Designing a Sustainable European Hydrogen Market
By Sébastien Noël, PhD Researcher
Photo: ©AdobeStock scharfsinn86/AA+W
Shortly after the Paris Agreement entered into force, several governments, including the EU, announced their national hydrogen strategies, favouring hydrogen as a promising fuel for the energy transition. Yet, some questions need to be addressed with regard to the importance of hydrogen for the energy transition. In this blog post, I explain that hydrogen may be obtained through different production processes, some of which may not be considered ‘sustainable’. Considering the use of production methods, the relevance of hydrogen for the energy transition might differ among the hard-to-abate sectors. I also discuss whether EU policies and regulations are adequately designed to ensure hydrogen’s sustainable value chain from production to end-use. And finally, I reflect on future developments.
Hydrogen on the EU renewable energy agenda for 2030
European Commission President Ursula von der Leyen recently shared her enthusiasm about the fifty percent renewable energy share in the EU electricity mix. Indeed, the EU has achieved a net increase in the use of renewable energy sources to generate electricity and a reduction of GHG emissions compared to previous years. However, certain economic sectors raise concern because they cannot be easily electrified and require large energy input in the form of molecules largely present in fossil fuels (coal, oil, natural gas). These ‘hard-to-abate sectors’ include the petrochemical, heavy chemical and steel manufacturing industries, as well as heavy road, aviation, and maritime transport. Using hydrogen produced by carbon-neutral or low-carbon production methods could significantly reduce these sectors GHG emissions released into the atmosphere.
In 2019, the European Commission unveiled the ‘European Green Deal’, its flagship policy that commits the EU to tackle climate change and environmental problems. While numerous communications followed thereafter, the Commission set green hydrogen high on its ambitious climate mitigation and energy agenda. In 2020, the Commission adopted ‘A hydrogen strategy for a climate neutral Europe’, which set a roadmap for the deployment of green hydrogen and, to a lesser extent, low-carbon hydrogen, by 2030 and onwards towards 2050. The first phase aimed towards at least 6 gigawatts (GW) of renewable hydrogen electrolysers installed in the EU for the period 2020-2024 and up to 1Mt of renewable hydrogen produced.
External pressure also prompted the EU to increase its ambition toward the green transition. The Russian aggression against Ukraine in February 2022 accelerated the Commission to reduce the EU’s dependence on imported fossil fuels and increase renewable energy. The Commission’s REPowerEU communication set the EU’s goal to achieve 20 Mt of green hydrogen, half of which is produced in the EU and the other originates from third countries by 2030.
The EU Agency for the Cooperation for Energy Regulators, however, reported there have only been 216 MW of installed electrolysers Union-wide, which only produced 0,04 Mt of green hydrogen in 2023.These figures do not look promising, as the EU has just entered into the 2nd phase (2025-2030) with the objective to achieve 40 GW of installed electrolysers, along with a 10 Mt green hydrogen target.
Emphasis on hydrogen’s ‘clean’ production processes
Hydrogen can be obtained from several production processes involving fossil, nuclear or renewable primary energy, which can be distinguished by their production costs and their global warming potential. Today, hydrogen is most commonly produced on industrial sites with unabated natural gas and coal sources processed with the steam reforming or gasification technologies. These technologies constitute grey (steam reforming, or SMR) or brown (coal gasification) hydrogen. Despite the fact that grey and brown hydrogen have the highest rates of global warming potential (10-13kg CO2-eq/kg H2 and 23-26kg CO2-eq/kg H2, respectively), their production costs (USD 1-6/kg H2 and 1,5-3,5/kg H2, respectively) remain the lowest in comparison to other, less polluting alternatives.
Certain technologies can mitigate carbon dioxide and methane gases emitted during the conventional production of hydrogen. For instance, blue hydrogen can be produced with carbon capture and storage (CCS) or utilization (CCU) technologies coupled with steam reforming or coal gasification. Using the best available technologies of CCUS can significantly reduce direct GHG emissions when hydrogen is produced with natural gas (2-5 kg CO2-eq/kg H2) or coal (2-3kg CO2-eq/ kg H2). But blue hydrogen remains expensive when applied to SMR (USD 1-5, 7/kg H2) and brown hydrogen (USD 2-5,5/kg H2) and thus less attractive for end-users.
Finally, hydrogen can be produced with electrolysis, where electricity reacts with water to separate its hydrogen and oxygen molecules. Arguably, not all types of electrolysis-based hydrogen can be considered ‘sustainable’ because of the origin of the electricity used. Upstream and midstream emissions can occur, when electricity is directly taken from the grid (25-35kg CO2-eq/kg H2). On the other hand, hydrogen can be produced with electricity generated from renewable and nuclear primary energy, which generates no (renewable) or little (nuclear) direct GHG emissions. Therefore, depending on the energy source, the electrolysis technology is typically referred to as ‘green’ (renewable) or ‘purple’ (nuclear) hydrogen.
Effective decarbonization requires that priority be given to green, purple and, to a lesser extent, blue hydrogen. These production processes could be classified as sustainable manufacture of hydrogen under the EU taxonomy delegated acts. In the future, also other production processes could be used as ‘low-carbon’ fuels, after passing the R&D stages (pyrolysis of methane) or reaching commercial maturity (hydrogen produced with biomass).
Conducive policy and regulatory environment for a green hydrogen economy
Regulatory mandates and financial support appear necessary to enable hydrogen to penetrate markets, where molecules are indispensable (petrochemical, heavy chemical) or complementary (aviation and maritime). Since recently, the EU has been establishing a demand-market for green and, to some extent, low-carbon hydrogen. This policy can be characterized as ambitious and interventionist because of the renewable energy targets and recent EU laws applicable in various sectors.
The EU has recently introduced changes in its legal framework for renewable energy with a significant relevance for green hydrogen. The recast EU Renewable Energy Directive (RED III) defines the conditions for ‘renewable fuels of non-biological origin’ (RFNBO) to be used in the Member States targets. RFNBO must be produced from renewable energy sources, except biomass, and reduce GHG emissions by 70%. The RED III further requires the electricity to be ‘fully renewable’ during the production of RFNBO , as specified in the ‘RFNBO Delegated Act’ and the ‘GHG Methodology Act’. If these criteria are fulfilled, hydrogen can contribute toward the RFNBO targets in the industry (42%) and transport (1%) sectors by 2030. Moreover, by 2030, the use of RFNBO must contribute towards the mandatory renewable energy targets applicable for industry (1.6%), transport (29%), as well as for the share of renewable energy in the EU as a whole (42.5%).
Businesses are also urging public authorities to provide financial support to reduce high capital and operation costs incurred for green hydrogen technologies and infrastructure. The EU and its Member States could allocate State resources to facilitate new market entrants (green hydrogen producers). This may include governmental grants, uncollected taxes, feed-in-tariffs, and hydrogen power purchase agreements (long-term contracts). Financial support could level up the playing field between green and carbon-intensive hydrogen, and eventually unlock necessary investments to make green hydrogen cost-competitive and replace incumbent fossil fuels.
These economic advantages could, if granted from state resources, constitute ‘state aid’ under EU law. EU competition rules (TFEU Articles 107, 108) provide the framework, within which Member States can allocate state aid to undertakings. In principle, state aids are prohibited because it is deemed incompatible with the internal market. In general, Member States must notify all types of state aid to the Commission for a review of compatibility with the internal market (TFEU, Article 108, al. 3). The notification procedure also applies to certain categories of state aid that may be considered compatible (TFEU Article 107, al. 3). These types of state aid comprise, inter alia, the ‘Important Project of Common European Interest’, or aid to ‘facilitate the development of certain economic activities’.
Under EU law, the Commission has a wide discretion to conduct an economic and social assessment of Member States’ aid. Guided by the Green Deal, the Commission could adopt communications and guidelines to promote the acceleration of renewable energy and hydrogen projects in the EU. Examples include 1) the 2022 Guidelines on State aid for climate, environmental protection and energy (CEEAG), 2) the Communication on Temporary Crisis and Transition Framework (TCTF), and 3) the Communication on Project of Common European Interest (PCEI).
Essentially, the EU Commission has been granting policy space for Member States to support green hydrogen projects through numerous State aids. Through these communications and guidelines, the Commission has broadened the scope of aid, which Member States can allocate, and presumed its limited distortive effects on competition and trade. Although these soft law instruments are not EU legally binding acts, the Commission is bound by them, and has restricted its wide discretion exercise. In practice, the Commission has approved an important number of State aid programs fostering, inter alia, green hydrogen technologies and its infrastructure.
A supportive green hydrogen policy requires that governments also address an important roadblock to the transition to clean energy, which is fossil fuel subsidies. Since the war in Ukraine, fossil fuel subsidies have been the largest by energy source (123 out of 390 billion). While aimed at limiting the cost of energy consumption in various economic sectors, these subsidies maintain the dependency on incumbent fossil fuels and defeat the purposes and objectives of the internal market, including a sustainable hydrogen economy. As the EU competence is limited, it cannot affect Member States’ right to determine the conditions for exploiting their energy sources and energy mix. In that regard, the Regulation on the Governance of Energy Union and Climate Action provides flexibility to Member States without establishing strict deadlines to terminate subsidies. Member States must only lay down national objectives to phase out fossil fuel subsidies in their integrated national energy and climate plans. Phasing-out initiatives of Member States have so far related mainly to solid fossil fuels (coal and lignite) used for electricity generation. Member States have not communicated any concrete plans to terminate support for fossil fuel subsidies in hard-to-abate sectors.
Looking ahead
Green hydrogen has seemingly become the EU’s new champion for the energy transition to meet the Paris Agreement climate objectives. The new EU Commission seemed optimistic about the EU’s ability to achieve its renewable energy and hydrogen targets with the help of a new financial instrument (‘Clean energy investment strategy for Europe’) that would support Member States in their implementation of EU legislation on natural and renewable gas to achieve integrated hydrogen networks.
However, the Commission’s enthusiasm creates expectations that may never be realized. The EU needs to dramatically accelerate its green hydrogen production capacity to meet its 2030 targets. In the alternative, the EU must also consider other technologies to mitigate climate change (technology neutrality principle), without creating ‘significant harm to the environment’. Renewable energy capacity could, for instance, be complemented with small modular reactors (i.e. small nuclear fission reactor), as suggested by the new Commissioner for Energy and Housing. These small modular reactors can be produced and transported to sites to produce low-carbon electricity, heat and hydrogen at commercial scale. Yet, this technology is not commercially mature, and EU Member States remain divided on the benefit of nuclear energy in contributing to the energy transition. It is also important that government intervention ensures that hard-to-abate hydrogen end-sectors operate in an integrated hydrogen valley connecting essential hydrogen infrastructure.
All in all, green hydrogen remains an expensive alternative to replace incumbent fossil fuels, or even carbon-intensive hydrogen, in various applications. Despite noticeable regulatory and financial initiatives taken by the EU and Member States, it remains to be seen whether green hydrogen and e-fuels will become attractive to trigger private investments.