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EC Fit for 55 offers benefits to hydrogen economy

23 July 2021 IHS Markit Energy Expert

The European Commission's (EC) Fit for 55 package includes a number of proposals that could support growth in the European Union's hydrogen economy, as the bloc seeks to reach its climate goals. Europe has a binding legal target of a 55% GHG emissions reduction by 2030 and a goal of a net-zero economy by 2050.

Among scores of new and updated policies, Fit for 55 would expand the EU Emissions Trading System (ETS) to include aviation and shipping (and, eventually, the building sector), and it would create a related ETS Innovation Fund to promote green projects that include hydrogen, among others. The draft regulations, announced earlier this month, await approval by the European Parliament and the EU Council.

"This package mainly deals with renewable hydrogen; the exemptions are the taxation directive and ETS that deal with all types of hydrogen. The important framework for non-renewable hydrogen is to come as part of the gas package at the end of the year," said Michaela Holl, EU Green Deal project lead at think tank Agora Energiewende, referring to the Fit for 55 directive that has yet to be proposed for regulating competitive decarbonized gas markets.

Holl identified a few key elements under Fit for 55:

  • Industry: A targeted 50% share for renewable fuels of non-biological origin (RFNBO) in energy and feedstocks by 2030, excluding production of oil products. Hydrogen fits in this category.
  • Transportation: Amendment of the regulation setting CO2 emission standards for cars and vans, known as the Renewable Energy Directive (RED). The revised RED stipulates a 2.6% target share of RFNBOs in transportation by 2030, with a preference for use in the aviation and maritime sectors.
  • Aviation: Revision of the EU ETS to include a 2% target share of sustainable aviation fuel (SAF) by 2025. SAF is often made from hydrogen, Holl said.
  • ETS Innovation Fund: Supports projects to produce and use hydrogen, especially in industrial settings.

"All of the above instruments will naturally create a guaranteed market for hydrogen in those sectors, and with this allow upscaling and investments," Holl said.

One missed opportunity noted by Holl is that the Energy Taxation Directive taxes renewables and low-carbon hydrogen at the same level through 2033. This part of the proposal "does not echo the strong priority in EU hydrogen strategy for renewable energy source-based production. So, it will not help narrow the cost gap between blue and green hydrogen," she said.

Infrastructure

Building the infrastructure for vehicular use of hydrogen is another key part of Fit for 55, said International Council on Clean Transportation (ICCT) Hydrogen Lead Stephanie Searle.

The revised Alternative Fuels Infrastructure Directive calls for hydrogen refueling stations at least every 150 km on highways for compressed hydrogen and every 450 km for liquid hydrogen by 2030, she explained.

"The new requirement for hydrogen refueling stations will probably be the most impactful part of the Fit for 55 package in terms of promoting increased use of hydrogen in transportation. The lack of available refueling stations is currently a major barrier to the penetration of fuel cell electric vehicles," Searle said.

From the US, hydrogen refueling entrepreneur Raghu Kilambi, CEO of PowerTap, looked on the infrastructure support with some envy. "The EU is laying a framework for a potential trillion-dollar hydrogen infrastructure to be in place within the next few decades. If the US does not do something similar, we will fall behind in the critical energy field," he told Net-Zero Business Daily on 21 July.

PowerTap is seeking to install hydrogen supply points at hundreds of truck stops across the US in the next five years, providing "blue hydrogen" made from natural gas that is processed onsite.

Green hydrogen for industry

In the EU's program, "green hydrogen" made from renewable natural gas or through an electrolysis process using renewable power is the favored fuel.

One of the key parts of the plan to fuel green hydrogen's growth, according to Agora Energiewende Senior Industry Advisor Oliver Sartor, is the use of Carbon Contracts for Difference (CCfDs). "The introduction of CCfDs as a new mechanism under the Innovation Fund is a very positive step by the Commission," he said. "It recognizes the economic challenge currently faced by certain breakthrough industrial technologies that they often have higher overall production costs than their conventional, high-carbon, counterparts."

However, for the steel-making and cement industries, and for certain basic chemicals, like ammonia, olefins, and methanol, Sartor said that hydrogen is more costly than conventional fossil fuels.

Carbon allowances would have to reach €80-€200/mt for renewable hydrogen to break even compared with processes using fossil fuels, he said.

Holl agreed, saying: "It should be clear that not even an ETS price in the range of €100-€200 ($118-$235) would always fully close the gap for green hydrogen without additional support."

The current allowance price is about €50-€52, according to the OPIS price service.

This is the problem the CCfD instrument tries to fix, Sartor explained. "In effect, the Innovation Fund's CCfD would pay projects that produce these goods using climate neutral or ultra-low carbon technologies a premium to cover the cost gap between the CO2 price in the ETS and the breakeven production cost," he said.

The payment fluctuates as the carbon allowance price changes, with the CCfD falling as the carbon price rises to the breakeven level. "The principle is a lot like how renewable energy feed in premia have worked—very effectively—in the power sector for wind and solar, until their costs came down," he said.

For industries that are high emitters of carbon, CCfDs might be the final piece of the puzzle to encourage a new way of operating, said Sonke Godeke, energy partner at law firm Pinsent Masons, who advises on energy projects with a particular focus on renewables and cleantech.

"Despite rising costs, such as those associated with purchasing emission certificates, it is currently cheaper for many branches of industry to continue production by using old, emissions-intensive processes and to accept additional costs for the resulting emissions than to invest in a more climate-friendly transformation of their production processes," Godeke said. "Therefore, CCfDs have the potential to accelerate the market introduction of and investment in climate-friendly processes in the raw materials industries by insulating industry from the operational cost differences."

It's all about certainty, he said, adding: "Further, CCfDs can offer adequate security of revenues and, by this, enhanced planning security."

The green hydrogen principle also could come into play for vehicles, said ICCT's Searle.

"The Renewable Energy Directive should, hopefully, at least ensure that any hydrogen used in transport is renewable, rather than produced from fossil fuels. This is important, as fuel-cell electric vehicles operating on hydrogen produced from steam methane reforming only slightly reduce lifecycle greenhouse gas emissions compared to diesel or gasoline cars, and only the use of renewable hydrogen delivers deep GHG reductions," she said.

Under the proposed new rules, hydrogen fuel-cell vehicles would rate as zero-emission vehicles, another boost. But they still have to compete with battery EVs, which have a significant cost advantage right now.

Leadership

Despite the uncertainties in the legislation and the challenges ahead in bringing large volumes of hydrogen to the market, there is an agreement that the Fit for 55 proposals are moving the EU in the right direction.

"The EU has come one step closer to becoming a global leader in hydrogen development. By putting targets on the use of hydrogen in industry and transport the EU stands a real chance to achieve climate objectives, create thousands of jobs, and protect its industry," said Jorgo Chatzimarkakis, secretary general of industry association Hydrogen Europe.

"Europe has been looking at this longer and harder than North America," said US entrepreneur Kilambi.

He sees long-distance trucking—a huge industry in both the EU and US—as the best near-term application for hydrogen. "The competition there is diesel, which has one of the worst emissions profiles of any sector," he said.

While battery-powered vehicles are building market share in light-duty applications, companies such as Europe's BMW see big opportunities for trucking, where the power needed to move the vehicles and their freight make batteries prohibitively expensive. "Until the last year-and-a-half, there has not been prominent discussion about trucks and hydrogen," said Kilambi.

This has changed on both sides of the Atlantic, he said, referring to developments such as Hyzon announcing a new design for hydrogen fuel cell vehicle storage systems with 40% lower weight and cost. "If you look at vehicle fleet owners, they have their own incentives to move towards lower emissions, such as government policies and their own ESG commitments," he said. "That's going to drive their decisions, and that's why the original equipment manufacturers are moving to electric trucks and cars."

Article by Cuckoo Susan James, OPIS. Editorial contributions by Kevin Adler, Net-Zero Business Daily.

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