EU Hydrogen Strategy Could Cause Power and Carbon Prices to Drop

ICIS Editorial

03-Aug-2020

This story has originally been published for ICIS Long-Term Power Analytics subscribers on31 July 2020 16:25 CET.

The European Commission’s Hydrogen Strategy released earlier this month sets out a roadmap to 2050 that includes a target of 40GW EU-based electrolyser capacity directly linked to 80GW to 120GW additional renewable capacity by 2030 and substantial accompanying funding and support mechanisms. We modelled scenarios that considered the renewable generation expansion, the rise in electricity demand, the emission reduction on the industry side and the impacts on carbon and power price. With the massive additional RES installation and all its implications, the annual power prices across EU drop by an average of €8.3/MWh. The EU ETS carbon price drops as well due to reduced emissions in the industry sector where green hydrogen replaces grey hydrogen. The carbon and power impact each has a reinforcing price effect on one another other as our integrated model shows.

EU Hydrogen Strategy: Key Points

  • Capacities
    • 2x40GW electrolyser capacity of which 40GW inside the EU by 2030, 40GW outside the EU in neighbouring countries
    • 80-120GW additional renewable energy source (RES) capacity
  • Regulation
    • Demand and supply side support, e.g. carbon contracts for difference (CCFDs), exact measurements not specified in the strategy paper
    • The creation of an European Clean Hydrogen Alliance to bring together public authorities, industry and civil society
    • The creation of regulation necessary to facilitate a highly-liquid market that supports supply and demand triggers
    • Transition support for low-carbon hydrogen produced via fossil fuels using carbon capture and storage (CCS) technology
  • EU Investments
    • €24bn and €42bn for electrolyser expansion
    • €220bn and €340bn for renewable expansion
    • €11bn for retrofitting of existing plants with CCS
    • €65bn for hydrogen transport, distribution and storage, including refuelling stations
    • €180-€470bn investment pledges up to 2050
  • Assumed electrolyser costs
    • The EU assumes electrolyser costs to halve over the next decade
    • Fossil fuel-based hydrogen: €1.5/kg hydrogen
    • With CCS: €2/kg hydrogen
    • Green hydrogen: €2.5/kg – €5.5/kg hydrogen
    • “Carbon prices in the range of €55-€90/tCO2e would be needed to make fossil based hydrogen with carbon capture competitive with fossil-based hydrogen today”
  • Demand for Hydrogen
    • Implications for the industry:
      • Replacing carbon-intensive hydrogen in refineries
      • Introducing to the production of ammonia
      • Finding new forms of methanol production
      • Partly replacing fossil fuels in steel making
      • Investing in zero-carbon steel making
    • Implications for Transport
      • Local city buses
      • Commercial fleets e.g. taxis
      • Fuel cell trains in rail network
      • Heavy-duty road vehicles
      • Inland waterways and short-sea shipping
      • Long-term aviation and maritime

The Hydrogen roadmap to 2050

The document outlined a roadmap of hydrogen expansion out to 2050 in three stages:

  • Phase One: 2020-2024
    • Installation of 6GW of renewable hydrogen electrolysers
    • Production of up to 1 million tonnes (mt) of clean hydrogen, used for the decarbonisation of current hydrogen production and usage, namely in industry and chemical sectors as well as heavy-duty transport
    • Policy work will be developed in order to establish a liquid hydrogen market, the formation of a euro-denominated benchmark by 2021
  • Phase Two: 2025-2030
    • Installation of 40GW electrolyser capacity by 2030
    • Production of up to 10mt of clean hydrogen (333TWh renewable hydrogen)
    • Renewable hydrogen used for balancing the renewable-based electricity system by using hydrogen-to-power generation methods. Also hydrogen storage for seasonal flexibility
    • Further retrofitting of existing fossil-fuel based hydrogen production methods with CCS to continue
    • The development of hydrogen clusters that rely on decentralised renewable energy production and local demand
    • Transport networks established between countries with large renewable potential to high demand centres
    • The build-out of hydrogen refuelling stations
    • International trade to develop between neighbouring countries to the EU
    • An open and competitive hydrogen market established in order to encourage investment, with unhindered cross-border trade
  • Phase Three: 2030-2050
    • Increased renewable electricity production as one quarter of renewable power could be used for clean hydrogen production by 2050
    • Hydrogen and hydrogen-derived synthetic fuels developed from CO2 and used across wider transportation sectors, such as aviation and shipping, as well as hard-to-decarbonise industrial and commercial buildings
    • Creation of biogas from hydrogen paired with CCS to generate negative emissions

Possible policy instruments

  • A benchmark for euro-denominated transactions by 2021
  • European-wide criteria for the certification of renewable and low-carbon hydrogen possibly building on the existing ETS monitoring, reporting and verification
  • A possible Carbon Border Adjustment Mechanism in 2021 to reduce the risk of carbon leakage
  • Demand side support mechanisms
    • Tendering systems for carbon contracts for difference (CCFDs)
    • This would be a long term contract with a public counterpart remunerating the investor by paying the difference between the CO2 strike price and the actual CO2 price in the ETS in an explicit way, bridging the cost gap compared to conventional hydrogen production

Analysis

Hydrogen Demand from the industry sector

  • Green hydrogen will cover just a small share of the current hydrogen demand in the industry
  • There are enough applications that can be easily switched to green hydrogen:
    • refineries
    • production of ammonia
  • After 2030 we expect increasing hydrogen demand from further industry parts and the transport sector

Emission Reduction Industry

  • Green hydrogen replacing grey hydrogen in the industry
  • Emission reductions mainly in the sectors that can easily switch to green hydrogen such as ammonia production
  • Overall industry emission reduction is about 50.51 mt in comparison to the generation of the same amount of grey hydrogen (Emissions of gas steam reforming: 8.41 kg CO2/kg H2) in the mid hydrogen scenario

Price impact on the carbon market

  • Considering the respective emission reduction from the industry, carbon prices drop significantly
  • In 2025 prices decrease in the mid hydrogen scenario in comparison to our base case by €2.38/t. In the high hydrogen scenario prices drop by €3.73/t and in the low hydrogen case by €0.91/t
  • Since in the high hydrogen and RES scenario less industry abatement is triggered and at the same time higher MSR volumes are taken out on the supply side, prices in 2030 in this scenario are higher as in the other two scenarios and nearly as strong as in our current base case
  • In 2030 the price drop for the mid hydrogen scenario is €4.14/t
  • The effect of additional RES capacity on the power side is balanced out with additional power demand for hydrogen and higher emissions due to the lower carbon price itself (fuel switch)

Hydrogen Production

  • Green hydrogen is produced in the power sector from additional RES capacity, mostly wind offshore followed by wind onshore and solar, see table below
  • We distributed the EU hydrogen capacity based on the installed RES capacities in each country, this approach is presented in our previous update on hydrogen
  • Electrolysers are used when they are in the money based on their variable costs. This means hydrogen is produced from power when it is cost efficient over gas-based hydrogen
  • Hydrogen demand from industry saves significant amounts of gas and EUA allowances with every unit of consumed green hydrogen
  • Furthermore, we assume a subsidy-based demand side support of €20/MWh for green hydrogen consumed
  • All this is included in the marginal costs or response price for the electrolysers
    • market value of synthetic gas [€/MWhth] = price for natural gas [€/MWhth] + (carbon price in [€/t] * specific CO2 emissions of natural gas [t/MWhth])
    • market value of hydrogen = efficiency of power-to-hydrogen * market value of synthetic gas
    • specific CO2 emissions of natural gas [t/MWhth] = 0.2016 [t/MWhth]
    • efficiency power to gas: 65%
    • efficiency power to hydrogen: 63% – 77% (plants with different efficiencies modelled)
  • response price for green hydrogen ranges from €38.43 /MWh to €72.43 /MWh depending on country, year, gas price, CO2 price and the electrolyser efficiency
  • Without the modelled state support, the installed electrolysers would not reach average full load hours of 5000 hours as presented in our previous update on hydrogen

Additional RES generation

  • By far the biggest impact on the power sector has the massive support of 80-120GW of additional RES capacity, supported with €220bn and €340bn
  • This significantly exceeds the additional hydrogen demand
  • The additional RES capacities push power prices down in all EU countries

Emissions Power Sector

  • The opposite effects of more renewable generation alongside the additional demand balance one other and overall power sector emission do not change significantly
  • Power demand for green hydrogen is balanced out by additional RES capacity and has no effect on emissions
  • Massive RES extension in addition to hydrogen power demand has a strong bearish effect on emissions
  • Nevertheless, the lower EUA price due to reduced industry emissions has a bullish effect due to increased fuel switching
  • Flexibility provided by electrolysers has a dampening effect on power prices as they reduce volatility. This is advantageous for base load power plants. This also increases the utilization of lignite power plants as more hydrogen is produced. The more flexible gas generation is pushed out of the merit order

Price impact power

  • Until 2024 power prices diverge just slightly among scenarios
  • Between 2024 and 2030 power prices plummet due to the massive additional RES capacity
  • German 2030 base load power price drops in comparison to our reference scenario by about €10/MWh in the mid hydrogen and up to €14.60/MWh in the high hydrogen scenario which includes even more RES capacity
  • Similar effects can be seen for all EU countries
  • On average EU base 2030 prices drop about €8.3/MWh in the mid hydrogen and RES scenario (synthetic EU power price)
  • Power demand for hydrogen has a bullish effect on power prices although it cannot balance out the price drop from the additional RES capacity
  • Hydrogen also provides significant flexibility to the system that favours the low cost utilisation of base load power plants and pushes out gas
  • A lower EUA price of up to €5/t in the mid hydrogen scenario compared to Business as Usual (BAU), due to lower emissions on the industry side supports the price drop and makes coal power plants cheaper

Sebastian Braun is Senior Analyst and Quantitative Team Lead at Power and Carbon Markets at ICIS. He can be reached at <a href=’mailto:Sebastian.Braun@icis.com‘>Sebastian.Braun@icis.com</a>

Simone Lischker is Senior Analyst – EU Carbon & Power Markets at ICIS. She can be reached at <a href=’mailto:Simone.Lischker@icis.com‘>Simone.Lischker@icis.com</a>

Roy Manuell is Senior Market Reporter at ICIS. He can be reached at <a href=’mailto:Roy.Manuell@icis.com‘>Roy.Manuell@icis.com</a>

Our ICIS Long-Term Power Analytics customers have access to extensive modelling of different options and proposals. Our long-term price forecast now also includes Bulgaria, Greece and Ireland.  If you have not yet subscribed to our products, please get in contact with Justin Banrey (Justin.Banrey@icis.com) or Audrius Sveikys (Audrius.Sveikys@icis.com).

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