Developing a European Hydrogen Economy – a Roadmap

On the 8th July 2020 the European Commission (the “Commission”) published their much awaited Hydrogen Strategy for a Climate-Neutral Europe (the “Strategy”). Following on the heels of a number of national hydrogen strategies recently published (such as Germany, the Netherlands and Portugal) the Strategy sets out the EU-wide vision for decarbonising a range of sectors across Europe with hydrogen. Hydrogen is expected to provide at least 13% of the final energy demand by 2050 in Europe. With this roadmap of actions for the coming decades, the Commission invites public and private sectors to join it on the pathway to achieve the European Green Deal and Europe’s clean energy transition.

The Strategy provides a concrete policy framework within which the European Clean Hydrogen Alliance (the “Alliance”), launched on the same date as the Strategy, will develop an investment agenda and a pipeline of projects. This group, made up of industry, civil society, state and regional ministers, and the European Investment Bank, is to complement the Strategy for Energy System Integration which examines how ongoing workstreams of EU energy policy (including hydrogen) will foster a climate neutral integrated energy system. Both strategies contribute towards the achievement of the Sustainable Development Goals and the objectives of the Paris Agreement.

A roadmap to 2050

Achieving the EU’s decarbonisation aims requires a significant uptake in hydrogen demand and development of new hydrogen projects. The Commission seeks critical mass investment to make hydrogen more cost effective. Estimated costs today for fossil-based hydrogen are around 1.5 €/kg for the EU, for fossil-based hydrogen with carbon capture and storage around 2 €/kg, and for renewable hydrogen 2.5-5.5 €/kg. The Strategy notes that carbon prices in the range of EUR 55-90 per tonne of CO2 would be needed to make fossil based hydrogen with carbon capture competitive with fossil-based hydrogen today. The costs of renewable hydrogen are going down quickly however. For example, electrolyser costs have already been reduced by nearly 60% in the last ten years and are expected to halve in 2030 compared to today with economies of scale. The Commission quote that electrolyser costs are predicted to decline from €900/kW to €450/KW or less in the period after 2030, and €180/kW after 2040. This needs to be coupled with an enabling regulatory framework, new lead markets, sustained research and innovation, large scale infrastructure networks and cooperation on a national and international level. The Strategy sets out a pathway to achieving these aims.

Although the Strategy ultimately favours the development of green hydrogen (produced mainly using wind and solar energy), the Commission recognises that in the short and medium term other forms of low carbon hydrogen (such as “blue” hydrogen) will be needed in order to rapidly reduce emissions from existing hydrogen production.

The Strategy identifies three phases of the uptake of hydrogen:

First Phase – 2020-2024

The strategic objective is to install at least 6GW of electrolysers and to produce up to 1 million tonnes of green hydrogen. This will mainly be in the chemical sector (where electrolysis is already more common), as well as in other end use applications such as industrial processes and heavy-duty transport.

During this phase the manufacturing of electrolysers needs to be scaled up, and hydrogen refuelling stations built. The policy focus will be on laying down the regulatory framework and on incentivising supply and demand in lead markets. Recognising the limitations in bridging the cost gap between conventional solutions and renewable and low-carbon hydrogen, the Strategy notes that State aid rules may need to be reviewed. To stimulate green hydrogen production the Commission aims to encourage the development of large wind and solar plants dedicated to GW-scale renewable hydrogen production before 2030.

The Alliance will also actively encourage a range of investments. As part of the Commission’s recovery plan the Alliance will fund instruments of Next Generation EU, including the Strategic European Investment Window of the InvestEU programme and the ETS Innovation Fund, which will enhance the funding support and help bridge the investment gap for renewables generated by the COVID-19 crisis. Further detail on the Commission’s investment agenda follows below.

Second phase – 2025 – 2030

In the second half of this decade, the Strategy aims to have at least 40GW of electrolysers installed by 2030 and up to 10 million tonnes of green hydrogen.

The Commission anticipates green hydrogen to gradually become cost-competitive with other forms of hydrogen production. The need for EU wide logistical infrastructure will emerge and steps will need to be taken to transport hydrogen from areas with large renewable potential to demand centres, which could be located in other Member States. By 2030 the EU will aim to have created an open and competitive EU hydrogen market with open cross border transfer and efficient allocation of hydrogen supply among sectors. This is likely to start on the Iberian peninsula where Spain and Portugal are already exploring these opportunities.

Third phase – 2030 onwards towards 2050

Renewable hydrogen technologies are expected to reach maturity and be deployed at a large scale to reach all hard to decarbonise sectors. The Strategy anticipates that about a quarter of renewable electricity produced may be used for renewable hydrogen production by 2050.

An investment agenda for the EU and the Alliance

To support the large amount of investment needed, the Commission has started the European Clean Hydrogen Alliance (the “Alliance”), announced in the Commission’s New Industrial Strategy. The Alliance is intended to play a crucial role in facilitating and implementing the Strategy and coordinating public and private investment across the value chain. As part of the Commission’s recovery plan, the Alliance is expected to fund instruments of Next Generation EU, including the Strategic European Investment Window of the InvestEU programme and the ETS Innovation Fund. Namely, the Commission has identified the Important Projects of Common European Interest (“IPCEI”), doubling of the InvestEU programme capacity and funds such as European Regional Development Fund and the Cohesion Fund as key to its investment strategies. From this, up to €470b for green hydrogen and up to €18b for blue in cumulative investments may be available.

Boosting demand and scaling up production

The Strategy also notes that support schemes are likely to be required for some time. In other potential measures to incentivise hydrogen production, it considers tendering for carbon contracts for difference, as well as having other policy aid instruments, as possible support schemes that may be needed to facilitate the quick uptake of hydrogen projects.

Therefore, the Commission is preparing to introduce EU-wide instruments such as a common low-carbon threshold/standard for the promotion of hydrogen production installations based on their full life-cycle greenhouse gas performance. This is likely to be through the revision of to the Emission Trading System (“ETS”). The ETS already provides a technology neutral, EU wide incentive towards cost-effective decarbonisation in all covered sectors through carbon pricing. In the revision of the ETS the Commission may consider how the production of renewable and low-carbon energy could be further incentivised, while taking account of the risk of sectors exposed to carbon leakage.

Other measures being considered are to strengthen the European-wide criteria for the certification of renewable and low-carbon hydrogen possibly building on the existing ETS monitoring, reporting and verification and the provisions set out in the Renewable Energy Directive.

The Strategy also notes that support schemes are likely to be required for some time. In other potential measures to incentivise hydrogen production, it considers tendering for carbon contracts for difference, as well as having other policy aid instruments.

The Strategy also foresees the revision of the State aid framework, including the State aid guidelines for energy and environmental protection, in 2021. The Commission sees it as an opportunity to create a comprehensive enabling framework to advance the European Green Deal, in particular with regard to decarbonisation.

A framework for hydrogen infrastructure and market rules

Based on the Commission’s assessment and aims, significant amounts of new infrastructure as well as changes to existing infrastructure (such as existing pipelines) will be needed from the second half of this decade. Following an increase in demand, longer range transportation may be necessary and can be achieved by revising the Trans-European Networks for Energy (TEN-E) and the review of the internal gas market legislation for competitive decarbonised gas markets. This is expected to go hand in hand with the revision of the Alternative Fuels Infrastructure Directive and the Trans-European Transport Network (TEN-T). The Commission suggests this process should be combined with a strategy to meet the transport demand through a network of fuelling stations.

The Strategy stresses caution in relation to the blending of hydrogen into the natural gas network. It notes it will be helpful in the transitional phase, but that blending may be less efficient and diminishes the value of hydrogen. Because the quality of gas consumed in Europe is affected by its origin and is dynamic, blending may cause differentiation in gas quality in the internal market particularly if neighbouring Member States accept different levels of blending and cross border flows are hindered.

Research and innovation in hydrogen technologies

The Strategy recognises the role that research and innovation efforts play in stimulating development of hydrogen projects and advocates for a coordinated approach:

• Generation – upscaling to larger size, more efficient and cost-effective electrolysers in a range of gigawatts;
• Further development of infrastructure to distribute, store and dispense hydrogen at large volumes and over long distances (as well as the repurposing of existing gas infrastructure which needs further research);
• Large scale end use applications need to be further developed (most notably in industry and transport);
• Further research to support policy making, particularly to improve and harmonise safety standards.

The main methods the Commission has identified for enabling this is through the Clean Hydrogen Partnership (focusing on green hydrogen production, transmission, distribution and storage and selected fuel cell end use technologies) and the ETS Innovation Fund (which should pool together around €10b to support low carbon technologies over the period 2020-2030). The Commission also sees a role for providing targeted support through dedicated instruments such as InnovFin Energy Demonstration Projects and InvestEU (among others).

Key takeaways and Concluding Comments

The Commission has set out an ambitious strategy for the uptake of hydrogen across Europe over the coming decades. Almost all hydrogen produced in the EU today (around 96%) is produced from natural gas and coal. The Strategy has prioritised “green” hydrogen as its end goal but accepts that other low-carbon hydrogen such as “blue” hydrogen is needed in the short to medium term. It is clear that the cost of hydrogen needs to come down for it to be a competitive and viable option in the EU energy market, but the Strategy has set out a number of ways by which to achieve this over the next 5, 10 and 30 years.

In the focus on hydrogen production and its end use, the Strategy says less about blending hydrogen into the existing gas grids. In the UK up to a 20% blend of hydrogen is being trialled in the gas grid for use in heating. Similar tests are underway in Germany and other European member states. Yet, it is not obvious from the Strategy how the Commission views the decarbonisation of heat and where hydrogen is placed in this sector.

The Strategy looks most promising for electrolyser manufacturers as the Commission predicts an uptake in the manufacturing and use of electrolysers and is proposing a number of schemes and funding to make this happen. We may see a drive for the development of large renewable hybrid schemes with electrolysers combined with wind and solar projects. This will undoubtedly involve reviewing the existing consenting and land rights, as well as the regulatory frameworks within which such projects operate (some of which were considered by CMS in “Consenting and Real Estate Considerations for Developing Hydrogen Projects”).

So, is this the “tipping point” for hydrogen as the Commission suggests? The Strategy is ambitious and at least at present seems set on the role that hydrogen will play in achieving Europe’s net zero ambitions.