Dutch government’s $14 billion scheme expands green hydrogen subsidies

The Netherlands plans "considerably higher" subsidies in its scheme that finances cleantech, aiming to whet industrial appetite for green hydrogen production.

The second annual round of the subsidy scheme (SDE++) opening on 28 June will make more funds available to bidders, the enterprise agency of the Ministry of Economic Affairs and Climate Policy said on 18 March. "This is not only necessary to increase sustainability more quickly and to achieve our climate goals. But also to reduce our dependence on the import of fossil fuels as quickly as possible," said Minister for Climate and Energy Rob Jetten.

Thanks to a surge in carbon prices funding such projects, the total funding available for all technologies has risen to $14 billion (€13 billion), whereas in the prior round only $5.5 billion (€5 billion) was available. The Dutch government also allows the budget to be increased by an additional €6 billion depending on demand.

A different version of the scheme, financing only renewable energy, began running in 2008.

Under a revision in 2020, the scheme became the first European example of Carbon Contracts for Difference (CCFDs) encouraging industrial companies to use cleantech. It offered funds for hydrogen production and carbon capture and storage (CCS), the latter of which took most of the funding in the last round.

The upcoming SDE++ round will fund competing projects based on the cost per 1 metric ton of CO2 abatement. Head of Research at Aurora Energy Research Lukas Bunsen said in a webinar last year, "This is the second time that not only renewables can participate but also other abatement technologies which then compete against each other."

He added that similar CCFD schemes had gained traction across Europe after the EU co-legislators in April 2021 agreed on ambitious targets within the Climate Law, which requires stronger abatement measures for both power and industrial sectors. "CCFD is discussed as one key way to get there," Bunsen said.

Germany and the UK are also considering CCFD policies that could mirror the SDE++ scheme.

Industrial hydrogen producers to use wind, solar

The previous (2020 and 2021) SDE++ rounds only attracted three hydrogen project applicants.

Aiming to appeal to more applicants, the upcoming (2022) SDE++ subsidy round features subsidies for a second kind of hydrogen project, namely electrolyzers which are directly linked to a wind or solar farm rather than to the grid.

For this type of project, the limits on the number of hours during which hydrogen production is subsidized, or full-load hours, have been raised because directly-linked projects reduce CO2 more, according to a report by the Dutch government's advisory body, the Netherlands Environmental Assessment Agency.

"This [directly linked renewable hydrogen] category was added in addition to the existing hydrogen category because the number of CO2-free full load hours, the costs for the connection to the grid, and the electricity prices differ between these two categories," said Johanneke Butijn, an associate specializing in renewable energy and project finance for the Amsterdam branch of law firm Clifford Chance.

Dentons law firm in the Netherlands has seen a few examples of companies planning to produce hydrogen with on-site renewables, for example Indian steelmaker TATA steel. "TATA Steel has been focusing on developing steel production based on hydrogen as quickly as possible. [It] is exploring options for setting up a hydrogen plant. The intention is to first produce hydrogen with natural gas and to transfer to green hydrogen as soon as it is sufficiently available," Jan Jakob Peelen, a partner at Denton's law firm in Amsterdam, explained to Net-Zero Business Daily.

Other companies planning on producing hydrogen from on-site renewables include Norwegian chemical company Yara and Danish wind power developer Ørsted. In 2020 they announced that, subsidies pending, they would produce renewable hydrogen to use as feedstock for green ammonia in Yara's carbon-neutral fertilizer production.

The proposed fertilizer project would form part of a planned Smart Delta Resources hydrogen cluster, in which a large, 200 MW electrolyzer will convert wind and solar power into hydrogen for industrial companies in the Scheldt-Delta region.

However, it remains to be seen whether the upcoming subsidy round will prove more incentivizing for companies.

Peelen warned the subsidy won't fully cover all the costs needed for developers to engage in commercial green hydrogen production, and so hydrogen would instead be used in-house. "We note, however, that the development of the green hydrogen market in the Netherlands may be impeded due to the fact that SDE++ subsidy for hydrogen is only granted for a limited number of [production hours] per year per electrolyzer. This number of hours is deemed not to be enough for commercial hydrogen production, which requires a higher number of hours," said Peelen.

So far, SDE++ funding can only be given to green hydorgen projects producing at moments when the Netherlands' electricity demand is being entirely met with renewables like wind, solar, and biomass, said Alex Kaat, communications and public affairs advisor for H2 Platform, a Dutch hydrogen advocacy organization.

Green hydrogen is also last in the line for SDE++ subsidies behind these technologies, said Kaat. Then, it is still not fully subsidized as there is a cap of 300 euro/ton CO2 for subsidies, while it costs about 500 euro/ton CO2 and is one of the most expensive techniques. "This is mostly the result of calculations we do not agree with and very strict rules that allow electrolyzers to only operate for 4,200 hours a year," he added.

"So far, the funding within the SDE++ [has been low] at around 150 euro/ton CO2, but thanks to the large budget, it is possible that hydrogen projects may get subsidies that do not cover all the costs," said Kaat.

The new category for green hydrogen production only includes wind and solar parks that are not already subsidized. "Whether this offers some a good opportunity, we do not know yet. And whether there is budget left, we do not know either," he said.

Future expansion of the scheme to more hydrogen categories is already on the horizon, though.

The Netherlands Environmental Assessment Agency is consulting on 2023 SDE++ subsidies for hydrogen produced using household waste that is thermochemically processed.

Dutch CO2 targets boost CCS

In this round more funding is available for decarbonizing technologies, which will lead to more participants and greater GHG and CO2 reduction, the Dutch government said. The Netherlands aims to reach a 95% reduction of CO2 from 1990 levels by 2050.

Aside from the new hydrogen category, this year's scheme will be opened up to hybrid glass furnaces which are used in the glass packaging industry. This kind of furnace for making bottles can run on electricity instead of natural gas, and may achieve further CO2 reduction by also using hydrogen or biogas, according to the European Container Glass Federation.

In this round, geothermal energy projects have been given longer time for development, and CCS projects have been given an extra year for completion.

The ceiling for captured emissions using CCS that attract subsidies has also been raised by 1.5 megatons, "because CCS has the potential to significantly reduce CO2 emissions in the short term," the Dutch government said.

Posted 28 March 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.