Making renewable hydrogen cost-competitive

In Agora Energiewende`s recent publication “Making renewable hydrogen cost-competitive: Policy instruments for supporting green H₂”, several policy instruments for supporting renewable hydrogen have been presented.
Whenever new instruments are suggested, questions arise as to their compatibility with national, European and international law.

This accompanying report includes evaluation of the following instruments:

• Carbon Contracts for Difference
• H₂ supply contracts
• Support for H₂-fuelled combined heat and power plants
• PtL quota for aviation
• General H₂ quota
• Labelling system for climate-friendly basic materials

Carbon Contracts for Difference
The “Carbon contract for difference” is a private law contract concluded between the favoured undertak- ing and a public counter-party. This contract forms the basis of the contractual obligation of the public counter-party to pay the difference between the amount of the contractually set basic price (strike price) and the reference price (here: CO2 price of the emission certificate), where the basic price is higher than the reference price. The approach thus ties in with the concept of so-called Contracts for Difference (CfD). The undertaking is in return to assume the obligation to invest in measures for the conversion of its production to hydrogen-based technologies. The contractually set basic price should align itself to the actual CO2 abatement costs, so as to generate the necessary investment incentive for hydrogen-based technologies.

H2 supply contract
The “H2 supply contract” instrument is based on an auction model for the purchase and resale of green hydrogen. It provides for an intermediary to buy-in hydrogen from a producer. For this purpose, a contract is concluded between the intermediary and the producer with the lowest-cost bid in an auction for the supply of a certain quantity of green hydrogen per period of time (e.g. monthly delivery quantity) over a fixed period (x years). The intermediary then also sells the green hydrogen on at auction, for example to an industrial end user, at the highest possible price. The producers of the green hydrogen receive a com- pensation payment from the intermediary in addition to the price for the sale to the intermediary of green hydrogen. This compensation covers the difference between the bid of the hydrogen producer (buy- ing-in price) and the bid of the end consumer (sales price). The approach thus ties in with the concept of so-called Contracts for Difference (CfD).

Support for H2-fuelled combined heat and power plants
To support H2-fuelled combined heat and power plants and to achieve the goal of 2.5 GW installed capacity (H2-based) by 2030, a number of suggestions have been made for the instrument’s design, which revolve in particular around its implementation in the CHP Act and the CHP Tendering Ordinance as well as combinations with other CHP support mechanisms. Those suggestions concern for example innovative CHP systems or a setting for an adequate maximum value for bids, which will be a crucial element in the support for H2-fuelled installations. Another element influencing the economic condi- tions is the duration of support.

PtL quota for aviation
The subject matter of the instrument would be a European quota increasing over time for the admixture of power-to-liquid (PtL) fuel in the form of synthetic e-kerosene up to a current maximum share of 50 % (energy content). The quota-obligated parties are in principle the providers (expected to be the distributors, cf. below) of fossil kerosene. The additional costs for this green fuel would have to be borne by the producers and distributors via the airlines and ultimately by the airline customers. A state subsidy to cover the additional costs is not envisaged.

General H2 Quota
The subject matter of the instrument would be a general quota for a virtual (using block & claim mechanisms) or actual admixture of green hydrogen to natural gas in the gas grid. This could be in the range of 3 to 5 %.1 Whether the admixture obligation would apply to gas withdrawals for all sectors in transport, heat, industry and possibly even electricity generation would still need to be discussed.

Labelling system for climate-friendly basic materials
The subject matter of the instrument is the labelling of products as products with a certain reduced level of embedded CO2 or GHG in total because the respec- tive production process involved green hydrogen. The labelling can take various forms (using a rating system (scale), a figure (e.g. the CO2 emissions “within” the product) or a binary “Yes” or “No” (compliance with product standard XY for green products)). In the matter at hand, it is intended to make the labelling mandatory by law.