On 8 July 2020, the European Commission (the "Commission") published its European Hydrogen Strategy (the "Hydrogen Strategy") and launched the industry-led European Clean Hydrogen Alliance (the "ECHA" or the "Alliance")
(1) The European Hydrogen Strategy
(A) Background: A Policy Framework for Energy Transition & Decarbonisation
The Hydrogen Strategy sets out the Commission's vision for how the EU can harness the power of hydrogen to achieve its commitments to decarbonise the continent and transition to clean energy by 2050. In particular, it sees hydrogen being used: as a (low carbon or renewable) fuel; a form of energy storage (to manage seasonal variations and intermittence in renewable energy production as well as to transport energy from production centres to more difficult to connect energy demand centres); and as an alternative to fossil-fuels used in hard-to-abate carbon intensive industrial processes (such as in the steel and chemicals industries) and sectors (such as the parts of the transportation sector).
The Commission recognises that today 'green hydrogen' (produced using renewal sources of energy) and 'blue hydrogen' (produced using fossil-fuels where greenhouse gas emissions from the production process are captured) are not yet as competitive as 'grey hydrogen' (produced from fossil-fuels but without any capture of greenhouse gas emissions). However, the Commission expects that, with the benefit of its coherent vision and a framework of support, the cost of green hydrogen and blue hydrogen will be able to compete with the cost of grey hydrogen as early as 2030.
Whilst the Commission's priority is to develop the market for green hydrogen, it asserts that in the short-to-medium term blue hydrogen will also be needed to reduce emissions and to encourage the uptake of clean hydrogen generally and to ultimately to support the mainstream uptake of green hydrogen in the longer-term.
(B) A Roadmap for a European Hydrogen Ecosystem
In the Hydrogen Strategy, the Commission sets out a roadmap and key milestones for its strategic vision:
- in the first phase, from 2020 up to 2024, the Commission aims to:
- install at least 6GW of green hydrogen electrolysers capacity in the EU;
- increase green hydrogen production within the EU to 1 million tonnes;
- decarbonise grey hydrogen production used in existing sectors – such as the chemicals sector; and
- boost the uptake of hydrogen demand in new end-use applications – such as other industrial process (e.g. steel making) or possibly heavy duty transportation (trucks, rail, maritime transport);
- in the second phase, from 2025 to 2030, the Commission aims to:
- install at least 40GW of green hydrogen electrolysers capacity within the EU;
- increase green hydrogen production within the EU to 10 million tonnes; and
- install and secure access to another 40GW of green hydrogen electrolysers capacity from neighbouring countries;
- in the third phase, from 2030 to 2050, the Commission aims for green hydrogen technologies to reach their maturity and to be deployed at large scale including in all hard-to-abate sectors.
(C) Key Challenges
The Hydrogen Strategy also highlights some of the key hurdles that will need to be overcome in order to achieve the goals set out in the roadmap and identifies some of the solutions and forms of support it may be able to offer overcome these hurdles. In particular, the Strategy emphasises the need to scale-up supply and boost demand in parallel in the short-to-medium term so as to reach a critical mass of investment, which ultimately becomes self-sustaining in the longer-term.
- Scaling-up supply: The main barrier identified by the Hydrogen Strategy is the cost of supply of hydrogen and the need for green and blue hydrogen to compete with grey hydrogen. This will require improvements in both production and distribution technologies as well as improvements in the affordability of renewable energy to be used in the production process.
These challenges will require an array of different support mechanisms including:
- a policy framework to support the uptake of green and blue hydrogen – in this regard the Commission anticipates that the existing Emissions Trading Scheme ("ETS") regime, and the proposed expansion already announced as part of the Green Deal, should encourage the required uptake. The Commission has also indicated that it may consider further incentives under the ETS regime to encourage the uptake of green and blue hydrogen, whilst continuing to acknowledge that these should not increase the exposure of sectors (including grey hydrogen) to the risk of carbon leakage;
- clarity with regards to (i) the technologies that need to be developed, and (ii) what is considered to be green hydrogen and blue hydrogen – in this regard the Commission has proposed the development of a policy framework which (during the transitional phase) takes account of the carbon emission reduction benefits of hydrogen production, which will include a European-wide regime and criteria for the certification of green and blue hydrogen which builds upon the existing ETS regime and the Renewable Energy Directive as well as a common low carbon threshold for blue hydrogen which may be defined by reference to the existing ETS benchmark;
- until green and blue hydrogen become cost competitive, direct support schemes will be required to encourage their scaling-up – such support might take the form of: (i) carbon contracts for difference ("CCfDs") which pay an investor the difference between the CO2 strike price and the actual CO2 price under the ETS regime, although these would still need to comply with State aid rules, (ii) changes to the electricity market to provide price rewards to clean hydrogen producers for the services that they provide to the energy system, for example, flexibility services, augmenting renewable production levels, reducing the burden from renewable incentives, and (iii) funding from EU schemes (see paragraph 2 below for further details);
- a review of the State aid framework and the State aid guidelines for energy and environmental protection – which has already scheduled for 2021;
- a pipeline of viable large-scale hydrogen projects – in this regard, the Commission has launched the ECHA to support the identification and selection of suitable projects for further of support – see paragraph 2 below for further details; and
- the scaling-up of renewable energy projects dedicated to large scale gigawatt green hydrogen production facilities.
- Boosting demand: New lead markets will need to be developed to support the increase in clean hydrogen production and the Hydrogen Strategy has already identified industrial applications and the transportation sector as two key markets that will need to be developed overtime.
The Hydrogen Strategy also highlights carbon intensive applications within refineries, the production of ammonia, new forms of ethanol production and steel making as industrial applications that are ripe for immediate conversion to hydrogen.
The Commission envisages hydrogen will play a key role in decarbonising those parts of the transportation sector where electrification is more difficult, for example, in specific parts of local city bus fleets, rail networks and, in the longer-term, heavy-duty road vehicles as well as the aviation and maritime sectors.
The Commission is considering various options for demand side supporting including quotas for green hydrogen or its derivatives in specific industries or specific industrial applications and/or introducing virtual blending requirements for clean hydrogen.
(2) The European Clean Hydrogen Alliance
(A) The Alliance
The Commission acknowledges that the roadmap set out in its Hydrogen Strategy will require coherent and cohesive investment agenda – with the Commission estimating that investment in hydrogen electrolysers and the scaling-up of solar and wind energy production capacity alone will need to reach €244-393 billion by 2030 – and public support. So in conjunction with the launch of it Hydrogen Strategy, the Commission also kick-started the launch of the ECHA (which forms part of its New Industrial Strategy) to support the implementation of its Hydrogen Strategy.
The Alliance is designed to bring together EU institutions, national, regional and local governments, industry participants across the value chain as well as other industry and societal stakeholders (such as trade unions, NGOs and industry and technological bodies) in a round table policy-making forum. It is envisaged that the Alliance will create a platform for the industry to co-ordinate and consult on projects that are needed to develop a clean hydrogen ecosystem as well as to assist in identifying the main (regulatory, technological, procedural and standardisation) bottlenecks and input into ongoing work on standardisation and research and development priorities. It is hoped that the pooling of resources will provide sufficient scale and industry-wide effects to facilitate the cost reductions and competitiveness needed to establish a sustainable full cycle hydrogen value chain within Europe.
The ECHA's governing body will be made up of 12 industry representatives, including representatives from Shell, EDF, Vattenfall, Siemens, Daimler and Bosch, as well as stakeholder representatives from the European Climate Foundation (a not-for-profit) and IndstriAll (an international trade union). The ECHA's work will span the entire hydrogen value chain and will be structured around six project sub-categories: Hydrogen Production; Transmission Distribution; Energy Sector; Industrial Applications; Mobility; and Residential Applications.
(B) Pipeline of viable Hydrogen Projects
The Alliance has primarily been tasked with identifying and building up a pipeline of viable large-scale clean hydrogen investment projects and preparing an investment agenda by the end of 2020.
It is intended that some of these projects will qualify for the special "Important Projects of Common European Interest" status ("IPCEI") and/or will qualify for support from EU investment and funding initiatives (including the ETS Innovation Fund, the InnovFin Energy Demonstration Projects, the InvestEU programme and the European Regional Development Fund and the Cohesion Fund). Where a project qualifies for IPCEI status, Member State governments will be allowed to offer funding to these projects beyond the usual amounts allowed under the EU rules on state aid limits. Preparations for the first hydrogen IPCEI projects have already begun.
The IPCEI framework requires projects to satisfy five criteria in order to qualify. In particular, the project must:
- be clearly defined in respect of its objectives and terms of implementation and the project must contribute in a concrete, clear and identifiable manner to one or more of the EU's objectives and have a significant impact on competitiveness of the EU or a significant impact on sustainable growth, value creation or societal challenges across the EU;
- involve more than one Member State;
- generate positive spillover effects for the European economy or society – the benefits should not be limited to the participating Member States and companies;
- involve co-financing by the project participants;
- (where the project involves R&D) involve a major innovation in its relevant sector or add important value to R&D to state of the art innovations or technologies in the relevant sector; or
- (where the project involves the deployment technology or innovations in industry) facilitate the deployment of: (i) a new product of high R&D value, or (ii) a fundamentally innovative production process.
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© Herbert Smith Freehills 2021