Two years on the Green Deal, hydrogen is still “the missing piece of the puzzle”

By Sébastien Douguet , Director – Deloitte Economic Advisory

Developments in the past two years have seen policymakers and companies take an increasingly supportive stance on hydrogen. From the European Green Deal to the fit-for-55 package, from the EU hydrogen strategy to the recent UK hydrogen strategy to the first pre-notification waves of the Hydrogen IPCEI, pieces have been set in motion to support the development of hydrogen across the continent.

This wave of enthusiasm reflects the stakes at play: as underlined by the latest IPCC report, the EU and other European countries cannot miss their decarbonization objectives, and reaching net-zero CO2 emissions by 2050 is an indispensable condition to avoid catastrophic climate change.

Hydrogen is now clearly recognized as one of the solutions to respond to one of the biggest policy and technological challenges ever, alongside established leads such as electrification, renewable energy and energy efficiency.

While the official objective of the EU is 10 million tonnes of renewable hydrogen by 2030, the current project pipeline1 and the policy and industrial discussions hint at a far larger potential for hydrogen, that also includes low-carbon technologies such as natural gas reforming with carbon capture and storage (CCS) and pyrolysis and reaches across the entire energy system. To better assess this potential, Hydrogen4EU was launched. This joint industry research project is led by Deloitte and combines the modelling expertise of research centers IFPEN and SINTEF. It aims at assessing the role of hydrogen in the European energy sector transition towards net-zero emissions. Two pathways are explored, both aligned with the key EU climate and energy policy goals. The “Technology Diversification” pathway provides insights into how an inclusive approach, based on a wide range of decarbonisation technologies, can help minimize the cost of the energy transition. The “Renewable Push” pathway examines the possible impact of a deliberate focus on renewable technologies, a prominent feature of the current policy debate as manifested in the fit-for-55 regulatory proposals.

The Hydrogen4EU study confirms that hydrogen can play an important role in the European energy transition. Propelled by strong policy and industrial momentum, demand for renewable and low-carbon hydrogen could triple the European Commission’s goal of 10 million tonnes of hydrogen in 2030 and exceed 100 million tonnes by 2050.

In both pathways, hydrogen is proven to be a versatile and cost-efficient energy carrier that could cover up to 25% of European final energy use by 2050. Transport and industry represent the bulk of the demand. In the transport sector, heavy-duty trucks, aviation, and shipping consume hydrogen directly in fuel cells or as e-fuels in traditional combustion engines. Iron and steel is the largest consumer in industry, followed by the chemical industry and by the production of process steam and heat in other sub-sectors. This is not even accounting for the hydrogen used as feedstock (for methanol, ammonia…), which could further increase hydrogen demand by around ten million tonnes.

The study’s findings suggest that renewable and low-carbon hydrogen are needed together in both pathways. While low-carbon hydrogen plays a critical role in establishing a hydrogen economy between 2020 and 2030, renewable hydrogen develops mainly after 2030 and meets the bulk of the additional demand growth. In the Technology Diversification pathway, the production mix is very balanced in 2050 with renewable and low-carbon sources each providing about half of the European output. In the Renewable Push pathway, renewable hydrogen plays a dominant role, underpinned by more ambitious targets in terms of renewables development in Europe. Renewable hydrogen is mainly produced by off-grid electrolysis, with hydrogen proving to have a clear value proposition for the integration of variable renewable energy into the system. Low-carbon hydrogen shows good potential for natural gas reformers with CCS and, to a lesser extent, for pyrolysis.

Part of the hydrogen needed in the transition to net-zero emissions may be imported from outside Europe, from neighboring regions such as Russia, North Africa and the Middle East. Our results show such imports gradually ramping up over the 2030s.

By 2050, between 10% and 15% of Europe’s hydrogen supply come from the international trade market; this correspond to 10 to 15 million tonnes of renewable or low-carbon hydrogen to be imported. Traditional exporters of natural gas are also well placed to become major hydrogen exporters to Europe.

This is notably the case for Russia and Algeria. Access to existing cross-border pipeline infrastructure is a significant advantage, as maritime transport is a costly alternative. New players, such as Morocco, Tunisia, and Ukraine, may also have a role to play thanks to their renewable energy potential and proximity to these pipelines.

The transformation of the energy system is underpinned by gigantic levels of investments. In the hydrogen value chain, between 3.1 trillion Euros –in the Technology Diversification pathway – and 5.5 trillion Euros – in Renewable Push pathway – need to be mobilized over the next three decades to finance the necessary investments. In both pathways, the infrastructure needed for renewable hydrogen in Europe is enormous and gives a hint about the seriousness of the challenges ahead: our renewable hydrogen production results require between 1000 GW and 1700 GW of dedicated solar PV capacity, a similar amount of wind capacity and between 680 GW and 1500 GW of electrolysers. The development of low-carbon hydrogen and other technologies such as biomass with CCS hinges on the availability of CCS technologies. Carbon removal technologies such as biomass with CCS and direct-air-capture are needed to compensate for some of the hardest-to-abate emissions and to unlock access to new solutions, such as e-fuels for aviation. CO2 storage demand may reach 1.4 Gt per year by 2050 in our Technology Diversification pathway, making a capacity ramp-up necessary during the present decade.

Both cross-border and national infrastructure would need to be developed progressively in the system to connect hydrogen demand to supply, with a heavy reliance on the ability to repurpose existing natural gas infrastructure.

The policy and industrial developments of the past eighteen months are a step in the right direction to address the challenges facing hydrogen. Most recently, the fit-for-55 package has finally proposed some binding targets that will stimulate the uptake of hydrogen and alternative fuels in the energy mix.

However, caution is still advised at the current stage, as the hydrogen regulatory and support framework remains a work in progress. The hydrogen and decarbonized gas market package is expected for the end of the year. Likewise, the new CEEAG State aid Guidelines are highly awaited to guide the design of future support schemes for hydrogen technologies. The Hydrogen4EU study points to five critical enablers to an economically optimal development of hydrogen:

· The cost of CO2 emissions needs to be internalized to shift the economics in favor of clean technologies.

· Clear and transparent accounting rules of CO2 are needed.

· Innovation and learning-by-doing should be fostered to bring new technologies to commercial viability.

· An increasing capital intensity of infrastructure projects calls for low-cost financing and bankability instruments for low-carbon and renewable solutions.

· Finally, the market and regulatory rules need to be clarified, to ensure system integration and coordinate supply and demand uptake.