A European Green Deal and important aspects of hydrogen projects implementation
Oksana CherinkoDirector of Consultancy
Oksana RomanHead of Management Consultancy & Business Development
A European Green Deal is a roadmap for making the EU’s economy sustainable and climate-neutral by 2050. Oksana Cherinko and Oksana Roman from Bilfinger Tebodin speak about the Green Deal highlights in terms of hydrogen projects implementation.
Market dynamics in 2020
The year of 2020 demonstrated a remarkable dynamics towards reaching the EU climate targets with hydrogen technologies envisaged to lead the path. In 2020, political commitment together with substantial funding support brought green hydrogen projects to a new level. After initial stages of R&D and pilot projects, the market started active investment planning across almost all European countries with an emerging trend of business case development.
Germany set out to become a European leader in hydrogen technologies, and a National Hydrogen Strategy approved in June 2020 supports the ambitions. The country is developing more than a half of all hydrogen projects implemented in Europe with more than 60 new hydrogen projects in the pipeline of 2020. As a part of its stimulus package to support economic recovery from the coronavirus pandemic, Germany intends to expand the role of green hydrogen to replace coal. The government announced a target of 5 GW of hydrogen production capacity by 2030, with another 5 GW a decade later.
Poland – another example of hydrogen supporting countries – announced its plans to have a 2 GW of hydrogen electrolysis capacity and 2,000 hydrogen fuel-cell buses by 2030 as part of a National Hydrogen Strategy expected for approval in the first quarter of 2021.
Ukraine appeared in the EU focus under the Green Hydrogen for a European Green Deal a 2×40 GW Initiative. Under the initiative, the European industry association Hydrogen Europe is setting a target of building an 80 GW electrolytic-based hydrogen production capacity by 2030, where 40 GW is to be developed in the European Union and an additional 40 GW in other countries, especially in North Africa and Ukraine.
Though the levelized cost of green hydrogen is still much higher than the cost of conventionally produced so-called grey hydrogen, it is expected that it can become competitive by 2030. According to expert opinions, green hydrogen production costs can drop by over 50 per cent due to potential for decrease of renewable power price and electrolyser CAPEX and increase of capacity utilization factor. Until green hydrogen reaches commercial viability, it is assumed that construction of hydrogen plants will be incentivized at the EU and national levels. Along with the positive dynamics of reducing the cost of production of green hydrogen, its transportation and storage are still the main puzzle to be solved.
A European Green Deal and European Commission’s strategic actions of 2020
A European Green Deal introduced by the European Commission in December 2019, serves as a roadmap for making the EU’s economy sustainable and reaffirms the Commission’s ambition to make Europe the first climate-neutral continent by 2050. The EU Green Deal provides an action plan to boost the efficient use of resources by moving to a clean, circular economy and to restore biodiversity and cut pollution. Reaching the targets requires a wide range of actions, including investing in environmentally-friendly technologies, supporting innovations, rolling out cleaner, cheaper and healthier forms of private and public transport, decarbonization of the energy sector, ensuring energy efficiency and working with international partners to improve global environmental standards.
Though Ursula von der Leyen presented the EU Green Deal just a year ago, an impressive set of strategic actions has been done since that. In order to support the EU Green Deal, the European Commission presented European Green Deal Investment Plan and the Just Transition Mechanism. The Commission has also adopted the European Industrial Strategy, set new strategic pathways for different industrial sectors by presenting new European strategies such as EU Energy System Integration Strategy and Hydrogen Strategy, Methane Strategy and Chemicals Strategy for Sustainability and others. To support the development of the hydrogen industry and to implement the adopted hydrogen strategy, in July 2020 the European Commission established the “European Alliance for Clean Hydrogen”.
In order to turn political commitment into a legal obligation, in March 2020 the European Commission has issued a proposal for a European Climate Law. The proposal aims to complement the existing policy framework by setting the long-term direction towards the EU’s 2050 climate-neutrality, enhancing adaptation efforts and establishing a process to set out and review a trajectory until 2050.
Key priorities set in a New Industrial Strategy and Hydrogen Strategy
Decarbonization of industry as the key polluter is one of the major targets of the EU Green Deal and hydrogen technologies are considered among the key enablers of decarbonization. The European Commission’s economic recovery plan ‘Next Generation EU’ highlights hydrogen as an investment priority to boost economic growth and resilience.
A New Industrial Strategy for a globally competitive, green and digital Europe shapes a new industrial way for Europe, fit for the ambitions of today and the realities of tomorrow. In order to help European industry achieve new targets, the strategy sets the following objectives:
- An industry that paves the way to climate-neutrality through green transition
- An industry shaping Europe’s digital future, which is supported by the EU digital strategy
- Competitiveness in the global arena, where Europe must use the influence of its single market to set global standards
Among the fundamental factors making European industrial transformation happen there are embedding a spirit of industrial innovation, building a more circular economy, supporting industries towards climate neutrality, creating a deeper and more digital single market, investing and financing the transition.
A Hydrogen Strategy for a climate-neutral Europe reflects the EU priority to develop “clean” hydrogen, produced using mainly wind and solar energy as the most compatible option with the EU’s climate neutrality goal in the long term. Development of green hydrogen value chain and use of green hydrogen as a feedstock, a fuel or an energy carrier and storage, as well as a variety of other possible applications will reduce greenhouse gas emissions across industry, transport, power and buildings sectors. In order to achieve the goal, the Hydrogen Strategy suggests the following actions:
- Creating a sustainable industrial value chain
- Boosting the demand for clean hydrogen coming from industrial applications and mobility technologies
- Establishment of a supportive policy frameworks and clear rules
- Supporting a dedicated infrastructure and a logistical network.
- Promoting research and innovation in clean hydrogen technologies
- Securing cooperation opportunities with neighboring countries and regions of the EU and establishment of a global hydrogen market
Among the EU countries, which have already published their hydrogen strategies there is Austria, France Germany, Italy, Portugal and Spain. The announced public funding from France, Germany, and Portugal amounts EUR 17.2 billion. Additionally, and EUR 25.9 billion have been announced as planned investment to be mobilized in Italy, Portugal, and Spain.
Market players’ agenda and selected examples of hydrogen projects
To keep up with the pace of energy transition, industrial market players are facing the need to incorporate political targets into their strategies, operations and business models. Strategic actions of oil and gas and energy companies as well as operators of chemical, petrochemical, cement, metallurgy plants and other industrial facilities include:
- Strategy revision and business model transformation with reassessment of investment priorities
- Creation of dedicated teams to make energy transition happen
- Diversification of energy portfolio with renewable and alternative energy sources, transition to “green” corporate energy
- Investments in research and innovative technologies and entering into alliances with technology providers and R&D centers for planning and implementation of innovative projects (hydrogen, green ammonia and methanol, CO2 Capture and Utilization, repurposing of gas infrastructure)
Multiple projects initiated or announced in 2020 are aimed at industrial-scale demonstration of hydrogen technologies across the EU states and neighbouring states. Selected examples of green hydrogen dedicated projects include:
- Important Projects of Common European interest (IPCEI). Blue Danube project under the Hydrogen for Climate Action initiative is to unite market players from nine countries along the entire hydrogen value chain. The goal of the project is to connect the Danube River with the River Rhine and the Black Sea and by this to unite pipeline networks across Europe and to maritime ports. Therefore, the project will develop production, transport and use green hydrogen on a large scale to strengthen and decarbonize both traditional and new industry sectors in Europe all along the hydrogen value chain.
- Westküste 100 as a German example of a cross-industry partnership. The goal of the project is to build an industrial-scale hydrogen economy including production of green hydrogen from offshore wind. The list of project participants includes representatives from different industrial sectors: Raffinerie Heide, EDF Germany, Holcim Germany, OGE, Ørsted, Stadtwerke Heide, thyssenkrupp Industrial Solutions and Thüga. The project includes construction of a hydrogen network connected to the refinery, municipal utilities, a cavern system and the existing natural gas network. The project also examines use of the oxygen resulted from electrolysis in the regional cement plant’s oxyfuel process. CO2 produced at the plant and combined with the green hydrogen will be used for the production of synthetic hydrocarbons such as aviation fuel and methanol.
- Five H2 Projects of PGNiG as a Polish example of a hydrogen sector development. PGNiG – one of the largest and oldest oil and gas enterprises in Poland – has been implementing a hydrogen program with five hydrogen-dedicated projects to be implemented during five years. For instance, Hydra Tank project is aimed at building an experimental hydrogen refueling station in Warsaw in cooperation with Toyota. InGrid Power-to-Gas project’s goal is production of hydrogen from renewable sources, with its further storage, distribution and potential injection of hydrogen into the natural gas network. New Fuel Lab is to be a first laboratory in Poland to study hydrogen and its mixtures as fuel. Other projects are related to mobility and ‘blue hydrogen’ production.
Financing of hydrogen projects
The EU transition towards a climate-neutral economy requires substantial support and investments from both the EU and the national public, private and IFIs sectors. In order to ensure an efficient transition and to mitigate undesired socio-economic impact in the most affected regions, the European Commission has established a Just Transition Mechanism. The Mechanism is set to mobilize financial support of at least EUR 150 billion over the period 2021-2027 through a new Just Transition Fund, InvestEU program and EIB public sector loan facility. Other EU level funding options include the Innovation Fund, the NextGenerationEU Fund, Horizon 2020 Green Deal funding program and Hydrogen for Climate Action just to name a few.
Other support measures recently launched or on development in the EU include national support mechanisms in the form of subsidies, tax benefits or compensation of grid fees and/ or transport costs; support of International Financial Institutions in the form of green bonds, reimbursable and non-reimbursable grants and loans; IPCEI funding etc.
Funding institutions providing financial support for hydrogen dedicated projects are focusing on demonstration and innovation projects aimed at decarbonization of industry and or mobility sectors, scaling hydrogen production using renewable energy, building a 100+ MW electrolysis-based hydrogen production etc. As industrial transformation requires substantial efforts, observed collaboration of market players along value chain to execute large-scale projects and obtain funding and state support. At the same time, there is an emerging trend of joint efforts of international financial institutions and investment funds to provide funding to support large-scale initiatives.
Important aspects of hydrogen projects implementation
Building an investment scenario for a new type of projects needs accounting a complex set of factors. Development and implementation of the project happen under the conditions of emerging markets with the lack of market benchmarks and established practices. Due to an innovative character of green hydrogen projects, there might be a need for independent external experts to verify the investment scenario and further develop the project.
Based on our experience, selected aspects to consider when developing an investment scenario, planning a project and applying for financial support include:
Business model should account a set of market, financing, technological, safety, environmental and social requirements as well as feasible project procurement and implementation strategy. Selected issues to consider:
§ When developing a business case, it is necessary to consider not only core technology like hydrogen production, but also associated processed such as renewable power generation, hydrogen storing and transporting as well as production of like green ammonia or methanol, LOHC technology, CCUS installations*.
§ Given the current LCOH costs, prior to the start of the project, it might be necessary to reach preliminary purchase agreements with users or offtakers, which obtain state support to compensate for the high cost of the product.
§ Apart from financing and technology terms, the project implementation time schedule should take into account other project needs like site search and due diligence, connecting to the grid and infrastructure permitting terms and procedures, procurement strategies to incorporate timing for equipment and components manufacture and delivery. As an example, about 1,5 year may be required for electrolysis equipment supply due to limited manufacturing capacity.
§ New types of projects may not comply with traditional frameworks, therefore requiring a governmental support to ensure readiness and access to infrastructure, provision of permits, funding and technical support etc.
§ As the EU regulations define maximum funding per project specifically to particular member state, there might be a need in the preliminary approval of the project funding by the EU authorities.
As all the programs are country specific and differ by types of support mechanisms and business case evaluation criteria, it’s important to account terms and conditions for financing application and provision at the early stages of the project. Selected issues to consider:
§ The amount of funding depends on the size of company that applies. Small and mid-sized enterprises with less than 250 employees and maximum EUR 50 million revenue can receive more funding support than large corporations can. At this, big players have a higher chance to obtain large-scale financing for pilot and demo projects (such as IPCEI projects).
§ Most of funding programs are open for application for a limited number of weeks, which means that project documentation to be well prepared in advance. Typical time to receive funding confirmation is between 3 and 9 months or even more. There are cases, when financial support is agreed prior to the project implementation but provided post-factum.
§ Variety of technological options can lead to multiple financing opportunities. At this, there might be the need for the project adjustment in order to receive maximum subsidies or financing.
§ When project is implemented and financed by several parties, financial model and project documentation should meet specific requirements of all funding institutions as well as various participants and beneficiaries of the project.
§ According to established practices, the level of contingencies is to correspond particular stage of project realization. For instance, up to 50 per cent may be accounted for a pre-feasibility study, 25-40 per cent for a conceptual design phase etc.
*LCOH – levelized cost of hydrogen; CCUS – carbon capture, utilization and storage; LOHC – liquid organic hydrogen carriers.
Though implementation of innovative hydrogen projects still requires strong investment will and significant efforts of multiple stakeholders, the year of 2020 gave a hope of reaching global climate goals. The energy transition is the way thanks to political commitment, business readiness, raising public awareness and changing consumer and behavior patterns.
We in Bilfinger Tebodin believe that the changes are inevitable and are ready to support your will with our and partners’ knowledge and expertise. Our next publications will cover the topic of hydrogen technologies, which received an impetus in development owing to the interest in hydrogen as an important pillar of the energy transition.