EU’s hydrogen strategy and strategy for energy system integration

Our Energy & Capital Markets Counsel Laura Huomo shares her insights on EU’s Hydrogen Strategy and Strategy for Energy System Integration.

On 8 July 2020, the European Commission published its hydrogen strategy for a climate-neutral Europe and a strategy for energy systems integration. The strategic roadmap for hydrogen provides for a concrete policy framework within which sits the European Clean Hydrogen Alliance. It will develop an investment agenda and a pipeline of concrete projects.

Within the EU, there are various countries which have published their own hydrogen strategy. Finland is not yet among those countries. However, the Ministry of Economic Affairs and Employment has appointed a working group on energy sector integration tasked with presenting concrete solutions on how to promote sector integration. It will also assess the possibilities of promoting the hydrogen economy and Power-to-X solutions. The working group’s term runs from 1 August 2020 to 30 June 2021.

It is obvious that investments made and steps taken in the next 5-10 years will play a crucial role in reaching the target of turning Europe climate neutral by 2050. What Europe needs to move forward with its strategy is for hydrogen development to move past the tipping point, major investments both from the public and private sectors, a new regulatory framework, new lead markets, supported research and innovation into breakthrough technologies. Further, in my opinion, scaling up needs large-scale infrastructure networks but only later in the process. All in all, we need complete value chains which are built together with all levels of EU regulators, national level cooperation, TSO and DSO cooperation.

States of the build-up of hydrogen economy

Based on the hydrogen strategy, the priority is to develop renewable hydrogen. However, the strategy recognizes that in the short and medium term, other forms of low-carbon hydrogen are needed.

I agree that it is foreseeable that the production of hydrogen will first be local with no need for infrastructure. This will also be possible without the entry into force of additional or streamlined legislation. It has been interesting to note that within the EU, there have been two different early stage thoughts on how the infrastructure will  be formed. One being retrofitting the existing gas pipeline network (at least partly)[1] and the other has been to build (at least amongst a few countries) a separate hydrogen transportation network. All in all this need for transformation one way or the other, in my opinion, will need to stem from the demand side which can be aided by the possible increase in carbon prices.[2]

Based on the significant volumes of renewable energy that the hydrogen economy will need, I can foresee a push for a massive amount of wind projects to be completed before 2030.

The published hydrogen strategy described three different phases for the creation of hydrogen economy:

First Phase – 2020-2024 – The strategic objective is to install at least 6GW of electrolysers and to produce up to 1 million tonnes of green hydrogen. During this phase, the manufacturing of electrolysers needs to be scaled up, and hydrogen refueling stations built. This phase will focus on creating the regulatory framework and incentivising supply and demand in lead markets. Tailoring the appropriate regulations and incentives may require the review of State Aid rules.

Second phase – 2025 – 2030 – The strategic objective is to have at least 40GW of electrolysers installed by 2030 and up to 10 million tonnes of green hydrogen. During this phase, the need for EU wide logistical infrastructure will emerge and steps will need to be taken to transport hydrogen from areas with large renewable potential to demand centres, which could be located in other EU Member States. By 2030, the regulation that was created during the first phase, will assist in creating an open and competitive EU-wide hydrogen market.

Third phase – 2030 – 2050 – The strategic objective is to have the renewable hydrogen technologies reach maturity during this phase and being deployed at a large scale to reach all hard to decarbonise sectors. The strategy anticipates that about one-quarter of renewable electricity produced may be used for renewable hydrogen production by 2050.

Financing Hydrogen Economy

There are various forms of financing available for the construction of the envisaged hydrogen economy: CEF (Connecting Europe Facility) energy and CEF transport, Next Generation EU, including the Strategic European Investment Window of the InvestEU programme and the ETS Innovation Fund. Different sources would be used for different time periods. Also, there are specific IPCEI instruments which enable State aid to address market failures for large cross-border integrated projects for hydrogen and fuels derived from hydrogen that significantly contribute to achieve climate goals. A strong investment agenda by Hydrogen Alliance (to be created by the end of 2020) will be exploring synergies and ensuring coherence of public support across the different EU funds (mentioned above) and EIB financing.

The EU sustainable finance taxonomy (Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088) (Taxonomy Regulation) was published on 22 June 2020 in the Official Journal of the European Union and it became effective on 12 July 2020. As set out by the Taxonomy Regulation, the Commission has also launched a call for applications for members of the Platform on Sustainable Finance. This Platform will be an advisory body composed of experts from the private and public sector. It will assist the Commission in the preparation of technical screening criteria (the so-called ‘delegated acts’), which will develop the taxonomy further. Delegated acts containing technical screening criteria will be developed in two phases: The first being technical screening criteria, for activities which substantially contribute to climate change mitigation or adaptation, will be adopted by the end of 2020 and implemented by the end of 2021. The second set of technical screening criteria, which covers economic activities substantially contributing to the other four environmental objectives, will be adopted by end 2021 and be implemented by end 2022.

Few words on system integration

The Energy System Integration Strategy defines the energy system integration to plan and plan to operate the energy system “as a whole”, across multiple energy carriers, infrastructures, and consumption sectors, by creating stronger links between them with the objective of delivering low-carbon, reliable and resource-efficient energy services, at the least possible cost for society. The strategy identifies six pillars where coordinated measures are outlined to address existing barriers for energy system integration:

  • A more circular energy system, with ‘energy-efficiency-first’ at its core
  • Accelerating the electrification of energy demand, building on a largely renewables-based power system
  • Promote renewable and low-carbon fuels, including hydrogen, for hard-to-decarbonise sectors
  • Making energy markets fit for decarbonisation and distributed resources
  • A more integrated energy infrastructure – new, holistic approach for both large-scale and local infrastructure planning
  • A digitalised energy system and a supportive innovation framework

To achieve the greatest efficiency in the most environmentally safe way inf the current energy system, we need to streamline at least parts of the regulation of these several parallel, vertical energy value chains, which link specific energy resources with specific end-use sectors. The structuring of this major reform needs to take into account various factors e.g. starting from the fact that the existing regulation on the electricity and gas sectors is tailored for a market that is open and competitive. What can be concluded is that when considering hydrogen as an energy carrier, it is new to the European energy market in a commercial sense. Therefore, the upcoming competitive market for hydrogen needs a different type of regulation from a mature electricity or gas market. The streamlining work does not stop with regulations. I assume that this will also lead to the review of market rules and network codes since they are specific to different sectors.

We are living in exiting times in the energy space. It will be exciting to see what the future brings and how regulatory strategy will form and unfold.

 

[1] This is also supported by the Hydrogen strategy.
[2] E.g. on 20 June 2020, the price of allowances in Europe’s carbon market surged to a 14-year high. This breach resulted in €30 per tonne-mark for the first time since 2006.

Author

Laura Huomo 
Energy & Capital Markets Counsel
Helsinki