February 2022, Vol. 249, No. 2
Features
Germany Ups Ambition on Hydrogen to Meet Climate Targets
By Andreas Walstad, European correspondent
Germany targets net zero emissions greenhouse gas (GHG) emission by 2045 and hydrogen will undoubtedly play a role in achieving that target. Hard-to-abate sectors such as heavy industry, road transport and aviation are likely sectors for demand growth, but a key question is where supply will come from.
With a new coalition government sworn in, however, political support appears plentiful exemplified by the 10 GW electrolyze target set for 2030, up from a previous target of 5 GW.
Electricity generation from renewables has grown considerably in Germany over the years, but plenty more is needed to fuel the country’s green hydrogen ambition. The new coalition – led by Olaf Scholz of the Social Democratic Party – has proposed to increase the share of renewables in power generation to 80% by 2030, compared with a current share of about 45%.
The target for offshore wind, which is tipped a role in hydrogen production, has been scaled up by 20 GW to 30 GW by 2030, 40 GW by 2035 and 70 GW by 2045. Installed offshore wind capacity is currently less than 8 GW. Germany also targets 200 GW of solar PV by 2030, up from 58 GW currently, a target that looks extremely challenging despite falling cost of technologies.
An expected acceleration of renewables installations, supported by the phase-out of nuclear power this year and coal by 2030, nevertheless bodes well for Germany’s green hydrogen ambition. There could be ample feedstock in place to generate enough clean electricity for hydrogen production at scale in the coming years.
Yet there are a number of challenges to overcome and one of them is costs. The recent spike in European natural gas prices makes green hydrogen look increasingly cost competitive compared with blue hydrogen with CCS, but the technology is still far from being commercially viable.
Subsidies will be needed to get large-scale projects off the ground and Berlin has pledged that money will be made available. A $113.35 million (EUR 100 million) a year financing package was tabled by the previous Angela Merkel-led government. Moreover, the Merkel government had committed $9.06 (EUR 8 billion) of investment in 62 projects.
But the new coalition is expected to go further.
Matthias Lang, a Dusseldorf-based partner with law firm Bird & Bird, compares the outlook for hydrogen with uptake in wind and solar power in Germany over the last couple of decades. Renewable electricity initially needed plenty of government support to see growth, but both wind and solar are now cost competitive with other technologies.
“EVs and Solar PV historically received huge grants before reaching scale. I think it will go exactly the same way with hydrogen. The wheels will squeak a bit to begin with, but I think we can do it,” said Lang.
Lang noted, however, that the technological challenges are considerable, particularly when it comes to scalability of electrolyzed capacity. Germany has a number of green hydrogen pilot projects underway, but more investment is needed to reach critical mass.
“The electroliers available today are nowhere near the capacity needed. Another challenge is commercial viability. We don’t have a business model yet to make hydrogen operational and sell it to the market,” said Lang.
A climate protection report, presented in January this year by German Climate Minister Robert Habeck, confirmed the government’s plans to speed up the deployment of wind and solar power. The report also reiterated the proposal to allocate 2% of Germany’s landmass to onshore wind power.
“Germany will need plenty of additional renewables production to develop a hydrogen economy. This is a huge challenge, but the government is committed to it,” said Kirsten Westphal, Executive Director of Analysis and Research at the H2Global Foundation, a government-backed funding instrument for green hydrogen.
“Existing gas pipelines will need to be repurposed for hydrogen transport. A starting point will be hydrogen valleys and industrial clusters to supply steel and chemical sectors,” she added.
Hydrogen Power
One project to look out for is Raffinerie Heide, an oil refinery in Schleswig-Holstein, Germany’s northernmost state. Heide and partners, which include Orsted and Thyssenkrupp, plan to install a 30 MW electrolyzer plant by 2023 although an FID has not yet been taken. The plan is to scale up the electrolyzer capacity to 700 MW by 2030 if everything goes to plan.
The hydrogen would replace natural gas as feedstock to power the refinery’s operations and could also be used to produce synthetic kerosene for aviation. The project developers recently announced that the caverns north of the refinery site are suitable for hydrogen storage.
Raffinerie Heide CEO Juergen Wollschlaeger said in a blog post posted on Dec. 15 that the nascent hydrogen sector requires both funding and legislation to fulfil its potential.
“When combined, these can enable us to build the hydrogen capacity we desperately need, to decarbonize our hardest-to-abate sectors, and enable industry to relinquish its fossil fuel dependence,” he said.
Wollschlaeger welcomed government plans to remove the EEG levy for green hydrogen from 2022 and the removal of the levy altogether from 2023. The EEG levy or surcharge, used to finance renewables, are paid for by end-users and make up around one third of electricity bills. The removal means that green hydrogen producers will be exempted from paying the levy on the renewable electricity they use to produce the hydrogen.
“The roadmap for EEG levy removal is a positive first step, but a tangible, high impact policy is still needed to drive change towards a greener economy” Wollschlaeger said.
Carbon contracts for difference (CCfDs) is one of the options the government is looking at. CCfDs, which mostly target the steel and chemical industries, are linked to carbon prices under the EU’s Emissions Trading System (EU ETS).
If carbon prices fall below a certain threshold, thus benefiting industries burning conventional fossil fuels, the government will pay out compensation to industries that have invested in clean technologies. The payouts will be equal to the difference between the carbon price and the cost of avoiding emissions.
If carbon prices rise above the threshold, thus penalizing polluting industries, low-carbon producers will have to pay back the difference to the government. This is to shore up investor confidence in clean technologies, which typically have higher operational costs.
The principle is that industries investing in hydrogen and other clean technologies will stay competitive even if carbon prices are not high enough to justify the investment. At the same time, the system aims at preventing overcompensation if carbon prices shoot up. More details on the CCfD design are expected in the coming months.
Scale-Up Effort
Germany’s hydrogen strategy should not be seen in isolation. On Dec. 14, the European Commission came forward with its much-anticipated Gas Package, a set of proposals on how to legislate future gas markets in the context of decarbonization.
The EC noted that there is significant potential to scale up the production and consumption of renewable and low-carbon gases across Europe, which make up less than 5% of the gas market today. As for blending natural gas with hydrogen in transportation networks, the EC proposed a cap of 5% for all cross-border points between EU countries from October 2025.
That means the TSO in the importing country must accept blended gas with up to 5% renewable gases from the exporting country. EU countries are free to use higher blending rates in their domestic markets.
Nevertheless, the proposal exemplifies that blending has limitations; it may not be technically viable or even safe above a certain threshold of say 5%. One alternative is repurposing natural gas networks to transport hydrogen only, but this also comes with a price tag.
“Turning natural gas infrastructure into hydrogen networks is a big topic. The question is, who pays for that?” Lang said.
As an alternative to pipelines, hydrogen can also be shipped as ammonia over long distances. To this end, the German government has signed agreements with a number of countries on ammonia imports, with Canada, Australia, Saudi Arabia, Morocco and Namibia.
The cost of transportation would be an obstacle, however green hydrogen can be produced much cheaper by solar PV in many of these countries compared with in Germany.
Moreover, a well-developed gas network in northwest Europe, if repurposed, means Germany could also use ports in the Netherlands and Belgium to import ammonia and hydrogen.
The German plan for hydrogen imports, known as H2Global, has an estimated budget of $1.02 billion (EUR 900 million) and will run for 10 years. It was recently approved by the EC under EU state aid rules.
The EC’s Executive Vice-President Margrethe Vestager, in charge of competition policy, said in a statement on Dec. 20 that the German scheme would “contribute to addressing the increasing demand for renewable hydrogen in the Union, by supporting the development of this important energy source in areas of the world where it is currently not exploited with a view to importing it and selling it in the EU.”
Blue Hydrogen?
The German coalition government, which in addition to the Social Democrats also consists of the Green Party and the Free Democrats (FDP), said in the coalition agreement that natural gas is indispensable as a transition fuel in power generation. However, the plan says new gas-fired power plants must be “hydrogen ready,” meaning that the gas can be blended or substituted with hydrogen in the future.
As for blue hydrogen with CCS, there appears to be only limited enthusiasm. Storing CO2 underground is seen as controversial among the public, unlike the Netherlands, Germany does not boast a large offshore industry with many suitable depleted oil and gas fields.
“It is fairly clear that Germany wants green hydrogen with offshore wind playing a big part as feedstock. Germany is not so excited by the other colors including blue. That is a pity, because we need big quantities to fully develop a hydrogen market,” said Lang.
Even if Germany does not want to produce blue hydrogen itself, it may import it. Russia has said on a number of occasions that it can ship blue hydrogen via the Nord Stream 2 pipeline in the future. In fact, the coalition agreement specifically states that this could be an option. “We want to work more closely with Russia on future issues,” including hydrogen, it says.
Germany will update its hydrogen strategy, first published in June 2020, later this year to be followed by a “System Stability Roadmap” in 2023, encompassing hydrogen networks, according to the coalition agreement.
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