EU comes out fighting for green hydrogen

The European Union is ramping up its efforts to support the burgeoning hydrogen economy, in the face of mounting competition from the United States. With the promise of auctions in the autumn and further clarity on what projects will qualify as 'green', this year has already seen some substantial moves to sure up investor confidence and maintain the block's lead in deploying renewable hydrogen projects.

Inspiratia insights:

• The EU's hydrogen auctions are to offer €800 million (£704m US$850m) of price support to renewable hydrogen producers over the next 10 years.
• The 'fixed premium' could help finance up to 25 million tonnes of green hydrogen production per year.
• Clarity on the definition of renewable fuels has allowed scope to include nuclear and other low-carbon energy sources that are supplemented by renewable PPAs.
• Competition from the US has spurred the EU to accelerate its hydrogen policies, just as similar plans in the UK are facing further delays.

The EU's new hydrogen auction scheme has the potential to reinvigorate green hydrogen production projects in the block, amidst a tide of investment slowly turning towards the US since the IRA (Inflation Reduction Act) was passed into law. This act saw provision for the government to award tax credits worth up to 30% of investment and US$3/kg of renewable hydrogen produced. This support has proved to be appealing to potential hydrogen investors, for offering variable price support that will allow renewable hydrogen to realistically compete with fossil fuels. More information about the IRA's tax credit mechanism can be found here.  

Calls for the EU and member states to go further in their support for hydrogen projects have been a noticeable part of the industry discourse for some years now, however, the US's bill undoubtedly stirred the block into action. December 2022 saw the first signals from the commission that a change in approach was due. This began with a review of the block's state aid rules, with a renewed emphasis on industry's ability to compete with those outside the European single market, not just within it.

The first hydrogen auction

The auction's pilot will be held in the autumn later this year and will incentivise production through the awarding of 'fixed premiums' per kilogram of renewable hydrogen produced over the next ten years. It is not yet known what the terms and conditions of the auction process will be nor the comparative levels of price support. However, further announcements are expected in June after further industry consultations.

The EU Innovation Fund has already committed an initial €800m (£704m US$850m) towards this scheme. Assuming that this whole budget is spent on price support, and that the auction process arrives at a level approximately on par with that offered in the United States, inspiratia estimates that the scheme could fund an average of 25 million tonnes of green hydrogen production per year until 2033.

The introduction of the auction process will introduce an extra level of bureaucracy for project sponsors to navigate as apposed to the IRA process, however, this could ultimately be of a benefit to the industry. There are good reasons to believe that this process will be ultimately similar to the CfD (contracts for difference) style auctions that currently determine the support for much of Europe's renewable capacity. This would mean that the support could be more efficiently distributed to producers than a flat, tariff style support per unit.

Whatever design is eventually settled on, these auctions will help incentivise the uptake of renewable gasses, and give energy offtakers a financially palatable alternative to compete with non-renewable hydrogen or natural gas.

The new green hydrogen definition

More major progress was made last week with the European commission publishing their proposed rules for what would be considered 'renewable liquid and gaseous transport fuel of non-biological origin'. Essentially, a guide to how the electricity for green hydrogen and other renewable fuels can be sourced.

To be considered fully renewable, evidence must be provided by fuel producers that demonstrate the following:

1. For electricity generated either on the same site or obtained from a direct line connection to the fuel producer, renewable asset must not have been in operation for more than 3 years before being used to produce the renewable fuel. In this case, if the renewables site is connected to the grid, it must be via a smart metering system that measures all electricity flows and proves that no electricity was taken from the grid to produce the fuel.
   
   
2. For electricity taken from the grid, the production facility must be located in a 'bidding zone' where the average proportion of renewable electricity exceeded 90% in the previous calendar year to be counted as fully renewable. In this case, the proportion of hours that the site is running must not exceed the proportion of renewable electricity. i.e., for a 95% renewable grid, production must stop for at least 5% of hours during the calendar year.
   
   
3. Alternatively, if fuel production is located in a 'bidding zone' where the emission intensity of electricity is lower than 18 gCO2eq/MJ, the producers may account for the difference through the use of renewable PPAs (power purchase agreements) with economic operators producing renewable electricity.
   
   
4. There is also provision for electricity taken from the grid to be counted as fully renewable if it is consumed during an 'imbalance settlement period', during which the fuel producer can demonstrate that renewable energy sources were redispatched by an amount corresponding to the electricity consumed.

An imperfect compromise of practicality and idealism 

These rules are the result of long consultation and negotiation, particularly between the French and German representatives. It was widely expected that producers with direct renewables connections would be eligible, however, the provision for grid connection with low carbon intensity to have an avenue for this green classification is incredibly important for France's high nuclear reliant grid. This will allow for green hydrogen producers to use low-carbon nuclear power in conjunction with renewable PPAs. These PPAs can be sourced from anywhere within the EU member states that share a grid network, so long as the production and generation take place in the same calendar month. The case for a hydrogen PPA in France just got an awful lot stronger.

Many have suggested that a 1-month window is too generous a time frame for correlation as it leaves the door open for potential green washing of non-renewable electricity into green hydrogen, and does not incentivise the concurrent use of the PPA linked assets. To rectify this, the regulations specify that a 1-hour window will be the rule as of 2030.

Less promising are the provisions for electrolysers to be used via the grid during the periods of imbalance. The requirement that the producer must prove that renewables were 'redispatched' could limit pre-emptive actions that could see system operators and fuel producers working together to manage an over capacity grid shedding load.

Additionality has also been considered in these rules when it comes to the 3-year rule. This has been included to discourage the cannibalisation of existing renewable capacity for sole use by fuel producers. Ideally, every new green hydrogen plant should be met with equal capacity of new renewable assets.

How does the competition look?

The twin announcements of €800 million (£704m US$850m) for hydrogen auctions and the green hydrogen definition have brought a sense of momentum and certainty to the EU's hydrogen future. If the commission are able to keep to the current timetable, then there is a strong case to be made for the EU remaining the dominant force in the rollout of hydrogen projects. The UK has so far shown the problems that can be caused by delaying key hydrogen support policy. The Hydrogen Business Model, initially expected to be finalised Q1 2023, was pushed back to Q3 in December, causing even more uncertainty for project backers. This at a time when EU & US policy has never looked more appealing has left the UK severely trailing in project activity so far this year.

Share of hydrogen project activity by region, 2020-2023

Source: inspiratia | datalive

Another advantage that the EU has over its external competition is the scope for 'double dipping' government support from a national level in addition to the EU's support. With Germany in particular offering green hydrogen producers a suit of investment grants, and the possibility of further support on the horizon.