Germany aims for RED III industrial RFNBO use via support, not quotas

• The German government confirmed to ICIS it will not impose company-specific RFNBO targets
• The use of subsidies rather than quotas proves starkly different to Dutch equivalent scheme
• Germany is to hold a general election on 23 February

LONDON (ICIS)–Germany’s federal ministry for economic affairs and climate protection told ICIS on 17 February that the country does not aim to implement company-specific targets or quotas for the use of renewable hydrogen, but instead will aim to achieve the targets via support mechanisms such as climate protection agreements.

EU member states are obligated via the renewable energy directive (RED III) to use renewable fuels of non-biological origin (RFNBO) across transport and industry. For transport, 1% of total fuels used by 2030 should be RFNBO, whereas for industry, 42% of hydrogen use should be RFNBO, rising to 60% by 2035.

Member states have until May 2025 to reflect their means of implementing these targets, with Finland already publishing its policy on RFNBO in transport towards the end of 2024.

GERMAN RFNBO IN INDUSTRY

According to a spokesperson from the federal ministry for economic affairs and climate protection, the German government has decided that “industrial targets will not be passed on to companies in the form of a corresponding company obligation or company-specific quota”.

Alternatively, the German government noted that it’s “addressing the achievement of targets and the ramp-up of RFNBOs on the demand side with a series of instruments and measures, such as the climate protection agreements, the federal fund for industry and climate protection, the IPCEI steel projects and the H2Global funding program.”

This would mean that the German government aims to see its industry RFNBO target met via support mechanisms, rather than the use of company-based penalties for failing to reach a specific quota.

The latter method, namely quota-based drivers which imply a penalty should a company miss its target, has been pushed by EU hydrogen market participants, predominantly on the seller side of the market. This is because a penalty mechanism would in theory drive up a would-be hydrogen buyer’s willingness to pay.

For example, the ICIS German THE front-month contract was assessed at €51.475/MWh on Friday 14 February, which equals €1.71 per 33.3kWh – the amount of energy in a kilogram of hydrogen.

ICIS Hydrogen Foresight data indicates that German willingness to pay for hydrogen is expected to average €2.31/kg in 2025, while RFNBO costs are expected to average €8.10/kg.

To bridge this gap, participants have been highlighting the need for a mechanism where parties would pay a penalty should they fail to meet their quota, therefore increasing their implied willingness to pay for RFNBO.

Member states have so far released little in the way of industrial RFNBO targets. However, in October 2024 the Dutch government published a consultation for its proposal to implement RED III targets via its HWI scheme, where companies must ensure that by 2030 24% of their hydrogen use is RFNBO.

Participants will receive a certificate for each unit of RFNBO used, which can be traded if the obligated party wishes.

In essence, the Dutch HWI as it stands would act as a quota-based scheme.

Speaking to ICIS in reaction to the proposed RED III mechanism, one market participant said they felt the scheme could face potential changes following the approaching German election on 23 February.

Another market participant said that they viewed the potential of a subsidy-only RED III implementation as negative as it showed the country presented less of a push to decarbonize, bringing more uncertainty to developers. They added that the alternative would be a lot of subsidies, which they were sceptical of.

COST OF SUPPORTING RFNBO UPTAKE

ICIS Hydrogen Foresight data indicates that industrial hydrogen demand in Germany could reach 75TWh by 2030, approximately 85% of total hydrogen demand in Germany by that time.

To balance willingness to pay across hydrogen projects in the ICIS Hydrogen Foresight project database with supply-side project costs, ICIS data indicates that accumulative support across capital and operational funding would need to surpass €70 billion.

GERMAN GAS DEMAND REDUCTION

Should the German government’s approach result in high levels of uptake of RFNBO across industry, reducing overall natural gas demand, this could ease gas and power prices.

However, in 2024 industrial natural gas offtake totaled 332TWh, amounting to just under 40% of Germany’s total gas demand for the year. As such, even if all 75TWh of projected hydrogen demand in industry moved from fossil fuel-based supply to RFNBO, this would still leave a substantial level of natural gas demand for industrials intact.