Consultation response – Invest 2035: the UK’s modern industrial strategy

Full consultation response

We welcome the publication of this Green Paper and the opportunity to respond. The Industrial Strategy will provide a crucial framework to drive forward this Government’s growth mission, something that must be inextricably linked to our obligation to decarbonise our economy and lead in the development of clean technologies.

This response will centre on the opportunity that green hydrogen solutions for shipping and aviation provide to deliver on the Clean Energy and Growth missions. With the UK’s strength in aerospace research and development, maritime leadership and clean power ambitions, it is well placed to become a leader in the development and deployment of zero emission aircraft and green hydrogen-derived fuels for shipping and aviation.

To achieve this, a clear and ambitious policy and regulatory environment will be paramount, as will a cross-sector approach that recognises the need for collaboration across the supply chain.

Green hydrogen solutions for shipping and aviation as sub-sectors for green growth

The Green Paper outlines a series of considerations to be made when identifying the most important sub-sectors for delivering on the objectives. It is critical that a holistic approach is taken to identifying sub-sectors, with delivery of central Government missions at the heart, along with a recognition of the importance of growth across the UK’s regions and, of course, delivering on the UK’s net zero obligations.

As the Clean Energy mission demonstrates, placing decarbonisation at the heart of decision-making on industrial strategy delivers not only on the vital steps the UK must take to achieve decarbonisation goals, but also presents an opportunity to lead in the development of low-emission solutions.

This response identifies clear avenues for achieving the Government’s growth and clean energy missions, whilst supporting a just transition, regional economic development and energy security, across the aviation and shipping sectors. Both aviation and shipping’s emissions are largely considered to be ‘hard-to-abate’ due to their carbon-intensive operation and international nature. Collectively, international shipping and aviation account for 15% of the UK’s emissions from transport[1] - a significant proportion – with both sectors relying on alternatives to fossil fuels used today to drive a significant proportion of their decarbonisation.

For aviation, the main alternatives available can largely be categorised as 1) zero emission aircraft (either direct electrification or the use of gaseous or liquid hydrogen propulsion aircraft), and 2) producing jet fuel from renewable sources, through a range of fuels commonly referred to as ‘sustainable aviation fuels’ (SAFs). SAFs can be further categorised into fuels produced using biogenic feedstocks (biofuels) or green hydrogen made from renewable electricity (e-kerosene).

Likewise for the maritime sector, along with efficiency improvements and the uptake of solutions such as wind assistance, alternatives can largely be categorised as 1) electric of hydrogen propulsion vessels, 2) biofuels or 3) alternative fuels such as methanol or ammonia produced using green hydrogen.

Given the existing size and maturity of the UK’s aerospace and clean energy sectors, there is a great potential for the UK to lead in the growth of low-and zero-emission solutions for decarbonising aviation and shipping. This, however, does not mean that we should be indiscriminate in seizing the opportunity for development in this sector. As shown in the Green Paper’s sector analysis (chart 3), the UK has seen strong growth in global export value for aircraft, but a contraction for ships by the same measure. Given the lack of competitive advantage that the UK possesses in shipbuilding, the same opportunity does not exist to pursue the development of zero emission vessels as a strategically important subsector.

Likewise, when taking the opportunity presented by the development of low-emission fuels for shipping and aviation, not all solutions offer equal potential to reduce emissions for the sector. E-fuels will not only offer greater emission reduction potential, but also do not have the associated risks of biodiversity loss, land use change impacts and supply challenges associated with biofuels. This makes e-fuels the only credible alternative fuels pathways to achieving the UK’s net zero ambitions without risking significant impacts to biodiversity and nature.

Due to their use decarbonising road transport, a number of biofuel production processes are also at a greater level of maturity than other production pathways, suggesting that there is less benefit to be had by directing government support towards their development. As such, we believe that the production of green hydrogen fuels – e-kerosene for aviation and e-methanol and e-ammonia for shipping – present a more strategic sub-sector for the production of alternative shipping and aviation fuels.

The zero-emission flight opportunity

The UK is well placed to lead in the development of zero-emission flight technologies. Sustainable Aviation, a UK trade group, forecast that ‘future aircraft types’ (including hydrogen and electric aircraft) will be responsible for 16% of emission reductions by 2050[2], indicating that there will be significant demand from the sector for these solutions. Given the nascency of the technology, significant technological development will need to take place in the coming decades across the supply chain to realise the opportunity of zero emission flight.

Crucially, UK innovation is already leading the way on zero emission flight development. ZeroAvia – based at Cotswold Airport in Kemble and Hollister, California – recorded its first flight powered by a hydrogen-electric engine in 2023 at Cotswold Airport, at the time the largest aircraft in the world to be powered by a hydrogen-electric engine[3]. Other companies, such as Airbus to Cranfield Aerospace Solutions, are also developing zero emission flight technologies in the UK.

As well as an existing presence in this part of the aerospace sector, the wider context of UK aerospace is also key to determining it as a growth opportunity. The UK captures around 12% of the large commercial aircraft market (as of 2019), with world leadership in areas such as fuel systems development[4], and the Aerospace Technology Institute (ATI) plays a crucial role in driving research and innovation for UK aerospace. As part of their FlyZero project, the ATI forecast that UK investment in the development of new aerospace technologies ahead of other nations could see the UK achieving up to 19% of the global industry and secure an additional 38,000 jobs by 2050[5]. Conversely, the same study suggests that not investing in the sector’s development could see the UK losing some of its sector stake (from 12% to 5%) and jobs reducing to just 74,000. Finally, the UK aerospace sector contributes significantly to regional growth, with a strong presence in the South West of England.

Green hydrogen-derived fuels

The UK government’s SAF mandate – to begin in 2025 – brings with it a guaranteed demand from airlines for SAF. The introduction of a binding mandate for the uptake of e-kerosene will be particularly important for driving the development of a UK e-fuels sector by creating long-term predictable demand that will de-risk investment. This is particularly important for e-kerosene as, while it provides greater emission reduction potential than other forms of SAF, it is expected to come with a higher cost.

Taking all fuel production pathways, it is estimated that the UK’s SAF industry could be worth up to £16.7 billion per year in exports by 2050, supporting around 130,000 jobs[6]. We have also already seen through projects awarded funding through the Advanced Fuels Fund (AFF) that e-kerosene production has the potential to provide green growth opportunities across the UK (especially in areas transitioning their economies away from a reliance on the oil and gas industry), with successful projects based in Teesside, Sheffield and Orkney.

Cross cutting opportunities

Integral to the development of the UK’s zero emission flight and alternative fuel sectors will be a significant, secure supply of green hydrogen. The UK government’s hydrogen strategy, which targets 10GW of low-carbon hydrogen production by 2030 (with a sub-target of 5GW of that being electrolytic hydrogen)[7], demonstrates the UK’s hydrogen ambitions. However, it is important that the UK’s hydrogen ambitions are viewed in parallel with the industries – such as aviation – that will be significant consumers of the fuel. As well as a supply of green hydrogen being crucial to developing e-kerosene and stimulating the development of zero-emission aircraft in the UK, so too will the aviation industry be important in driving investment in UK green hydrogen projects by demonstrating guaranteed demand.

Regulation as an enabler and barrier to growth

Effective policy and regulation is the ultimate lever that government has at its disposal to drive forward these sub-sectors by unlocking investment. As highlighted above, the UK has ambitions to be a significant producer of green hydrogen, a resource that will be key to decarbonising a number of hard-to-electrify sectors such as shipping and aviation. However, it is also a solution that – at least in the immediate term – will likely come at a cost premium. While we have markets with clear use cases – shipping and aviation – the key to unlocking investment and driving uptake of green hydrogen-solutions will be effective regulation.

Across the sectors identified in this response, investor certainty and regulatory environment are closely linked. Taking a look at e-kerosene and maritime e-fuels across the UK and Europe, no e-kerosene projects[8] and just six maritime e-fuel projects[9] have reached final investment decision (FID). While the UK government has introduced a clear regulatory framework to support the uptake of SAF for aviation, through the SAF mandate and plans to introduce a revenue support mechanism for UK SAF production, the regulatory environment for maritime decarbonisation and deployment of zero emission aircraft lags behind.

With regulatory ambition being key to influencing business decisions, overcoming barriers in seeking finance and deploying capital, we have identified a number of regulations that can be reformed or introduced to encourage growth and innovation in these sub-sectors.

Strengthening the SAF mandate and a targeted approach to revenue support

As reflected throughout this response, the SAF mandate has played an important role in creating a market for alternative jet fuels in the UK, starting from next year. Disappointingly, however, the sub-target for e-kerosene as set out in the SAF mandate falls behind other similar targets internationally, such as ReFuel EU Aviation. As the SAF mandate has only just come into law, it is unclear yet what impact it has had on investment into e-kerosene production in the UK. However, a clearer demand case set out by stronger sub-mandates for e-kerosene would likely have a positive impact on driving forward investment into UK e-kerosene production.

Another measure identified by the UK government as beneficial to boosting investment in UK-produced SAF is the industry-funded revenue support mechanism. As highlighted above, no European-based e-kerosene projects have yet reached final investment decision, highlighting the greater barriers to investment that e-kerosene projects face compared to other types of SAF. These greater barriers are because of the nascency of the technology and higher costs of production.

With further investor confidence, as seen in other industries such as low carbon electricity through the contract for difference (CfD) scheme, we believe that the introduction of a revenue support scheme for SAF will be important for incentivising investment in UK e-fuel (SAF) production. With high production costs for these fuels a significant barrier to securing offtake agreements with airlines, it is clear that further incentives beyond a SAF mandate will be necessary to scale e-fuel production. However, any revenue certainty mechanism should be targeted towards incentivising the fuel production pathways that face the greatest barriers to investment – namely e-kerosene.

Furthermore, scaling e-kerosene production supported by the mandate and a well-designed revenue support mechanism will lead to increased hydrogen production, complimenting UK hydrogen targets and, ultimately, improving economies of scale and reducing cost.

Pricing fossil fuels

The shipping and aviation industries do not pay for the carbon they emit, which in part is contributing to the significant price gap between fossil fuels and green hydrogen alternatives. While it may appear counterintuitive that pricing fossil fuels will act to drive investment, in extending the scope of the ETS to include international emissions, the economic case for alternatives is strengthened and revenues are raised that could be used to support government incentives such as the revenue support mechanism.

When taking the example of the UK emissions trading system (ETS), some emissions from both sectors are included, however aircraft and vessels travelling internationally (outside of European in the case of aviation) are not covered. With long-haul flights accounting for only 20% of all flights but 67% of emissions[10], this leaves a significant proportion of emissions not covered by ETS and with a greater cost gap between fossil fuels and alternative, lower emission fuels. Bringing these emissions into the ETS could therefore help in providing a source of revenue that could be used to provide government support for investment into UK-produced green hydrogen solutions and incentivise their uptake by bridging the cost gap.

Providing a market for zero emission flight

The UK has a real opportunity to lead in the development of zero emission flight technologies, yet does not have a regulatory environment that would incentivise its growth. There is already international precedent for regulation to support the development of zero emission flight technologies: Norway has targeted for zero-emission domestic flight by 2040 and is investing in a dedicated test arena for low and zero-emission aircraft. With other jurisdictions putting in place measures to incentivise uptake of zero emission technologies, there is an increasing risk of the UK falling behind without action.

Private investment, and public investment supported through increased revenues raised from the aviation industry, could be encouraged through adopting a similar target in the UK. The UK must therefore bring in plans to introduce a zero-emission flight target for domestic flights. With significant investment needed to scale the technology, such a regulation would play an important role in giving investors certainty that there will be future demand. This certainty is not only needed to develop zero emission flight technology, but also across the supply chain and aviation sector from airports to fuel supply infrastructure.

Updating the Clean Maritime Plan

The UK currently lacks a regulatory framework for decarbonising the maritime sector. The Clean Maritime Plan must urgently be updated to rectify this. By introducing a UK shipping decarbonisation policy that includes clear and ambitious overall and interim targets for cutting UK shipping emissions and committing to introduce an alternative maritime fuels mandate requiring a minimum uptake of green hydrogen-derived e-fuels from 2030, a similar market for maritime e-fuels would be created as has been achieved for e-kerosene. This has the power to stimulate investment in UK-produced e-fuels, as there are currently only two UK-based projects under discussion[11]. Similarly to aviation fuels, revenue support will likely also be required – and as with aviation, this must be targeted towards e-fuels and be industry funded (through, for example, an expansion of the UK ETS).

Conclusions

Green hydrogen solutions for decarbonising shipping and aviation – both zero emission flight and production of e-fuels – present an opportunity to stimulate green growth, support a just transition, bring economic opportunity across regions and support energy security. However, to capitalise on these opportunities the Industrial Strategy must identify them as sub-sectors for delivering their objectives. At the heart of capturing this opportunity is creating an effective regulatory environment that will push these sectors towards green hydrogen solutions, bridge the cost gap between fossil fuels and alternative technologies, and provide a framework for targeted, industry-backed government investment. To overcome regulatory barriers to investment, the following actions must be taken for each sub-sector:

Zero emission flight

• Commit to introducing a zero emission flight target, sending a strong demand signal for zero emission flight technologies and providing investor certainty

Green hydrogen-derived fuels for shipping and aviation

• Strengthen the e-kerosene sub-mandate within the SAF mandate and introduce a maritime e-fuels mandate, ensuring demand for e-fuels for both sectors, stimulating investment and demand for green hydrogen and driving forward the UK’s e-fuel production sector.

• Ensure that industry-funded revenue support mechanisms are targeted towards e-fuels when designing the SAF Revenue Support Mechanism, and committing to implement a similar scheme for UK-produced maritime e-fuels.

Cross-cutting

• Extend the UK ETS to cover international aviation and shipping emissions, both increasing the competitiveness of e-fuels and zero emission flight technology in relation to fossil fuels and raising revenues to invest public money into green hydrogen solutions for shipping and aviation.

[1] Department for Transport, Transport and environment statistics: 2023, 2023

[2] Sustainable Aviation, Net zero carbon road-map: summary report, 2023

[3] ZeroAvia, ZeroAvia Makes Aviation History, Flying World’s Largest Aircraft Powered with a Hydrogen-Electric Engine, 2023

[4] Aerospace Technology Institute, The Case for the UK to Accelerate Zero-Carbon Emission Air Travel, 2022

[5] Aerospace Technology Institute, The Case for the UK to Accelerate Zero-Carbon Emission Air Travel, 2022

[6] TheBusinessDesk, UK set to lose out on £17bn global sustainable aviation fuel industry unless urgent action taken

[7] Department for Energy Security and Net Zero, British Energy Security Strategy, 2022

[8] Transport & Environment, E-fuels for planes: with 45 projects, is the EU on track to meet its targets?, 2024

[9] Transport & Environment, E-Fuels observatory for shipping, 2024

[10] Transport & Environment, Above the clouds: UK aviation trends in 2023, 2024

[11] Transport & Environment, Shipping e-fuels observatory, 2024