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Part 2

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

Summary of the use case in Germany

On 10 June 2020, the German Federal Government adopted the national hydrogen strategy (Nationale Wasserstoffstrategie“National Hydrogen Strategy”).41 The National Hydrogen Strategy is intended to create a coherent framework for the production, transport, consumption and further use of hydrogen in Germany, as well as for innovation and investments in the hydrogen sector.

The National Hydrogen Strategy identifies all three key sectors (industry, transportation, heat) as potential areas for increased future use of hydrogen, but foresees that the use cases do not become viable at the same time. In the short to medium term, priority will be given to areas in which the use of hydrogen is close to economic viability and in which no major path dependencies are created or in which no alternative decarbonisation options exist. Initially, therefore, the National Hydrogen Strategy posits that hydrogen should be used where there are no easier, climate-neutral alternatives, where hydrogen is needed in large quantities and where transport is relatively easy to organise.42

  • Industry as short to mid-term use case
  • Transport as short to long-term use case
  • Heat as long-term use case

Broadly, the stated aims of the National Hydrogen Strategy are to: (a) achieve the German climate targets, (b) create new value chains for the German economy by developing a domestic market for hydrogen technology, and (c) develop international energy policy co-operation to secure market opportunities for German companies and secure sufficient hydrogen imports.

In September 2021, the Government has published the first report on the state of the implementation of the National Hydrogen Strategy.84

Examples of demonstration/feasibility projects in Germany
With “GET H2 Nucleus” BP, Evonik, Nowega, Open Grid Europe and RWE Generation intend to build the first hydrogen infrastructure accessible by public customers. Therefore, an electrolysis plant with a capacity of more than 100 MW shall be built at the RWE power plant site in Lingen to produce green hydrogen from wind power. Subsequently, the hydrogen will be transported to the chemical parks and refineries in Lingen, Marl and Gelsenkirchen via a 130-kilometre-long pure hydrogen network, consisting mainly of converted and upgraded natural gas pipelines. Production of the green hydrogen and delivery to customers is scheduled to start as early as 2023. Following a decision of the Federal Government announced on 28 May 2021, the project has been shortlisted as potentially eligible for funding from the EU program "Important Projects of Common European Interest" (“IPCEI”).85
Shell, Mitsubishi Heavy Industries, Vattenfall and Wärme Hamburg are planning a joint project to generate hydrogen from wind and solar energy at the Hamburg-Moorburg power plant site. In addition to a scalable electrolysis plant with an initial capacity of 100 MW, it is also planned to develop the site into a so-called "Green Energy Hub".86 The project has been shortlisted for potential funding from IPCEI.87
STEAG, Siemens Energy, Creos Deutschland, Saarbahn and Stahl-Holding-Saar have joined forces for a cross-border hydrogen project to establish a green hydrogen economy in Saarland, France and Luxembourg. The goal of the project is, inter alia, to use an existing gas infrastructure to establish a cross-border high-pressure network for the transport of hydrogen. The aim is to create a 100 km infrastructure that will enable hydrogen producers and consumers to develop business models in the industry, the heat market and the transport sector (e.g. Saarbahn plans to operate a cross-border public transport system with fuel cell trains and buses). Three sub-projects have been shortlisted for potential IPCEI funding:88

(i) H2SYNGAS, Dillingen, a project of SHS – Stahl-Holding-Saar developing a technology to use process gases and hydrogen for the blast furnace process.

(ii) mosaHYc, a project of Creos and GRTgaz to use an existing gas infrastructure to build a 100km cross-border high-pressure network for the transport of hydrogen.

(iii) "HydroHub Fenne", a project of STEAG and Siemens Energy to construct a PEM (Proton Exchange Membrane) electrolysis plant to use electricity from renewable sources.

In addition to the numerous announced projects in Germany, the German Federal Government is building partnerships around the world as part of its National Hydrogen Strategy89: There are international pilot projects with German support in as well as partnerships already with, for example, Chile90, Morocco91, Australia 92 or Saudi Arabia93.
Industry response

The National Hydrogen Strategy has generally been received positively by industry as an important signal of the Government’s support for clean hydrogen. However, some industry participants have called for clearer policy proposals to develop the hydrogen market and greater certainty around regulatory changes required to integrate hydrogen into the energy system.43

The National Hydrogen Strategy states that in the Government’s view, only green hydrogen is sustainable over time. At the same time, the Government assumes that within the next ten years, global and European hydrogen markets will evolve, and that CO2-neutral hydrogen will be a transitional technology over this period. Industry has expressed a preference for a technology-neutral approach, though CCS pilot projects have met public resistance in Germany in the past. This resistance may, however, changes should CC(U)S facilities in the North Sea be considered. In addition, also after the release of the National Hydrogen Strategy, the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (Bundesministerium für Umwelt, Naturschutz und nukleare Sicherheit) and the German Federal Ministry of Education and Research (Bundesministerium für Bildung und Forschung) have been sceptical about the use and promotion of non-green hydrogen, even if only on a transitional basis. It can be expected that the new Government will continue to push for green hydrogen.

 

Part 4

Hy-Achieving – creating a suitable incentive regime

The National Hydrogen Strategy contemplates considerable financial support for the rollout of a hydrogen economy over the next few years, including:

  • Until 2026: up to 1.4bn for the National Innovation Programme Hydrogen and Fuel Cell Technology;
  • Until 2023: 1bn for technologies and large industrial installations which use hydrogen for decarbonising production processes in the context of the national decarbonisation programme;
  • from 2020: 7bn for the domestic market rollout of hydrogen, decided in the context of the “future package”, i.e. the post-Covid recovery plan; and
  • from 2020: 2bn for international hydrogen partnerships, also as part of the “future package”.

The Federal Government foresees two policy phases:

  • Until 2023: The National Hydrogen Strategy includes an action plan with 38 measures in total. These represent the first phase of the National Hydrogen Strategy, in which the market rollout and the foundations for a functioning domestic market will be initiated by 2023. Parallel to this, pioneering topics such as research and development and international issues are being promoted by the Government.
  • from 2024-2030: In the next phase from 2024, the emerging domestic market will be consolidated, and the European and international dimension of hydrogen will be shaped. In this context, the idea of continuous further development is an integral part of the National Hydrogen Strategy.

The market rollout and the foundations for a functioning domestic market for hydrogen are to be achieved by the following measures:

  • With regard to the production of hydrogen:
  • the Government is in the process of examining whether electricity required for producing green hydrogen can be exempt from taxes, levies and surcharges. Since 1 January 2021 electricity required for the production of green hydrogen is exempt from the surcharge (Erneuerbare-Energien-Umlage;EEG Surcharge”) under the German Renewable Energy Sources Act (“EEG”) (see Part 5);
  • in addition, CO2 attributable to fossil fuels in the areas of transport and heat will in the future be charged;
  • the production of green hydrogen may be supported through tendering models, e.g. for the decarbonisation of the steel and chemical industries, and additional tenders for renewable energy generation; and
  • model projects shall examine the extent to which electrolysers and electricity and gas network operators can cooperate in the production of hydrogen (subject to unbundling rules).
  • For the use of hydrogen in the transport sector,
  • the minimum quota of renewable energy (including hydrogen) to be used in the transport sector shall be significantly increased, going beyond EU requirements;
  • the use of green hydrogen in the production of fuels shall in the future count towards the greenhouse gas reduction quota;
  • a potential obligation to use electricity-based aircraft fuels shall be examined; and
  • incentives in the form of investment support for climate-friendly means of transport (including, but not limited to, hydrogen-based technologies) and support of fuel station/charging station network.
  • For the use of hydrogen in the industrial sector, especially in the chemical and steel sectors,
  • investment support programmes for the conversion to hydrogen as a basic material are to be set up;
  • support shall be provided via the so-called Carbon Contracts for Difference (“CfD”) (this includes state support in the amount of the cost difference between: (i) the actual cost of avoiding emissions by using decarbonisation technologies, expressed as a contractually agreed CO2 price per avoided amount of greenhouse gas emissions, and (ii) prices according to the emissions trading system) - in this connection, the H2Global platform is under development, an auction based mechanism where the balance between the lowest bid on the supply side and the highest bid on the demand side will be compensated from Government grants94; and
  • the demand for climate-friendly products should be strengthened, e.g. by introducing a demand quota for climate-friendly materials such as green steel; as a precondition, a labelling system would be required.
  • For the use of hydrogen in the heating sector, the application of fuel cell heating devices in buildings shall be promoted.

The implementation of the strategy is accompanied by a National Hydrogen Council of 26 experts from industry, science and civil society and a committee of state secretaries for hydrogen, supported by a hydrogen co-ordination centre set up by the Government.

The actual funds available for the direct financial support programmes mentioned above shall, according to the National Hydrogen Strategy, all be set out in the budgets of the respective ministries.61 They fall within the responsibility of the competent ministries and will be financed by these in the framework of the applicable budget and financial programmes.62 In September 2021, the Federal Ministry of Economics and the Federal Ministry of Research presented a funding guideline for the financial support of international hydrogen projects.95

The €7bn foreseen for implementing the National Hydrogen Strategy will first become part of the Energy and Climate Fund reserve (Energie- und Klimafonds-Rücklage).63  For future years, liquid funds (Barmittel) in the amount of €200m have been made available. In addition, up to €800m has been foreseen in the budgets for future years (Verpflichtungsermächtigungen).64  For international co-operation, liquid funds (Barmittel) in the amount of up to €390m are foreseen in the budget for 2021, up to €700m for 2022 and up to €700m for 2023.65 The exact distribution of funds is still under discussion.

Regarding funding of support measures, the Government makes the general statement that in principle, hydrogen and the electricity required for hydrogen production should be financed by the sector that consumes the hydrogen. The economic viability of hydrogen can, however, be improved by support measures.66

Part 5

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

Regulatory framework

Pure hydrogen networks have not been subject to network regulation in the past, except for distribution (not transmission) networks for hydrogen that meet the definition of “biogas”. This is the case if the hydrogen has been produced by electrolysis using predominantly renewable energy sources (in practice, at least 80%). The admixture of hydrogen classifying as biogas and other hydrogen produced by water electrolysis is regulated both on distribution and transmission level.

Beyond this, transmitting or distributing hydrogen was only covered by the (Energiewirtschaftsgesetz – “EnWG”) if the hydrogen supplements natural gas in a conventional gas grid. Such hydrogen feed-in must comply with the requirements of the regulations of the German Technical and Scientific Association for Gas and Water (Deutscher Verein des Gas- und Wasserfachs e.V. – DGVW). Due to sensitive consumers, particularly natural gas fuel stations, the potential for feeding a hydrogen share into natural gas grids is currently very limited. According to BNetzA, hydrogen may in fact only account for 2%, which may not be exceeded anywhere in the entire network. Various tests, however, are currently being carried out, exploring the possibility of higher hydrogen shares of up to 20% and 30% in real network operation.

On 27 July 2021, however, new legislation for a transitional regulation of hydrogen networks that is part of the EnWG entered into force. The new legislation only applies to those operators that opt to be subject to this legislation. Its key features are the following:

  • Hydrogen networks will not become subject to the regulation of gas networks.96 As a consequence, the cost for new hydrogen infrastructure will not be socialised through uniform grid fees for gas and hydrogen customers. This may lead to a need for public funding as grid fees for the use of hydrogen network may at least initially be disproportionately high. During the legislative process especially gas network operators had called for uniform tariffs.
  • The Federal Government intends a gradual introduction of regulation for hydrogen networks. As a first step, operators can exercise an option to become subject to regulation for their entire network. This will, however, only be possible after BNetzA has confirmed the need for the respective hydrogen infrastructure.
  • After exercising the option, the operator will be subject to a number of obligations – similar to those for gas networks. These include the obligation to provide grid connection and grid access to customers. It is expected that an ordinance will come into force in the course of 2022 that will contain rules on access to and connection with hydrogen networks. Also, operators of hydrogen networks will be subject to certain unbundling requirements under which they may not own electrolysers or storage facilities.
  • Unlike in the case of gas networks, the tariffs for the use of hydrogen networks will at least in a ramp-up phase not be subject to an incentive regime (Anreizregulierung). Instead, the network tariffs will have to be non-discriminatory and cost-based (planned vs. actual cost) but will not be subject to approval by BNetzA. Operators can, however, only include costs in the tariff if BNetzA has confirmed the need for the relevant infrastructure and approved the cost. Further detail will be set out in an ordinance, the hydrogen Network Tariff Ordinance. It is expected that it will enter into force before yearend 2021. To incentivise investments into hydrogen networks, the rate of the return on equity will be fixed at 9% until 2027 for new infrastructure and 7.73% for old infrastructure.97 After 2027, BNetzA will determine the relevant rates.
  • To avoid legal insecurity and possibly protracted administrative procedures, existing permits and easements for gas networks that are converted for the transportation of hydrogen will be grandfathered.
  • Operators of hydrogen grids opting for regulation as well as gas grid operators must report to BNetzA the status of the hydrogen grid every two years (beginning in 2022). The purpose is to put BNetzA into a position to decide if and to what extent a hydrogen network development plan is required. In the bi-annual network development plans for gas, operators of gas transmission networks can earmark those gas lines that they intend to convert into hydrogen lines.

The European Commission has announced that it will publish a first legislative proposal for the regulation of hydrogen in December 2021 which could require certain adjustments to the German regulation once passed.

Hydrogen production – electricity surcharge reduction/exemption

The electricity price significantly contributes to the cost of producing hydrogen. In Germany, surcharges are a considerable component of electricity prices. Among them is the renewable energies surcharge payable for each kWh consumed to finance the subsidies payable to operators of renewable energy installations (“EEG Surcharge”). For ordinary final consumers, in 2021, it amounts to 6.5 ct/kWh. In 2022, it will go down to 3.723 ct/kWh, mainly due to federal subsidies and the increase in power prices. Nevertheless, even then the EEG Surcharge will form a significant part of the electricity prices.

In particular to address competitive disadvantages for German industry internationally, the German Renewable Energies Act (Erneuerbare-Energien-Gesetz – “EEG”) provides for certain reductions of or exemptions from the EEG Surcharge.

To promote the phase-in of hydrogen production, since 1 January 2021, with an amendment that became effective on 27 July 2021, the EEG contains specific EEG Surcharge reduction and exemption provisions respectively. Eligible undertakings may not invoke both privileges at the same time but may switch between them on an annual basis.

(i) Reduction of EEG Surcharge for hydrogen production in general: The EEG Surcharge payable on electricity used for the production of any type of hydrogen will be reduced for undertakings producing electricity-intensive industrial gas if (a) the electrochemical production of hydrogen makes up the largest contribution to the overall value added (gesamte Wertschöpfung) and (b) the undertaking has (i) an energy and environmental management system in place or (ii), if it has consumed less than 5 GWh of electricity in the last business year, an alternative system for improving energy efficiency (see section 64a EEG).

The term “undertaking” includes any legal entity operating installations for the electrochemical production of hydrogen. As a consequence, among others, also SPVs and JVs can qualify for the reduction even if they are still in a phase-in period do not yet fully participate in economic activities. State aid approval is, however, still required in this respect.

While the reduction currently covers any type of hydrogen, the Federal Government may, by way of an ordinance, limit its availability to green hydrogen only (see sec. 93 no. 1 EEG).

(ii) Exemption from the EEG Surcharge for green hydrogen production: The other option to reduce the electricity price is available for electricity consumed for the production of green hydrogen in a green hydrogen production facility (a) commissioned before 1 January 2030 and (b) connected to the grid via its own metering point. In this case, the EEG Surcharge will be reduced to zero (see sec. 69b EEG). The exemption applies from 1 January 2022.

Following an amendment of the Renewable Energies Ordinance (Erneuerbare-Energien-Verordnung – “EEV”; see section 12i) which entered into force on 20 July 2021, the criteria for such green hydrogen are the following:

(a) The hydrogen has been electrochemically produced within the first 5,000 full load hours of a calendar year in a facility for the production of green hydrogen (this is aimed at ensuring that electrolysers will be operated mainly during periods when a large amount of renewable electricity is being fed into the grid);

(b) using exclusively electricity

  • which demonstrably originates from installations producing electricity from renewable energy installations as defined in the EEG that are (i) at least 80% located in the German pricing zone and (ii) no more than 20% in a pricing zone electronically connected to the German pricing zone; and
  • for which no subsidy payments to support renewable energies pursuant to, among others, the EEG or the EEV are being received.

State aid approval for sec. 69b EEG is still pending. The EEV already provides that an adjustment of the above requirements may become necessary once the European Union will have determined its requirements for green hydrogen.

(iii) Other privileges: In addition to the EEG Surcharge reduction or exemption, operators of water electrolysis installations for the production of hydrogen benefit from grid fee exemptions for both the offtake of electricity required for electrolysis and the feed-in of gas into the gas grid (sec. 113 para. 6, sentences 7 and 8 EnWG).

Moreover, a reduction of the EEG Surcharge can be combined with a reduction of other surcharges to the electricity price, (i) the co-generation surcharge (sec. 27 para. 1 sentence 1 no. 2 Co-Generation Act (Kraft-Wärme-Kopplungsgesetz – “KWKG”) and (ii) the offshore grid surcharge (sec. 17f para. 5, sentence 2 EnWG in conjunction with sec. 27 para. 1 sentence 1 no. 2 KWKG). In the event of an exemption from EEG Surcharge, the co-generation surcharge and the offshore grid surcharge are also reduced to zero (sec. 27d KWKG and sec. 17f para. 5, sentence 2 EnWG in conjunction with sec. 27d KWKG, respectively).

Planning and permitting aspects

Production

Permitting

The construction of electrolysis plants is subject to German federal law, although there is as of now no established, generally applicable permitting procedure for all types of such plants. Rather, the applicable permitting procedure depends to a large extent on the exact (technical) specifications of the plant and the expected production quantities as well as on the choice of the developer.

(a) Applicable permitting regime for Power-To-X

At the choice of the developer, the construction of so-called Power-To-X plants may be possible on the basis of planning approval procedure for a permit in the form of a planning approval (Planfeststellungsbeschluss; see sec. 43 para. 2 sent. 1 no. 7 EnWG).

The competent planning approval authority of the federal state is responsible for such a planning approval procedure. The public and relevant authorities participate in that procedure. This includes, among others, authorities for nature and landscape conservation, soil protection, emission control, water management or building law, but also environmental and commercial associations as well as the general public. The issuance of the planning approval requires the consideration of all public and private interests, whereby the approval authority has discretion in weighing of the interests involved and in granting the approval (Planungsermessen).

In addition, a preliminary environmental impact assessment has to be carried out and, depending on its outcome, potentially also a full environmental impact assessment (“EIA”).

The issuance of a planning approval has a one-stop effect (Konzentrationswirkung), such that further public permits (e.g. building permits) are not necessary.

Usually, planning approval procedures generally take at least six months but may last approx. one to two years.

(b) General permitting regime for electrolysis plants

If the developer does not choose the planning approval procedure, the construction and operation of an electrolysis plant may be subject to a permit under the German Federal Emission Control Act (Bundes-Immissionsschutzgesetz – “BImSchG”). It has, however, not yet been conclusively clarified whether this procedure is actually available for electrolysis plants in every case, especially for smaller installations.

In a permitting procedure according to the BImSchG, in addition to the competent authority, the relevant federal and state authorities are involved; also, the public would likely participate. Furthermore, a preliminary EIA (and a full EIA, if applicable) will have to be carried out.

A permit under BImSchG also has a certain one-stop effect.

The permitting authority must regularly decide on the application within a period of seven months (subject to an extension by three months), starting from submission of complete documentation, including EIA reports.

For offshore production of hydrogen/PtX, the National Hydrogen Strategy provides that:

“potential adjustments (…) will be discussed [including] the designation of additional areas that can be used (…), the infrastructure necessary for this, and the potential for additional auction rounds for the production of renewables”.

On 1 October 2021, the Ordinance on Auctioning Sites for Alternative Energy Generation in the Exclusive Economic Zone (Verordnung zur Vergabe von sonstigen Energiegewinnungsbereichen in der ausschließlichen Wirtschaftszone, SoEnergieV) entered into force. It creates the basis for the practical testing of the use of offshore electricity for hydrogen production.

Construction or modification of pipelines

As described above, hydrogen may be injected in the existing German natural gas network, however, due to technical requirements only in a small amount. Thus, separate hydrogen networks will have to be developed by modifications of existing natural gas pipelines and the construction of new ones. In respect of modifications, existing permits are grandfathered (see above). The permitting of the construction of new gas supply pipelines with a diameter greater than 300 millimetres would be subject to a plan approval procedure pursuant to sec. 43 EnWG. The corresponding permitting process would include, amongst others, an EIA as well as an assessment of the project’s compatibility with other nature conservation issues (such a “Natura 2000” nature protection areas and species protection etc.).

 


Footnotes
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