Low carbon hydrogen will play a crucial role in Europe’s decarbonised future economy, as shown in many recent scenarios. In a system soon dominated by variable renewables such as solar and wind, hydrogen links electricity with industrial heat, materials such as steel and fertiliser, space heating, and transport fuels. Furthermore, hydrogen can be seasonally stored and transported cost-effectively over long distances, to a large extent using the existing natural gas infrastructure. Green hydrogen in combination with green electricity has the potential to entirely replace hydrocarbons, although blue hydrogen will help meeting hydrogen demand in the short to medium term. Predictions for hydrogen’s share in the EU’s final energy demand by 2050 range from 24% to 50%. Hence, hydrogen in combination with renewable electricity has the potential to entirely replace hydrocarbons in Europe by 2050.
This paper describes a European gas system entirely based on hydrogen by 2050. The post-COVID stimulus package, the role of the European Green Deal and the European Hydrogen Strategy, released in July 2020, are discussed to make the hydrogen vision a reality. Finally, policy recommendations for the hydrogen transition are provided.
The Future of Energy in Europe
The EU aims to be climate-neutral by 2050 – an economy with net-zero greenhouse gas emissions. This objective is at the heart of the European Green Deal and in line with the EU’s commitment to global climate action under the Paris Agreement.
Europe is a net energy importer, with 54% of the 2016 energy needs met by imports, consisting of petroleum products, natural gas and solid fuels. Although Europe is working ambitiously to become less dependent on energy imports, it is unlikely that Europe can become entirely energy self-sufficient. Most scenarios, including BP’s Energy Outlook 2019 indicate that Europe shall remain a net importer of energy until mid-century and beyond. Given the population density and comparatively limited potential for renewable energy, the expectation is that Europe shall continue to import energy, also in a future renewable energy system. However, instead of fossil fuels, over time Europe shall import energy in the form of green electrons and molecules.
The following table contains the current final energy mix in Europe (2015)
Table 1 EU Final Energy
As can be seen in Table 1, electricity comprises a mere 22% of all final energy, and although huge strides have been made in decarbonising the electricity system, 75%-80% of Europe’s energy consumption relies on carbon fuels. Nonetheless, electrification is one of the megatrends in the ongoing energy transition. Since 2011, the annual addition of renewable electricity capacity has outpaced the addition of coal, gas, oil and nuclear power plants combined, and this trend is continuing. Due to the recent exponential growth curve and associated cost reduction, solar and wind power on good locations are now often the lowest cost option, with production cost of bulk solar electricity in the sunbelt approaching the 1 $ct/kWh mark. Although many of the recent world records for solar price levels were in the Middle East, Portugal currently holds the record with a bid price $0.0132/kWh achieved in an auction that was announced in August 2020. However, electricity cannot serve every application and has limitations in industrial processes requiring high temperature heat, the chemicals industry or in bulk and long-range transport.
Several scenarios indicate that electricity can grow from the current 22% to 50% of Europe’s final energy by 2050. Almost all of that will be renewable electricity, mostly solar and wind. To achieve that, the installed solar capacity will have to grow to approximately 2000 GW and wind capacity to 650 GW. In a net-zero emissions Europe, the main question is what will complement clean electricity? There are a few options:
- Curbing demand. Increasing energy efficiency and reducing demand is usually cost-effective with many additional benefits and should be done first, why some even call it “the first fuel”. However, efficiency improvements across many parts of our energy system are counter-balanced by projected economic growth that is still associated with increased energy demand. The overall impact is therefore limited in absolute numbers.
- Carbon capture and storage (CCS). CCS, in which CO2 is captured and permanently stored underground allows the continuation of using carbon fuels to produce power or in industry. Although CCS adds to the cost of conventional carbon processes, in absence of a cost-reflective carbon price, such solutions may be more competitive than green alternatives in the short term. An example is blue hydrogen, which is hydrogen made from natural gas coupled with CCS, which is currently cheaper than green hydrogen, made from renewable electricity and water. However, the cost of green hydrogen will come down with increased deployment following the learning curves of solar, wind and electrolysis, the price for carbon is expected to go up (blue hydrogen still emits carbon), so green hydrogen is expected to be competitive within the decade. This makes the current investment climate in blue hydrogen risky. Also, CCS requires appropriate geological structures which are not found everywhere throughout Europe.
- Biomass. Biogenic energy sources include energy crops, wood or forest waste, waste from food crops, horticulture, food processing, animal farming, or human waste from sewage plants. Given that not all biomass is automatically sustainable and due care should be taken regarding the water footprint and potential competition with food, biomass will play an important but not dominating role. It should also be noted that with the progressing energy transition, the production of fossil fuels will decline, and eventually, carbon will become a much scarcer commodity than today. So, it remains to be seen whether carbon from biomass or waste will be available for energy purposes, or rather be used for higher-value applications such as plastics.
- Green hydrogen. Green hydrogen can be produced at any scale. Hydrogen can be transported at low cost over long distances, e.g. from the Sahara Desert through gas pipelines to Europe and hydrogen can be stored loss-free in large volumes over a season, hence making it an ideal partner to green electricity.
Out of the four “sister” elements to green electricity in the energy transition, hydrogen is the most talented and versatile.
Hydrogen in the Energy Transition
Low-carbon hydrogen, either made from renewable electricity and water or from natural gas with carbon capture and storage will play a crucial role in our decarbonised future economy, as described above.
Figure 1 shows the 7 roles hydrogen will play in decarbonising major sectors of the economy:
Figure 1. The Role of Hydrogen in the Energy Transition (source: Hydrogen Council)
Hydrogen in Europe
Recognising the massive potential for hydrogen, the European Commission released the “Hydrogen Strategy for a climate-neutral Europe” on 8 July 2020. The aim of the strategy is to decarbonise hydrogen production – made possible by the rapid decline in the cost of renewable energy and acceleration of technology developments – and to expand its use in sectors where it can replace fossil fuels. According to the European Commission, the strategy foresees a gradual trajectory, with three phases of development of the clean hydrogen economy, at different speed across different industry sectors:
- In the first phase (2020-24) the objective is to decarbonise existing hydrogen production for current uses such as the chemical sector and promote it for new applications. This phase relies on the installation of at least 6 Gigawatt of renewable hydrogen electrolysers in the EU by 2024 and aims at producing up to one million ton of renewable hydrogen. In comparison to the current situation, approximately 1 Gigawatt of electrolysers are installed in the EU today.
- In the second phase (2024-30) hydrogen needs to become an intrinsic part of an integrated energy system with a strategic objective to install at least 40 Gigawatt of renewable hydrogen electrolysers by 2030 and the production of up to ten million tonnes of renewable hydrogen in the EU. Hydrogen use will gradually be expanded to new sectors including steelmaking, trucks, rail and some maritime transport applications. It will still mainly be produced close to the user or close the renewable energy sources, in local ecosystems.
- In a third phase, from 2030 onwards and towards 2050, renewable hydrogen technologies should reach maturity and be deployed at large scale to reach all hard-to-decarbonise sectors where other alternatives might not be feasible or have higher costs.
The European transmission grid for natural gas is approximately 200,000 km long, with a distribution grid that is a multiple of that. A schematic view of the natural gas system and infrastructure is given in Figure 2. Most of that existing infrastructure can be used for hydrogen, which is a major advantage over electricity, where major additional investments are required to connect future offshore wind generation from northwestern Europe and solar generation from southern Europe to the load centers. The cost of converting natural gas pipelines to accommodate hydrogen are estimated to be between 10% and 35% of the cost of a new pipeline according to Guidehouse. In addition to the pipeline conversion cost, compressors need to be replaced, adding to the overall cost.
The availability of a well-developed gas grid is a major advantage Europe has over other regions and a driver of the gas transition and hydrogen agenda.
Figure 2. A schematic view of a natural gas system.
Hydrogen as part of the economic recovery post-COVID19
Investment in hydrogen will be a critical growth engine in the context of recovery from the COVID-19 crisis. The European Commission’s recovery plan highlights the need to unlock investment in key clean technologies and value chains, to foster sustainable growth and jobs. It stresses clean hydrogen as one of the essential areas to address in the context of the energy transition and mentions a number of possible avenues to support it.
Moreover, Europe is highly competitive in clean hydrogen technologies manufacturing and is well positioned to benefit from a global development of clean hydrogen as an energy carrier. Cumulative investments in renewable hydrogen in Europe could be up to €180-470 billion by 2050, and in the range of €3-18 billion for low-carbon fossil-based hydrogen. Combined with EU’s leadership in renewables technologies, the emergence of a hydrogen value chain serving a multitude of industrial sectors and other end uses could employ up to 1 million people, directly and indirectly.
Policy Options for the European Hydrogen Strategy
As explained above, Europe intends to invest up to €470 billion in low-carbon hydrogen in the next decade. Since low carbon hydrogen is not yet cost-competitive, support is required. Some of the funding will come from the Green Deal, for which the EU has earmarked €1 trillion, two-thirds in the form of grants and one third in the form of loans. It should be noted that this has to cover a lot more than just the hydrogen strategy, most notably energy efficiency. Member states and the private sector will also contribute.
It is important to step back and consider the bigger picture of energy subsidies. According to IRENA, in 2017 the world’s total, direct energy sector subsidies – including those to fossil fuels, renewables and nuclear power – are estimated to have been at least $634 billion. However, adding externalities that are currently unpriced, especially the cost associated with air pollution and climate change, the real number for direct subsidies and externalities associated with fossil fuels is approximately $3.1 trillion per year, exceeding renewable energy subsidies by a staggering factor of 19. So, there is a strong case to make for targeted subsidies for low-carbon hydrogen, especially if they accelerate the reduction of the cost gap with polluting alternatives. In addition, it should be noted that hydrogen will mainly replace oil and gas in Europe, commodities that are not strategic given increasing reliance on imports. Environmentally friendly subsidies to clean and renewable energy can help to improve the efficiency of capital allocation across the energy sector, especially considering unpriced externalities.
Governments around the world are currently rolling out massive COVID-19 economic support packages. According to the IMF’s Fiscal Monitor, in advanced economies, where interest rates are near their effective lower bound, scaling up of quality public investment can have a powerful impact on employment and activity, crowd in private investment, and absorb excess private savings without causing a rise in borrowing costs. Indeed, many western European countries can currently borrow money against negative interest rates, enabling support packages without borrowing heavily from future generations. According to the IMF, empirical estimates based on a cross-country data set and a sample of 400,000 firms show that public investment can have a powerful impact on GDP growth and employment during periods of high uncertainty—which is a defining feature of the current crisis. For advanced and emerging market economies, the fiscal multiplier peaks at over 2 in two years. Increasing public investment by 1 percent of GDP in these economies would create 7 million jobs directly, and between 20 million and 33 million jobs overall when considering the indirect macroeconomic effects. Every $1 million spent on green electricity generates between 5 and 14 jobs, compared to 2-8 jobs in traditional infrastructure investments.
In the case of subsidising Europe’s hydrogen agenda, the following elements are to be considered:
Speed: Investmentsin low carbon hydrogen will primarily replace carbon fuels. To close the current cost gap, policy support is required until hydrogen is as cheap as oil and gas. Given the huge unpriced external costs associated with carbon fuels, such policy support is justified. Given that the external costs associated with carbon emissions and local air pollution are a multitude of the required subsidies to make low carbon hydrogen cost competitive, it is most economical to effectuate the transition as fast as possible. Of course, one has to consider that stranding assets that haven’t reached their economic life also has a cost, so that requires careful management. Valuable lessons learned could be obtained from the exit of coal mining throughout Europe. However, it is equally important to provide clear policy signals, avoiding additional investments in future stranded assets.
A second side benefit of a speedy transition trajectory could be technology leadership. Europe is currently leading in (offshore) wind energy technology and electrolysis and if the European local market develops faster than elsewhere, European companies are in a better position to retain their leadership position.
Blue vs. Green Hydrogen: The European hydrogen strategy expresses a clear preference for green hydrogen. Although blue hydrogen is currently cheaper than green hydrogen, several analysts predict that green hydrogen will be at par before the end of the decade. Blue hydrogen has an important role to play because it can be deployed very quickly at scale, most notably through retrofitting existing steam methane reforming units with carbon capture installations. This option is specifically mentioned in the European hydrogen strategy. However, potential investors in new blue hydrogen facilities will have to consider the possibility that their assets may no longer be profitable from 2030 onwards. Careful assessment of the risk is required to avoid future stranding of such assets.
Public vs. Private Sector: In the current environment of high uncertainty, the IMF says that public investment, especially in green energy, can have a powerful impact on GDP growth and employment, also crowding in private capital. Europe has a largely privatised energy market, and this has proven to guarantee a secure and cost-effective supply of energy. However, in absence of pricing signals for externalities, the private sector alone would not drive the energy transition. A transition as foreseen in the European hydrogen strategy requires full cooperation between the public and the private sector. The role of the public sector is to incentivise investments that would otherwise not take place, for example by providing subsidies or setting standards, obligations, quotas and the like.
An area of particular relevance for the public sector would be the gas infrastructure, which is by nature monopolistic in character and to a large extent regulated. Even though ownership of gas pipelines is private, the transition from natural gas to hydrogen will probably require investments that would need substantial public support. Since high-quality infrastructure is an enabler of a cost-effective energy system, this should be prioritised.
Burden sharing: Until low carbon hydrogen is cost competitive, financial support is required. Europe has a lot of experience with renewable energy subsidies for which various modalities were implemented. Quotas, renewable obligations, contracts for difference, feed in tariffs, feed in premiums, investment subsidies and auctions are all policy measures that were used in European member states to switch from fossil-based electricity to renewable electricity. The result has been that in many locations, renewable energy is now cost competitive and monetary support measures are no longer required.
A feed-in tariff mechanism is proposed that can stimulate production and create hydrogen volume by pooling the initial cost gap for renewable and low-carbon hydrogen in the period until cost parity of hydrogen in the market. The cumulative payment for the cost gap is distributed evenly and fairly over all natural gas customers through a clearing mechanism.
A legal framework will allow hydrogen producers to inject hydrogen in the natural gas grid for blending or in the pure hydrogen gas grid. They will be entitled to a 20-year hydrogen offtake agreement with a tariff ensuring a fair return on investment. A typical utility return in the range of 10% is proposed in the beginning. The off-taker is either a TSO for large-scale high-pressure bulk hydrogen, or a DSO for small-scale medium-pressure hydrogen. The DSO and TSO can pass the marginal cost, i.e. the difference between the local hydrogen feed-in tariff and the (market) price for hydrogen, on to a European Hydrogen Clearing Pool. The marginal cost difference in the form of a Renewable Hydrogen Surcharge is spread out evenly and fairly over all European natural gas consumers and hydrogen consumers. It should be noted that the cumulative surcharge associated with hydrogen volumes used by non-gas sectors such as steel and transport shall not be passed on to gas customers. Figure 3 shows the principle set up of the hydrogen clearing pool.
Figure 3. Hydrogen Clearing Pool Mechanism
Such a European feed-in tariff with a hydrogen clearing pool could be modelled on the German Renewable Energy Act. Like in the German Renewable Energy Act environment, certain natural gas or hydrogen-intensive sectors that are operating in an internationally competitive environment, may receive an exemption for paying the Renewable Hydrogen Surcharge. It is expected that by 2035 renewable hydrogen is competitive and that a feed-in tariff mechanism is not necessary anymore and could be replaced by auctions and tender procedures.
Such a feed-in tariff system is technically not a subsidy. Since the money doesn’t come from national or regional budgets in a tax-and-spend setting, it doesn’t compete with other worthy causes and has proven to be very stable.
Europe is working towards a net-zero carbon energy system by 2050. For that to happen, all electricity needs to be green and electricity will grow 2.5 times to cover 50% of all final energy demand. Hydrogen has the potential to cover a large part of the remaining 50%, which is the basis for the European Hydrogen Strategy that was released in July 2020. To cover the cost gap until low-carbon hydrogen is cost-competitive, a conducive policy framework is required to incentivise the necessary investments.
- To integrate the hydrogen strategy in the economic recovery program, Europe should work towards a fast introduction of hydrogen in the energy system. Money can currently be borrowed by European governments at historic low cost, public investments in green energy are very effective in creating value and jobs and crowding in private investments, and a fast transition saves money due to currently unpriced externalities connected to fossil fuels.
- The policy focus should be on green hydrogen, although blue hydrogen is required in the short term.
- In Europe’s privatised energy sector, the private sector will make the bulk of the investments. However, the public sector will set the pace, provide a conducive policy framework, including direct subsidies, and will focus on the transition of the natural gas infrastructure to accommodate hydrogen.
- A European feed-in system for hydrogen with a clearing mechanism to socialise the cost gap over all gas customers should be considered, similar to the successful German Renewable Energy Act.