The EU is close to finalising a regulatory regime designed to stimulate the growth of its hydrogen economy. But industry figures believe some aspects will have to be revised in the next few years if the bloc wants to boost the sector to compete globally.

The EU is home to 201 projects of more than 20MW at the memorandum of understanding stage, according to IEA data, but only 19 projects have taken FID—and none that require offtake from a third party.

“In terms of the raw number of projects proposed and announcements, there are many more projects in the EU versus the US. But there are more projects moving to FID in the US,” says Daryl Wilson, executive director of industry body the Hydrogen Council. 

This is partly due to the complexity of EU regulations compared with other jurisdictions. The regime broadly falls into three areas of legislation: certification, supply-side stimulation and demand-side stimulation.

Certification

Certification has long been identified by industry as a key piece of the policy puzzle.

The European Commission this year finally adopted two delegated acts defining what it means by renewable—also known as green—hydrogen. The acts impose strict rules on the temporal and geographical correlation of renewable assets and electrolyser assets, designed to ensure the use of renewable power for hydrogen production does not inadvertently lead to the re-carbonising of electricity grids.

€4/kg – Upper limit for the EU’s fixed green hydrogen premium

But, combined with electricity prices in Europe that are already higher than elsewhere in the world, the rules will make it expensive to build projects in the EU, according to Dan Feldman, a partner at law firm King & Spalding.

“Setting up projects in Europe is not easy. Electricity is expensive, and the rules on what counts as green electricity are strict,” he says. “When you look at the cost and complexity, people may come to the conclusion that importing is easier.”

The additionality rules will also apply to importing countries. But simpler permitting regimes, better renewable resources and cheaper electricity costs may make it more likely for developers to get importing projects financed, Feldman adds.

Supply

The supply-side policy regime flows from the EU’s top-down targets to have 10mn t/yr of domestic production and 10mn t/yr of imports by 2030.

The bloc has recently established a ‘Hydrogen Bank’, with an initial tranche of €800mn ($878mn) from its Innovation Fund.

The EU is still consulting on the exact mechanism of support, but it has confirmed the bank will offer producers a fixed price payment per kg of hydrogen produced, for a maximum of ten years of operation. The first pilot auctions are being designed and are due to be launched in autumn 2023 with a proposed cap of €4/kg of hydrogen. Bidders cannot win more than 33pc of the available budget and must have a project size of at least 5MW.

But the bank is undercapitalised and will struggle to secure interest from projects, according to Daniel Fraile, chief policy officer at industry association Hydrogen Europe.

“The €800mn allocated by the Commission to the Hydrogen Bank is peanuts. So eventually, it is going to be a question of putting more money into the mechanism,” he says.

“We also need to make concessions on reducing the strictness of the definition of renewable hydrogen [in the delegated acts], or I have difficulty seeing how projects are going to be financed.”

Fraile notes that the European Commission has the opportunity to review the delegated acts in 2028, and the revision will take stock of whether the industry is able to reach the 2030 objectives or not.

“I predict that, in one year’s time, we will have plenty of market reports saying ‘the price is expensive’ and ‘we are not meeting our targets’, and policymakers will review the rules,” he says.

A similar scheme to the Hydrogen Bank, offering project developers a premium for green hydrogen, has already been launched in Germany by NGO intermediary H2Global.

The first auction in December last year focused solely on imports of green ammonia, green methanol and sustainable aviation fuel (SAF), rather than domestic production. This was stipulated by German economic and climate affairs ministry BMWK, which provided the finance for the auction.

Should the second auction be opened up to domestic producers, H2Global CEO Timo Bollerhey maintains there are plenty of projects that will generate interest.

“If you look at the sheer numbers we are talking about over the next few years, we will need imports and domestic production. I have no doubt that we will get interest from the domestic side, if funding bodies like BMWK allow for that,” he tells Hydrogen Economist.

Demand

Demand-side stimulation falls into sector-specific targets for the industry and road transport sectors, as well as targets for aviation and maritime that are still to be decided.

Legislators have agreed that 42pc of the hydrogen used in industry should come from renewable fuels of non-biological origin (RFNBOs) by 2030 and 60pc by 2035.

And they have set a binding combined sub-target of 5.5pc for advanced biofuels and RFNBOs in the share of renewable energies supplied to the transport sector by 2030. Within this target, there is a minimum requirement of 1pc of RFNBOs.

“The €800mn allocated by the Commission to the Hydrogen Bank is peanuts” Fraile, Hydrogen Europe

Meanwhile, the sale of passenger cars with internal combustion engines will be banned from 2035. The Alternative Fuels Infrastructure Regulation (Afir) mandates the construction of at least one gaseous hydrogen refuelling station every 200km along the planned Trans-European Transport Network, as well as one for each urban node, by the end of 2030. Each refuelling station is required to have a 1t/d hydrogen supply capacity.

The RefuelEU Aviation and FuelEU Maritime laws have yet to be agreed. The European Council proposes aircraft fuel suppliers be obliged to provide a 20pc minimum share of SAFs by 2035, and for vessels above 5,000t to reduce their greenhouse gas intensity by 31pc by 2040.

However, all these mandated targets on the demand side will incentivise only 4.4mn t/yr of demand in 2030, according to calculations by Hydrogen Europe, leaving questions around which sectors will be using the remaining 15.6mn t/yr of hydrogen.

“There is quite a significant gap between what will be needed on the demand side by the binding targets and the 20mn t/yr target set on the supply side,” says Fraile.

The European Commission hopes that strong price signals from the EU emissions trading scheme (ETS) will help reduce the cost gap between using grey hydrogen and green hydrogen for sectors on the demand side. Industry sectors in the ETS will be exposed to increasingly strong price signals as free allowances are phased out over the next few years, while road transport will be included in a parallel ETS beginning in 2027.

But the ETS sends a notoriously volatile price signal, and it has been hard for firms to make long term plans based on the policy, according to Fraile.

“In my view, the ETS is not strong enough a signal for industrials to commit to displace grey hydrogen with green. It might be strong enough to displace grey with blue,” he says.

Reality

The result of all these pieces of legislation is a complex policy environment that reflects the general attitude to risk within the EU, according to Wilson.

“Each jurisdiction acts out of their own culture, history and way of doing things. You have a very simple tax incentive-driven, entrepreneurial approach with big numbers in the US. And you have this collaborative consensus approach with lots of rules and complexity coming out of Europe,” he says.

The danger is that this more cautious, consensus-based approach in the EU may hinder projects from getting to FID, according to Feldman.

“The reality is that it is very difficult to take a real FID and start construction,” he says. “The projects that have got to FID are entrepreneurial. They are looking at the demand that is there and are not necessarily waiting for every little bit of risk to be locked down before they go ahead and push the button.”

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Author: Tom Young