The EU has set out ambitious plans to kick-start production of renewable hydrogen on a vast scale, part of a proposed overhaul of energy regulations, but uncertainty remains over the role of fossil fuel electricity and project finance.

Private sector lenders and public backers have shown increasing interest in replacing fossil fuel gas with hydrogen produced using renewable energy, as a means of generating power while lowering carbon emissions.

Hydrogen forms a major component of reforms tabled by the European Commission last week, which would amend the Renewable Energy Directive – a piece of EU legislation from 2018 – by extending certification systems for renewable fuels, overhauling tax rates and setting “concrete targets” for decarbonisation.

By 2030, it says EU companies should be producing 10 million tonnes of renewable hydrogen, with electrolysers – which use electricity to separate hydrogen from oxygen in water – capable of generating 40GW of power.

The proposals are part of the EU’s ‘Fit for 55’ programme, a package of reforms aimed at reducing greenhouse gas emissions by at least 55% before 2030. An additional policy framework supplementing the directive, plus changes to EU gas legislation, are due to be published in December.

Though the initial raft of reforms has largely been welcomed by NGOs, concerns have already arisen over the potential ongoing role of fossil fuels in generating hydrogen.

Global Witness, an environment-focused NGO, says the EU still refers to “fossil-based hydrogen, mis-labelled as ‘low carbon hydrogen’”. It fears that tax breaks and emissions allowances could be granted in cases where hydrogen is being produced from fossil fuels.

That would result “in an inconsistent and incoherent hydrogen policy across its ‘Fit for 55’ package”, the organisation argues.

“We’d object to the term ‘low carbon’,” Tara Connolly, senior gas campaigner at Global Witness, tells GTR.

“That’s essentially referring to hydrogen produced from fossil fuels, with the promise of carbon capture and storage as well, but if you look at the lifecycle emissions of an entire gas pipeline – so extraction, methane emissions and so on – that ‘low carbon’ hydrogen could be just as bad as coal.”

The NGO has previously accused Hydrogen Europe – an industry association with more than 250 members, including Shell, Total and Equinor – of pushing for “loopholes… that would allow energy companies to use large amounts of fossil electricity to produce hydrogen, and still have it labelled as renewable”.

“This is a cause for deep concern, as hydrogen made from fossil electricity has a huge carbon footprint – up to 130 times bigger than hydrogen made from renewable electricity,” it argued in a June report, titled ‘Greenwashed Hydrogen’.

 

Hydrogen production

One flashpoint in the dispute over hydrogen production is additionality – a concept where hydrogen producers would be required to source renewable electricity from new installations rather than existing power infrastructure.

The rationale is that even if an electrical grid is normally powered from renewable sources, soaring demand from hydrogen producers might create a shortfall in supply and require backup electricity generation using fossil fuels.

In a position paper published in June, Hydrogen Europe argues that the European commission should exempt renewable fuel producers from providing additionality until 2025.

The industry group says it “does not challenge the direct use of renewable electricity where most efficient”, but suggests the lead time for renewable electricity projects is often longer – it gives the example of seven years for a wind farm – than the two years taken to construct an electrolyser.

“Until new electricity capacity is available, electrolyser project developers will therefore have a very low incentive to build,” it says.

Hydrogen Europe adds that in reality, there is often surplus supply from renewable electricity production that could be diverted towards electrolysis.

“The idea that by generating more demand for renewable energy you would inadvertently create more demand for fossil electricity is based on a flawed assumption: that demand for renewable electricity is highly elastic,” it says.

But the Bellona Foundation, a climate-focused research group, argues that in practice, existing electrical grids in Europe are in a “transitional phase” and are not yet ready to power hydrogen generation from entirely renewable sources.

Taking the German grid as an example, it says hydrogen produced without additionality would ultimately be “as carbon intensive as fossil gas hydrogen”, emitting more than three times more carbon than allowed under EU sustainability criteria.

“Kick-starting hydrogen production today to decarbonise European industry tomorrow will come at the compromise of increased fossil fuels consumption, and thus emissions,” it says in a report published in June.

“To safeguard the electricity transition while in parallel creating the conditions for future large-scale hydrogen production, the enabling legislation must ensure and catalyse additional deployment of renewables to meet the needs of hydrogen production.”

The amount of power needed to produce hydrogen also raises wider questions over its suitability to replace fossil fuels directly, Global Witness’ Connolly points out.

“Hydrogen production from electrolysers is very inefficient,” she says. “Rather than using renewable electricity to produce hydrogen for powering fuel cells in an electric car, you would be better off powering that car directly from electricity in the first place.”

The EU targets focus on hydrogen as a power source for industrial activity, as well as heavy-duty and long-distance transport, rather than consumer use.

 

Funding uncertainty

The Hydrogen Council, a global industry-led initiative, describes Europe as “the centre of hydrogen development, accounting for more than 50% of announced projects and estimated investments of US$130bn” in the first half of 2021.

“However, all other regions grew faster proportionally with over 75% increase,” it says in an insights paper published in July. “Furthermore, trade flows between supply and demand centres are starting to arise.”

China “is emerging as a hydrogen powerhouse”, with more than US$20bn of public funding pledged to hydrogen projects. Around half are linked to transport applications.

Until there is greater certainty over the mechanics of Europe’s hydrogen industry, the prospect of backing hydrogen-related projects remains difficult ground for financial institutions.

Astrid Behaghel, hydrogen coordinator at BNP Paribas, said at an industry event in May that off-take contracts will typically last three to five years, whereas project finance deals would involve loan tenors of a decade or more, challenging the “bankability” of such initiatives.

Government or export credit agency guarantees on loans could be an option in incentivising greater lending.

The European Investment Bank said this month that “public intervention is likely to be required to bridge economic gaps and make hydrogen projects possible” in a market intelligence report published by S&P Global.

Lisa McDermott, executive director for project finance at ABN Amro, says in the report that the risks involved mean there is “still some way to go before banks will be giving out large amounts of non-recourse financing” for green hydrogen projects.