AccueilExpressionsGreen Deal Reloaded - Clean Hydrogen: the Way Forward is Together 30/06/2021 Green Deal Reloaded - Clean Hydrogen: the Way Forward is TogetherPARTAGER Arthur Sauzay - contributeur externe Associé chez A&O Shearman Max Landshut - contributeur externe Romaric Lazerges - contributeur externe Moritz Meister - contributeur externeInstitut Montaigne and the Genshagen Foundation have launched a series of publications, titled Green Deal Reloaded - perspectives for a sustainable and just transformation of the EU, which reflects on the economic, social and political issues related to the Green Deal in the context of the Covid-19 crisis and recovery plans in Europe.Clean hydrogen is a central piece of Europe’s Green Deal goal of reaching climate neutrality. Beyond the ambitious goals announced by the EU last year, the question now is how to build a common pathway at the Member State level. The German and French strategies illustrate the challenges of aligning the tools needed for successful progress regarding the ramp-up of a European hydrogen economy. Beyond the hype, a major tool for reaching climate goalsEuropean Union institutions are progressively converging on the twin goals of reaching so-called "climate neutrality" by 2050 and, as a first milestone, reducing greenhouse gas (GHG) emissions by at least 55% by 2030. Such ambitious objectives will undeniably require very significant and long-term efforts in all sectors, from energy production to industry and transportation.In that context, though clean hydrogen is not a new solution, it is once again taking centre stage worldwide. The reason is two-fold:First, there is a need to decarbonize the current production of hydrogen, which accounts for about 3% of CO2 emissions in the EU. Indeed, although hydrogen use does not generate emissions, its production is to date almost entirely dependent on fossil fuels.Second, clean hydrogen is needed in several GHG-intensive industrial sectors that today use natural gas and coal (notably, for chemicals, cement and steel) as well as in transportation, where decarbonization is currently difficult to achieve.For its supporters, plentiful, relatively cheap clean hydrogen is a major, if not indispensable, ingredient needed to reach climate neutrality by 2050. Bill Gates, author of a recent book on solutions to avoid climate disaster, mentions this tool as having the long-term potential to help reduce world GHG emissions by up to 30%. The world currently produces 100 million tons of hydrogen annually: Bloomberg NEF estimates indicate that in a 1.5° warming scenario, production needs to increase to 700 million tons by 2050 (a sevenfold increase) and be emission-free. Not surprisingly, many regions across the globe aim at becoming clean hydrogen leaders.The technical, economic and legal hurdles to achieving this transformation cannot be underestimated. On the technical and economic side, the biggest hurdle is the availability of sufficient amounts of low-carbon, and cheap, electricity needed to produce clean hydrogen from water electrolysis (splitting water to extract dihydrogen molecules). But the regulatory challenges are equally complex.In the past year alone, more than 30 new projects have been announced by large European companies (utilities, industry, and transportation operators) as well as start-ups. However, most projects will need an adequate legal and regulatory framework in order to reach completion. Such a regulatory framework is a precondition for the mobilization of tens of billions of euros in public and private capital. In that regard, Europe’s experience in the development of renewable electricity production shows that being able to raise money from banks and capital markets requires a well-designed set of rules.Brussels, Berlin and Paris: The issue of coordination Against that background, it is no surprise that both the EU (July 2020) and many Member States, including France (September 2020) and Germany (June 2020), launched strategies to increase the production of clean hydrogen rapidly. For the purpose of this analysis, we will focus on France and Germany, two major European states with high ambitions in the hydrogen sector.Plentiful, relatively cheap clean hydrogen is a major, if not indispensable, ingredient needed to reach climate neutrality by 2050.One year after these strategy announcements, the legislative machines in Brussels, Paris and Berlin have started issuing texts and proposals, allowing for an initial assessment of the direction that each one is taking. While France focuses on national clean hydrogen projects, using renewable and nuclear electricity, Germany intends to focus mainly on hydrogen from renewable electricity produced nationally or imported using long-distance transportation.As is the case in other policy areas and as further explained below, there is a risk of insufficient coordination. This could lead to added complexity, with significantly different rules for deciding which projects are labelled as "clean hydrogen," which ones may obtain public support from the state, etc. Even though initial projects are designed to serve local hydrogen production and consumption, such fragmentation is likely to slow the ability of stakeholders (including project developers and investors) to scale up their hydrogen efforts across Europe.Compared to the support of renewable electricity, a higher level of coordination will be needed to bring more than 10 gigawatts of clean hydrogen production capabilities online (starting almost from scratch), over the next 10 years, in the two countries and beyond. To outline the key elements of a successful framework, as well as the risks of excessive divergence, we can go into more detail by diving into three key aspects of clean hydrogen strategies.Compared to the support of renewable electricity, a higher level of coordination will be needed.French hydrogen timelineThrough a tender procedure and by contract, two types of support are granted: An additional remuneration ("operating aid") to compensate for the higher costs of clean hydrogen. For some projects, in addition to the operating aid, an investment aid is possible to cover high initial costs (e.g. for the electrolyser). This support mechanism will target production units of renewable hydrogen and low-carbon hydrogen (as defined by law) produced by electrolysis of water and located on the French territory exclusively. The contract will include the beneficiary's economic and environmental commitments over the duration of the contract, up to 20 years (more likely, 12 to 15 years). The procedure for granting the contract will be subject to the public procurement principles of transparency and equal treatment. The government has been careful not to repeat past mistakes. The scheme fundamentally differs from power purchase agreements used for wind and solar support where the French State found that some projects had secured what was perceived as excessive profitability. The French Ordinance sets out strong checks to the amount of aid granted to the beneficiary. The support contract may provide that the project holder shall give up such subsidies and tax breaks so that the capital invested may not exceed a "reasonable" income level. The launch date of the first calls for projects will depend on the European Commission's State aid approval.In Germany, the support scheme consists of several elements, most of which still require clarification and/or additional laws/ordinances to be drafted and adopted. However, it is already clear that Germany will spend billions of EUR on hydrogen technologies being rolled out starting in 2021 and 2022 (cf. timeline below). The German support scheme will most likely not be combined in one central legal act. Instead, there will probably be numerous amendments to important energy sector laws, such as the German Renewable Energy Act (Erneuerbare Energien Gesetz - EEG) and the German Energy Industry Act (Energiewirtschaftsgesetz - EnWG), which would typically be followed by ordinances specifying the details.Just like in France, Germany’s scheme is expected to cover operating and investment costs. Operating costs will take the form of an exemption of clean hydrogen from the so-called "surcharges" paid by electricity consumers in Germany. These surcharges finance the public support offered to renewable plants and are the cause for the high price of electricity in Germany. In addition, projects will benefit from public subsidies to cover the investment costs, as part of the German application to the EU clean hydrogen IPCEI initiative. A total of 230 projects applied under a call for projects in February 2021. On 28 May 2021, the German government announced that 62 projects were chosen, including transportation, pipelines, green chemicals and green steel applications, as well as about 2 GW of electrolyser capacity. A total of EUR 8 billion is earmarked for the German IPCEI projects alone. They will be coming from the German Federal State and the German Local States, and aim to trigger total investments of about EUR 33 billion (incl. EUR 20 billion from private investors). The German government aims to send out grant decisions as early as the beginning of 2022.In light of a recent decision by the German Federal Constitutional Court, Germany’s path of decarbonisation has to be accelerated. Current draft legislations foresees raising the bar from 55% to 65% GHG reduction by 2030, followed by 88% by 2040 and the plan for Germany to reach carbon neutrality by 2045. Such acceleration of Germany’s decarbonisation will most likely also impact the timeline for the German hydrogen efforts. Details are expected to follow the Federal election, in September 2021.German hydrogen timelineIn addition to IPCEI, Germany is contemplating an innovative contractual system under which a subsidy paid to the hydrogen consumer (e.g. a steel plant) would be linked to the price of a ton of CO2 under the EU-ETS. This so-called "Carbon Contract for Difference" (CCfD) regime would target the support of the GHG emissions avoided by the consumer, in addition to the hydrogen itself. This system is more advanced, but also more complex, than current support schemes used to support wind or solar plants. In its July 2020 hydrogen strategy, the European Commission also proposed to develop a CCfD regime as part of a pilot program.As shown above, there are significant differences between the support schemes in France and Germany. This is quite similar to the current situation in the field of support to renewables, and also reflects structural differences in financing mechanisms for the energy transition. It would be useful to aim for more alignment, at least regarding the key principles. There is room for additional convergence. To live up to the expectations and the potential of clean hydrogen to accelerate the road to climate neutrality, European stakeholders will need to clear several hurdles. The need for a well-designed legal framework is one of them. Looking at the example of France and Germany, there is room for improvement. Further, beyond the issue of internal coordination, Europe should not forget it will be facing stiff competition from the rest of the world. Therefore, clean hydrogen offers a chance to design holistic, multi-level support and regulatory systems - a precedent that could be useful for future initiatives launched as part of the Green Deal. Copyright: JEAN-FRANCOIS MONIER / AFPPARTAGERcontenus associés 28/04/2021 Green Deal, un nouvel élan - Le Green Deal ou l’invention d’un nouveau modè... Pascal Canfin