Policymakers in Europe are struggling to maintain renewable hydrogen momentum going into 2023 as political delays, financial uncertainty and supply chain issues hamper project development.
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Developers put final investment decisions on hold in September after a vote in the European Parliament effectively scrapped a key policy framework setting out rules on renewable hydrogen proposed by the European Commission.
The industry was awaiting revised proposals late December after the European Commission's initial proposals were met with industry warnings that strict additionality and temporal correlation rules would deter investment.
The European Parliament in September passed an amendment to the proposed Renewable Energy Directive, effectively overruling the Delegated Act and scrapping the additionality criteria.
That was initially welcomed by industry bodies, but project developers soon started pausing investment decisions due to renewed uncertainty.
S&P Global Commodity Insights' clean hydrogen project database shows that of a total 29.7 million mt of production, just 0.3% is operational, permitted or under construction.
The EU is targeting 10 million mt/year of renewable hydrogen production and another 10 million mt/year of imports by 2030.
S&P Global analysts forecast around just 4.5 million mt/year of European production by 2030, and a similar volume of imports.
Hydrogen Europe warned that a failure of the Parliament and Commission to reach an agreement over the Delegated Act could leave rules within the RED legislation, leading to the possibility of further delays and a fragmented market as EU member states transpose the rules into national legislation.
Hydrogen Europe Chief Policy Officer Daniel Fraile said 2023 would be a year of final investment decisions for the first major hydrogen projects in Europe once policy uncertainty was settled.
"With the Renewable Energy Directive expected to be done by mid-year, setting binding targets for the use of renewable fuels of non-biological origin in industry and possibly also in transport, hydrogen actors will have a much better view of the size and potential of the market," Fraile told S&P Global.
Any revised proposal will need approval from the European Parliament and Council.
In the meantime, the US stole a march in the hydrogen policy space, introducing the Inflation Reduction Act over summer, that set out clear and simple subsidies of up to $3/kg for clean hydrogen production.
Many investors and some project developers switched their attention across the Atlantic from Europe, leaving industry representatives in the EU and UK warning of an exodus of capital, skills and technology developments that had previously appeared assured in Europe.
"You have very substantial incentives, which are clear with no ambiguity in the US," Hydrogen Council Executive Director Daryl Wilson told S&P Global Commodity Insights in an interview. "That is a tremendous investment platform."
However, the US was starting from a less-developed position on its projects compared with Europe, and Wilson noted too that it was not a "zero-sum game."
"There is plenty of interest to go around the world to activate projects in Europe, the US, Asia and elsewhere," he said. "You have to remember, up until the last year, the US was about five years behind, and so there is a degree of catching up in project proposals and project development."
Energy transition security
Supply chain disruptions and rising energy prices have also pushed up costs for renewable hydrogen projects in Europe.
Hydrogen fund Hy24 CEO Pierre-Etienne Franc said there were widespread delays to engineering, procurement and construction offers, and it had become difficult to secure long-standing offers with rapidly changing raw materials costs.
Franc also said interest rates of above 4% would start making project finance difficult for some operators, with rising debt burdens and no prospect yet of lower costs.
Around 3 GW of renewable hydrogen production capacity had received EU backing for operations by 2025-26, and Hy24 had completed its oversubscribed Eur2 billion ($2.1 billion) fund raise in October, aiming to deploy the fund over the coming five to six years, Franc said.
A trickle of projects designated as Important Projects of Common European Interest had been cleared to receive state support, with grants already unlocking investment decisions, while the European Commission has proposed a Eur3 billion hydrogen bank to drive demand, in line with REPowerEU's 2030 targets.
Policy headwinds facing low-carbon and renewable hydrogen projects in Europe will be temporary, with projects poised for swift deployment once there is regulatory certainty, the Hydrogen Council's Wilson said.
The industry group's October report, 'Global hydrogen flows: hydrogen trade as a key enabler for efficient decarbonization,' found that 65 million mt of hydrogen could be transported long distance by 2030, out of a potential annual market of 140 million mt. The figures were based on demand growth aligned with a net-zero pathway.
This contrasts with S&P Global analysts' view of 8.7 million mt/year of global trade by 2030 and 103 million mt/year of demand.
In 2030, trade is expected to be dominated by pipeline shipments, with some early green ammonia and methanol shipments also starting by then. Germany has already launched a first tender to import green ammonia under its H2Global scheme, with deliveries from 2024.
"By 2030, the first piped imports into Europe will occur as domestic hydrogen supply is constrained and available renewable capacity is built up to decarbonize power," the Hydrogen Council said. "This facilitates competitive low-carbon supplies from markets such as Norway."
By 2050, international trade in hydrogen and its derivatives could reach 400 million mt/year of a total market of 600 million mt/year. Trade could cut hydrogen supply costs by 25% by 2050, saving $6 trillion, it said.
Around $750 billion in investment was needed by 2030 to reach clean hydrogen targets in line with net-zero emissions goals by midcentury, with industry reaching around a third of this in project announcements, Wilson said.
Utility-scale projects in hundreds of megawatts could be built in around two years, though subsequent projects would benefit from the development of early projects, speeding up deployment and lowering costs, he said.
Reductions in electrolyzer cost curves were progressing broadly in line with the Hydrogen Council's expectations from forecasts over the last five years or so, while the outlook for natural gas-based hydrogen production costs should become clearer in the coming six months, Wilson said.