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EU countries failing to lighten burden of hydrogen costs to reach net-zero: study

03 June 2022 Cristina Brooks

Europe needs to find hundreds of billions of Euros for "expensive" green hydrogen projects to reach its net-zero aims even as it leads the world in hydrogen finance.

A 30 May report prepared by the EU's development bank, the European Investment Bank (EIB), for the European Commission (EC) innovation policy development department, DG RTD, looked at investment barriers.

To find out what barriers potential hydrogen investors face, the EIB's Advisory Service surveyed 46 players in the European financial and industrial sector. The players were mostly based in France, Germany, the Netherlands, Belgium, and Denmark.

This included 26 European investors across multiple asset classes, for example banks, sovereign wealth funds, venture capital firms, private equity firms, and institutional investors.

It also surveyed 20 industrial companies across the hydrogen value chain, notably technology providers, renewable energy developers, hydrogen consumers, and hydrogen storage operators.

The report's authors concluded that "the funding committed to hydrogen projects today ... remains relatively low due to a number of hurdles and uncertainties, in terms of economic competitiveness, regulatory clarity, financing availability, and lack of supply chain maturity among others."

In addition, electricity costs pose a barrier to hydrogen produced from renewable electricity, the report noted. "To date, renewable hydrogen production remains expensive in most cases and dependent on the availability and cost of renewable electricity," it said.

Regulations were also needed for securing the integrity of a future hydrogen commodities market in order to ensure additionality, guarantees of origin, and safe transport and storage.

Currently, certifications for both green and blue hydrogen are underway in plans within the EU's net-zero revisions of the Renewable Energy Directive and newly proposed Gas Decarbonization Package.

These are under legislative scrutiny because the EU set a political target of net-zero through the 2019 European Green Deal to fulfill its Paris Agreement pledge.

Billions in investment

The EC in its 2020 Hydrogen Strategy assumed producers would need €180 billion-€470 billion to be on track for 500 GW by 2050.

This would also allow it to produce 40 GW of green hydrogen and 5 million metric tons (mt) of blue hydrogen by 2030.

The report said far less investment has been announced for hydrogen projects so far, or about €130 billion.

Final investment decisions have been reached for only 2% of the 23 GW of electrolyzer capacity that has been announced for 2030. The EC in 2020 estimated that for electrolyzers alone, investors must spend €24 billion-€42 billion by 2030.

The EIB report found that today's low investment levels could hamper the European Green Deal, currently being rolled out through proposals in the Fit-for-55 policy package, and the EU's hydrogen strategy.

In its March energy policy response to the Russian invasion of Ukraine, the EC quadrupled even proposed green hydrogen production levels (5.6 million mt) to 20 million mt by 2030.

Investors warned that it was possible that the market had inflated these costs, noting high valuations and "the potential for market valuation corrections in the sector, could disrupt the current momentum and discourage further investment activity."

Expense the main hydrogen use barrier

Governments, and their failure to regulate support for hydrogen markets in ways that make it economically attractive to potential hydrogen users, were singled out for shaming in the report.

Potential consumers do not need hydrogen, because there are cheaper alternative fuels, but a government could fix this if it monetized the avoided carbon emissions, for example with so-called "demand creation mechanisms."

Citing the main barrier, the authors said higher costs at several stages of the value chain put hydrogen at a disadvantage in competitive markets.

"The current cost gap for the production, transport, and use of low-carbon hydrogen is thus the primary constraint to making hydrogen business models work," the report's authors found.

For transportation, a lack of pipelines for hydrogen makes it more expensive to obtain than natural gas, for which pipelines exist.

Higher costs for machines that use hydrogen create another disincentive for potential consumers. In another example, the cost of fuel cell vehicles remains higher than existing alternatives, the report said.

All of these developmental hurdles combined "[create] risks for investors," the report noted.

Investors need hydrogen CCFDs, subsidies

Investors surveyed urged European states to put in place "clearer public support mechanisms."

Already, the Netherlands held an auction allowing hydrogen developers to bid for Europe's first Carbon Contracts for Difference (CCFDs) subsidies, the SDE++ scheme. Germany and the UK are also considering similar policies.

However, the SDE++ scheme has yet to award any hydrogen production subsidies and hydrogen projects are "last in line" for funds, according to consultants.

Potential investors criticized the "incomplete and fragmented" nature of hydrogen production support. "Schemes differ greatly between sectors and regions, or are in some cases nonexistent. This calls for more integration of public support, including from a value chain management perspective," the report's authors wrote.

The report noted that electricity costs are some of the main unsubsidized costs renewable hydrogen producers seeking to use grid power rather than dedicated supplies face.

There is also the controversial issue of throttling green hydrogen production subsidies to certain times of the day. In the Dutch SDE++ scheme, funding can only be given to projects producing green hydrogen when the associated renewable energy sources are not needed by the Dutch grid.

The EC launched a contested consultation on a draft delegated act on standards for renewable hydrogen, attempting to clear up the problem of hydrogen producers competing with the grid for renewable power, on 20 May.

But the progress is too slow for eager investors. "Virtually all players consulted through this study are planning or have already made investments in the hydrogen sector [but] economic and regulatory conditions would need to improve further in order to mobilize the full financing needed to meet the ambitious EU targets," the EIB report found.

Posted 03 June 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.



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