The race to scale up hydrogen: is the EC rolling out the red carpet to public spending?

With the COP26 summit as a backdrop, and after a summer where we witnessed devastating floods and fires across the globe, governments are launching a welter of pledges to slash CO2 emissions. The EU is committed to climate neutrality by 2050, while the UK targets a 78% drop in emissions by 2035, Japan by 46% by 2030, and the US by 50% by 2030. As governments seek to turn these vows into concrete policies, many highlight hydrogen as part of the path to net zero. The intensifying focus on hydrogen should also be seen in the context of the current energy crisis, where soring energy bills call for long-term energy strategies to be carefully considered and dependency on natural gas to be reduced.

In this blogpost, we will zoom in on the role of the EU’s State aid rules to scale up hydrogen. The debate around how competition policy can, and should, be used to tackle climate challenges is ongoing (see our reporting here). While views are diverging on numerous topics, most do rally behind the State aid rulebook as a key driver for the green transition.

It is also to the State aid rulebook that the main changes to the competition law framework are expected. These changes are welcome as it is time to start spending the block’s huge EUR 724bn recovery fund. A substantial part is earmarked for green spending and the fund will offer a boost to technologies such as hydrogen. Large sums are at stake, with prospects of big rewards for well positioned companies.

Golden opportunity to substitute fossil fuels?

The buzz around hydrogen as a headline-grabbing ‘fuel of the future’ is far from new. The spotlight has increased further thanks to falling production costs, spikes in energy prices and climate concerns. The promise of hydrogen revolves around curbing emissions from top polluters, such as heavy industries and long-distance transport, where electrification is difficult or impossible. Some in the industry project that, if successful, hydrogen could meet almost one fifth of global energy demand. Others, however, call for caution, highlighting that hydrogen may not be a silver bullet and risks diverting resources from areas where the green upshot would be bigger.

Hydrogen for dummies – it is all about the colour

While there is ample hydrogen, hydrogen atoms are seldom unaccompanied. To be used as energy, hydrogen must therefore be separated from other elements. This can be done in a number of ways, all of which require energy, and each having its own colour code:

  • Brown hydrogen is found at the polluting end of the scale as the production uses coal as energy feedstock.
  • Grey hydrogen production uses fossil fuels, typically natural gas, and currently accounts for the vast majority of global production. As this creates considerable CO2 emissions, it is not considered a green fit.
  • A cleaner, but more expensive, variant is blue hydrogen. The production of blue hydrogen also relies on fossil fuels, but uses carbon-capture technology to store emissions from this process.
  • If the production is based on renewable energy, the hydrogen becomes green.

Thanks to their eco-friendly labels, blue and green hydrogen are the focus for many investors and policymakers, including the EC. In the words of Competition Commissioner Vestager, green hydrogen in particular “will take us one step closer to making Europe the first climate-neutral continent by 2050”.

Green light to hydrogen spending

EU Member States are lining up to invest billions of euros in greening the economy, and the cost to the public purse of scaling up hydrogen is expected to be substantial. Such public spending must comply with the EU’s State aid rules. And while the rulebook has long allowed for green spending, there is broad consensus that the current rules do not offer sufficient room for green action. Several significant updates are therefore pending, of which we want to highlight three:

  1. The key document in the EC’s toolbox is the guidelines on State aid for climate, energy and the environment. A revised draft was published this summer, covering multiple welcome changes which vastly expand the possibilities of using  State aid to reach the goals of the Green Deal. The EC aims to facilitate public spending on new technological innovations; broaden the range of support measures; and allow Member States to fund a larger share of the cake. Hydrogen is highlighted throughout the draft, with support for both production and infrastructure in the cards. Hydrogen is also brought forward as a solution for clean mobility.
  2. In the same vein, the EC recently published a proposal to extend the General Block Exemption Regulation . Support under the GBER is exempted from the general rule of prior notification to the EC, making investments both easier and faster. The proposal aims to increase the scope for public funding of green projects and covers various forms of support to hydrogen projects, and reflects the EC’s focus on green hydrogen.
  3. A further route to support hydrogen is the tailor-made rules for large and coordinated projects across several Member States, so-called Important Projects of Common European Interest. An IPCEI requires State aid approval, and offers a possibility to bring together knowledge and financial resources across Member States. Given the focus on sizeable projects, IPCEIs are particularly well suited for investments covering the entire hydrogen value chain. They are also likely to foster welcomed cooperation across Member States. The IPCEI rules are currently under review and we expect the upcoming changes to further promote the Green Deal. That said, we already see a number of IPCEI hydrogen projects in the pipeline.

The colours of the future

While the spotlight is very much on climate, the hydrogen scale up is not only about green concerns but also about competitiveness. To the EC, the block’s competition policy should enable “Europe’s companies to become global leaders in green technologies, green production processes or green products, through innovation”. And in the global race for hydrogen technologies, it may make perfect sense for the EC to act early and allow for public spending, rather than to risk the EU being left behind while others pull ahead.