The use of hydrogen as an energy carrier in the context of the energy transition has become a very topical issue following the publication of the European Hydrogen Strategy in July 2020. The growth of a low-emission hydrogen market implies major technological, economic and social challenges. This Report offers a reasoned overview of the variables at stake and the main open questions from the point of view of regulation and markets. The analysis is developed with a European perspective, but with an eye to the position of Italy, whose natural gas sector, which is very important in the energy mix, could prove to be a strong point in the presence of adequate addressing and accompanying policies.

A hydrogen Europe? The Commission believes it

In a context in which, finally, climate change has entered the list of global priorities, the search for energy sources which favour the transition towards a largely decarbonised era is now open. Natural gas has always been indicated as the only real candidate to replace oil pending a broad and solid diffusion of renewables. An idea which has certainly not faded, but which has to deal with the growing interest in hydrogen. The International Energy Agency (IEA), in a study this year, has estimated that in the scenario of a global zero emissions economy, the weight of hydrogen from electrolysis will be around 62%, while that of hydrogen from fossil fuels with carbon capture and storage will reach around 38%. With the overall size of world demand about 6 times the current one.

Could it be that the time for hydrogen has really come? Not that in the past – periodically – this element has not attracted the attention of scientists looking for an alternative and competitive “energy vector” (more correct than “fuel”) compared to fossil sources. But until now we had remained in the field of the laboratory experiment or the prototype, which generally did not follow the commitment of “weight” subjects – states, supranational or multinational bodies in the energy sector – towards the elaboration of policies of investment for scale development.

Now, however, it seems that something is changing. If several nations are already preparing strategic development plans, it is the European Union which takes a step forward by giving shape to a real Hydrogen Strategy. The result of the work of the European Commission and presented in July 2020 – unfortunately at a time when the attention of the media was directed to the health emergency – the document is part of the process of complete decarbonisation of the EU economy by 2050, with the hydrogen as a solution to reach the set goals.

Although the objectives for the short term are not, in reality, too dissimilar from the ideas already included by some EU member countries in their national plans for the energy sector, the identification of a very precise and ambitious trajectory for expansion low-emission hydrogen for the medium and long-term and the classification of low-emission hydrogen as a priority axis of action within the European Green Deal and the Next Generation EU recovery package, have evoked the scenario of a disruptive change on a community scale.

This prospect of profound change in the continental energy horizon has raised numerous questions both in terms of the evolution of technologies for the production, transport and consumption of this commodity, and in terms of infrastructure financing and the regulation of this new scope, market opportunities and the consequences on neighbouring sectors, in particular that of natural gas.

However, for the world of the near future to be under the banner of hydrogen, some existing barriers must be considered and overcome and, at the same time, certain conditions must occur to facilitate their exploitation. In fact, outlining the expansion trajectory of low-emission hydrogen in the context of the energy transition requires imagining the market for a commodity that today has a different and residual role almost from scratch. The growth in the weight of hydrogen in the European and world energy mix will require substantial investments in still little-known technologies and the development of new production chains and value chains (see IEA report). The choice of the expansion path is not neutral and could affect both the success of the initiative locally or globally, and the configuration of the hydrogen sector in the medium and long term.

Demand, supply, investments and regulation: 4 challenges for the European Strategy

The Commission’s reasoning is based on 4 main lines which are also 4 challenges to overcome if we want to reach the goal. Let’s see them briefly.

The first concerns the possible expansion of an offer which is reliable and competitive. The European Strategy starts from the observation of a growing global investments in technologies for the generation and use of low-emission hydrogen (IEA 2019). The European Commission interprets this data and the decline in the costs of electrolysers to produce the “green” one as a signal of proximity to a turning point in the low or zero-emission hydrogen sector, to the extent that production costs are halved further by 2030 thanks to economies of scale. From Brussels they know that if we want to bring the weight of “green” hydrogen to 13-14% of the European energy mix by 2050, it is unthinkable, in the short and medium term, to do without the support of fossil fuels production with carbon capture and storage.

The road map towards a hydrogen Europe sees:

  • 2024: support for the installation of at least 6 GW of electrolysers powered by renewable energy and the production of at least 1 Mt of green hydrogen, equal to approximately 0.2% of the gross primary energy needs of the European Union (EU-27) in 2019.
  • 2030: growth of electrolyzation capacity from renewable sources up to at least 40 GW and an increase in the production of green hydrogen to 10 Mt, equal to about 2.2% of the gross primary energy needs of the EU-27 in 2019.
  • 2030-2050: large-scale development of green hydrogen, in particular to support the energy demand of the sectors most difficult to decarbonise, such as heavy transport and some industrial activities.

The second point concerns the demand. In particular, one wonders how to make it grow enough to support the significant increase in supply. The Commission expects that, in the future decarbonised economy, hydrogen will be used as a production input or fuel in some industrial processes, a source of energy for heavy transport, fuel mixed with natural gas in the transport and / or distribution networks (“blending” of hydrogen in natural gas networks) and as a tool for optimizing the production of electricity from renewable sources.

Looking at the first 2 uses, the European Strategy provides that in a first phase hydrogen with low emissions can replace the “grey” hydrogen currently used in some industrial sectors (refining, ammonia production), be mixed with natural gas and used as a fuel for the production of steel, to feed small fleets of commercial vehicles or selected railway lines not yet electrified, and finally to be mixed in small percentages in some local natural gas networks near to the production points. In the medium to long term, the Commission instead expects a contribution of hydrogen in zero-emission steelmaking, heavy long-haul road transport and non-electrified rail transport by fuel cell trucks or trains, short-haul shipping and finally in air and sea transport through blending in synthetic fuels.

With regard to the generation of electricity from renewable sources, hydrogen will serve to respond to a problem today posed by the increase in non-programmable RES, such as wind and photovoltaic, and that is how to arrive at a reliable system capable of guaranteeing supply levels to the network even in periods when production is stopped or intermittent, knowing that energy storage technologies are still insufficient.

A third issue addressed concerns investments. The Commission estimates that the economic resources used to increase production by 2030 will have to be between 24 and 42 billion euros for the electrolysis capacity and 220-240 billion euros for the construction and connection of 80-120 GW of solar generation capacity until 2030. The support measures the Commission plans to use are both direct support for research and development, and the financing of specific initiatives selected with competitive procedures, and finally a system of contracts for carbon differences to reduce the cost differential with respect to “grey” hydrogen.

As regards the other low-emission hydrogen production technologies, the Commission expects to be able to support in the short and medium term also the retrofitting of “grey” hydrogen production plants with infrastructures for carbon capture and storage, thus increasing the production of the so-called “blue” hydrogen. Funding for this kind of technology could reach 11 billion euros; overall, the investments planned until 2050 for the production of low-emission hydrogen alone should amount to 180-470 billion euros.

The fourth and final question concerns the definition of a regulatory framework with which to regulate a market in a relevant and complex perspective, but still to be built. The picture is particularly complicated because the predicted trajectory for the hydrogen sector and, more generally, the scale of the energy transition requires a holistic approach, which simultaneously considers the implications for the electricity, natural gas, transport and buildings sectors.

In the hydrogen production segment, the main challenge from an economic point of view, and from an orientation point of view, concerns the identification of a shared definition at community level of “low-emission hydrogen”. This definition should serve as a reference both for certifications or labelling for the benefit of consumers, and above all for producers willing to invest in specific technologies. It is easy to understand why this seemingly simple point has been and continues to be the subject of heated debate.

The question seems to have found a first solution in spring 2021 with the publication of the implementation measures of the European taxonomy for sustainable investments, which have attributed the qualification of “sustainable” to hydrogen produced with emissions over the life cycle of less than 3 tCO2eq / tH2. According to some stakeholders, this limit is compatible with the use for electrolysis of the generation mixes with the lowest emissions in Europe (for example the French one). Initially this limit was more stringent (2.256 tCO2eq/tH2), however at the European level it was realized that it would have been difficult to achieve even for some renewable plants. Even the value currently set is not without criticism: some observers have highlighted how this threshold is too restrictive with respect to the possibility of decarbonising through the capture and storage of the carbon which is now generated in the processes of hydrogen production from fossil fuels. On the other side of the fence, some European companies active in the generation from renewable sources have indicated how a more stringent indication could have provided a more decisive signal about the direction to take and about the importance of renewable electricity sources for the decarbonization process of the EU.

Another aspect is related to the possibility of defining hydrogen produced by electrolysis as “renewable”. In fact, Directive (EU) 2018/2001 includes, among the relevant criteria for renewable fuels of non-biological origin, both the indication of a minimum saving of 70% of climate-altering emissions compared to the homologous fossil fuel, and additionality, i.e. the condition that the production of the renewable candidate fuel must not subtract renewable (electricity) energy from other uses. This criterion must therefore be considered in planning investments in new hydrogen production capacity, ideally with low emissions.

It is interesting to note that while the EU is discussing a “technology neutral” approach but still rather ambitious in terms of environmental sustainability, other countries committed to creating a hydrogen supply chain have chosen a different path. Among these, the case of Japan stands out, which has outlined a path largely based on the import by ship of hydrogen produced abroad from solid fossil fuels with carbon capture and storage and has simply hypothesized to be able to solve the problems related to climate-altering emissions from long-distance transport by ship.

The crux of transport infrastructures

Exhausted these 4 major issues, others remain, equally important. Among them there is that of transport and dedicated infrastructures able to connect the production points with those of consumption. The choice of the type of infrastructure will naturally also depend on the location of the production and consumption poles and the technologies which will be more convenient for transporting hydrogen, also in light of the end uses to which it will be destined. If in an initial phase the market will probably have a local or even internal dimension to individual industrial clusters, the expectation is that in the medium and long term the hydrogen market will take on a national and then community dimension, open to exchanges with some non-European countries.

The planning of transport infrastructures and the definition of their financing and use methods have numerous profiles of interest from an economic and regulatory point of view.

A first point already highlighted in the European Hydrogen Strategy is the need to regulate access and use of infrastructures in a pro-competitive manner. A second critical point concerns the planning and financing of transport infrastructures, also in light of the gradual erosion, in the medium and long term, of the weight of natural gas in the European energy mix. In this sense, see the opinion of the Commission Vice-President Frans Timmermans.

The discussion revolves in particular around 3 closely related themes:

  • The possibility of reusing existing gas pipelines for the transport of hydrogen in mixed or pure form.
  • The methods of financing the adaptations to existing infrastructures and the construction of any new infrastructures.
  • Long-term planning of infrastructure development.

At the end of this review of the open problems, it is interesting to note that in the spring of this year several gas network operators have already organized themselves to propose a vision for a possible European hydrogen network, largely based on the repurposing of the existing gas networks and with the introduction of some new dedicated transport lines.

In order for the transition to be sustainable also from an economic and social point of view, it will be crucial that policy makers develop an organic and forward-looking action plan, envisage accompanying measures for the downstream segments of the supply chain and promote the development of skills and collaborations also at the local authorities concerned. Given the extent of the change expected in the medium term, it will also be very important to monitor the perceptions of citizens and communities and ensure information and transparency measures, in order to prevent the development of conflicts which could slow down or hinder the transformation of the system energy as a whole.

Italy is in a delicate position with respect to the issue of hydrogen, being among the European countries with the highest weight of natural gas on the total consumption of primary energy. This feature can be a strength, thanks to the possibility of exploiting and/or upgrading the existing infrastructures and connections with the countries of North Africa, but also a weakness, if the companies in the gas sector are not put in the right conditions to undertake an efficient transformation process (see Position Paper n. 178).