Hydrogen Bombs...

The European Union continues its headlong dive into the most expensive hydrogen possible. Every step they take in the name of climate equates to higher and higher prices for consumers.

I am a bit delayed on my latest Substack due to work and family responsibilities, and during that delay a number of great ‘stacks on hydrogen have been published (looking at you

Energy Transition Absurdities

and

Irina Slav

). But that won’t deter me from giving you a quick take on Europe’s awful hydrogen policy. So here we go…

Proponents claim renewable hydrogen — produced via electrolyzers powered by renewable energy (sun, wind, hydro) — can and will play a critical role in decarbonizing sectors such as long haul trucking, chemicals, iron and steel production, and electricity generation. The IEA forecasts hydrogen could count for 6% of total emissions reductions under its net zero scenario. Many governments are throwing a lot of money and public support behind low carbon hydrogen development.

Take the United States, for example. It just announced the winners for its $7 billion clean hydrogen hubs (estimated to produce a combined total of 3 million tons of renewable hydrogen by 2030). Through the Inflation Reduction Act it provides a sliding scale for production tax credits up to $3/kg of hydrogen based on lifecycle carbon emissions intensity. It also allows for a 30% investment tax credit for in scope advanced energy projects. All of this in the hope the United States will produce 10 million tons of renewable hydrogen by 2030.

Other governments are also throwing large sums of money and regulatory capital at clean hydrogen. China, the UK, India, Germany, etc. It is the latest green energy fad where money might be made off government largesse.

And what is Europe doing? On the positive side (if you’re in the hydrogen production market and need government funding to make investment possible), the European Union has established a contract-for-difference scheme through its Hydrogen Bank — its first auction, which is funded for €800 million, is scheduled for November 23, 2023.

Now the painfully bad parts of their approach.

• The EU has decided to focus solely on hydrogen produced via electrolysis powered by renewable electricity — so called renewable hydrogen. It is exorbitantly expensive (€90-225/MWh) compared to hydrogen from natural gas (€30-71/MWh) and there is essentially zero infrastructure for it now. Why jump from the most cost effective route to produce hydrogen to the most expensive one without any intermediary steps which can bring costs down while reducing emissions?

• The EU doubles down by setting a target of 20 million tons of renewable hydrogen — 10 million tons from domestic production and 10 million tons from imports — by 2030. The United States is looking to produce 3 million tons with its much better set of incentives, $7 billion initial investment, infrastructure, and value chain. But Europe will double the U.S. target. Sounds like a plan!

• Of the 8.5 million tons of hydrogen the EU currently produces per year, 96% of it comes from natural gas. In six years the EU expects to shift from essentially zero renewable hydrogen production to 2.5 times its current hydrogen production — and do so via the most expensive production process possible, in a high energy cost and inflationary environment, with challenged supply chains, and strong headwinds for project financing. Sounds reasonable.

• In order to prevent the cannibalization of renewable electricity sources from the power grid for hydrogen production, the EU has established the additionality principle wherein after 2027 renewable hydrogen production facilities can only receive renewable electricity from plants that are no older than 36 months from initial production. There are a couple carve outs to this principle — namely a low emissions power grid (you’re welcome France) or a high renewable energy penetration power grid (more than 90%). So new hydrogen production will require new renewable electricity production that is specifically built for hydrogen. I am no math whiz, but that sounds like additional costs layered onto additional costs to me.

• The EU will also require temporal and geographic linkages between renewable hydrogen production and the associated renewable electricity used. By 2030 the temporal linkage will be based on hourly reporting of renewable generation. The hydrogen production facility will also have to be located within the same power bidding zone.

• The EU hydrogen market will still allow non-renewable hydrogen to be sold and consumed, but it will not count towards its established targets and won’t qualify for any additional, ill-defined state aid/subsidies.

• At this time, it is unclear if hydrogen from the United States or other third countries will qualify as renewable hydrogen. One reason is after 2027 renewable power plants cannot receive most government subsidies (including tax credits) in order to qualify as hydrogen produced from renewable sources. Most U.S. hydrogen producers looking to export to Europe don’t think their product will qualify as renewable hydrogen.

The real kicker is that Europe somehow believes there will still be sufficient customers (i.e., industrial and manufacturing capacity) in 2030 to consume 20 million tons of hydrogen. The very same industries that use hydrogen today — refineries, energy intensive industries like fertilizer production, the chemicals sector, and metal and steel — are fleeing Europe. Significant new markets for hydrogen are not going to spring up in the next six years. The European energy costs are too high, and the climate push towards more renewables will only make them higher. Other markets are providing better incentives for hydrogen investment, like the United States. And the regulatory burden in Europe is becoming unbearable.

Another important issue to keep an eye on is the pending EU action banning PFAS’ (forever chemicals). If this is approved, it will negatively impact electrolyzers that require PFAS chemicals to properly function, especially those that are best suited to produce hydrogen with intermittent renewable power (the proton exchange membrane process). Without any real PFAS alternatives, its unclear how electrolyzer manufacturers would survive this proposed legislation.

In addition, the PEM electrolyzer technology relies on platinum group metals like iridium. Resolving supply chain issues on iridium and other metals will be critical to reducing the costs of electrolyzers, but that is a long way off. Especially with the paltry sums of money being spent on electrolyzer technology research.

Industry stakeholders are also concerned about the lack of standards and incentives for electrolyzer production in Europe to combat the much cheaper Chinese technologies. On average, Chinese produced electrolyzers are half to one-quarter the cost of European manufactured electroloyzers. If Europe doesn’t move fast on this issue, it will face the same outcome as its solar industry did - the utter destruction of European-based manufacturing at the hands of a flooded market by cheap Chinese producers.

The European approach to renewable hydrogen market development is bad. It focuses on the supply side far too much, does little to incentivize demand uptake in current and new hydrogen markets, and is limited by the tools at the disposal of the European Union. Certain member states will spend a lot of money on domestic hydrogen markets (German, France), but this will potentially distort the single market concept and piss off smaller member states.

The likely outcome is the next European Commission will have to revisit the quantity targets and its approach to renewable hydrogen in the European Union. That means more uncertainty for investment, which results in delayed and/or cancelled projects and likely zero impact on GHG emissions, which is, in theory, the objective of this effort. The approach to hydrogen will bomb fantastically.