Hydrogen placed at the heart of future EU energy policy.
The REPowerEU plan was a direct reaction to the Russian invasion of Ukraine, and as a result hydrogen has been placed front and centre in the energy transition strategy with clear targets for the replacement of fossil gas and other fuels by 2030. It is, however, becoming abundantly clear that even after maximising energy efficiency and renewable energy deployment, the EU will need energy imports. The European Commission reinforced this message with an ambitious proposal to import 10 million tonnes of renewable hydrogen and derivatives from third countries, in addition to producing 10 million tonnes locally.
New opportunities for hydrogen
Such large volumes open up new opportunities for hydrogen – beyond the existing use of unabated fossil hydrogen – to replace other uses of fossil fuels and feedstocks. Hydrogen and hydrogen carriers will support the decarbonisation of the power sector by providing an excellent form of flexibility to variable renewables. Hydrogen and carriers will store renewable energy for long periods and secure supply during times of low renewable production. It will help replace natural gas in buildings alongside other clean technologies such as heat pumps. Hydrogen will likewise play an essential role in reducing air pollution in cities and in ports,ensuring European goods and European commuters are transported more sustainably. To deliver on our common European climate ambitions, all clean technologies will be needed. Hydrogen technologies are not a silver bullet but, as regards their role in the transition, the argument has been won – they must play a significant part.
Whereas trade of hydrogen between the EU and abroad is quasi-inexistent today, the mentioned targets would require a radical change of landscape. By 2050, the potential total demand for hydrogen and its derivatives could reach 60 million tonnes. The World Energy Council indicates that domestic production of clean hydrogen would be able to meet not more than 20% of projected hydrogen demand in 2030 and less than 50% in 2050. As such, developing strategic partnerships with potential exporting players and a clear regulatory framework to enable such trade is imperative. To achieve this 20 million tonne target, some main elements of market design require urgent attention and coordination at international level: namely, a common legal definition for hydrogen and an international system of hydrogen certification with robust environmental criteria.
Removing barriers to investment
Investor certainty is key for a nascent hydrogen sector. This is true both within and outside the EU. Whilst hydrogen project developers are racing to deploy large scale facilities to kick-start much needed renewable hydrogen production, their eyes are on the European Commission which promised to publish the Delegated Act (DA) defining renewable hydrogen and derivatives (for example renewable fuels of non-biological origin, RFNBO) by the end of 2021. The European Commission came under harsh scrutiny for its intention to impose a heavy administrative burden and strict criteria of additionality, temporal and geographic correlation on renewable hydrogen production. Compliance against these criteria would allow fuels to count towards the sub targets for RFNBO consumption for transport and industry proposed in the Renewable Energy Directive.
Whilst it is indisputable that we need a massive amount of additional renewable energy capacity if we want to decarbonise and achieve energy independence, it is unclear why such criteria are only imposed on renewable hydrogen producers. Having overly complex rules would strain hydrogen production and put at risk the future availability of renewable hydrogen because of potential high production costs and limited availability of renewable electricity. Indeed, excessively short time correlation and the exclusion of subsidised renewable power to be used for RFNBO production – just to name a few – would increase production costs, limit volume and risk the EU’s competitive edge in a global race for scaling clean hydrogen technologies, vis-à-vis the US or the UK. Hydrogen imports would also have to comply with these criteria to count towards EU renewable energy targets, thereby severely limiting our ability to import the amount of hydrogen needed.
Developing a harmonised, bullet proof system of hydrogen certification is essential in creating a market-based estimation of relevant sustainability attributes and fostering the development of a global hydrogen market. A standard methodology for determining such attributes, such as a carbon footprint, will build consumer trust, incentivise cross-border trade and match supply with demand in a swifter manner which will increase market liquidity. Although the importance of accurate and harmonised certification has been clearly recognised by industry stakeholders and policymakers alike, most of existing hydrogen certification schemes are voluntary and limited in terms of full climate accounting. The Hydrogen and Decarbonised Gas Package proposal lacks a clear vision for hydrogen certification and fails to factor in the differences between natural gas and hydrogen in its book and claim system. This leaves the system incredibly vulnerable to greenwashing.
The Green Hydrogen Standard
There are a few voluntary initiatives that aim to build the basis of a harmonised hydrogen certification scheme. One example is the Green Hydrogen Standard launched in May 2022 which sets a maximum threshold for greenhouse gas emissions of 1kg CO2 e per kg H² . Green hydrogen producers are invited to submit their projects for accreditation and certification by the Green Hydrogen Organisation (GH2) and are then able to obtain and trade GH2 certificates of origin. Certifhy is another important certification initiative – albeit limited to European markets – initiated at the request of the European Commission. It works together with competent authorities and existing EU issuing bodies to provide a tradable certificate that assigns a clear value to renewable and low-carbon environmental attributes.
Hydrogen and hydrogen derivatives, whether produced in the EU or in third countries, will have to respect a GHG emission saving threshold of at least 70%. This comes on top of the rules set in the DA mentioned above addressing RFNBO production rules. To calculate these emissions savings, a fossil fuel comparator at 94 gCO2 e/MJ would be used, in line with the value set for biofuels and bioliquids. This means that, with a 70% required reduction, the GHG footprint threshold for hydrogen is 3.38 tCO2 /tH2.
Many types of RFNBO will contain carbon in their chemical composition, such as e-diesel, e-kerosene, e-methanol, or e-methane. The rules aim to tackle the source of the captured carbon and of upstream emissions accounting. Captured CO2 could be deducted from the carbon footprint of the RFNBO if it is captured from air, biomass and biofuels, or a geological source. Captured CO2 may also be deducted if captured in industries covered by the EU Emissions Trading System (EU ETS). As an example, this is possible in cases where the emissions have been taken into account upstream in an effective carbon pricing (the EU ETS or an alternative CO2 pricing system in the case of imported CO2 or RFNBO).
All in all, these rules will require third country RFNBO producers to rigorously verify emissions from all the fuel’s inputs, processing, transport and distribution, and combustion at end use. Regarding the use of carbon, the burden of proof will be on non-EU manufacturers to demonstrate that the emissions that allowed the carbon capture have been subjected to carbon pricing in the EU or in third countries.
Does EU carbon pricing go far enough?
As such, there are ongoing discussions whether applying carbon pricing outside of the EU is enough. While emissions and sector scopes usually differ, carbon prices are also very disparate across geographies. For example 2021 average price of the EU ETS was above €50/tCO2 while it was below €10/tCO2 on the Chinese ETS.
Mandating that a carbon price equal to that of the EU ETS should be paid could provide for a fairer level playing field. In this regard, the European Parliament would like to develop a methodology to account for all emissions of RFNBO under the EU ETS. Any secondary legislation should ensure that carbon pricing is non-discriminatory between EU production and imports of hydrogen and derivatives.
The Carbon Border Adjustment Mechanism (CBAM) may also be considered as part of the solutions to account for inputs’ emissions. If covered by the CBAM, imported RFNBOs and other e-fuels would be considered ‘complex goods’. Such goods would be subject to carbon pricing for their total emissions. The CBAM is an environmental policy aiming to encourage decarbonisation in the EU and abroad, by preventing carbon leakage risk. It would ‘mirror the EU ETS’ for imports of non-EU products, first gradually applying to 5 selected products at high risk of carbon leakage (including fertilisers and ammonia). While the European Parliament proposes to add hydrogen and some hydrogen derivatives on the list, neither the Commission nor the Council supports this initiative.
Considering the Commission’s plan to start with a few sectors only, if hydrogen is not covered right from the start, it might as well be in a second stage. However, the coverage of hydrogen and derivatives by the CBAM should come in due time only after an impact assessment has been performed. In this sense, it is key to reduce the administrative burden on importers and put hydrogen and all hydrogen carriers on an equal footing in terms of carbon leakage protection. Indeed, this last condition is crucial to ensure a fair level playing field when it comes to carbon pricing policy, also on inputs such as carbon contained in an e-fuel, between the EU and third countries.
In a nutshell, both the GHG DA and the CBAM could complement each other in regulating emissions from imported fuels and could help ensure the lowest-carbon fuels are incentivised to be consumed in the EU, whether they are produced domestically or imported.
Whatever shape the final rules take, the upcoming DAs on RFNBO production and GHG savings, the CBAM and the potential EU ETS DA will be key determinants for the business cases of RFNBO producers and traders. They will have to be workable and rigorously consistent, providing for legal clarity, environmental trustworthiness, and a fair international level playing field. Ahead of COP 27 in Cairo in November 2022, it will be crucial that policymakers around the globe coordinate on the policies aimed both at qualifying and carbon-pricing hydrogen and derivatives, to allow the swift emergence of a liquid international market of such fuels and the establishment of hydrogen as an international commodity.
In response to the hardships and global energy market disruption caused by Russia’s invasion of Ukraine, the European Commission presented the REPowerEU Plan. It is a plan for:
Producing clean energy
Diversifying our energy supplies
- Common purchases of gas, LNG and hydrogen via the EU Energy Platform for all Member States who want to participate as well as Ukraine, Moldova, Georgia and the Western Balkans
- New energy partnerships with reliable suppliers, including future cooperation on renewables and low carbon gases
- Rapid roll out of solar and wind energy projects combined with renewable hydrogen deployment to save around 50 bcm of gas imports Increase the production of biomethane to save 17 bcm of gas imports
- Approval of first EU-wide hydrogen projects by the summer
- An EU Save Energy Communication with recommendations for how citizens and businesses can save around 13 bcm of gas imports
- Fill gas storage to 80% of capacity by 1 November 2022 EU-coordination demand reduction plans in case of gas supply disruption
- New national REPowerEU Plans under the modified Recovery and Resilience Fund – to support investment and reforms worth €300 billion
- Boosting industrial decarbonisation with €3 billion of frontloaded projects under the Innovation Fund
- New legislation and recommendations for faster permitting of renewables especially in dedicated ‘go–to areas’ with low environmental risk
- Investments in an integrated and adapted gas and electricity infrastructure network Increased ambition on energy savings by raising the EU-wide target on efficiency for 2030 from 9% to 13%
- Increase the European renewables target for 2030 from 40% to 45%
- New EU proposals to ensure industry has access to critical raw materials
- Regulatory measures to increase energy efficiency in the transport sector
- A hydrogen accelerator to build 17.5GW by 2025 of electrolysers to fuel EU industry with homegrown production of 10 million tonnes renewable hydrogen
- A modern regulatory framework for hydrogen