, and is seen as the fastest way of scaling up hydrogen production until green hydrogen, produced using only renewable energy sources, can reach commercial viability.

Though Protium is a green hydrogen company, Baxter sees a role for blue hydrogen, at least at first, but says the big challenge will be “getting carbon capture and storage to a place where it is commercially useful”.

Where are the UK’s regional hydrogen hubs?

On 17 March the government announced funding for hydrogen hubs in both Teesside and North Wales, two of a number of sites around the country looking to develop the technology.

The area around Aberdeen shows how projects supporting different technologies can be clustered together to create a mutually supportive ecosystem. Aberdeen is home to world-leading subsea technology companies due to its legacy North Sea oil industry, and also has offshore wind capacity nearby.

Storegga, the lead developer of the Acorn CCUS and hydrogen project nearby in north-east Scotland, announced on 3 March that Australian asset manager Macquarie had increased its stake in the business, while the Singaporean sovereign wealth fund GIC and Japanese conglomerate Mitsui had also made investments. A final investment decision is due on the project in 2022.

If the energy source is different for different hydrogen plants, how do you create a balanced and unbiased CfD? Jen Baxter, Protium

McDonald of Scottish Enterprise says that investors from Japan, Germany and Norway have all expressed interest in hydrogen projects in Scotland.

“There is a big FDI opportunity here”, says McDonald. “Many of the companies we are working with on the energy transition are inward investors to Scotland.”

Although investor interest is high, how the projects will be funded is still undecided. Parkin expects a form of the contracts for difference (CfD) scheme used for offshore wind to be the funding mechanism for hydrogen projects.

A CfD would pay the hydrogen producer the difference between its cost of production and the natural gas equivalent, allowing the producer to market its product at the same price as natural gas.

Theoretically, as the carbon price rises the subsidy will fall away as the respective prices reach parity.

Baxter argues there are many unanswered questions, however, about how CfDs could be used for hydrogen. “If the energy source is different for different hydrogen plants, how do you create a balanced and unbiased CfD? Or will there be CfDs for particular end users? What will be the process for that?” she asks.

Missed opportunities in the automotive sector

While there is momentum behind CCUS and hydrogen projects, progress on electric vehicles seems to have slowed. The UK is already behind many other countries in developing gigafactories for battery production, which puts at risk an automotive sector already suffering due to Brexit.

Bailey says it is disappointing that the government is yet to make a firm commitment to building a gigafactory in the UK and says funding for electric charging infrastructure does not go far enough.

If the government doesn’t seize the opportunity to put the building blocks in place on things like battery manufacturing and EV charging, we aren’t going to have a mass car industry making vehicles. David Bailey, University of Birmingham

“If the government doesn’t seize the opportunity to put the building blocks in place on things like battery manufacturing and EV charging, we aren’t going to have a mass car industry making vehicles,” he says.

“We might end up with some R&D, a little bit of assembly, but with most of the economic activity taking place elsewhere.”

Facing this existential threat, the automotive sector seems to be shifting lobbying efforts from accelerating gigafactories to pushing back the 2030 ban on all petrol and diesel vehicles sales. Following the Budget, the Society of Motor Manufacturers and Traders darkly warned that by its estimates, UK car sales would fall dramatically from 2.5 million in 2025 to just 800,000 in 2030 if the ban was introduced as planned.

The UK has a history of seeing domestic industries die and McDonald says that if industries are not decarbonised quickly enough, the local economies they support could see the same challenges as those endured by former coal mining and steelmaking communities in the second half of the last century.

McDonald says: “The engineering base invested in making engines needs to focus on something else. If we don’t capture that opportunity to manufacture batteries and electric motors, then we will lose the automotive part and somewhere down the road the motivation for having car factories in the UK reduces.”

Small window of opportunity

The UK government may not be able to make the country a leader in all aspects of its proposed Green Industrial Revolution, but opportunities exist if it can move quickly enough and avoid the mistakes from the roll-out of offshore wind.

“The UK has been slow off the mark in developing an indigenous offshore wind sector,” says Parkin. “Great on deployment but pretty rubbish creating an industrial supply chain. Now we have got the opportunity to get a market-leading position on CCUS and hydrogen very early on.”

Parkin argues that the UK has an advantage in becoming a blue hydrogen hub, creating future opportunities for exports, because many other European countries are wary of investing in any new projects with fossil fuels technologies, even using CCUS.

Norway and the Netherlands are both pursing blue hydrogen projects, however, and share the UK’s oil and gas expertise and geological structures. They will be competing to attract the same investors as the UK.

According to Parkin, HyNet North West deliberately selected UK company Johnson Matthey to provide the technology for its hydrogen project so that it is “British technology, funded by British taxpayers through the development cycle, to decarbonise British industry”.

Agreeing a subsidy scheme to fund capital projects will be vital, but McDonald argues the government should also “use some of that public subsidy to drive the supplier infrastructure, to make sure we are actually investing in and creating UK suppliers”.

Parkin believes the UK supply chain will be stretched to deliver four or five big cluster projects at the same time, given the level of pipeline, offshore and process engineering required. “The best way to accelerate these plans is to continue to be clear on policy announcements, and that will cause people to invest in supply chain capacity,” he says.

Parkin predicts that legislation needs to be in place by 2022 if final investment decisions on planned CCUS projects are going to be reached in 2023. “If the government is serious about getting the first two of these built by 2025, and all of our partners have set net-zero commitments at board level and need these projects, then policy ambitions needs to be translated into regulated structures and legal instruments quicker than has ever happened before,” he says.

That leaves a small window of opportunity for the government to realise its ambitions and still much work to do.

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