A switch from unabated fossil hydrogen to renewable hydrogen is nearly viable economically with prices in the EU Emissions Trading System (ETS) at their current levels, but only if free allocation in the scheme is abolished, according to an analysis by non-governmental organisation Sandbag.

The financial costs of such a switch in the methanol and fertiliser sectors are very close to a market price in the ETS of more than €55/t ($65/t) and are already below this price in the refining sector thanks to a market premium expected from selling Renewable Energy Directive II (Red II)-compatible transport fuel. The EU ETS market closed last week at just under €58/CO₂.

“The switch to renewable hydrogen could already be incentivised by the current CO₂ price” Sandbag

But the free allocation system in the ETS means hydrogen producers using steam methane reforming technology receive free allowances for each unit of hydrogen they produce, shielding them from the carbon costs in the scheme.

The cost of the hydrogen switch is expected to fall even further over the course of the decade, Sandbag notes.

“This analysis illustrates that, in some member states and certain sectors, the switch to renewable hydrogen could already be incentivised by the current CO₂ price, without any need for non-market interventions or public funding,” says the report, Untangling the knots – clearing the way to fast green hydrogen deployment.

Green switch

The report uses averaged values taken across Europe to calculate its renewables levelised cost of energy assumptions, factoring in some industrial consumers signing power-purchase agreements with renewables producers.

It also assumes that Red II will create a market premium of €2.5/kg on renewable hydrogen for the refining sector because using hydrogen will help consumers meet their obligation to use 14pc “renewable fuel” under the EU directive.

Finally, it assumes a natural gas price of €17.2/MWh based on current market prices for delivery in 2023.

The report suggests that the 6.9mn t/yr of demand from the ammonia, methanol and refining sectors currently being met by grey hydrogen could be met with the green variety without those sectors paying any more—although producing these volumes will require the installation of 49GW of electrolysers and 92GW of dedicated renewables generation.

The EU27’s renewables capacity was 503GW at the end of 2020, and the region installed 30GW in 2020.

“When paired with future demand from the steel, aviation and shipping sectors that will increase towards 2030, significant renewable hydrogen demand will exist from the sectors identified as priority hydrogen users in the EC’s Hydrogen Strategy,” the report says.

€55 – ETS price needed to incentivise green hydrogen over grey

“This calls into question the necessity of using hydrogen in non-priority sectors (e.g. blending into natural gas pipelines), which is often justified by the need to create new demand for renewables-based hydrogen.”

But it emphasises that all of the above would be possible only if free allocations in the EU ETS were abolished. 

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Author: Tom Young