Part 4

Hy-Achieving – creating a suitable incentive regime

EN-H2

In the EN-H2, the Portuguese Government has focussed on public and private European and National financing sources as the route to incentivising clean hydrogen. The European financing sources included in the EN-H2 are: (i) Invest EU; (ii) Connecting Europe Facility; (iii) Horizon Europe; (iv) Innovation Fund; (v) InnovFin Energy Demo Projects; (vi) EEA Grants 2014-2021 (Blue Growth, Innovation and SMEs); (vii) Just Transition Mechanism – Just Transition Fund; (viii) EU Recovery Fund (COVID-19 related); and (ix) European Bank of Investment.

The Portuguese financing sources included in the EN-H2 are: (i) PO SEUR – Operational Programme for Sustainability and Efficiency in the Use of Resources (Programa Operacional Sustentabilidade e Eficiência no Uso de Recursos); (ii) Innovation Support Fund (Fundo de Apoio à Inovação); (iii) Environment Fund (Fundo Ambiental); (iv) PPEC – Plan for the Promotion of Consumption Efficiency (Plano de Promoção de Eficiência no Consumo); (v) PPEC – Plan for the Promotion of Consumption Efficiency (Plano de Promoção de Eficiência no Consumo); (vi) Portugal 2030; (vii) PPEC – Plan for the Promotion of Consumption Efficiency (Plano de Promoção de Eficiência no Consumo) and (viii) Blue Fund (Fundo Azul).

Besides these financing sources, the EN-H2 also highlights other support mechanisms that will promote the development of a hydrogen economy. Please consider the table below for further supporting mechanisms expected to be implemented in the future:

It is not clear how and if hydrogen investment costs are to be reflected in end-user tariffs. However, some of these support mechanisms have already received formal policy endorsement, as is the case with the amendment of the guarantees of origin legal framework to include “low carbon gases and for gases of renewable origin” – i.e. green hydrogen – since August 2020.

The EN-H2 strategy is highly focused on transferring the potential increase in production costs of hydrogen from consumers to financing sources (e.g. the Environmental Fund). However, it is not clear whether this funding will suffice in order to incentivise hydrogen at the rate required for the transition to net zero.

Recovery and Resilience Plan (RRP)

As mentioned in Getting Hy, the RRP proposes investing:

• € 185 M in the production of renewable gases, technologies that have been tested and are not yet sufficiently spread in the national territory – for self-consumption and/or injection in the natural gas distribution grid – maximum allocation per project of € 15 M;
• € 2 M in the installation of 2 pilot areas of local production and hydrogen charging in the Businesses Location Areas (Áreas de Acolhimento Empresarial) for heavy vehicles fleets (passengers, waste, logistics, etc.).

According to the RRP, the targets and schedule for the implementation of EN-H2 and, in particular, the renewable gas production projects, will be as follows:

Targets

264 MW of renewable gas production capacity [2021-2025]:

Schedule for launching the support tenders

Execution timeframe for the € 185 M

* Standard cost considered per MW: around € 1,550 k/MW.

First call for tender

On 28 September 2021, the Portuguese government launched the first call worth €62M under the program “Support for the production of renewable hydrogen and other renewable gases”. This call aims at subsidizing the production of the first 88 MW of hydrogen production capacity.

The eligible projects are (i) production of gases from renewable sources related to the development and testing of new technologies (TRL equal to or greater than 6), from production to consumption; and (ii) production of gases from renewable sources with tested technologies (TRL equal to or greater than 8) and which are not yet sufficiently disseminated in the national territory, from production to consumption.

100% of eligible expenses will be reimbursed, corresponding to the extra cost of an investment in the production of gases of renewable origin compared to a conventional installation to produce hydrogen from steam reformation of natural gas. Funding per beneficiary and per operation will have a maximum allocation of € 5 M, which could be doubled to € 10 M if the project covers investments in different activities of the value chain (production, distribution and final consumption). 

In February 2023, the Portuguese Government published the final report with the assessment of the applications submitted for the first call tender. A total of 25 projects will be supported under this programme (21 green hydrogen projects and 4 biomethane projects) up to a total of € 102 M.

The launch of a second call for tender worth € 83 M has meanwhile been announced, to be mainly focused on the production of biomethane. The submission of applications will be open until 31 July 2023.

First Portugal biomethane and hydrogen tender: fostering demand

In January 2023 the main rules and calendar for the centralised purchasing system for biomethane and hydrogen produced through the process of water electrolysis using renewable energy sources were published (Order no. 15/2023, issued by the Portuguese State Secretary for Energy and Environment):

• Electronic tender procedure: to be launched by June 2023, following which the wholesale last resort supplier (“LRS”) will enter into agreements with the awarded producers to purchase up to 150 GWh/year of biomethane and 120 GWh/year of hydrogen, to will be injected in the gas national grid;
• Price: the base price will be 62€/MWh for biomethane and 127€/MWh for hydrogen (i.e., the maximum price to be paid by the LRS as contracting authority).
• Duration: the agreements will have a 10-year duration from the date of the first supply - the tender documents will define the relevant beginning date for the purchases. 
• Quantities: the quantities to be purchased by the LRS and the price to be paid will be defined in the agreement and will apply to the entire duration of the agreement. 
• Guarantees of origin: the relevant biomethane and hydrogen produced must be delivered to the LRS together with the respective guarantees of origin. 
• Connection to the gas grid: as a condition precedent for entering into the purchase agreements, the producers should be qualified for the connection to the transport grid or the gas distribution grid, as well as comply with the underlying conditions.
• Entities and roles: the tender will be conducted by DGEG together with the LRS.

Until 30 May 2023 the tender documents will be prepared by the Directorate General of Energy and Geology (DGEG) in coordination with the LRS and submitted to the approval of the member of the Government responsible for the energy sector. Then, until 30 June 2023, DGEG will publish the relevant announcement, thus launching the tender.

Other

In September 2021, the Portuguese Government also launched an electronic auction to allocate capacity reserve for the injection into the public grid (in Pego, Abrantes) of electricity produced exclusively from renewable energy source(s). The tender was open to all renewable energy sources, thus admitting production of hydrogen. In March 2022, the final report was published with the proposal to award the tender – the awarded proposal (from Endesa) comprising a hydrogen project.

In addition, the energy sector national regulator ERSE approved in 2020 a pilot project, in Seixal, for the injection, by Galp Gás Natural Distribuição, of hydrogen into the natural gas distribution grid (the Green Pipeline Project). The project was successfully licenced and started injecting in the grid in March 2023 – within the next two years, the percentage of injection is expected to increase up to 20%. 

Simplification of licensing procedures 

On 18 April 2022, the Portuguese Government approved a series of exceptional measures for the simplification of administrative proceedings regarding the production of renewable energy, including hydrogen (Decree-Law 30-A/2022, of 18 April, as amended on 10 February 2023 by Decree-Law 11/2023). Pursuant to this Decree-Law, the installation of facilities for the production of hydrogen from water electrolysis is subject to a prior communication procedure (and no longer to a licensing one, which is more time consuming). In addition, if the project has an installed capacity equal to or below 1 MW, the respective installation is exempt from any prior urban planning control. 

Furthermore, with the approval of Decree-Law 11/2023, of 10 February, the Portuguese Government exempted the production of hydrogen from renewable sources and water electrolysis from any type of environmental licensing, including from environmental impact assessment procedures.