Why Europe's head start on hydrogen is at risk

Jorgo Chatzimarkakis of Hydrogen Europe warns what is at stake if Europe continues ‘tiresome political discussions’ and fails to create a viable hydrogen market.

In early 2020, hydrogen was still considered a niche technology, an intriguing idea for the future.

Fast forward nearly three years and the word hydrogen is featured often and prominently in the energy transition discussion.

The European Union was relatively fast to get on board, the process boosted by the announcement of the Hydrogen Strategy in the middle of the pandemic, a revisited Fit for 55 package in 2021 and by the REPowerEU communication this year.

The effects have been significant: the Hydrogen Strategy influenced aspects of the EU’s Fit for 55 packages, such as including binding targets for renewable hydrogen in both transport and industry; all of it now under discussion.

REPowerEU is yielding an increase in hydrogen targets as Europe strives to wean itself off Russian fossil fuels. Certainly, the hydrogen sector is looking more promising than only a few years ago, fuelled by a strong cost decrease on renewable electricity, the main cost driver of clean hydrogen. And thus, it is a topic on the lips of many energy and energy-adjacent businesses and organisations.

Hydrogen in Europe is not only a technological necessity, but a geopolitical and economic opportunity.

The European Union, and the continent more broadly, faces existential questions following a decade of rising Euroscepticism and a faltering industrial sector growing ever more reliant on outsourced supply chains.

But from fuel cell and electrolyser manufacturers to energy operators and power producers, Europeans are extremely well represented throughout the hydrogen value chain. We have the potential to be world leaders in a nascent sector expected to become a vital pillar of the energy transition, providing hundreds of thousands of new jobs, energy security, energy independence and sorely needed emission reductions.

So why do many in the industry sense that implementation is lagging, allowing other countries and regions to catch up and even overtake Europe?

The passing of the Inflation Reduction Act in the US, which provides substantial incentives to hydrogen schemes, creates the real risk of a technological exodus from Europe across the Atlantic.

The Biden administration will offer new clean hydrogen production tax credits and expand the existing investment tax credit for hydrogen energy storage. Its definition of clean hydrogen – emitting no more than 4kg of CO2 equivalent per single kilo of hydrogen produced – is process-neutral, crowding in multiple methods of hydrogen production to an attractive funding programme.

Producers will receive up to $3 per kilo of hydrogen for the cleanest hydrogen, while more carbon-intensive hydrogen can still receive up to $0.60 per kilo.

There are additional incentives in the act for end-use hydrogen applications in transportation, thereby covering three of the main components of the hydrogen value chain – production, storage and use in transportation.

So what is to be done?

First, we need to implement what is already on the table. Pause the endless, tiresome political discussions, recognise the vast challenge ahead of us, and get things done. We already have ambitious targets on the table and Important Projects of Common European Interest (IPCEIs) waiting in the wings, and what is really needed is for them to go ahead now.

Meanwhile, the Delegated Act on additionality, part of the RED II legislative package, must be significantly simplified to enable the sector to grow and develop at the necessary pace. The Delegated Act proposes two components that would be counterproductive for the timely and effective development of a hydrogen market in Europe.

Firstly, strict requirements on temporal correlation – under which a power plant’s output and the electricity consumed by the electrolyser must match in a certain timeframe – have been mandated by the Commission driven by concerns that additional electricity demand would be met by gas-fired power plants, leading to an increase of emissions.

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But these concerns can’t be generalised and, so far, a lack of technical evidence and market functioning assessments provided by the European Commission have led to a polarisation of views from supporters and critics of this measure.

One thing is clear: no other sector has ever been subjected to such rigorous requirements.

A strong temporal correlation requirement will slow down project implementation and increase the cost of renewable hydrogen, limiting the availability and viability of projects even in those sectors that depend solely on clean hydrogen to decarbonise. Such rules will reduce Europe’s hydrogen competitiveness across the value chain.

Second, the act prescribes an additionality requirement, a principle we at Hydrogen Europe support but which we fear (in the application of certain criteria) will handcuff first movers to the detriment of the entire European hydrogen sector.

For example, lead time for construction of some renewable energy projects does not coincide with the much shorter time needed to build an electrolyser. In the case of offshore wind, we are talking about seven to nine years versus two years for the electrolyser. What this means is that until new electricity capacity is available, electrolyser developers will have next to no incentive to build, when what we currently need is for projects to get moving as soon as possible to reach economies of scale. Flexibility will therefore be crucial.

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A transitional period with some grandfathering clauses for first movers is key here. The hydrogen market is still in its embryonic stage and – to continue the metaphor a while longer – must be properly nurtured and supported in order to survive.

But the Delegated Act increases complexity, increases costs and brings regulatory uncertainty across the board. For the sector, the biggest challenge is therefore to overcome unnecessary regulatory hurdles and actually get underway, before losing ground to regional competitors; something which is already happening.

With the passing of the Inflation Reduction Act, the Biden administration in the US has sent a clear statement of intent to hydrogen producers and consumers.

It does not get bogged down in cumbersome definitions of clean hydrogen by the process in which it is produced, but simply measures whether the production process results in a lifecycle greenhouse gas emissions rate of no more than 4kg of CO2 (or CO2 equivalent) per kilogram of hydrogen. What this does is allow for a variety of production methods in a technology-neutral way and provides scope for innovation within each of them, with the eligible projects then receiving significant tax credits on a scale based on their emissions rates.

Producers will receive up to $3.00 per kilogram of hydrogen for the least carbon-intensive hydrogen, all the way down to $0.60 per kilogram of hydrogen for the most carbon-intensive hydrogen that still qualifies. These incentives will increase the viability – and bankability - of clean hydrogen projects in the US, without even mentioning the additional tax credits for end-use hydrogen applications in transportation.

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The challenges facing hydrogen in Europe are multifaceted but boil down to a single issue: to create a leading, viable market for the sector before it is too late.

Europe is at risk of wasting the head start it achieved with the publication of the Hydrogen Strategy in 2020, and letting the US and China poach investment away from the continent.

For us at Hydrogen Europe, our mission is clear.

We must convince lawmakers at the EU level to simplify the regulatory framework and launch the sector properly, uninhibited by unfair or unnecessary constraints. The legislative advances in the US should act as another motivator to achieve what we know is fully in reach, if we would only dare to stretch out our arms.

ABOUT THE AUTHOR

Jorgo Chatzimarkakis is Chief Executive of Hydrogen Europe.