Renewable Hydrogen: helping achieve the twin European objectives of decarbonisation and energy security

Alexandru Floristean

Operating Partner at FiveT Hydrogen

The accelerated adoption, at scale, of renewable hydrogen as an energy vector, fuel and chemical feedstock is increasingly seen as indispensable for achieving the twin European objectives of decarbonisation and energy security. 

While the Fit-for-55 package proposed by the European Commission on the 14’th of July 2021 had already laid the groundwork for leveraging the potential of renewable hydrogen towards EU’s climate goals, RePowerEU, the European action plan to reduce European dependence on Russian fossil fuels has shifted momentum towards renewable hydrogen into high gear.

With the aim of empowering clean alternatives to Russian fossil fuels, RePowerEU, more than doubles the ambitions set out in the Fit-for-55 package in terms of renewable hydrogen. Under the plan, annual renewable hydrogen consumption in the EU should reach 20 million tonnes (Mt) per year by 2030, replacing the consumption of more than 27 billion cubic meters (bcm) of natural gas.

Arguments in favor of renewable hydrogen have been building for years, but recent events have given them new impetus.

The replacement of natural gas, coal and oil with renewable hydrogen supports both the decarbonisation of the European energy system as well as the reduction of dependence on fossil fuels.

Far from being a whim of EU policy makers, achieving both these objectives is a strategic imperative for the EU, bringing about benefits across the entire policy spectrum.

Taking place on the backdrop of a growing energy crisis, Russia’s invasion of Ukraine, the subsequent cut-off of gas supplies to several European countries, the adoption of energy sanctions by the EU and the increased volatility of energy prices have shown the critical importance of securing European energy independence, especially from Russian fossil fuels.

The adoption of renewable hydrogen significantly expands the list of countries that can produce and export energy. For the first time, any country in the world where the sun shines and the wind blows can become an energy producer and exporter. This represents a strategic opportunity for both these countries and for Europe which, from an energy security perspective, can now choose its energy partners more selectively and diversify its energy supply.

From a climate perspective, the latest IPCC report has made it clear that reducing GHG emissions across the full energy sector requires major transitions, including a substantial reduction in overall fossil fuel use, the deployment of low-emission energy sources and switching to alternative energy carriers 1 .

1 Working Group III Contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, Summary for Policymakers, 2022

From an economic point of view, investments in renewable hydrogen represent a major opportunity to create economic value and to revitalize energy-intensive industries (e.g. ammonia, steel, etc.) that suffer from under-investment, low margins, high resource costs and strong global competitive pressure.

Renewable hydrogen is set to be adopted in a wide range of sectors

In 2020, the consumption of hydrogen (97% of which was “grey” hydrogen produced through the reformation of natural gas, without carbon capture) was estimated to be ~8.4 Mt 2 . It was predominantly consumed in the petrochemical industry, in ammonia production and in the chemical industry and accounted for a significant share of the natural gas consumption in Europe.

RePowerEU envisages that renewable hydrogen will replace the consumption of "grey" hydrogen obtained from natural gas in existing uses and, at the same time, be introduced, in large quantities, in new sectors: in road transport (replacing gasoline and diesel), as a sustainable aviation fuel (replacing kerosene), in the maritime sector, (replacing heavy fuel oil, maritime diesel and other maritime fuels), in steel production (replacing coal), as a source of (industrial) heat (further replacing natural gas) and to a very small extent in power generation in niche applications.

Source: European Commission: RePowerEU

Regulatory measures are paving the way for a commercial market for renewable hydrogen

To achieve such an accelerated and wide adoption of renewable hydrogen, the Fit-for-55 package and RePowerEU propose a series of measures which either incentivise or mandate the use of renewable hydrogen in various sectors.

The proposed revised Renewable Energy Directive (RED II) sets mandatory targets for the consumption of renewable hydrogen and synthetic fuels made from renewable hydrogen (“renewable fuels of non-biological origin” (RFNBOs), as they are known in legal terms) in industry and in transport. The proposed, legally binding, targets require that at least 75% of all hydrogen consumed in industry and at least 5% of all energy consumed in transport should come in the form of RFNBOs.

While these targets are likely to be some of the strongest legislative drivers behind the adoption of Renewable Hydrogen in Europe, they are not alone: (i) the reduction of the maximum amount of GHG industrial installations are allowed to emit under the EU’s Emission Trading System (ETS) will ensure that emitting GHG into the atmosphere comes at a high price, (ii) the gradual elimination of free allowances under the same system will mean that polluters will either adopt cleaner production pathways or pay the full costs of GHG emissions, (iii) the extension of the scope of the ETS system will create decarbonisation incentives in sectors (maritime, buildings, road transport) where such pressure did not exist previously, (iv) a new energy taxation regime will ensure that polluting fuels are taxed significantly more than their low-carbon alternatives, (v) specific regulations in the maritime and aviation sector will further incentivise the adoption of low-carbon and sustainable fuels in those sectors, (vi) mandatory targets for the development of charging and hydrogen refuelling infrastructure will help solve the “ chicken and egg” dilemma faced by zero-emission cars, vans, buses and trucks and other legislative proposals create a regulatory environment in which clean energies, such as renewable hydrogen, can become competitive against their fossil counterparts.

On the Funding side, building on the already existing financial incentives put forward in the Fit-for-55 package and in the Recovery and Resilience Facility, RePowerEU envisions a number of additional measures which meant to further improve the competitiveness of renewable hydrogen against fossil fuels. These include:

  • Mobilising EU funding under the Connecting Europe Facility, Cohesion Policy and Recovery and Resilience Facility to support the upscaling of production and transport infrastructure of renewable hydrogen.
  • Topping-up Horizon Europe investments and increasing the Clean Hydrogen Joint Undertaking’s budget by 20% to EUR 1,2Bn with the goal of doubling the number of Hydrogen Valleys which it can financially support.
  • Launching, for the first time, “Carbon contracts for difference” funding schemes and dedicated “REPowerEU” windows under the Innovation Fund to support:
    • the switch from existing hydrogen production based on natural gas to renewables
    • the transition to hydrogen-based production processes in new industrial sectors, such as steel production.
    • innovative clean tech manufacturing (such as electrolysers and fuel cells) and mid-sized pilot projects
  • A dedicated hydrogen purchasing platform, the “European Global Hydrogen Facility” which will draw on the experience of H2Global and which will support the import of Hydrogen and Hydrogen derivatives into the EU
  • Channeling large-scale investments in an EU-wide “hydrogen backbone” to enable the transport and storage of Hydrogen across the EU
  • The development of three major hydrogen imports corridors via (i) the Mediterranean, (ii) the North Sea area and, (iii) as soon as conditions allow, with Ukraine

Source: European Commission: RePowerEU

The unprecedented measures to shift away from fossil fuels are what is needed right now

Given the climate, geo-strategic and economic considerations, the European Union, through the Fit-for-55 package and RePowerEU, has shown it is determined to enact European policies that will, at the same time, (i) support the development of clean energy, including in the form of renewable hydrogen and (ii) sharply penalize industries who refuse to adopt clean energies.

This double strategy of support ("carrot") and penalty ("stick") gives economic operators little choice but to embrace the opportunity to shift away from fossil fuels and to welcome investments in clean energy sources and new production methods.

The ambitious and unprecedented European policies proposed under the Fit-for-55 package and the RePowerEU action plan will, without a doubt, fundamentally change the economic models of the 20’th century that were built around the consumption of fossil fuels. This change is only for the best.