Decarbonising hydrogen: How low can you go?

Green, clean, and a fossil fuel killing machine. The policy debates surrounding hydrogen have been subject to a plethora of unregulated labels related to the greenhouse gas reduction potential of the technology. Because of this, anyone could simply claim he or she was producing green or clean hydrogen, even if that hydrogen would only be 10% or 20% less CO2-intensive than the original fossil-based alternative.

In this context, today’s Hydrogen and Decarbonised Gas Market Package could provide much-needed clarity to set the course for a fully decarbonised future of Europe’s extensive gas infrastructure network. As part of the second batch of the European Commission’s Fit-for-55 package to reduce the EU’s greenhouse gas emissions by at least 55% by 2030 compared to 1990, one of the aims of the Hydrogen and Decarbonised Gas Market Package (HDGMP) is to properly define so-called “low-carbon” forms of hydrogen. This definition was left out of the recent proposal to revise the Renewable Energy Directive (RED III), as that only covers forms of hydrogen solely produced with renewable energy (hence the term “renewable hydrogen”).

Defining “low-carbon” hydrogen is crucial, as the EU’s heavy industry tries to decarbonise as fast as possible and does away with fossil-based hydrogen. This will require hundreds of terawatt hours of decarbonised hydrogen in the years to come, and it’s unlikely this will all be produced by renewable energy sources. But we have ambitious EU climate targets to meet for 2030 (-55%) and 2050 (climate neutrality) at the latest, and therefore any definition of “low-carbon” hydrogen should set a very clear decarbonisation pathway to meet those targets.

This is unfortunately where the HDGMP’s Directive on “Common rules for the internal markets in renewable and natural gases and in hydrogen” risks not meeting the objective. In particular, the Directive defines low-carbon hydrogen as “hydrogen the energy content of which is derived from non-renewable sources, which meets a greenhouse gas emission reduction threshold of 70%”, full stop. If the EU does not include in the definition of low-carbon hydrogen a clear path to full decarbonisation by 2050 at the latest, it risks opening the door for supporting hydrogen projects that may never be able to achieve a 100% GHG reduction.

That is because many financial incentives will be linked to the definition of low-carbon hydrogen: For example, the future Energy Tax Directive will allow governments to put the lowest energy taxes on “low-carbon fuels” that include low-carbon hydrogen, and it may also be eligible for a string of national and EU funding such as the future Energy and Environmental State Aid Guidelines (EEAG) and EU Emissions Trading System (EU ETS) Innovation Fund.

And then there’s the risk of lock-in effects. Some may argue that each EU policy can be revised upwards, and that we can therefore wait with making the definition of low-carbon hydrogen more ambitious. However, it would be extremely dangerous to wait and hope for a revision in the distant future to do the trick. Natural gas and hydrogen infrastructure can have an estimated lifespan of 30 years or more, and energy companies make a business case based on that estimate. Sudden changes in what is considered sustainable or not may ruin the business case of a long-term project completely (just ask the “advanced” biofuels crowd). Also in this situation, it might simply be too costly to upgrade a hydrogen plant that was never intended to be fully decarbonised, to set it up with such a task after it’s been built.

This can lead to costly court cases and might force governments into expensive buy-outs to put these hydrogen projects offline prematurely. Recent history has been clear that this risk can become a reality, quickly: For example, the Onyx coal-fired power plant in the Netherlands was only built in 2015 as one of the most modern coal plants in Europe at the time, only to be seen as unfit-for-the-future a few years later. In November 2021, the Dutch government was forced to buy out the current owners for a whopping EUR 212 million to take it offline as soon as possible.

Some may say the damage has already been done in the recently agreed delegated act on climate change mitigation of the Sustainable Finance Taxonomy (SFT), which unfortunately already allows the financial sector to label financing to any hydrogen-based project as “sustainable” if such activities complies with a life-cycle GHG emission savings requirement of 73.4% for hydrogen (i.e. lower than 3tCO2e/tH2). Fortunately, the technical screening criteria of the SFT also require the hydrogen-based project to identify which “physical climate risks” may affect its performance during its expected lifetime. This requirement will hopefully nudge any credible financial sector institution to push the project in question to present a credible plan towards full decarbonisation.

In short, the EU’s Hydrogen and Decarbonised Gas Market Package would be best served with a robust and ambitious definition of low-carbon hydrogen from the get go. The Directive should therefore adopt a definition of "low-carbon hydrogen" that can demonstrate a full GHG reduction threshold by 2050 at the latest, with concrete intermediate GHG reduction targets (e.g. -80% and -90% CO2 reductions) in between.That would help make any hydrogen-based project coming online today to be(come) fit-for-the EU Green Deal.

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