German hydrogen plans would boost demand but offshore wind growth to dampen price impact

This story has originally been published for ICIS Long-Term Power Analytics subscribers on 18 June 2020 18:00 CET.

The German government has pledged to build 5GW electrolyser capacity by 2030 as part of its National Hydrogen Strategy (NWS) to meet an estimated hydrogen demand of up to 110TWh by 2030. The plans included 14TWh green hydrogen generation, assuming 70% efficiency and 4,000 full load hours per year, and the corresponding 20TWh additional renewable power demand.

We modelled the government’s proposals and compared the results to our base case scenario. The findings indicated that the additional electrolyser capacity will raise demand but that the additional renewable capacity that we assumed to be offshore wind would mitigate a significant price boost. This shows that the government’s plans for hydrogen theoretically align with our model assumptions but do not yet address the likely challenges facing the rapid expansion of green hydrogen in the country.

Background

• The government aims to establish hydrogen technologies as a new pillar of the German export-oriented economy
• The much-anticipated German hydrogen strategy had been delayed due to differences in opinion between the CDU and SDP coalition partners as well as the covid-19 pandemic
• Green hydrogen can be used in several use cases:
• Replace grey hydrogen in industry and transport
• Replace natural gas in heating and industry
• Storing electricity as a battery for the power system
• Germany generates a significant amount of power from carbon-emitting coal, lignite and gas. The three combined accounted for around half the electricity in 2019
• Germany has a 2030 climate target of 65% of final power consumption from renewable sources
• Germany’s vast gas infrastructure places the country well to become the centre-point of a possible European hydrogen boom as existing assets can be converted requiring the construction of fewer new projects
• Germany contains the most gas storage capacity in Europe
• Much of the German 26GW gas-fired power plant fleet is not utilised due to the current economics of power generation
• We expect installed German gas-fired generation capacity to rise to 40GW by 2030
• Germany also has the largest installed renewable capacity in Europe with strong growth expected over the next decade
• A recent amendment to the climate action legislation saw a commitment to build at least 20GW offshore wind capacity by 2030 rising to a 40GW target by 2040
• The European Union has set a target of carbon neutrality by 2050

The German National Hydrogen Strategy

• According to the strategy, only hydrogen produced on the basis of renewable energies is sustainable in the long term
• This represents a strong statement of intent towards green hydrogen at the expense of the cheaper other forms. The paper does concede that due to it being the early stages of the global hydrogen industry, Germany will expand its hydrogen network in partnership with other forms of carbon-neutral hydrogen, such as blue hydrogen, on a transitional basis
• The strategy makes clear that Germany considers hydrogen a central part of the next stage of both its own, the European and even global energy transition
• €7bn in domestic hydrogen support with an additional €3bn towards forging relationships with other countries in the development of hydrogen. This pledge was made as part of the German stimulus package to boost its economy in the wake of the covid-19 pandemic
• The strategy makes clear that Germany will aim to render hydrogen competitive by pushing cost reduction measures
• In terms of capacity additions, 5GW electrolyser capacity by 2030 and another 5GW aimed by 2035 ( by 2040 at the latest)
• This corresponds to 14TWh green hydrogen output and 20TWh renewable generation demand, assuming a 70% efficiency of hydrogen production and 4,000 full load hours
• Enhance the country’s hydrogen infrastructure by using Germany’s existing gas infrastructure, but also by extending dedicated hydrogen networks or building new ones

Our assumptions

• Our assumptions aim to replicate the assumed 14TWh hydrogen generation and the corresponding 20TWh additional renewable power demand
• We modelled the planned additional 5GW electrolyser capacity as presented in the National Hydrogen Strategy (NWS)
  • We assumed a capacity increase pathway as presented in Fig.1
  • We model marginal costs for the electrolysers between €30/MWh and €35/MWh in 2020 and €50/MWh to €60/MWh in 2030. This reflects the marginal costs to gas
  • If the electricity price is below the marginal costs the production of hydrogen with electrolysers is cost efficient over conventional blue hydrogen
  • An electrolyser efficiency of 75% is assumed
  • Various different response prices were already tested in our previous analysis

• The additional electricity demand will be covered with 5GW additional offshore wind capacity as suggested in the NWS, see Fig.2
  • About 4,000 full load hours per year are expected
  • Up to 20TWh generation by 2030
  • Additional offshore wind capacity built in the North and Baltic Sea
  • The 5 GW are on top of the recently amended offshore wind capacity target of 20GW by 2030. This has not yet been included in our base case
• We compared the NWS scenario to our most recent base case update (June 2020)

Analysis

• Power Prices
  • As long as the additional electrolyser demand equals roughly the additional wind generation we do not see a price effect between the base and the hydrogen scenario for the yearly base prices
  • The price impact however of the additional demand was dampened by the corresponding offshore wind capacity additions which overcompensate
• This demonstrates the imperative of combining renewable capacity expansion with green hydrogen expansion
• Our previous analysis of green hydrogen’s potential in Europe did not consider corresponding renewable expansion and found that emissions increased with electrolyser demand due to higher generation
  • Nevertheless, the electrolysers have a balancing effect. The standard deviation of the hourly power price is reduced by €1/MWh, the majority of negative prices are flattened out
• Full load hours
  • We found that the full load hours for the electrolyser differ significantly between the different years due to the fluctuation of power prices and the relatively stable marginal costs of the electrolyser capacities
  • Whereas marginal costs of €35/MWh lead to 6,400 full load hours in 2020 (also due to the covid-19 demand drop), in 2022 the same marginal costs lead to just 1,204 full load hours as power prices climb
  • Our assumed marginal cost pathways lead to on average 2,201 and 4,498 full load hours between 2020 and 2030. Therefore, with 3,350 full load hours on average, the hydrogen generation falls below the planned 4,000 full load hours, based on purely market-induced price setting
  • Our results therefore showed 22% less hydrogen generation than planned in the NWS, see Fig.3
  • Lower power prices for example due to more RES based generation
  • As in our previous analysis, we saw a cannibalization effect; the more hydrogen is installed the lower the full load hours and the profit margin per MW

• Emissions
  • The power sector emissions would be neutral as the additional demand will be 100% covered by additional offshore wind generation
  • 14 TWh hydrogen produced with the classic gas steam reforming method (8.41 kg CO2/kg H2) would emit 3.5mt CO2 emissions (8.41/33.33*14,00,000)
  • In the period from 2021 to 2030 this would save 17.6mt of CO2 emissions in the respective sectors
  • Nevertheless, the same amount of wind replacing the German electricity mix would save over the period about 33mt of emissions (11/33.33*20,0000,000*5)
• Comparison with old analysis
  • The results are in line with our previous analysis on hydrogen
  • They reflect our medium scenario in which we assumed 4.7GW of electrolyser capacity by 2030
  • The main difference is the addition of renewable generation capacity
  • Most other effects as the cannibalization of prices with more hydrolyser capacity still apply
  • The changes compared to the base case scenario are marginal as described above

Key challenges

• One key takeaway from the hydrogen inclusion in the stimulus package draft is that there is no clear defined strategy for the technology as yet aside from the financial pledge and capacity target
• At present there is no legal framework for a hydrogen network that would allow TSOs to build or operate a hydrogen transport infrastructure. Legislation to enable this however will take time due to the complexity and scale of the task
• The lack of legislative clarity is also a challenge on an EU level and remains a significant deterrer to investment
• The economics of green hydrogen investment are not sufficiently attractive to enable the widespread development of the technology in Germany, which means that state-subsidy will be required to attract investment to generate the necessary expansion
• Green hydrogen is estimated to cost around four times more than hydrogen produced from fossil fuels
• Choice of support mechanism
  • One option will be the direct support for building up electrolyser capacity
  • Beside this, a support for every MWh produced is a valuable option
  • Nevertheless, both will not solve the quantity problem that was presented above
• One challenge will be to ensure that hydrogen is produced with new RES capacities and that both installations fit together
• If Germany were to build up offshore wind infrastructure to accompany the electrolyser capacity, this will likely exacerbate already-existing grid issues in transporting power from the north to the south of the country
• In short, will building the necessary additional offshore wind capacity compared to 2020 levels even be possible by 2030?

Sebastian Braun is Senior Analyst and Quantitative Team Lead at Power and Carbon Markets at ICIS. He can be reached at Sebastian.Braun@icis.com

Roy Manuell is Senior Market Reporter at ICIS. He can be reached at Roy.Manuell@icis.com

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