In the fight for climate neutrality by 2050 and taking into account the EU's drive to move away from its dependence on fossil fuels – especially after the outbreak of the war in Ukraine and the resulting concerns about energy security – hydrogen is taking up an ever more important role in the energy transition. The recent shift in European energy policy is based on two major points: environmental and geopolitical concerns, which have led the European Union to rethink its long-term energy strategy. Many experts believe that hydrogen is at the heart of the energy transition, helping to store renewable energy lastingly and on a large scale, as evident in recent legislation. The latest RePowerEU plan, published in 2022 and presented by the European Commission in response to the Russian invasion, foresees that 45% of energy should come from renewable sources by 2030 and that 75% of hydrogen in the industrial sector should be renewable (10 million tons of renewable hydrogen produced in the EU and 10 million tons from imports). The importance of this issue has already been discussed on our website. Now it is time to understand the recent geopolitical and regulatory developments in the European Union when it comes to green hydrogen policy.
First, green hydrogen must be produced from renewable electricity, and in places where this is scarce, decisions must be made to obtain it from elsewhere. Domestically, it is well known that the renewable energy market in the EU is tight. Indeed, northern European countries rely on wind power generation for just around one fifth of their electricity supply. Other factors contributing to the shortage on top of the cuts in gas supplies include the reduced availability of nuclear power plants (after the phasing out of German and French nuclear energy) and weak hydroelectric production due to droughts. The recent high demand resulting from the end of the COVID-19 pandemic also contributed to this scenario. The rising prices are thus a result of geopolitical and environmental conditions that boost the European demand for renewable energy and create incentives for diversification and cooperation with different countries.
As we know, one of the difficulties in promoting a green hydrogen economy is the cost and competitiveness of renewable energy – and the technological development of electrolysers – compared to energy from fossil fuels. We have already dealt with the colours of hydrogen and, undoubtedly, to date, the production of grey and blue hydrogen is much cheaper than that of green hydrogen. In fact, previously, the profitability of green hydrogen production seemed unpromising, but things have started to take a turn. According to IRENA, a combination of falling solar and wind energy costs, improved performance, and economies of scale in electrolysers could make hydrogen produced from renewable electricity competitive when compared to fossil-fuel alternatives by 2030. A recent study by Enapter also found that the cost of producing green hydrogen using AEM electrolysers is already competitive compared to fossil fuels and could far undercut grey hydrogen by 2025.
To increase the competitiveness of green hydrogen, IRENA proposes a cost reduction strategy that combines government support for research programs with policy and target setting and private sector efforts, as shown in the figure below:
Although these scenarios predict a positive future for green hydrogen investments, it should be noted that this criterion is difficult to evaluate because market development is still in its infancy and there is a high degree of uncertainty (QUITZOW et al., 2023). Thus, lowering the cost of green hydrogen depends in part on lowering the cost of renewable energy production (renewable electricity and the cost of electrolysers), but tax credits, grants, and loans can also play a major role in creating and establishing a green hydrogen market – and, indeed, this has recently been the subject of much debate. From this perspective, we have also decided to focus on recent policy developments in green hydrogen policy in the European Union, following the Inflation Reduction Act (IRA) in the United States.
The U.S. has recently granted a massive green subsidy for green hydrogen under the IRA. The IRA can be considered the country's first serious attempt to address the climate crisis. The problem is that, in addition to being generous, it also includes several protectionist measures that, even if mainly aimed at China, could potentially hurt the European green industry. The IRA tax incentives are linked to domestic content requirements that would encourage companies to go west and produce in the U.S., making it a more attractive place for green technologies and investment. As a result,the IRA was initially received with a mix of enthusiasm and criticism by the European Union. It is acknowledged that the IRA's goals lead to alignment between EU and U.S. policies but, at the same time, some elements of the new U.S. policies pose challenges, as the European Investment Bank points out. As noted, the IRA provides significant support for solar panels, wind energy, energy storage, and clean hydrogen, but most of these benefits are limited to manufacturers that can claim “made in America” status. This arrangement excludes European manufacturers who do not receive the same subsidies from the European Union. As a result, there is a risk that some European manufacturers of hydrogen products and equipment will fold their tents and migrate to the U.S., further squeezing the EU's already underfunded innovation sector.
It is important to note that a coordinated transformation and the creation of uniform taxes and levies, comparable to the measures in the U.S., is not currently possible in the European Union because the bloc has no real authority over taxes and levies – the U.S. government, on the other hand, is able to use tax breaks for everyone as a quick and easy way to make these massive investments. Under the IRA, a ten-year tax credit to produce green hydrogen (1) was introduced, with the amount of the tax credit varying based on the degree of cleanliness in the production process. European fears of losing competitiveness have turned into a response: on the 1st of February, the European Commission presented the Green Deal Industrial Plan. Among other things, the Commission has proposed detailed rules to define what constitutes renewable hydrogen in the EU, adopting two delegated acts in February 2023. The European Parliament and the Council of the EU have four months to approve or reject the rules, but they cannot change them.
The European Union faces significant challenges in pushing forward integrated and structural changes related to taxation and levies. Therefore, the EU moved forward trying to legally define renewable hydrogen to create a safer regulatory environment to ease the formation of the green hydrogen market. Previously, on our blog, the environmental, economic, and political importance of the definition of renewable hydrogen has been discussed. In the first delegated act, the commission defined under which conditions hydrogen, hydrogen-based fuels and other energy carriers could be considered as an RFBNO (Renewable fuel of non-biological origin). The commission also clarified the principle of “additionality” for hydrogen set out in the EU’s Renewable Energy Directive. But what is the “additionality rule”? Why is it a key factor in understanding the EU’s positionon renewable energypolicy? And what does it have to do with taxation and subsidies? To put it simply, the additionality principle tries to define what can be considered renewable hydrogen and to ensure it contributes to decarbonization. Since green hydrogen is related to the amount of GHG (greenhouse gas) emissions, it is necessary to match hydrogen production to electricity produced through renewables to ensure the hydrogen is “green”. In summary, in order to receive tax benefits, grants, and subsidies the producers need to demonstrate low GHG emissions (which makes it necessary to measure them during the generation of electricity that flows into the electrolyser).
Stakeholders have proposed several approaches for calculating GHG emissions stemming from relevant electricity generation
The most stringent of these approaches require temporal and regional matching and additionality provisions. In this approach, for electricity to qualify as zero-emitting, every kilowatt-hour (kWh) of electricity going into an electrolyzer must be matched with a kWh of electricity generated from a new, zero-emitting generator sited in the same region as the electrolyzer on an hourly basis. This provides the highest degree of assurance that the electricity demand from the electrolyzer isn’t causing increased GHG emissions in the power sector, thereby yielding the cleanest possible hydrogen. (KING Benet al., 2023)
As exposed by the European Parliamentary Research Service, putting in place a policy where renewable energy can be sourced from the grid requires taking the following criteria into consideration:
Choices regarding these criteria have an important impact on the cost of renewable hydrogen production. The definition of the additionality rule changed before and after the Commission’s delegated act. The delegated act sets out different ways in which producers can demonstrate that the renewable electricity used for hydrogen production complies with additionality rules. It further introduces criteria aimed at ensuring renewable hydrogen is only produced when and where sufficient renewable energy is available (known as temporal and geographic correlation). The delegated act was published with an amendment (amendment 13), which has eased the implementation of the additionality principle for renewable hydrogen (predicting a transitional phase for implementation and adding the possibility of proving the electricity is renewable towards a power purchase agreement (PPA) with operators producing renewable electricity).
Before that, the EU predicted stricter regulations for the criteria. The “transitional phase” allows green hydrogen facilities in operation before 2028 to get an exemption from the additionality rules through 2037. The publication of the act is itself positive since it brings regulatory certainty to the market. The European approach is still stringent in some ways because it requires a strict temporal and regional correlation and additionality provisions for the upcoming years. This means that every kilowatt-hour (kWh) of electricity going into an electrolyser will have to be matched with a kWh of electricity generated from a new, zero-emitting generator sited in the same region as the electrolyser on an hourly basis. Various stakeholders have expressed mixed opinions; for example, Bellona has raised concerns about the possibility of greenwashing and increased emissions in the short term. They also criticise the long transitional periods and the possibility of producing renewable hydrogen with non-renewable electricity, which they believe could undermine the credibility of the EU’s renewable energy market and contribute to increased GHG emissions. According to Bellona, long transitional periods pose a serious risk of a short-term increase of emissions, provided that:
1. The additionality principle will enter into force only in 2028, allowing for all the electrolysers connected to the grid in the coming five years to free-ride on the renewables that were deployed for the energy transition, and this for over ten years (until 2038). 2. Similarly, the adoption of a very loose temporal correlation until the end of 2029 creates a system in which hydrogen producers will de facto be able to use electricity whenever they prefer instead of when it is available. (…) The last-minute inclusion of a provision to produce renewable hydrogen with non-renewable electricity is problematic due to the long-term effect this will have on the power sector emission intensity and the credibility of Europe on the international market for renewable hydrogen.
On the other hand, Hydrogen Europe sees the measures as a positive step towards the development of the renewable hydrogen market. However, they warn that the strict rules of hourly and geographical correlation will make green hydrogen projects more expensive. Jorgo Chatzimarkakis, Hydrogen Europe’s CEO, says:
“A far-from-perfect regulation is better than no regulation at all. At last, there is clarity for industry and investors and Europe can kick-start the renewable hydrogen market. This comes at a critical time, with the USA setting a very high benchmark with their Production Tax Credits, offered under the Inflation Reduction Act, attracting more and more investments towards their clean hydrogen market’’.
Now, the above-mentioned acts have been submitted to the European Parliament and the Council, giving them two months to scrutinise and either accept or reject – but not amend them. Many are eager to see further developments, since it is a prerequisite for national support schemes, investment decisions for the development of the hydrogen industry in the EU, and the eventual incorporation of hydrogen in the Carbon Border Adjustment Mechanism.
----------- 1 Hydrogen produced with a process that does not emit more than 4 kg of CO2 per kg.
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