The future of “green” hydrogen

Hydrogen will be a key enabler of climate neutrality in various sectors. In line with this insight, policy makers in Europe have been actively adopting hydrogen development strategies.

Unfortunately, as clearly acknowledged in the European Commission’s 2020 Hydrogen Strategy, renewable hydrogen production is economically uncompetitive today – even with record carbon certificate prices – and is expected to remain uncom­petitive until the 2030s. To put it succinctly: there is currently no natural market demand for fully decar­bonized hydrogen, nor is such demand anticipated to materialise prior to the end of this decade.

European industrial policy is required to fill this gap – and, in our view, action should be taken quickly (i.e. as part of the Fit-for-55 Package, and the revision of state aid guidelines).

To better understand hydrogen’s policy support needs and their effects, Agora Energiewende and Guidehouse have examined the policy instruments most promising for bridging the cost gap between renewable hydrogen and its fossil counterparts. Based on our findings, in this study we present a policy instrument mix and roadmap designed to catalyse the renewable hydrogen ramp-up.

Key conclusions:

1. There is a limited set of applications in all sectors that urgently need renewable hydrogen to become climate-neutral. These applications include steel, ammonia and basic chemicals production in the industrial sector, as well as long-haul aviation, maritime shipping and the power sector. Renewable hydrogen needs to be channelled into these no-regret applications.

2. Ramping up renewable hydrogen will require extra policy support that is focused on rapid cost reductions. Electrolyser system costs need to be reduced by economies of scale and learning-by-doing effects.

3. CO₂ prices will not be high enough in the 2020s to deliver stable demand for renewable hydrogen. This makes a hydrogen policy framework even more important. Even at CO₂ prices of 100 to 200 €/ton, the EU ETS will not provide sufficient incentives for renewable hydrogen production –additional policy support is needed.

4. A policy framework to ramp up the market for renewable hydrogen should initially target the applications where hydrogen is clearly needed and a noregret option. Policy instruments: carbon contracts for difference in industry; a quota for aviation; auctions to support combined heat and power plants; measures to encourage markets for decarbonised materials; and hydrogen supply contracts.

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