The EU’s recently proposed new green finance taxonomy, which classifies gas and nuclear power as sustainable, will increase investment in both technologies and could influence the way the hydrogen market develops, according to experts.

The move aims to increase private sector investment in gas and nuclear to replace capacity lost by the closure of coal plants. The private sector has been reluctant to invest in new gas capacity in Europe for fear of creating stranded assets, according to James West, senior managing director at investment bank and advisory group Evercore.

“Companies were not willing to invest because of the uncertain outlook,” he says. “The EU considering, and hopefully putting, natural gas and nuclear into what they view as clean is a huge step in the right direction to make the energy transition less bumpy.”

“The EU considering, and hopefully putting, natural gas and nuclear into what they view as clean is a huge step in the right direction” West, Evercore

The proposed taxonomy has sparked controversy among member states and climate action groups. The current taxonomy’s technical screening criteria mandate that power generation must remain within an emissions threshold of 100g CO₂e/kWh to qualify as sustainable.

“Increasing this threshold to 270g CO₂e/kWh for gas projects with permits granted before 2030, as is proposed in the Complementary Delegated Act, would mean many energy companies would demonstrate alignment with the taxonomy, even though their activities and transition plans would not be aligned with net zero,” says an open letter from the Institutional Investors Group on Climate Change, a coalition of pension funds and asset managers.

Gas switching

While discussions prior to the taxonomy draft focused on whether new combined-cycle gas turbines (CCGTs) would need to be built with carbon capture or other forms of emissions abatement, the proposed update would enable the market to build new, unabated gas capacity up to 2035, according to Anise Ganbold, hydrogen research lead at consultancy Aurora Energy Research. This is likely to delay hydrogen’s role in the power sector as a cleaner alternative to natural gas.

“By prolonging the life of CCGTs or incentivising more CCGTs, you are cutting off that demand source for hydrogen,” she says.

But Ganbold notes that power generation is one of the smaller expected sources of demand for hydrogen—after heavy industry, transport and heating. And most early-phase hydrogen projects are likely to be sheltered from competition with the gas market by public subsidies and grants. Furthermore, there is an expectation that this market is here to stay.

“People are thinking a bit more long-term when it comes to hydrogen,” she says.

While energy transition efforts have previously been derailed by hydrocarbon market dynamics, the outlook for clean hydrogen remains positive, according to West.

“I feel like the momentum behind hydrogen today is just so strong that it is like residential solar, where the train has left the station. Nothing is going to slow it down,” he says.

Green edges forward

Recent rises in gas prices—which have contributed to the case for additional gas projects—mean blue hydrogen prices could be undercut by green sooner than expected. Prices for all forms of hydrogen using gas as a feedstock rose over the last year, according to price reporting agency ICIS, bringing blue close to parity with grey as the latter faced additional carbon prices.

“A year ago, I would have said that blue hydrogen takes off way before green hydrogen does,” says West. “Now, you are going to see people say, ‘Let us just leapfrog it. Forget about blue, let us go green.’”

“People are thinking a bit more long-term when it comes to hydrogen” Ganbold, Aurora

Depending on the mode and location of production, some green hydrogen production may still have exposure to gas prices, according to Ganbold.

“If it is coming from the grid, then you are just fully exposed to the wholesale power prices, which are driven in a large part in Europe by gas prices,” she says.

However, if green hydrogen is produced by dedicated renewable energy capacity or has contracted a power-purchase agreement, then the effect of gas prices is likely to be negligible.

Ganbold adds that the outlook for green hydrogen also depends on policies, which could require all hydrogen in a given market to be green rather than putting it in competition with blue. In this case, domestic production will compete with imports from where green hydrogen is cheapest to produce.

However, transport remains one of hydrogen's key costs. Hydrogen production, liquefaction and transport costs can be as high as $4-5/kg and will need to drop to $1-2/kg for green hydrogen to be competitive, according to West.

“If we think about hydrogen near-term—call it 5-10 years—co-location [of supply and demand] is the key. Longer term, we are going to have to get the logistics costs down,” he says.

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Author: Polly Martin