LONDON (ICIS)--The European Commission on 8 July adopted a European hydrogen strategy, which prioritises renewables-based green hydrogen and allows natural gas-produced blue hydrogen a transitional role.
Green hydrogen produced by electrolysis splitting water into hydrogen and oxygen would cut emissions to almost zero. The blue alternative generated by reformation of natural gas with emissions reduced by using carbon capture and storage (CCS) technologies could reduce CO2 production by about 50% overall. According to some estimates about 90% of emissions produced during methane reformation process can be captured using CCS.
Cost of technology and renewable electricity will be a decisive factor in future application of any kind of hydrogen, being discussed as an option for decarbonising the production and use of energy by supplementing or displacing other fuels in particularly polluting sectors, such as transportation and heavy industry.
The focus on hydrogen gained momentum as European Commission president Ursula von der Leyen made climate neutrality her flagship policy. After announcing the EU’s Green Deal, which serves as the bloc’s roadmap to reach this goal, she proposed a Climate Law, which sets into stone a more ambitious 2030 target for CO2 emissions reduction and a climate neutral target for 2050. Climate neutrality, also called carbon neutrality, means not emitting more carbon than can be absorbed by soils, forests and oceans.
To reach these new targets, Brussels is betting on expanding renewables production and electrifying the grid where possible.
The coronovirus pandemic has made many countries reconsider their priorities focusing on supporting their economies. However, Brussels wants to place preserving the renewables industry in the centre of the block’s economic recovery.
“Most worryingly […] the crisis has shown the vulnerability of our supply chains, reduced investment levels and shrunk markets caused delays for projects in emerging markets and in some cases stopped production in Europe,” energy commissioner Kadri Simson emphasized following the energy ministers meeting of 29 April.
“We need more renewable energy,” Simson said. “The energy system integration strategy will aim to increase the role of renewables via electrification, and green gases in hard-to-decarbonise sectors,” she added, indicating a limited role for green gases like green hydrogen.
A renewables based solution, however, may not the least expensive alternative, according to Eurogas, the association representing the European gas wholesale, distribution and retail. A study commissioned by Eurogas to international consultants DNV GL has found that reaching carbon neutrality by 2050 could be 7% cheaper if the EU were to opt for alternative gases including hydrogen. A research estimated that the EU’s 2050 total carbon neutrality costs would be to €4.1tn.
The cost difference between the Eurogas commissioned study and the EU 1.5TECH scenario outlined in the bloc’s long-term decarbonisation strategy is related to the decarbonisation solutions offered in each case.
The 1.5TECH scenario emphasises the need for electrification, particularly in the heating sector.
James Watson, secretary general of Eurogas, told ICIS the 1.5TECH scenario was focused on the electrification of heating, offering solutions such as building renovations to improve their efficiency or investing in heat pumps.
In contrast, the subsidies required to incentivise consumers to choose decarbonised energy are €10.1 trillion (80%) lower in the Eurogas scenario. Further cost savings are made by repurposing existing gas infrastructure, for example switching from gas to hydrogen boilers, instead of building new electricity infrastructure.
The Eurogas study also found that in a scenario where hydrogen production would require carbon capture and storage (CCS), the costs could amount to €930bn for the period 2020-2050, or €30bn annually over this period. The estimated costs in the study would be on average 9% lower than the 1.5TECH scenario, Eurogas said.
Types of hydrogen
According to consultancy firm Wood Mackenzie, 99% of current hydrogen production is made from hydrocarbons and those varieties of hydrogen are not carbon neutral.
Green hydrogen that is using renewable energy could compete with hydrocarbon-based hydrogen by 2030 if renewable power prices remain low, according to market participants and hydrogen-focused organisations.
Blue hydrogen is a cleaner version of hydrogen produced from natural gas. It is not emmissions-free, but, according to Wood Mackenzie, could cut the amount produced carbon by about 50%.
Hydrogen produced from natural gas without emission reduction through CCS currently accounts for nearly 50% of worldwide demand, according to the International Renewable Energy Agency (IRENA), while the share of hydrogen produced with electrolysers is only 4%.
Natural gas is currently the primary source of hydrogen production, accounting for around three quarters of the annual global dedicated hydrogen production of around 70 million tonnes, accounting for about 6% of global natural gas use, according to International Energy Agency (IEA).
The EU strategy is determined to support green hydrogen and targets 40GW electrolyser capacity as well as an estimated 80GW-120GW additional renewable capacity by 2030.
In order to coordinate the strategy, the Commission also launched the European Clean Hydrogen Alliance to bring together public authorities, industry and civil society. The policy focus of the coming years will be to ensure proper regulation is set up in order to produce a highly-liquid market that supports supply and demand triggers.
The document acknowledges the need to develop a benchmark for euro denominated transactions by 2021.
The current cost of clean and low-carbon hydrogen is uncompetitive compared to hydrogen produced from fossil fuels without capturing emissions.
The strategy references fossil-fuel based hydrogen can be as little as €1.5/kg, disregarding carbon prices. Whereas low-carbon hydrogen and clean hydrogen can cost between €2/kg and €2.5-5.5/kg respectively.
A carbon price of around €55-90 per tonne of CO2 equivalent (tCO2e) would make low-carbon hydrogen competitive. The value as traded during the second quarter was closer to €25/tCO2e.
Electrolyser costs are expected to halve by 2030, according to the strategy document. They have dropped by 60% in the last ten years.
According to a recent research from Wood Mackenzie, electricity prices would need to fall below $30/MWh (€ ) for green hydrogen production becoming competitive with fossil-fuel-based hydrogen in Australia, Germany and Japan by 2030.
However, current wind and solar PPA prices in those countries range from $53/MWh to $153/MWh, the firm estimated.
The costs of producing hydrogen from renewable energy could drop by 2030 as a result of scaling up electrolysers capacity, several market participants told ICIS.
Wood Mackenzie estimated that, according to project pipeline, by 2025 an additional 3,205MW of electrolysers dedicated to green hydrogen production will be built globally – 12 times current capacity.
“Costs for green hydrogen will fall dramatically once economies of scale are reached for electrolysers. Strategies to promote this on both national and EU levels are the right way to establish a good framework within which green hydrogen production can be increased while reducing costs,” said David Burns, Head of Clean Hydrogen at the gases and engineering company Linde.
“Depending on the production pathway, once economies of scale start to be realized, capex will decrease significantly. It’s the same as we have seen for batteries and solar cells in past decades,” added Burns.
According to Hydrogen Council, implementation of blue hydrogen would require $6bn until 2030 to fund the additional production costs versus hydrogen produced from natural gas without CCS, assuming the usage of existing reservoirs.
Hydrogen boilers would be a low-carbon building heating alternative, especially for existing buildings currently served by natural gas network, according to the Council.
The cost of solar and wind power, the largest driver of renewable hydrogen production costs, has seen an 80% decrease over the past decade.
The EU strategy said electrolyser investments would need to range between €24bn and €42bn between now and 2030 and in order to scale up necessary solar and wind energy of 80GW-120GW a further €220bn-€340bn would be required.
A further €11bn for retrofitting half of existing plants with CCS, as well as €65bn for hydrogen transport, distribution and storage, including refuelling stations.
Up to 2050, investments in production capacities could amount to €180-€470bn in Europe.
Announced in early March, the Climate Law empowers the European Commission to revise the relevant policy instruments and make recommendations to member states that are not on track to meet the targets.
When assessing the countries’ collective and individual progress, Brussels will take into account a wide range of data, reports and information on investment consistent with the Taxonomy Regulation.
The Taxonomy Regulation establishes a framework to help businesses and investors identify economic activities which are considered environmentally sustainable.
When designing this new regulation, the Commission tasked a technical expert group with determining what economic activities are sustainable to drive investments towards such activities.
In their report, the expert group considers it sustainable the retrofit of the gas network, but not its expansion. The role of gas and hydrogen in the energy transition and beyond 2050 may remain limited.
An extensive electrification of the network remains the preferred scenario, representatives of the electricity and gas industries underlined at Brussels-based conferences on the decarbonisation of the EU in late January.
Furthermore, with the Climate Law, the European Commission can adopt delegated acts and set out the trajectory at Union level to achieve the 2050 climate neutrality target.
This may potentially be in contradiction with the principle of subsidiarity and the right of member states to decide their energy mix.
“According to the Commission’s own modelling, what this would imply for national energy mix choice is that there should be no room for coal in 2020 but also, no room for unabated gas already in 2020 and not in 2030 as the industry expects,” according to Poppy Kalesi, director of global energy at the Environmental Defence Fund. As part of its climate strategy, the Commission plans to update the Non-Financial Reporting Directive in the last quarter of 2020. In this recast, we see an intention to make existing financial system “speak” with systems and policies aiming to make climate risk financially material, Kalesi told ICIS.
Funding cuts for gas
In November 2019, the European Investment Bank (EIB) decided to stop granting loans to fossil fuel projects from the end of 2021, which conforms with the recommendations of the technical expert group.
Instead, the EIB will provide more loans to green infrastructure and electrification projects.
Where green electricity is not viable, the bank will consider the next least polluting fuel, like gas. The only projects that might still be financed will be ones that enable the switch from a heavy polluting transport fuel to LNG, or where electrification cannot be achieved economically.
The European Central Bank’s new president Christine Lagarde said the central bank would also consider the technical expert group’s recommendations on sustainable finance.
Experts interviewed by ICIS agree that other funding programs like the Connecting Europe Facility (CEF) are likely to follow the same trend. The CEF grants funds to European Projects of Common Interest, which are selected on basis of their capacity to improve interconnection between member states and reinforce security and diversity of supply.
Both the electricity and gas industries agree that there will be less gas in the bloc’s pipelines.
“Doubling down on decarbonisation means doubling up on electricity. We need an unprecedented build-up of the electricity sector,” Eurelectric secretary general Kristian Ruby said in late January in Brussels.
“Part of that power will be transported by gas [but] we should not think that we’ll burn as much gas in 20 years,” Ruby added.
“There will not be much [natural] gas in these pipelines in the future,” ENTSOG’s president Stephan Kamphues agreed, “but I would expect other gases,” he added, indicating that decarbonised and renewable gases like hydrogen may help reduce the scale of stranded assets.
Adapting the gas network to fill it with hydrogen may prevent it becoming an entirely stranded asset.
Switch of priorities
The coronavirus pandemic switched priorities in the EU’s agenda and the international annual climate summit, COP26, was postponed until further notice.
Global diplomatic activity has slowed in the face of the coronavirus crisis, vice-president for the European Green Deal Frans Timmermans said on 1 April.
At the same time, the Commission is repurposing the Green Deal from a roadmap for the energy transition into a growth strategy for the bloc. Brussels aims to “combine [the economic recovery] with the necessity to move to a green economy,” instead of “throwing a lot of money to the old economy,” Timmermans said on 28 April.
To do so, the Commission wants to stick to the same agenda as when the COP26 was certain to take place in November. But whether the timing will be met in practice remains to be seen.
Even if the Commission aims to stay on the course, some member states may have left the boat.
In The Netherlands, “due to the corona crisis, the cabinet will not be introducing new measures to reduce CO2 emissions for the time being. This is despite the demand from the House of Representatives to come up with new plans before 1 April,” Dutch economy minister Erik Wiebes said after a cabinet meeting on 27 March.
At the start of May, the European Parliament’s Committee on Budgets urged the Commission to table a revised proposal for the next Multiannual Financial Framework for the period 2021-2027 focusing on the economic consequences of the coronavirus outbreak. The Parliament’s Committee also asked for a contingency plan in case the next budget is not approved by the end of the year.
In April, the Council tasked the Commission with proposing a recovery plan, linked to a revised proposal for the 2021-2027 budget.
“The Green Deal will be at the heart of that plan and energy will have an important role to play,” energy commissioner Kadri Simson said on 29 April.
The long-term budget of the EU has to be approved by the European Parliament, Commission and Council. The Commission presented its position in May 2018, and announced a new proposal for May 2020 to take account of the consequences of the coronavirus crisis.
The Parliament presented its position in November 2018 and re-confirmed it in October 2019 but the Council is yet to agree on its own policy stance. It remains to be seen if, after protracted talks, the EU’s top institutions will agree on the next long-term budget on time and how big the energy share will be.
Additional reporting by Jake Stones, Luka Dimitrov and Aura Sabadus