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Part 2

Hy-Politics – political considerations shaping the evolution of clean hydrogen policy

Summary of the use case in the EU

On 8 July 2020, the European Commission published its hydrogen strategy for a climate-neutral Europe. At the same time, the Commission launched its European Clean Hydrogen Alliance (the “ECHA”). The objective of this Strategy is the massive deployment of clean hydrogen in Europe across different sectors making it cost-competitive. This is a key priority for the European Commission and one of the main deliverables of the European Green Deal to achieve climate neutrality by 2050.

The Commission’s strategic vision is to increase hydrogen’s share in the EU energy mix from less than 2% today to 13-14% by 2050. The Commission considers that hydrogen can play a key role in fully or partially decarbonising some carbon intensive industrial processes, such as the steel and chemical sectors. It can also offer a decarbonisation solution to areas of the transport system which are hard to abate (e.g. heavy-duty road vehicles), complementing the electrification of transportation. The Commission notes that the use of hydrogen in the transport sector will be further addressed its Sustainable and Smart Mobility Strategy (due to be published by the end of 2020).

The strategy notes that a hydrogen economy would allow existing natural gas infrastructure to be re-purposed, helping to avoid stranded assets. Clean hydrogen has multiple purposes and can also be used as a feedstock, a fuel, an energy carrier or storage with applications across industry, transport, power and buildings sectors.

The hydrogen strategy states that the ECHA will “play a crucial role in facilitating and implementing” the hydrogen strategy, including by identifying viable investment projects to facilitate the development of the hydrogen value chain.

Green vs. blue

It is clear from the Commission’s Hydrogen Strategy that there is a preference for renewable hydrogen over blue hydrogen. An earlier leaked draft of the Hydrogen Strategy made little reference to blue hydrogen production, possibly due to differing levels of support for blue hydrogen across the Member States. However, the final published version does acknowledge the importance of hydrogen from fossil fuels (with carbon capture technology) in the short to medium term as a transition to the development of wide scale renewable hydrogen.

Therefore, the Commission’s long-term priority is to develop renewable hydrogen (produced using mainly wind and solar energy) as the most compatible with the EU’s climate neutrality goals. The Hydrogen Strategy notes that cumulative investments in renewable hydrogen in Europe could be up to €180-470 billion by 2050 but in a much lower range of €3-18 billion for low-carbon fossil-based hydrogen.


Part 4

Hy-Achieving – creating a suitable incentive regime

The European Commission’s Hydrogen Strategy acknowledges that there is a need for policy levers which assist in the development of the full value chain across supply of and demand for hydrogen. The Hydrogen Strategy suggests that policy should create both supply- and demand-side incentives. On the supply side, the focus should be on reducing the cost gap between green and blue hydrogen and grey hydrogen. The Commission notes that estimated costs for grey hydrogen in the EU today are around €1.5/kg, costs for blue hydrogen are around €2/kg, and the costs for green hydrogen are around €2.5-5.5/kg (though costs for green hydrogen today are more likely to fall in the higher end of this range). Consequently, carbon prices in the range of €55-90 per tonne of CO2 would be needed to make blue hydrogen competitive with grey hydrogen today (noting that the current carbon price in the ETS is around €25 per tonne of CO2). The Commission suggests that financial support is likely to be required for some time in order to close this gap.

The Hydrogen Strategy notes that the bridging of this cost gap will need to be implemented through appropriate State aid rules. It proposes a carbon contract for difference (a “CCfD”) as the policy instrument of choice for clean hydrogen. The CCfD would remunerate the investor by paying the difference between the CO2 strike price under the CCfD and the actual CO2 price in the EU Emissions Trading Scheme (“ETS”).

The Hydrogen Strategy also suggests that green hydrogen (though not blue) would be eligible for direct financial support on the basis of competitive tenders. Other forms of support may include quotas of renewable hydrogen in specific end-use sectors (e.g. certain industries, such as the chemical sector or transportation) to stimulate demand a targeted way.

The Commission has also said that it may consider how the production of green hydrogen could be further incentivised through the ETS regime itself. Expansion of the ETS to cover sectors which are not currently covered by the ETS regime (such as transport), would create incentives on specific types of end-users to decarbonise and use hydrogen instead of fossil fuels.

The EU Hydrogen Strategy therefore highlights a clear need for government support schemes to incentivise investment in hydrogen production, supply and demand i.e. a “full value chain approach”, in order to help close the cost gap. Such support schemes would need to be in place for some time in order to increase the scale of clean hydrogen.


Part 5

Hy-ly Volatile? making it safe, sustainable and transportable

The EU Hydrogen Strategy acknowledges that regulatory reform will need to be implemented to encourage the development of a hydrogen market across the whole value chain.

Currently, one of the main pieces of EU legislation relevant to clean hydrogen is the recast Renewable Energy Directive which requires Guarantees of Origin schemes (providing proof of “clean” production which can be traded separately from the physical commodity to which they relate) to be established by member states by 2021 for renewable gases, including green hydrogen.

However, as acknowledged by the Hydrogen Strategy, common low-carbon thresholds or standards for the promotion of hydrogen production installation based on their greenhouse gas performance remain to be developed. The Commission also notes that comprehensive terminology and EU-wide criteria for certification of green and blue hydrogen will be required. The private CertifHy scheme has sought to create a Guarantees of Origin scheme that is capable of running on an EU-wide basis, with a view to – as CertifHy itself puts it - avoiding “bottom-up developments of inconsistent national GO schemes that can hamper establishing an effective European market for Green and Low-carbon Hydrogen (as is currently the case for biomethane/biogas)”.

The Hydrogen Strategy also refers to the need for regulatory and financial support for networks that would benefit clean hydrogen. This may include a revision of the Trans-European Networks for Energy Regulation, which provides a framework for the selection of electricity, gas and CO2 infrastructure projects of common interest (“PCIs”) that can benefit from financial support through public funds, a review of the internal gas market legislation for competitive decarbonised gas markets and of the Alternative Fuels Infrastructure Directive.

The Hydrogen Strategy suggests that, for early phase projects, existing rules for closed distribution systems or direct lines may be relevant – in other words, some of the regulatory requirements on unbundling (which would restrict investors in hydrogen projects participating in multiple parts of the value chain) and third party access, could be disapplied to allow initial projects to be developed. However, the strategy does acknowledge that third party access rules will need to be developed in time to ensure hydrogen infrastructure is accessible on a non-discriminatory basis (though it does not explore whether or how developers can be incentivised to develop projects that design-in redundant capacity so as to avoid future inefficiencies from unnecessary duplication of infrastructure). The Hydrogen Strategy does not address the longer-term view on the application of unbundling rules to hydrogen projects.

The Commission notes that a regulatory framework for a liquid hydrogen market will be needed. This includes the possibility of blending hydrogen into the existing gas network, though the Hydrogen Strategy notes that blending is less efficient and diminishes the value of hydrogen. This will therefore require some controls on the technical requirements and gas quality standards to ensure that different Member States do not accept different levels of blending, thereby hindering cross-border flows. A review of the internal gas market legislation for competitive decarbonised gas markets will be needed, to ensure interoperability of markets for pure hydrogen, common quality standards or cross-border operational rules. However, there is currently little clarity on what this may entail.

Australia    Belgium  •  China    The EU •  France  •  Germany  •  Italy  •  Japan  •  The Netherlands  •  Poland  •  Portugal  •  Spain    The UK
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